**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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**Form 20-F**

**o**                                   Registration Statement pursuant toSection 12(b) or (g) of the Securities Exchange Act of 1934

**or**

**x**                                 Annual report pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934 for the fiscal year endedDecember 31, 2006

**or**

**o**                                   Transition report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934

**or**

**o**                                   Shell company report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934 

**Date ofevent requiring this shell company report**

**Commissionfile number 333-12032**

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****

**MOBILE TELESYSTEMS OJSC**

(Exact name of Registrantas specified in its charter)

**Not Applicable**

(Translation ofRegistrant’s name into English)

**RUSSIAN FEDERATION**

(Jurisdiction ofincorporation or organization)

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

(Address of PrincipalExecutive Offices)

**Securities registered or to beregistered pursuant to Section 12(b) of the Act:**

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

 

Securities registered or to be registered pursuant toSection 12(g) of the Act:

**NONE(Title of Class)**

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

**NONE(Title of Class)**

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Indicate the number ofoutstanding shares of each of the issuer’s classes of capital or common stockas of the close of the period covered by the annual report.

1,977,404,009 ordinaryshares, par value 0.10 Russian rubles each and 155,310,125 American DepositaryShares, as of December 31, 2006.

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  x Yes o No

If this report is an annualor transition report, indicate by check mark if the registrant is not requiredto file reports pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934.  oYes x No

Note—Checking the box abovewill not relieve any registrant required to file reports pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934 from theirobligations under those Sections.

Indicate by check markwhether the registrant(1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. x Yes o No

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated file, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

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

 

Indicate by check markwhich financial statement item the registrant has elected to follow.  o Item 17 x Item 18

If this is an annualreport, indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). o Yes x No

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(1)              Listed, not for trading or quotation purposes, but onlyin connection with the registration of ADSs pursuant to the requirements of theSecurities and Exchange Commission.

 

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**Tableof 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                                              |   | 4 |
| C.                                                         |   | Reasons  for the Offer and Use of Proceeds                                    |   | 4 |
| D.                                                         |   | Risk Factors                                                                  |   | 4 |
| Item  4.                                                   |   | Information  on Our Company                                                   |   | 37 |
| A.                                                         |   | History  and Development                                                      |   | 37 |
| B.                                                         |   | Business  Overview                                                            |   | 40 |
| C.                                                         |   | Organizational  Structure                                                     |   | 71 |
| D.                                                         |   | Property,  Plant and Equipment                                                |   | 71 |
| Item  4A.                                                  |   | Unresolved  Staff Comments                                                    |   | 72 |
| Item  5.                                                   |   | Operating  and Financial Review and Prospects                                 |   | 72 |
| Item  6.                                                   |   | Directors,  Senior Management and Employees                                   |   | 108 |
| A.                                                         |   | Directors  and Senior Management                                              |   | 108 |
| B.                                                         |   | Compensation  of Directors and Senior Management                              |   | 111 |
| C.                                                         |   | Board Practices                                                               |   | 113 |
| D.                                                         |   | Employees                                                                     |   | 116 |
| E.                                                         |   | Share Ownership                                                               |   | 116 |
| Item  7.                                                   |   | Major  Shareholders and Related Party Transactions                            |   | 117 |
| A.                                                         |   | Major  Shareholders                                                           |   | 117 |
| B.                                                         |   | Related  Party Transactions                                                   |   | 118 |
| C.                                                         |   | Interests  of Experts and Counsel                                             |   | 120 |
| Item 8.                                                    |   | Financial  Information                                                        |   | 120 |
| A.                                                         |   | Consolidated  Statements and Other Financial Information                      |   | 120 |
| B.                                                         |   | Significant  Changes                                                          |   | 122 |
| Item  9.                                                   |   | Offer  and Listing Details                                                    |   | 122 |
| Item  10.                                                  |   | Additional  Information                                                       |   | 123 |
| A.                                                         |   | Share Capital                                                                 |   | 123 |
| B.                                                         |   | Charter  and Certain Requirements of Russian Legislation                      |   | 123 |
| C.                                                         |   | Material  Contracts                                                           |   | 137 |
| D.                                                         |   | Exchange  Controls                                                            |   | 140 |
| E.                                                         |   | Taxation                                                                      |   | 141 |
| F.                                                         |   | Dividends  and Paying Agents                                                  |   | 147 |
| G.                                                         |   | Statement by  Experts                                                         |   | 147 |
| H.                                                         |   | Documents on  Display                                                         |   | 147 |
| I.                                                         |   | Subsidiary  Information                                                       |   | 147 |
| Item  11.                                                  |   | Quantitative  and Qualitative Disclosures about Market Risk                   |   | 147 |
| Item  12.                                                  |   | Description  of Securities Other Than Equity Securities                       |   | 151 |
| Item  13.                                                  |   | Defaults,  Dividend Arrearages and Delinquencies                              |   | 152 |
| Item  14.                                                  |   | Material  Modifications to the Rights of Security Holders and Use of Proceeds |   | 152 |
| Item  15.                                                  |   | Controls  and Procedures                                                      |   | 152 |
| Item  16A.                                                 |   | Audit  Committee Financial Expert                                             |   | 155 |
| Item 16B.                                                  |   | Code of  Ethics                                                               |   | 155 |
| Item  16C.                                                 |   | Principal  Accountant Fees and Services                                       |   | 156 |
| Item  16D.                                                 |   | Exemption  from the Listing Standards for Audit Committees                    |   | 156 |

i

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| Item 16E. |   | Purchases  of Equity Securities by the Issuer and Affiliated Purchasers |   | 157 |
|-----------|--------|-------------------------------------------------------------------------|--------|-----|
| Item  17. |   | Financial  Statements                                                   |   | 157 |
| Item  18. |   | Financial  Statements                                                   |   | 158 |
| Item 19.  |   | Exhibits                                                                |   | 158 |

 

Unless the context otherwise requires, references to“MTS,” “we,” “us,” or “our” refer to Mobile TeleSystems OJSC and itssubsidiaries. “UMC” refers to Ukrainian Mobile Communications, our Ukrainianoperations, 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 United States, references to“rubles” or “RUR” are to the lawful currency of the Russian Federation,references to “hryvnias” are to the lawful currency of Ukraine and referencesto “€,” “euro” or “EUR” are to the lawful currency of the member states of theEuropean Union that adopted a single currency in accordance with the Treaty ofRome establishing the European Economic Community, as amended by the treaty onthe European Union, signed at Maastricht on February 7, 1992.

ii

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**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

Matters discussed in thisdocument may constitute forward-looking statements within the meaning ofSection 27A of the U.S. Securities Act of 1933 (the “U.S. Securities Act”)and Section 21E of the U.S. Securities Exchange Act of 1934 (the “U.S.Exchange Act”). The Private Securities Litigation Reform Act of 1995 providessafe harbor protections for forward-looking statements in order toencourage companies to provide prospective information about their businesses.Forward-looking statements include statements concerning plans,objectives, goals, strategies, future events or performance, and underlyingassumptions and other statements, which are other than statements of historicalfacts.

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,” “may,” “should,” “could”and similar 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;

·       growthin demand for our services;

·       economicoutlook and industry trends;

·       developmentsof our markets;

·       theimpact of regulatory initiatives; and

·       thestrength of our competitors.

The forward-lookingstatements in this document are based upon various assumptions, many of whichare based, in turn, upon further assumptions, including without limitation,management’s examination of historical operating trends, data contained in ourrecords and other data available from third parties. Although we believe thatthese assumptions were reasonable when made, because these assumptions areinherently subject to significant uncertainties and contingencies which aredifficult or impossible to predict and are beyond our control, we cannot assureyou that we will achieve or accomplish these expectations, beliefs orprojections. In addition to these important factors and matters discussedelsewhere herein and in the documents incorporated by reference herein,important factors that, in our view, could cause actual results to differmaterially from those discussed in the forward-looking statements includethe achievement of the anticipated levels of profitability, growth, cost andsynergy of our recent acquisitions, the timely development and acceptance ofnew products, the impact of competitive pricing, the ability to obtainnecessary regulatory approvals, the condition of the economies of Russia,Ukraine and certain other Commonwealth of Independent States, or CIS, politicalstability in Russia, Ukraine and certain other CIS countries, the impact ofgeneral business and global economic conditions and other important factorsdescribed herein and from time to time in the reports filed by us with the U.S.Securities and Exchange Commission, or the SEC.

Except to the extentrequired by law, neither we, nor any of our respective agents, employees oradvisors intends or has any duty or obligation to supplement, amend, update orrevise any of the forward-looking statements contained or incorporated byreference in this document.

1

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**PART I**

**Item 1.**                        *Identity of Directors, Senior Management and Advisors*

Not applicable.

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

Not applicable.

**Item 3.**                        *Key Information*

**A.**                SelectedFinancial Data

The selected consolidatedfinancial data for the years ended December 31, 2004, 2005 and 2006, andas of December 31, 2005 and 2006, are derived from the auditedconsolidated financial statements, prepared in accordance with U.S. GAAPincluded elsewhere in this document. In addition, the following table presentsselected consolidated financial data for the years ended December 31, 2002and 2003, and as of December 31, 2002, 2003 and 2004, derived from ouraudited consolidated financial statements not included in this document. Ourresults of operations are affected by acquisitions. Results of operations ofacquired 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,**                                                                                                                                                              | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2002**                                                                                                                                                                                                 | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                                              | ** ** | **(Amounts in thousands of U.S. dollars, 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                                                   |       | $                                                                                                                                                                                                        | 1,299,141  |   | $ | 2,465,089 |   | $ | 3,800,271 |   | $ | 4,942,288 |   | $ | 6,287,100 |   |
| Sales of handsets  and accessories                                                      |       | 62,615                                                                                                                                                                                                   |       | 81,109 |   | 86,723 |   | 68,730 |   | 97,154 |   |
| Total net  operating revenues                                                           |       | 1,361,756                                                                                                                                                                                                |       | 2,546,198 |   | 3,886,994 |   | 5,011,018 |   | 6,384,254 |   |
| **Operating expenses:**                                                                 | ** ** | ** **                                                                                                                                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of services,  excluding depreciation and amortization shown separately  below |       | 196,445                                                                                                                                                                                                  |       | 301,108 |   | 481,097 |   | 732,867 |   | 1,223,715 |   |
| Cost of handsets  and accessories                                                       |       | 90,227                                                                                                                                                                                                   |       | 173,071 |   | 218,590 |   | 254,606 |   | 209,260 |   |
| Sales and marketing  expenses                                                           |       | 171,977                                                                                                                                                                                                  |       | 326,783 |   | 460,983 |   | 608,092 |   | 607,835 |   |
| Depreciation and  amortization expenses                                                 |       | 209,680                                                                                                                                                                                                  |       | 415,916 |   | 675,729 |   | 907,113 |   | 1,095,981 |   |
| Sundry operating  expenses(1)                                                           |       | 229,056                                                                                                                                                                                                  |       | 406,722 |   | 631,532 |   | 876,309 |   | 1,113,727 |   |
| Net operating  income                                                                   |       | 464,371                                                                                                                                                                                                  |       | 922,598 |   | 1,419,063 |   | 1,632,031 |   | 2,133,736 |   |
| Currency exchange  and transaction losses (gains)                                  |       | 3,474                                                                                                                                                                                                    |       | (693 | ) | (6,529 | ) | (10,319 | ) | (24,051 | ) |
| **Other income (expenses):**                                                            | ** ** | ** **                                                                                                                                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                                                                         |       | (8,289                                                                                                                                                                                                   | )          | (18,076 | ) | (21,792 | ) | (24,828 | ) | (13,055 | ) |
| Interest expense,  net of capitalized interest                                          |       | 44,389                                                                                                                                                                                                   |       | 106,551 |   | 107,956 |   | 132,474 |   | 177,145 |   |
| Equity in net  income of associates                                                     |       | —                                                                                                                                                                                                   |       | (2,670 | ) | (24,146 | ) | (42,361 | ) | (58,083 | ) |
| Bitel investment  and write off                                                         |       | —                                                                                                                                                                                                   |       | — |   | — |   | — |   | 320,000 |   |
| Other income  (expenses), net                                                           |       | (2,454                                                                                                                                                                                                   | )          | 6,090 |   | (9,310 | ) | 13,211 |   | 65,913 |   |
| Total other income  (expenses), net                                                     |       | 33,646                                                                                                                                                                                                   |       | 91,895 |   | 52,708 |   | 78,496 |   | 491,920 |   |
| Income before  provision for income taxes and minority interest                    |       | 427,251                                                                                                                                                                                                  |       | 831,396 |   | 1,372,884 |   | 1,563,854 |   | 1,665,867 |   |
| Provision for  income taxes                                                             |       | 110,417                                                                                                                                                                                                  |       | 242,480 |   | 354,664 |   | 410,590 |   | 576,103 |   |
| Minority interest                                                                       |       | 39,711                                                                                                                                                                                                   |       | 71,677 |   | 30,342 |   | 26,859 |   | 14,026 |   |
| Net income                                                                              |       | $                                                                                                                                                                                                        | 277,123    |   | $ | 517,239 |   | $ | 987,878 |   | $ | 1,126,405 |   | $ | 1,075,738 |   |
| Dividends declared(2)                                                                   |       | —                                                                                                                                                                                                   |       | $ | 111,355 |   | $ | 219,918 |   | $ | 402,692 |   | $ | 561,629 |   |

2

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| Net income per share, basic and diluted                            |       | 0.14          |       | 0.26          |       | 0.50          |       | 0.57          |       | 0.54          |       |
|--------------------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|
| Dividends declared  per share                                      |       | —        |       | 0.06          |       | 0.11          |       | 0.20          |       | 0.28          |       |
| Number of common  shares outstanding                               |       | 1,983,359,507 |       | 1,983,397,064 |       | 1,986,124,030 |       | 1,987,925,652 |       | 1,977,404,009 |       |
| Weighted average  number of common shares outstanding         |       | 1,983,359,507 |       | 1,983,374,949 |       | 1,984,497,348 |       | 1,986,819,999 |       | 1,987,610,121 |       |
| **Consolidated cash flow data:**                                   | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** |
| Cash provided by  operating activities                             |       | $             | 412,772    |          | $          | 965,984       |       | $             | 1,711,589  |          | $          | 1,803,610 |   | $ | 2,389,903 |   |
| Cash used in  investing activities                                 |       | (697,921      | )          | (1,910,087    | )          | (1,543,201    | )          | (2,458,347    | )          | (1,790,549    | )          |
| (of which capital  expenditures)(3)                                |       | (574,272      | )          | (958,771      | )          | (1,358,944    | )          | (2,181,347    | )          | (1,721,968    | )          |
| Cash (used  in)/provided by financing activities    |       | 100,817       |       | 997,545       |       | 10,773        |       | 461,528       |       | (464,066      | )          |
| **Consolidated balance sheet data  (end of period):**              | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** |
| Cash, cash  equivalents and short-term investments                 |       | $             | 64,661     |          | $          | 335,376       |       | $             | 347,510    |          | $          | 106,343 |   | $ | 276,036 |   |
| Property, plant  and equipment, net                                |       | 1,344,633     |       | 2,256,076     |       | 3,234,318     |       | 4,482,679     |       | 5,297,669     |       |
| Total assets                                                       |       | 2,283,296     |       | 4,225,351     |       | 5,581,187     |       | 7,545,780     |       | 8,573,945     |       |
| Total debt (long-term  and short-term)(4)                          |       | 454,485       |       | 1,660,334     |       | 1,937,148     |       | 2,850,557     |       | 3,078,452     |       |
| Total  shareholders’ equity                                   |       | 1,302,044     |       | 1,723,910     |       | 2,523,323     |       | 3,294,089     |       | 3,751,781     |       |
| Including capital  stock(5)                                        |       | 40,352        |       | 40,361        |       | 43,162        |       | 45,024        |       | (64,220       | )          |
| **Financial ratios (end of  period):**                             | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** |
| Total debt/total  capitalization(6)                                |       | 25.9          | %          | 49.1          | %          | 43.4          | %          | 46.4          | %          | 45.1          | %          |
| **Industry and operating data:****(7)**                            | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** |
| Mobile penetration  in Russia (end of  period)                     |       | 12            | %          | 25            | %          | 51            | %          | 87            | %          | 105           | %          |
| Mobile penetration  in Ukraine (end of period)      |       | —        |       | 13            | %          | 29            | %          | 64            | %          | 105           | %          |
| Subscribers in  Russia (end of period, thousands)(8)               |       | 6,644         |       | 13,370        |       | 26,540        |       | 44,219        |       | 51,222        |       |
| Subscribers in  Ukraine (end of period, thousands)(8)              |       | —        |       | 3,349         |       | 7,374         |       | 13,327        |       | 20,003        |       |
| Overall market  share in the Moscow license area (end of period)   |       | 43            | %          | 43            | %          | 45            | %          | 45            | %          | 42            | %          |
| Overall market  share in Russia (end of period)     |       | 38            | %          | 37            | %          | 36            | %          | 35            | %          | 34            | %          |
| Overall market  share in Ukraine (end of period)         |       | —        |       | 51            | %          | 53            | %          | 44            | %          | 41            | %          |
| Average monthly  usage per subscriber in Russia (minutes)(9)       |       | 159           |       | 144           |       | 157           |       | 128           |       | 129           |       |
| Average monthly  usage per subscriber in Ukraine (minutes)(9)      |       | —        |       | 97            |       | 114           |       | 117           |       | 142           |       |
| Average monthly  service revenue per subscriber in Russia(10)      |       | $             | 23         |          | $          | 17            |       | $             | 12         |          | $          | 8 |   | $ | 8 |   |
| Average monthly  service revenue per subscriber in Ukraine(10)     |       | —        |       | $             | 15         |          | $          | 13            |       | $             | 10         |   | $ | 7 |   |
| Subscriber  acquisition costs in Russia(11)                        |       | $             | 35         |          | $          | 26            |       | $             | 21         |          | $          | 19 |   | $ | 23 |   |
| Subscriber  acquisition costs in Ukraine(11)                       |       | —        |       | $             | 32         |          | $          | 19            |       | $             | 14         |   | $ | 10 |   |
| Churn in Russia(12)                                                |       | 33.9          | %          | 47.3          | %          | 27.5          | %          | 20.7          | %          | 23.3          | %          |
| Churn in Ukraine(12)                                               |       | —        |       | 23.8          | %          | 15.8          | %          | 21.8          | %          | 29.9          | %          |

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  (1)      “Sundry operating expenses” consist ofgeneral and administrative expenses, provision for doubtful accounts and otheroperating expenses (including charges incurred in connection with the“universal services reserve fund”).

  (2)      Includes dividends on treasury shares of$1.1 million, $1.5 million and $6.0 million for the years endedDecember 31, 2004, 2005 and 2006, respectively. The Board of Directorsrecommended that the annual general meeting of shareholders to be held onJune 29, 2007, approve annual cash dividends in the amount of $747.4million (including dividends on treasury shares of $6.0 million) for theyear 2006, payable in 2007. See also “Item 10. Additional Information—B.Charter and Certain Requirements of Russian Legislation—Dividends.”

3

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  (3)      Capital expenditures include purchases ofproperty, plant and equipment and intangible assets.

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

  (5)      Calculated as common stock less treasurystock.

  (6)      Calculated as book value of total debtdivided by the sum of the book values of total shareholders’ equity and totaldebt at the end of the relevant period. See note 4 above for thedefinition of “total debt.”

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

  (8)      We define a subscriber as an individual ororganization whose account shows chargeable activity within 61 days (or183 days in the case of prepaid tariffs) or whose account does not have anegative balance for more than this period. Prior to October 1, 2004, UMCused a 90-day period for such purposes with respect to its “Jeans” and“SIM-SIM,” or prepaid, subscribers.

  (9)      Average monthly minutes of usage persubscriber is calculated by dividing the total number of minutes of usageduring 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 throughDecember 2003.

(10)      Average monthly service revenue persubscriber is calculated by dividing our service revenues for a given period,including guest roaming and fees for connecting users of other operators’ fixedline and wireless networks to our network, or interconnect fees, by the averagenumber of our subscribers during that period and dividing by the number ofmonths in that period. For Ukraine, the 2003 figure has been calculated basedon the months of March through December 2003.

(11)      Subscriber acquisition costs arecalculated as total sales and marketing expenses and handset subsidies for agiven period divided by the total number of gross subscribers added during thatperiod. For Ukraine, the 2003 figure has been calculated based on the months ofMarch through December 2003.

(12)      We define our churn as the total number ofsubscribers who cease to be a subscriber (as defined above) during the period(whether involuntarily due to non-payment or voluntarily, at such subscriber’srequest), expressed as a percentage of the average number of our subscribersduring that period. For Ukraine, the 2003 figure has been annualized based onthe months of March through December 2003. The significant decreasein the 2004 churn rate in Ukraine is largely attributable to the change in ourchurn policy 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

*An investment inour securities involves a high degree of risk. You should carefully considerthe following information about these risks, together with other informationcontained in this document, before you decide to buy our securities. If any ofthe following risks actually occur, our business, prospects, financialcondition or results of operations could be materially adversely affected. Inthat case, the value of our securities could also decline and you could loseall or part of your investment.*

*We have described the risks and uncertainties that ourmanagement believes are material, but these risks and uncertainties may not bethe only ones we face. Additional risks and uncertainties, including those wecurrently are not aware of or deem immaterial, may also result in decreasedrevenues, increased expenses or other events that could result in a decline inthe value of our securities.*

**Risks Relating to Business Operations in EmergingMarkets**

***Emerging markets such as the Russian Federation,Ukraine and other CIS countries are subject to greater risks than moredeveloped markets, including significant legal, economic and political risks.***

Investorsin emerging markets such as the Russian Federation, Ukraine and other CIScountries should be aware that these markets are subject to greater risk thanmore developed markets, including in 

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some cases significant legal, economic and politicalrisks. Investors should also note that emerging economies such as the economiesof the Russian Federation and Ukraine are subject to rapid change and that theinformation set out herein may become outdated relatively quickly. Furthermore,in doing business in various countries of the CIS, we face risks similar to(and sometimes greater than) those that we face in Russia and Ukraine.Accordingly, investors should exercise particular care in evaluating the risksinvolved and must decide for themselves whether, in light of those risks, theirinvestment is appropriate. Generally, investment in emerging markets is onlysuitable for sophisticated investors who fully appreciate the significance ofthe risks involved and investors are urged to consult with their own legal andfinancial advisors before making an investment in our securities.

**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, the General Prosecutor ofUkraine filed a claim against us and others in the Kiev Commercial Courtseeking to unwind the sale by Ukrtelecom of its 51% stake in UMC to us. Thecomplaint also sought an order prohibiting us from alienating 51% of our stakein UMC until the claim was resolved on the merits. The claim was based on aprovision of the Ukrainian privatization law that included Ukrtelecom among alist of “strategic” state holdings prohibited from alienating or encumberingits assets during the course of its privatization. While the Cabinet ofMinisters of Ukraine in May 2001 issued a decree specifically authorizingthe sale by Ukrtelecom of its entire stake in UMC, the General Prosecutorasserted that the decree contradicted the privatization law and that the saleby Ukrtelecom was therefore illegal and should be unwound. On August 12,2004, the Kiev Commercial Court rejected the General Prosecutor’s claim.

On August 26, 2004, the General Prosecutorrequested the Constitutional Court of Ukraine to review whether certainprovisions of the Ukrainian privatization law limiting the alienation of assetsby privatized companies were applicable to the sale by Ukrtelecom of UMC sharesto us. As of the date of this document, the Constitutional Court of Ukraine hasnot yet responded to the General Prosecutor’s request.

If the Constitutional Court of Ukraine determines thatUkrtelecom’s sale of its stake in UMC contradicted the terms of the Ukrainianprivatization law, the General Prosecutor would be able to request the KievCommercial Court to reopen the case based on new circumstances and couldpotentially include additional plaintiffs that were not parties to the originalproceeding and/or additional claims.

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 by Sistema, which currently controls53.1% of our outstanding shares. If not otherwise required by Russian law,resolutions at a shareholders’ meeting will be adopted by a simple majority ina meeting at which shareholders holding more than half of the issued sharecapital are present or represented. Accordingly, Sistema has the power tocontrol the outcome of most matters to be decided by vote at a shareholders’meeting and, as long as it holds, either directly or indirectly, a majority ofour shares, will control the appointment of a majority of directors and removalof directors. Sistema is also able to control or significantly influence theoutcome of any vote on matters which require three-quarters majority vote of ashareholders’ meeting, such as amendments to the charter, proposedreorganizations 

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and substantial assetsales and other major corporate transactions, among other things. Thus, Sistemacan take actions that may conflict with the interests of other shareholders andholders of our ADSs.

Sistema has outstanding a significant amount ofindebtedness, including $350.0 million of notes maturing in 2008,$350.0 million of notes maturing in 2011 and $600.0 million outstandingunder a $600.0 million credit facility agreement Sistema entered into withVneshtorgbank, maturing in 2010. Therefore, Sistema will require significantfunds to meet its obligations, which may come in part from dividends paid byits subsidiaries, including us.

Sistema voted in favor of declaring dividends of $220.0 millionin 2004, $402.6 million in 2005 and $561.6 million in 2006. The indenturesrelating to our notes do not restrict our ability to pay dividends. As a resultof paying dividends, our reliance on external sources of financing mayincrease, and our cash flow and ability to repay our debt obligations, or makecapital expenditures, investments and acquisitions could be materiallyadversely 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.

***The telecommunications services market is characterizedby rapid technological change, which could render our services obsolete ornon-competitive and result in the loss of our market share and a decrease ofour revenues.***

The telecommunicationsindustry is subject to rapid and significant changes in technology and ischaracterized by the continuous introduction of new products and services. Themobile telecommunications industry in Russia is also experiencing significanttechnological change, as evidenced by the introduction in recent years of new standardsfor radio telecommunications, such as WiFi, WiMAX, EDGE and UMTS, ongoingimprovements in the capacity and quality of digital technology, shorterdevelopment cycles for new products and enhancements and changes in customerrequirements and preferences. Such continuing technological advances make itdifficult to predict the extent of the future competition we may face. As aresult, we cannot assure you that existing, proposed or as yet undevelopedtechnologies will not become dominant in the future and render the technologieswe use less profitable or even obsolete. We cannot assure you that new productsand services that are more commercially effective than our products andservices will not be developed. Furthermore, we cannot assure you that we willbe successful in responding in a timely and cost-effective way to keep up withthese developments. Changing our products or services in response to marketdemand may require the adoption of new technologies that could render many ofthe technologies that we are currently implementing less competitive orobsolete. To respond successfully to technological advances and emergingindustry standards, we may require substantial capital expenditures and accessto related or enabling technologies in order to integrate the new technologywith our existing technology.

***A decline in relations between Russia and the othercountries where we operate could materially adversely affect our business,financial condition, results of operations and prospects.***

We have operations in Russia, Ukraine, Uzbekistan,Turkmenistan and Belarus and may expand into other countries in the future,which have had in the past strained relationships with Russia. Any new tensionsbetween Russia and these countries or further declines in such relationshipscould materially adversely affect our business, financial condition and resultsof operations.

For example, the relationship between Ukraine andRussia has been historically strained due, among other things, to Ukraine’sfailure to pay arrears relating to the supply of energy resources, Russia’sintroduction of an 18% value-added tax, or VAT, on Ukrainian imports and borderdisputes. Tensions 

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between Russia and Ukrainewere recently ignited in relation to a dispute over the decision of Gazprom, theRussian gas monopoly, to increase the price of natural gas sold to Ukraine.Although this dispute was settled in January 2006 with the parties’ entryinto a new gas transportation contract, the terms of this contract have beensubject to severe criticism in both countries and led, among other things, tothe Ukrainian parliament’s attempt to dismiss the Ukrainian government inJanuary 2006. A decline in Ukraine-Russia relations and any changesadversely affecting energy supplies from Russia to Ukraine and/or Ukraine’sexport of goods and services to Russia could materially adversely impact theUkrainian economy, our Ukrainian operations and our financial condition,results of operations and prospects.

In addition, therelationship between Turkmenistan and Russia has been strained over the supplyand payment of gas from Turkmenistan. In 1994, the Russian government refusedto export Turkmen gas to hard currency markets and, in addition, certain majorcustomers in the former Soviet Union fell behind in their payments for thesupply of gas. These two factors contributed to a sharp fall in industrialproduction and an increase in the country’s deficits. In September 2006,Turkmenistan threatened to cut off gas supplies to Russia until the Russiangovernment ultimately agreed to increase the amount it pays for Turkmen naturalgas from $65 to $100 per 1,000 cubic meters. Any further decline inTurkmenistan-Russia relations and any changes adversely affectingTurkmenistan’s export of oil and natural gas to hard currency markets viaRussian export routes could materially adversely impact the economy inTurkmenistan and, in turn, our business, financial condition, results ofoperations and prospects.

***We face significant risks with respect to ouroperations in Turkmenistan due to the country’s current political, economic andlegal uncertainty.***

Turkmenistan has taken acautious approach to economic reform, attempting to use revenues from its oiland gas and cotton sales to sustain the economy. Nonetheless, in 2004 the unemploymentrate was approximately 60% and, in 2003, 58% of the population was estimated tobe living below the poverty line. Between 1998 and 2002, Turkmenistan sufferedfrom a lack of adequate export routes for its natural gas, and from itsshort-term debt obligations. Economic prospects in the near future arediscouraging due to widespread poverty in Turkmenistan and high levels of debt.If the economy continues to suffer and the people of Turkmenistan lack thedisposable income required to purchase our telecommunications services, thenour business, financial condition and results of operations could suffer.

***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 final stagesof implementing a new billing system, which we expect to complete in Russia inJuly 2007. The transition to the new billing system in the other countrieswhere we operate will take longer to complete. Although we have already begunto experience increases in our overall efficiency and reductions in ourexpenses as a result of the new billing system, we are still required to runboth the old and new billing systems simultaneously during the transitionperiod, creating additional burdens on our technical support staff. We may alsoexperience technical problems with the new billing system during the transitionperiod. These factors may increase our operational risks and expenses andinconvenience for subscribers in the short term. The failure or breakdown ofkey 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 orintegrate our acquired businesses, we will be unable to expand our subscriberbase and maintain our profitability.***

We plan to expand our network infrastructure byextending coverage and increasing the capacity of our existing network in theMoscow and regional license areas, as well as by further developing ouroperations in Ukraine, Uzbekistan and Turkmenistan and making investments inMTS Belarus.

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Our ability to increase our subscriber base dependsupon the success of our network expansion. We have expended considerableamounts of resources to enable this expansion. Limited information regardingthe markets into which we have or are considering expanding, either throughacquisitions or new licenses, complicates accurate forecasts of future revenuesfrom those regions, increasing the risk that we may overestimate theserevenues.

In addition, we have expanded our network throughacquisitions and we may continue to engage in further acquisitions. We may notbe able to integrate previous or future acquisitions successfully or operatethem profitably. Such integration requires significant time and effort from oursenior management, who are also responsible for managing our existingoperations. Such integration may also be difficult as our technical systems maydiffer from those of the acquired businesses. In addition, unpopular costcutting measures may be required and control of cash flow may be difficult toestablish. Any difficulties encountered in the transition and integrationprocess could have a material adverse effect on our results of operations.

We also may face risks during the course of ourexpansion into countries outside of the Russian Federation. Differing culturesand more uncertain business operating environments could lead to lowerprofitability and higher risks to our business. For example, in 2005 weacquired a 51% stake in the company owning indirectly 100% of Bitel LLC(“Bitel”), a mobile operator holding a Global System for Mobile Communications,or GSM, 900/1800 license for the entire territory of the Kyrgyz Republic. InDecember 2005, Bitel’s corporate offices were seized by a third partyfollowing a ruling by the Kyrgyz Supreme Court. See “3⁄4LegalRisks and Uncertainties3⁄4Our inability togain operational control over Bitel has prevented us from realizing theexpected benefits of our acquisition and resulted in our write off of the costsrelating to the purchase of Bitel, and we may face significant liabilities tothe seller and Bitel.”

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 cannotinterconnect cost-effectively with other telecommunications operators, we maybe unable to provide services at competitive prices and therefore lose marketshare and revenues.***

Our ability to provide commercially viable servicesdepends on our ability to continue to interconnect cost-effectively with fixedline and mobile (zonal, intercity and international) operators in Russia,Ukraine and other countries in which we operate. Fees for interconnection areestablished by agreements with network operators and vary, depending on thenetwork used, the nature of the call and the call destination.

In Russia, the government plans to privatizeSvyazinvest, a holding company that controls Rostelecom, Russia’s primary domesticand international long distance operator, and certain regional fixed lineoperators. In Ukraine, the government plans to privatize Ukrtelecom, which hasa 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 and costs.

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 and establishing technical conditions for interconnection feasibleonly for certain operators. Any difficulties or delays in interconnectingcost-effectively with other networks could 

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hinderour ability to provide services at competitive prices or at all, causing us tolose market share and revenues, which could have a material adverse effect onour business and results of operations.

***Governmentalregulation of our interconnect rates in Ukraine could adversely affect ourresults of operations.***

Under the Ukrainian Telecommunications Law adopted inNovember 2003, the National Commission for the Regulation on Communications,or the NCRC, commencing January 1, 2005, is authorized to regulate thetariffs for public telecommunications services rendered by fixed lineoperators, whereas the mobile cellular operators (including UMC) are entitledto set their retail tariffs and negotiate interconnect rates with otheroperators. However, the NCRC would be entitled to regulate the interconnectrates of any mobile cellular operator declared a “dominant market force” by theAntimonopoly Committee of Ukraine, or the AMC. Although UMC currently has overa 41% market share of the wireless communications market in Ukraine, it has notbeen declared a dominant market force by the AMC. Government regulation of ourinterconnect rates could limit or decrease our interconnect revenues, whichcould have a material adverse effect 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 mobile cellular operators. Such increases could causeour 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 fixed line operators, which could cause our revenues to decreaseand materially adversely affect our results of operations.

***If frequenciescurrently assigned to us are reassigned to other users or if we fail to obtainrenewals of our frequency allocations, our network capacity will be constrainedand our ability to expand limited, resulting in a loss of market share andlower revenues.***

There is a limited number of frequencies available forwireless operators in each of the regions in which we operate or hold licensesto operate. We are dependent on access to adequate spectrum allocation in eachmarket in which we operate in order to maintain and expand our subscriber base.While we believe that our current spectrum allocations are sufficient,frequency may not be allocated to us in the future in the quantities, with thegeographic span and for time periods that would allow us to provide wirelessservices on a commercially feasible basis throughout all of our license areas.For example, the availability of frequencies in the GSM 900 MHz band in Ukraineis limited by the fact that the Ukrainian military has a number of frequenciesfor its exclusive use. While future capacity constraints could be reduced by anincrease in the GSM frequencies allocated to us, including additionalfrequencies in the GSM 1800 MHz band, we may not be awarded some or any of theremaining GSM spectrum. In addition, the Ukrainian government is currentlydelaying the allocation of new frequencies to wireless communications operatorsin Ukraine which, in turn, may constrain our network capacity in those areas ofUkraine characterized by high subscriber usage. 

A loss of allocatedspectrum, which is not replaced by other adequate allocations, could also havea substantial adverse impact on our network capacity. In addition, frequencyallocations are often issued for periods that are shorter than the terms of thelicenses, and such allocations may not be renewed in a timely manner or at all.If our frequencies are revoked or we are unable to renew our frequencyallocations, our network capacity would be constrained and our ability toexpand limited, resulting in a loss of market share and lower revenues.

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***We may not realizethe benefits we expect to receive from our investments in third-generation,or 3G, wireless services, which could have a material adverse effect on ourbusiness and results of operations.***

On April 20, 2007,the Federal Communications Agency awarded Megafon, Vimpelcom and us a licenseto provide 3G services in the Russian Federation. The 3G license will allow usto provide mobile radio telephone services using the IMT-2000/UMTS standard.Historically, mobile operators that have developed 3G networks have experiencedvarious difficulties and challenges, including a limited supply of 3G-compatiblehandsets, limited international roaming capabilities, as well as 3G softwareand network-related problems. We may experience similar problems or encounternew difficulties when developing our 3G network and may be unable to fullyresolve them. For example, we cannot be certain that:

·       our3G network and services will deliver the quality and level of service that ourcustomers demand or prefer;

·       wewill be able to provide all contemplated 3G services at reasonable prices andwithin a reasonable timeframe;

·       manufacturersand content providers will develop and offer products and services for our 3Gnetwork on a timely basis;

·       therewill be sufficient demand for 3G services in the markets where we operate;

·       our3G network will be commercially viable in all of the locations we are requiredto operate pursuant to our 3G license; 

·       ourcompetitors will not offer similar services at lower prices; and

·       changesin the Russian government’s policies, rules, regulations or practices will notaffect our network rollout or our business operations.

In addition, Russian military authorities also usefrequencies on the 3G spectrum. During the construction of the 3G network, wewill have to ensure that there will not be any overlap of frequencies used by usfor commercial purposes and the Russian military.

Moreover, licenses for the use of code divisionmultiple access, or CDMA, technology have already been granted for theprovision of fixed wireless services in a number of regions throughout Russia.CDMA is a second-generation digital cellular telephony technology thatcan be used for the provision of both wireless and fixed services. Currently,CDMA technology is offered by certain mobile operators in Russia using the NMT-450standard. If CDMA operators were able to develop a widespread networkthroughout Russia, we would face increased competition. 

Potential competition fromother 3G or CDMA providers, together with any substantial problem with therollout of our 3G network and provision of 3G services in the future, couldmaterially adversely effect our business, financial condition and results ofoperations.

***Because we lack a comprehensiveback-up system for our network and insurance for our computer systems, anetwork or computer systems failure could prevent us from operating ourbusiness and lead to a loss of subscribers, damage to our reputation andviolations of the terms of our licenses and subscriber contracts and penalties.***

We are able to deliver services only to the extentthat we can protect our network systems against damage from communicationsfailures, computer viruses, power failures, natural disasters and unauthorizedaccess. Any system failure, accident or security breach that causesinterruptions in our operations could impair our ability to provide services toour customers and materially adversely affect our business and results ofoperations. In addition, to the extent that any disruption or security breachresults in a loss of or damage to customers’ data or applications, orinappropriate disclosure of confidential 

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information, we may incurliability as a result, including costs to remedy the damage caused by thesedisruptions or security breaches.

We have back-up capacity for our network management,operations and maintenance systems, but automatic transfer to back-up capacityis limited. In the event that the primary network management center was unableto function, significant disruptions to our systems would occur, including ourinability to provide services. Disruptions in our services occurred in theMoscow license area on May 30, 2003, in the Kiev license area onAugust 31, 2004 and September 1-2, 2004, in the Nizhny Novgorodlicense area on December 10, 2004, 2005, in the Kirov license area onDecember 21, 2004, in the Ekaterinburg license area on February 21-22,2005, in the Moscow license area on May 25-27, 2005, in the Saransklicense area on September 1, 2005 and October 6, 2005 and in theOrenburg license area on November 15, 2005. These types of disruptions mayrecur, which could lead to a loss of subscribers, damage to our reputation,violations of the terms of our 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 fulfillthe terms of our licenses could result in their suspension or termination,which could have a material adverse effect on our business and results ofoperations.***

Each of our licensesrequires service to be offered by a specific date and most contain furtherrequirements as to network capacity and territorial coverage to be reached byspecified dates. In addition, all of our licenses require us to comply withvarious telecommunications regulations relating to the use of radio frequenciesand numbering capacity allocated to us, network construction andinterconnection rules, among others. If we fail to comply with the requirementsof applicable Russian, Ukrainian or other applicable legislation or we fail tomeet any terms of our licenses, our licenses and other authorizations necessaryfor our operations may be suspended or terminated. A suspension or terminationof our licenses or other necessary governmental authorizations could have amaterial adverse effect on our business and results of operations.

***If we are unable tomaintain our favorable brand image, we may be unable to attract new subscribersand retain existing subscribers, 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 services couldnegatively affect this brand image, which could lead to loss of market shareand revenues.

***Our intellectualproperty rights are costly and difficult to protect, and we cannot guaranteethat the steps we have taken to protect our property rights will be adequate.***

We regard our copyrights, trademarks, trade secretsand similar intellectual property, including our rights to certain domainnames, as important to our continued success. We rely upon trademark andcopyright law, trade secret protection and confidentiality or licenseagreements with our employees, customers, partners and others to protect ourproprietary rights. Nonetheless, intellectual property rights are especiallydifficult to protect in the markets where we operate. In these markets, the regulatoryagencies charged to protect intellectual property rights are inadequatelyfunded, legislation is underdeveloped, piracy is commonplace and enforcement ofcourt decisions is difficult. 

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In addition, litigationmay be necessary to enforce our intellectual property rights, to determine thevalidity and scope of the proprietary rights of others, or to defend againstclaims of infringement. Any such litigation may result in substantial costs anddiversion of resources, and, if decided unfavorably to us, could have amaterial adverse effect on our business or results of operations. We also mayincur substantial acquisition or settlement costs where doing so wouldstrengthen or expand our intellectual property rights or limit our exposure tointellectual property claims of third parties. While we have successfullyenforced our property rights in courts in the past, we cannot assure you thatwe will be able to successfully protect our property rights in the future. 

***Failure to renewour licenses or receive renewed licenses with similar terms to our existinglicenses could have a material adverse effect on our business and results ofoperations.***

Our telecommunications licenses expire in variousyears from 2007 to 2013 and may be renewed upon application to the relevantgovernmental authorities. Government officials in Russia and the other CIScountries in which we operate have broad discretion in deciding whether torenew a license, and may not renew licenses after their expiration. If licensesare renewed, they may be renewed with additional obligations, including paymentobligations.

In addition, the license requirements in our currenttelecommunications licenses may not comply with the requirements set forth inthe new regulations effective from January 1, 2006. Although suchnon-compliance will not invalidate our licenses, the Federal Service forSupervision in the Area of Mass Media, Communications and Protection ofCultural Heritage, or Rossvyazokhrankultura, is requiring communicationsoperators to apply for amendments of all their licenses granted prior toJanuary 1, 2004. We were not able to have all our licenses issued prior toJanuary 1, 2004, amended prior to January 1, 2006. We are currentlybringing our older licenses in line with the new requirements, and expect thisprocess to be completed by the end of 2008. We will be subject to penalties fornon-compliance if our licenses are suspended or terminated.

Failure to renew ourtelecommunications licenses or receive renewed licenses with similar terms toexisting licenses could significantly limit our operations, which could have amaterial adverse effect on our business and results of operations.

***We engage intransactions with related parties, which may present conflicts of interest,potentially resulting in the conclusion of transactions on terms not determinedby market forces.***

We have purchasedinterests in various mobile telecommunications companies from Sistema andentered into arrangements with subsidiaries of Sistema for advertising (Maximaand Mediaplanning), interconnection services (MTT), interconnection andtelephone numbering capacity (MGTS, Comstar UTS and MTU-Inform), IT servicesand hardware purchases (Kvazar-Micro), banking services (MBRD), officeleases (MGTS), use of the brand name (Sistema Telecom) and the purchase of anew billing system (Sitronics). Furthermore, we have entered into a number ofequipment lease agreements with Invest-Svyaz–Holding, one of ourshareholders and a wholly-owned subsidiary of Sistema. Related party transactionswith Sistema and other companies within the Sistema group may present conflictsof interest, potentially resulting in the conclusion of transactions on termsless favorable than could be obtained in arm’s-length transactions.

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***In the event thatour minority shareholders or the minority shareholders of our subsidiaries wereto challenge successfully past or future interested party transactions, or donot approve interested party transactions or other matters in the future, wecould be*** limited in our operational flexibility andour business, financial condition, results of operations and prospects could bematerially adversely affected.

We own less than 100% of the equity interests in someof our subsidiaries. In addition, certain of our wholly-owned subsidiaries havehad other shareholders in the past. We and our subsidiaries in the past havecarried out, and continue to carry out, transactions that may be considered tobe “interested party transactions” under Russian law, requiring approval bydisinterested directors, disinterested independent directors or disinterestedshareholders depending on the nature of the transaction and parties involved.The provisions of Russian law defining which transactions must be approved as“interested party transactions” are subject to different interpretations and,as a result, we cannot assure you that our and our subsidiaries’ interpretationand application of these provisions will not be subject to challenge. Any suchchallenges, if successful, could result in the invalidation of transactions,which could have a material adverse effect on our business, financialcondition, results of operations and prospects.

In addition, Russian lawrequires a three-quarters majority vote of the holders of voting stockpresent at a shareholders' meeting to approve certain transactions and othermatters, including, for example, charter amendments, major transactionsinvolving assets in excess of 50% of the assets of the company, repurchase ofshares by the company and certain share issuances. In some cases, minorityshareholders may not approve interested party transactions requiring theirapproval or other matters requiring minority shareholder or supermajorityapproval. In the event that these minority shareholders were to challenge successfullypast interested party transactions, or do not approve interested partytransactions or other matters in the future, we could be limited in ouroperational flexibility and our business, financial condition, results ofoperations and prospects could be materially adversely affected.

***Our competitiveposition and future prospects depend on our senior managers and other keypersonnel.***

Our ability to maintainour competitive position and to implement our business strategy is dependent toa large degree on the services of our senior management team and other keypersonnel. Moreover, competition in Russia and in the other countries where weoperate for personnel with relevant expertise is intense due to the relativelysmall number of qualified individuals and, as a result, we attempt to structureour compensation packages in a manner consistent with the evolving standards ofthe Russian labor market. We are not insured against the detrimental effects toour business resulting from the loss or dismissal of our key personnel. Theloss or decline in services of members of our senior management team or aninability to attract, retain and motivate qualified key personnel could have amaterial adverse effect on our business, financial condition and results of operations.

***All or part of oursubscriber database, containing private information relating to oursubscribers, was illegally copied and stolen in early 2003 and is currentlypublicly sold in Russia.***

In January 2003, we discovered that part of ourdatabase of subscribers, containing private subscriber information, wasillegally copied and stolen. The database contained information such as thenames, addresses, home phone numbers, passport details and other personalinformation of approximately five million of our subscribers. Followingits theft, this database was available for sale in Russia. In addition, inMay 2003, certain subscriber databases of several operators in theNorth-West region, including those of MTS, MegaFon, Delta Telecom and two otheroperators, were stolen and are currently being sold. 

In December 2003, we completed our internalinvestigation relating to the theft of our subscriber databases and found thatthese incidents were due to weaknesses in our internal security in relation tophysical access to such information. We have taken measures that we believewill prevent such incidents from occurring in the future, but such incidentsmay nonetheless recur.

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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. Although we make every effort to protect confidentialinformation, future breaches of security and leaks of confidential information,including information relating to our subscribers may negatively impact ourreputation and our brand image and lead to a loss of market share, which couldmaterially adversely affect our business, financial condition, results ofoperations and prospects. 

***We face increasingcompetition in the Russian and Ukrainian markets that may result in reducedoperating margins and loss of market share, as well as different pricing,service or marketing policies.***

The Russian and Ukrainian wirelesstelecommunications services markets are highly competitive. The trend inRussian and Ukrainian government licensing policies has been to increasecompetition among wireless telecommunications service providers. Russian andUkrainian regulatory authorities have moved from granting exclusive licensesfor each technology standard per region to granting multiple licenses coveringthe same territory. Increased competition, including from the potentialintroduction of new mobile operators in the markets where we operate, mayresult in reduced operating margins and loss of market share, as well asdifferent pricing, service or marketing policies.

***If the FederalAntimonopoly Service was to conclude that we acquired or created a new companyin contravention of antimonopoly legislation, it could impose administrativesanctions and require the divestiture of this company or other assets.***

Our businesses have grownsubstantially through the acquisition and formation of companies, many of whichrequired the prior approval of, or subsequent notification to, the FederalAntimonopoly Service or its predecessor agencies. In part, relevant legislationin certain cases restricts the acquisition or formation of companies by groupsof companies or individuals acting in concert without such prior approval ornotification. While we believe that we have complied with the applicablelegislation for our acquisitions and formation of new companies, thislegislation is sometimes vague and subject to varying interpretations. If theFederal Antimonopoly Service was to conclude that an acquisition or formationof a new company was done in contravention of applicable legislation, it couldimpose administrative sanctions and require the divestiture of this company orother assets, which could have a material adverse effect on our business,financial condition and results of operations.

***If we are found tohave a dominant position in our markets, the government may regulate ourtariffs and restrict our operations.***

Under Russian legislation, the Federal AntimonopolyService may categorize a company as a dominant force in a market. CurrentRussian legislation does not clearly define “market” in terms of the types ofservices or the geographic area. As of December 31, 2006, we werecategorized as a company with a market share exceeding 35% in Moscow and theMoscow region. This classification, in turn, gives the Federal AntimonopolyService the power to impose certain restrictions on the businesses of thoseentities.

Additionally, UMC, which has over a 40% market shareof the Ukrainian wireless communications market, can be categorized as acompany with a dominant position in the market and become subject to specificgovernment-imposed restrictions. While UMC is currently not categorizedas a company with a dominant position in the market, it reduced certain of itstariffs at the recommendation of the Antimonopoly Committee of Ukraine, or theAMC, in April 2004. See “Item 4. Information on Our Company—B. BusinessOverview—Regulation in Ukraine—Competition” for additional information.

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If we or any of oursubsidiaries were to be classified by the Federal Antimonopoly Service (or theAMC with respect to our operations in Ukraine) as a dominant market force or ashaving a dominant position in the market, the Federal Antimonopoly Service (orAMC, as the case may be) would have the power to impose certain restrictions ontheir businesses. Specifically, the Russian authorities may impose on ustariffs at levels that could be competitively disadvantageous. Moreover, ourrefusal to adjust our tariffs according to such government-determinedrates could result in the withholding of all our revenues for the benefit ofthe state. Additionally, restrictions on our expansion or government-mandatedwithdrawal from regions or markets could reduce our subscriber base and preventus from fully implementing our business strategy. We may also be required to completeadditional license applications at an additional unexpected cost.

***We rely heavily onindependent dealers to enroll new subscribers. Our failure to maintain andfurther develop our extensive distribution network of independent dealers maylead to a decrease in our subscriber growth rate, loss of market share andrevenues.***

We enroll a vast majorityof our subscribers through a network of independent dealers. Independentdealers have begun to consolidate their operations and, as a result, haveincreased their bargaining power when negotiating with mobiletelecommunications operators, including us, and have been demanding contractterms and conditions that are less favorable to us. In addition, press reportssuggest that certain of our competitors may enter into special preferentialarrangements with large retail networks to promote their services to thedetriment of other mobile operators on the Russian market. If we fail tomaintain and further develop our distribution network of independent dealers,we may be forced to significantly expand our customer service centers andpoints of sales at a faster rate than we initially intended and incuradditional unexpected costs. We may also experience a decrease in oursubscriber growth rate, loss of market share and revenues.

***Alleged medicalrisks of cellular technology may subject us to negative publicity orlitigation, decrease our access to base station sites, diminish subscriberusage and hinder access to additional financing.***

Electromagnetic emissionsfrom transmitter masts and mobile handsets may harm the health of individualsexposed for long periods of time to these emissions. The actual or perceivedhealth risks of transmitter masts and mobile handsets could materiallyadversely affect us by reducing subscriber growth, reducing usage persubscriber, increasing the number of product liability lawsuits, increasing thedifficulty in obtaining or maintaining sites for base stations and/or reducingthe financing available to the wireless communications industry.

**RisksRelating to Our Financial Condition**

***Servicing andrefinancing our indebtedness will require a significant amount of cash. Ourability to generate cash or obtain financing depends on many factors beyond ourcontrol.***

We have a substantial amount of outstandingindebtedness, primarily consisting of the obligations we entered into inconnection with our notes and bank loans. At December 31, 2006, ourconsolidated total debt, including capital lease obligations, was approximately$3,078.5 million. Our interest expense for the year ended December 31,2006 was approximately $177.1 million, net of amounts capitalized.

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Our ability to service, repay and refinanceour indebtedness and to fund planned capital expenditures will depend on ourability to generate cash in the future. This, to a certain extent, is subjectto general economic, financial, competitive, legislative, regulatory and otherfactors that are beyond our control. If we are unable to generate sufficientcash flow or otherwise obtain funds necessary to make required payments, we maydefault under the terms of our indebtedness, and the holders of our indebtednesswould be able to accelerate the maturity of such indebtedness, potentiallycausing cross-defaults under and acceleration of our other indebtedness.Furthermore, approximately half of the debt we have incurred is at floating ratesof interest linked to indices, such as LIBOR and EURIBOR and, as a result, ourdebt obligations can increase if such indices rise. Although we have hedged therisks associated with certain of our debt linked to floating rates of interest,it may not be sufficient to offset significant increases in our other debt thatwe have not hedged against.

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.”

***Adisposition by our controlling shareholder of its stake in our company couldmaterially harm our business.***

Under certainof our debt agreements, an event of default may be deemed to have occurredand/or we may be required to make a prepayment if Sistema disposes of its stakein our company or a third party takes a controlling position in our company.The occurrence of any such event of default or failure to make any requiredprepayment which leads to an event of default, could trigger cross default/crossacceleration provisions under certain of our other debt agreements. In suchevent, our obligations under one or more of these agreements could becomeimmediately due and payable, which would have a material adverse effect on ourbusiness and our shareholders’ equity. If Sistema were to dispose of its stakein us, our company may be deprived of the benefits and resources that itderives from Sistema, which could harm our business.

***If weare unable to obtain adequate capital, we may have to limit our operationssubstantially, which could have a material adverse effect on our business,financial condition, results of operations and prospects.***

We willneed to make significant capital expenditures, particularly in connection withthe development, construction and maintenance of, and the purchasing ofsoftware for our GSM network. We spent approximately $1,358.9 million in2004, approximately $2,181.3 million in 2005 and approximately $1,722.0million in 2006 for the fulfillment of our capital spending plans. In addition,the acquisition of UMTS licenses and frequency allocations and the buildout ofa UMTS network will require additional capital expenditures. However, futurefinancings and cash flow from our operations may not be sufficient to meet ourplanned needs in the event of various unanticipated potential developments,including the following:

·       a lack ofexternal financing sources;

·       changes inthe terms of existing financing arrangements;

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

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·       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 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. For example, wehave had ruble-denominated tariffs and have been charging our subscribers inRussian rubles since January 1, 2007. As a result, the devaluation of theruble against the U.S. dollar can adversely affect us by increasing our costsin ruble terms. If the ruble declines against the U.S. dollar and priceincreases cannot keep pace, we could have difficulty repaying or refinancingour U.S. dollar-denominated indebtedness, including our notes.

***Inflation could increase our costs andadversely affect our results of operations.***

The Russianeconomy has been characterized by high rates of inflation. In both 2005 and2006, 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 ofour costs, including salaries and rents, which are sensitive to rises in thegeneral price level in Russia, our costs will rise. In this situation, due tocompetitive pressures, we may not be able to raise the prices we charge for ourproducts and services sufficiently to preserve operating margins. Accordingly,high rates of inflation in Russia could increase our costs and decrease ouroperating margins.

***Our cash holdings are subject todevaluation.***

We invest our excess cash in a limitednumber of ruble-denominated instruments. 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. This conversion requirementwas abolished in May 2006. We earned approximately $93.3 million,$99.4 million and $106.9 million in foreign currency in 2004, 2005 and2006, respectively, primarily from our roaming agreements. This requirementfurther increases balances in our ruble-denominated accounts and,consequently, our exposure to devaluation risk.

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***Indenturesrelating to our notes and our controlling shareholder Sistema’s notes contain,and some of our loan agreements contain, restrictive covenants, which limit ourability to incur debt and to engage in various activities.***

The indentures relating to our outstandingnotes contain covenants limiting our ability to incur debt, create liens on ourproperties and enter into sale and lease-back transactions. The indentures alsocontain covenants limiting our ability to merge or consolidate with anotherperson or convey our properties and assets to another person, as well as ourability to sell or transfer any of our or our subsidiaries’ GSM licenses forthe Moscow, St. Petersburg, Krasnodar and Ukraine license areas. Some of ourloan agreements contain similar and other covenants. Failure to comply withthese covenants could cause a default and result in the debt becomingimmediately due and payable, which would materially adversely affect ourbusiness, financial condition and results of operations.

In addition,Sistema, which controls 53.1% 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/OIBDA (as defined therein) ratio is met. Inaddition to us, Sistema has various other businesses that require capital and, therefore,the consolidated Sistema group’s capacity to incur indebtedness otherwiseavailable to us could be diverted to its other businesses. Sistema may also enter into other agreements inthe 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 obligations under its current and future financings and otheragreements, which could materially limit our ability to obtain additionalfinancing required for the implementation of our business strategy.

***If achange in control occurs, our noteholders and other debt holders may require usto redeem notes or other debt, which could have a material adverse effect onour financial condition and results of operations.***

Underthe terms of our outstanding notes, if a change in control occurs, ournoteholders will have the right to require us to redeem notes not previouslycalled for redemption. The price we will be required to pay upon such eventwill be 101% of the principal amount of the notes, plus accrued interest to theredemption date. A change in control will be deemed to have occurred in any ofthe 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 does notbeneficially own at least 50% of the total voting power of all shares of commonstock of such entity.

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

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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.

***Russiancompanies can be forced into liquidation on the basis of formal non-compliancewith certain requirements of Russian law.***

Certain provisions of Russian law may allowa court to order liquidation of a Russian legal entity on the basis of itsformal non-compliance with certain requirements during formation,reorganization or during its operation. There have been cases in the past inwhich formal deficiencies in the establishment process of a Russian legalentity or non-compliance with provisions of Russian law have been used byRussian courts as a basis for liquidation of a legal entity. Weaknesses in theRussian legal system create an uncertain legal environment, which makes thedecisions of a Russian court or a governmental authority difficult, if notimpossible, to predict. If involuntary liquidation were to occur, suchliquidation could lead to significant negative consequences for our group.

For example, inRussian corporate law, negative net assets calculated on the basis of Russianaccounting standards as at the end of the second or any subsequent year of acompany’s operation can serve as a basis for a court to order the liquidationof the company upon a claim by governmental authorities. Many Russian companieshave negative net assets due to very low historical asset values reflected ontheir Russian accounting standards balance sheets; however, their solvency, *i.e*., their ability to pay debts as theycome due, is not otherwise adversely affected by such negative net assets. Theamount of net assets of some of our subsidiaries is below the minimum legalrequirements Although we are currently taking steps to remedy this and thesesubsidiaries continue to meet all of their obligations to creditors, there is aminimal risk of their liquidation.

**RisksRelating to Our Countries of Operation**

**EconomicRisks**

***Economic instability in the countries wherewe operate could adversely affect our business.***

Sincethe dissolution of the Soviet Union in 1991, the economies of the countrieswhere we operate 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 ofa black and gray market economy;

·       pervasivecapital flight;

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

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·       significantincreases in unemployment and underemployment; and

·       theimpoverishment of a large portion of the population.

Although the countries where we operatehave benefited recently from the increase in global commodity prices, providingan increase in disposable income and an increase in consumer spending, theeconomies of these countries have been subject to abrupt downturns in the past.In particular, on August 17, 1998, in the face of a rapidly deterioratingeconomic situation, the Russian government defaulted on its ruble-denominatedsecurities, the Central Bank of Russia stopped its support of the ruble and atemporary moratorium was imposed on certain foreign currency payments. Theseactions resulted in an immediate and severe devaluation of the ruble and asharp increase in the rate of inflation; a substantial decline in the prices ofRussian debt and equity securities; and an inability of Russian issuers toraise funds in the international capital markets. Certain other CIS countries,including Ukraine and Belarus, were similarly affected by these events.

These problems were aggravated by a majorbanking crisis in the Russian banking sector after the events of August 17,1998, as evidenced by the termination of the banking licenses of a number ofmajor Russian banks. This further impaired the ability of the banking sector toact as a consistent source of liquidity to Russian companies and resulted in thelosses 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 and, if thishappens, our businesses in these countries could suffer.

***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 and inconsistent application. The August 1998 financialcrisis resulted in the bankruptcy and liquidation of many Russian banks andalmost entirely eliminated the developing market for commercial bank loans atthat time. Many Russian banks currently do not meet international bankingstandards, and the transparency of the Russian banking sector in some respectsstill lags far behind internationally accepted norms. Aided by inadequatesupervision by the regulators, certain banks do not follow existing CentralBank of Russia regulations with respect to lending criteria, credit quality,loan loss reserves or diversification of exposure. Furthermore, in Russia, bankdeposits made 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.

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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. Another banking crisis or thebankruptcy or insolvency of the banks from which we receive or with which wehold our funds could result in the loss of our deposits or affect our abilityto complete banking transactions in Russia, which could have a material adverseeffect on our business, financial condition and results of operations.

***Theinfrastructure in Russia and Ukraine is inadequate, which could disrupt normalbusiness activities, including our business operations.***

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.In addition, the road conditionsthroughout Russia and Ukraine are poor with many roads not meeting even minimumstandards. The Russian and Ukrainian governments are actively considering plansto reorganize the nations’ rail, electricity and communications systems. Anysuch reorganization may result in increased charges and tariffs while failingto generate the anticipated capital investment needed to repair, maintain andimprove these systems.

Thedeterioration of the physical infrastructure in Russia and Ukraine harms thenational economies, adds costs to doing business in these countries andgenerally disrupts normal business activities. These difficulties can impact usdirectly; for example, we keep portable electrical generators to help us maintainbase station operations in the event of power outages. Further deterioration ofthe physical infrastructure in Russia and Ukraine, as well as the othercountries where we operate, could have a material adverse effect on ourbusiness, financial condition and results of operations.

***Fluctuationsin the global economy may materially adversely affect the economies of thecountries where we operate and our business in these countries.***

The countries’economies where we operate are vulnerable to market downturns and economicslowdowns elsewhere in the world. As has happened in the past, financialproblems or an increase in the perceived risks associated with investing inemerging economies could dampen foreign investment in Russia, Ukraine,Uzbekistan, Turkmenistan and Belarus and businesses in these countries couldface severe liquidity constraints, further adversely affecting their economies.Additionally, because Russia and Turkmenistan produce and export large amountsof oil and gas, the Russian and Turkmen economies are especially vulnerable tothe price of oil and gas on the world market and a decline in the price of oiland gas could slow or disrupt the Russian and Turkmen economies. Recentmilitary conflicts and international terrorist activity have also significantlyimpacted oil and gas prices, and pose additional risks to the Russian economy.Russia and Ukraine are also major producers and exporters of metal products andtheir economies are vulnerable to world commodity prices and the imposition oftariffs and/or antidumping measures by the United States, the European Union orby other principal export markets.

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**Politicaland Social Risks**

***Politicaland governmental instability in Russia and Ukraine could materially adverselyaffect our business, financial condition, results of operations and prospectsand the value of our shares 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 Russian and Ukrainian governments, major policy shifts orlack of consensus between various branches of the government and powerfuleconomic groups could disrupt or reverse economic and regulatory reforms. Inaddition, the Ukrainian and Russian presidential elections scheduled for 2007and 2008, respectively, could bring more volatility to these markets. Anydisruption or reversal of reform policies could lead to political orgovernmental instability or the occurrence of conflicts among powerful economicgroups, which could have a material adverse effect on our business, financialcondition, results of operations and prospects and the value of our shares andADSs.

***Potentialconflict between central and regional authorities could create an uncertainoperating environment hindering our long-term planning ability.***

The Russian Federation is a federation of86 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 could result in the enactment of conflictinglegislation at various levels and may lead to 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,and such challenges may occur in the future. This lack of consensus may hinderour long-term planning efforts and create uncertainties in our operatingenvironment, both of which may prevent us from effectively and efficientlyimplementing our business strategy.

Additionally, ethnic, religious, historicaland other divisions have, on occasion, given rise to tensions and, in certaincases, military conflict, which can halt normal economic activity and disruptthe economies of neighboring regions. For example, violence and attacksrelating to the Chechen conflict have spread to other parts of Russia andseveral terrorist attacks have been carried out by Chechen terrorists in otherparts of Russia, including in Moscow. The further intensification of violence,including terrorist attacks and suicide bombings, or its spread to other partsof Russia, could have significant political consequences, including theimposition of a state of emergency in some or all of Russia. Moreover, anyterrorist attacks and the resulting heightened security measures are likely to causedisruptions to domestic commerce and exports from Russia. These factors couldmaterially adversely 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 have subsided following theinvalidation of the November election results and the new presidentialelection held in December 2004, the long-term effects of these events andtheir effect on 

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relationsamong Ukrainians is not yet fully known. If such tensions in Ukraine arere-ignited in the future, our long-term planning ability and operations in Ukrainecould suffer.

***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 months afterthe last government was dismissed by the Ukrainian president. The latest voteoccurred in the wake of widespread criticism of the government for signing acontroversial deal on gas supplies from Russia earlier in the month and aheadof the Ukrainian parliamentary elections in March 2006. As a result of theMarch elections, the previous government continued to perform its dutiesuntil the appointment of a new government in August 2006.

Changes to theUkrainian constitution introduced on January 1, 2006 shifted importantpowers from the president to parliament, including the right to name the primeminister and form a government. With these new powers, there is a riskthat the impasse between the president and parliament will evolve into aprotracted political struggle and cause Ukraine’s economy to decline. Anydisruption or reversal of political reforms in Ukraine could cause adeterioration in the political, social and economic environment in Ukrainewhich, in turn, could have a material adverse effect on our operations inUkraine, our business, financial condition and results of operations. See also “RisksRelating to Our Business—A decline in relations between Russia and the othercountries where we operate could materially adversely affect our business,financial condition, results of operations and prospects.”

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

The politicaland economic changes in the countries where we operate in recent years haveresulted in significant dislocations of authority. The local and internationalpress have reported that significant organized criminal activity has arisen,particularly in large metropolitan centers. Property crime in large cities hasincreased substantially. In addition, the local and international press havereported high levels of 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 selectiveinvestigations and prosecutions to further the commercial interests of certaingovernment officials or certain companies or individuals. Additionally, somemembers of the media in the countries we operate in regularly publishdisparaging articles in return for payment. The depredations of organized orother crime, demands of corrupt officials or claims that we have been involvedin official corruption could result in negative publicity, disrupt our abilityto conduct our business and could thus materially adversely affect ourbusiness, financial condition, results of operations and prospects.

***Social instability could increase support for renewedcentralized authority, nationalism or violence and thus materially adverselyaffect our operations.***

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, including restrictions on foreigninvolvement in the economies of the countries where we have operations; andincreased violence. An occurrence of any of the foregoing events could restrictour operations and lead to the loss of revenues, materially adversely affectingour operations.

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**Legal Risks andUncertainties**

***Weaknessesrelating to the legal system and legislation in the countries where we operatecreate an uncertain environment for investment and business activity, whichcould have a material adverse effect on the value of our shares and ADSs.***

Each of thecountries we operate in is still developing the legal framework required tosupport a market economy. The following risk factors relating to these legalsystems create uncertainty with respect to the legal and business decisions thatwe make, many of which uncertainties do not exist in countries with moredeveloped 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;

·       thelack of judicial and administrative guidance on interpreting legislation;

·       therelative inexperience of judges and courts in interpreting legislation;

·       thelack of an independent judiciary;

·       ahigh degree 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.

The recent nature of muchof Russian, Ukrainian, Uzbek, Turkmen and Belarusian legislation, the lack ofconsensus about the scope, content and pace of economic and political reformand the rapid evolution of these legal systems in ways that may not alwayscoincide with market developments place the enforceability and underlyingconstitutionality of laws in doubt and results in ambiguities, inconsistenciesand anomalies. In addition, Russian, Ukrainian, Uzbek, Turkmen and Belarusian 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 contracts, or to defend ourselves against claims by others. We cannotassure you that regulators, judicial authorities or third parties will notchallenge our internal procedures and bylaws, as well as our compliance withapplicable laws, decrees and regulations.

***The judiciary’slack of independence and overall inexperience, the difficulty of enforcingcourt decisions and governmental discretion in enforcing claims could preventus or holders of our shares and ADSs from obtaining effective redress in acourt proceeding, materially adversely affecting the value of our shares andADSs.***

The independence of the judicial system and itsimmunity from economic, political and nationalistic influences in each ofRussia, Ukraine, Uzbekistan, Turkmenistan and Belarus remain largely untested.The court system in each of these countries is understaffed and underfunded.Judges and courts are generally inexperienced in the area of business andcorporate law. Judicial precedents generally have no binding effect onsubsequent decisions. Not all Russian, Ukrainian, Uzbek, Turkmen and Belarusianlegislation and court decisions are readily available to the public ororganized in a manner that facilitates understanding. The judicial systems inthese countries can be slow or unjustifiably swift. Enforcement of court orderscan, in practice, be very difficult to achieve. All of these factors makejudicial decisions in these countries difficult to predict and effectiveredress uncertain. Additionally, court claims are often used in furtherance of politicaland commercial aims or infighting. We may be subject to such claims and may notbe able to receive a fair hearing. Additionally, court orders are not alwaysenforced or followed by law 

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enforcement agencies, andthe government may attempt to invalidate court decisions by backdating orretroactively applying relevant legislative changes.

These uncertainties alsoextend to property rights. For example, during Russia and Ukraine’stransformation from centrally planned economies to market economies, legislationhas been enacted in both countries to protect private property againstexpropriation and nationalization. However, it is possible that due to the lackof experience in enforcing these provisions and due to political factors, theseprotections would not be enforced in the event of an attempted expropriation ornationalization. Expropriation or nationalization of any of our entities, theirassets or portions thereof, including UMC, potentially without adequatecompensation, would have a material adverse effect on our business, financialcondition, results of operations and prospects.

***Our inability togain operational control over Bitel has prevented us from realizing theexpected benefits of our acquisition and resulted in our write off of the costsrelating to the purchase of Bitel, and we may face significant liabilities tothe seller and Bitel.***

In December 2005, our wholly-owned subsidiary MTSFinance S.A. acquired a 51.0% stake in Tarino Limited (Tarino) from NomiholdSecurities Inc. (Nomihold) for $150.0 million in cash. Tarino was at that timethe indirect owner, through its wholly-owned subsidiaries, of Bitel LLC, aKyrgyz company holding a GSM 900/1800 license for the entire territory ofKyrgyzstan.

Following the purchase of the 51.0% stake, MTS Financeentered into a put and call option agreement with Nomihold to acquire theremaining 49.0% interest in Tarino (and, therefore, the remaining shares inBitel). The call option was exercisable by MTS Finance from November 22,2005 to November 17, 2006, and the put option was exercisable by Nomiholdfrom November 18, 2006 to December 8, 2006. The call and put optionprice was $170.0 million.

Following a decision of the Kyrgyz Supreme Court on December 15,2005, Bitel’s corporate offices were seized by a third party. As we did notregain operational control over Bitel’s operations in 2005, we accounted forour 51.0% investment in Bitel at cost as at December 31, 2005. We appealedthe decision of the Kyrgyz Supreme Court in 2006, but the court has not actedwithin the time period permitted for appeal. We subsequently sought the reviewof this dispute over the ownership of Bitel by the Prosecutor General ofKyrgyzstan to determine whether further investigation could be undertaken bythe Kyrgyz authorities. In January 2007, the Prosecutor General informedus that there were no grounds for involvement by the Prosecutor General’soffice in the dispute and that no legal basis existed for us to appeal thedecision of the Kyrgyz Supreme Court. Consequently, we decided to write off thecosts relating to the purchase of the 51% stake in Bitel, which has beenreflected in our annual consolidated financial statements for the year ended December 31,2006.

In November 2006, MTS Finance received a letterfrom Nomihold purporting to exercise the put option and sell its remainingstakes in Tarino (and, therefore, Bitel) for $170.0 million to MTS Finance. In January 2007,Nomihold commenced an arbitration proceeding against MTS Finance in the LondonCourt of International Arbitration in order to compel MTS Finance to purchasethe remaining shares. Nomihold seeks specific performance of the put option,unspecified monetary damages, interest, and costs. The matter is currentlypending. MTS Finance is vigorously contesting this action and has asked thearbitration tribunal to dismiss Nomihold’s claim.

A group of individual shareholders of Sistema hasagreed to compensate MTS Finance for any potential loss up to $170 million shouldthe arbitration decision regarding exercise of the aforementioned put optionprove unfavorable to MTS Finance. Notwithstanding this, in the event MTSFinance does not prevail in the arbitration, we could be liable to Nomihold for$170.0 million plus any additional amounts that the arbitration tribunal mightaward to Nomihold.

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In connection with the above mentioned put optionexercise and the uncertainty as to the resolution of the dispute with Nomihold,we have recognized a liability in the amount of $170.0 million for the purposesof our annual consolidated financial statements with a corresponding charge toother non-operation expenses as of December 31, 2006 and for the year thenended.

In addition, three Isle of Man companies affiliatedwith us (KFG Companies) have been named defendants in lawsuits filed by Bitelin the Isle of Man seeking the return of dividends received by these threecompanies in the first quarter of 2005 from Bitel in the amount ofapproximately $25.2 million plus compensatory damages, and to recoverapproximately $3.7 million in losses and accrued interest. In the event thatthe defendants do not prevail in these lawsuits, we may be liable to Bitel forsuch claims. The KFG Companies have also asserted counterclaims against Bitel,and claims against other defendants including Altimo and Altimo Holding, forthe wrongful appropriation and control of Bitel. It is not possible at thistime to predict the outcome or resolution of these claims.

In a separate arbitrationproceeding initiated against the KFG Companies by Kyrgyzstan Mobitel InvestmentCompany Limited (KMIC) under the rules of the London Court of InternationalArbitration, the arbitration tribunal in a recent award found that the KFGCompanies breached a May 31, 2003 Transfer Agreement concerning the sharesof Bitel. The Transfer Agreement was made between the KFG Companies and IPOCInternational Growth Fund Limited (IPOC) although IPOC subsequently assignedits interest to KMIC, and KMIC was the claimant in the arbitration. Thetribunal ruled that the KFG Companies breached the Transfer Agreement when theyfailed to establish a date on which the equity interests in Bitel were to betransferred to KMIC and by failing to take other steps to transfer the Bitelinterests. This breach occurred prior to MTS Finance’s acquisition of the KFGCompanies. The arbitration tribunal ruled that KMIC is entitled only to damagesin an amount to be determined in future proceedings. We are not able to predictthe outcome of these proceedings or the amount of damages to be paid, if any.

***Selective orarbitrary government action could have a material adverse effect on ourbusiness, financial condition, results of operations and prospects.***

Governmental authorities in the countries where weoperate 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 tax auditsand claims, criminal prosecutions and civil actions. Federal and localgovernment entities have also used ordinary defects in matters surroundingshare issuances and registration as pretexts for court claims and other demandsto invalidate such issuances and registrations or to void transactions.Moreover, the government also has the power in certain circumstances, byregulation or government act, to interfere with the performance of, nullify orterminate contracts. 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, theRussian tax authorities have aggressively brought tax evasion claims relatingto Russian companies’ use of tax-optimization schemes, and press reports havespeculated that these enforcement actions have been selective and politicallymotivated. Selective or arbitrary government action, if directed at us, couldhave a material adverse effect on our business, financial condition, results ofoperations and prospects

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***Failure to complywith existing laws and regulations or to obtain all approvals, authorizationsand permits required to operate telecommunications equipment, or the findingsof government inspections or increased governmental regulation of ouroperations,*** could result in a disruption in our businessand substantial additional compliance costs and sanctions.

Our operations and properties are subject toregulation by various government entities and agencies in connection withobtaining and renewing various licenses, approvals, authorizations and permits,as well as with ongoing compliance with existing laws, regulations andstandards. Regulatory authorities exercise considerable discretion in mattersof enforcement and interpretation of applicable laws, regulations andstandards, the issuance and renewal of licenses, approvals, authorizations andpermits and in monitoring licensees’ compliance with the terms thereof. Russianauthorities have the right to, and frequently do, conduct periodic inspectionsof our operations and properties throughout the year. Any such futureinspections 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 legalconsiderations and in preferential treatment for our competitors.”

Due primarily to delays in theissuance of permits, approvals and authorizations by regulatory authorities,frequently it is not possible to procure all of the permits for each of ourbase stations or other aspects of our network before we put the base stationsinto commercial operation or to amend or maintain all of the permits when wemake changes to the location or technical specifications of our base stations.At times, there can be a significant number of base stations or othercommunications facilities and other aspects of our networks for which we do nothave final permits to operate and there can be delays in obtaining the finalpermits, approvals and authorizations for particular base stations or othercommunications facilities and other aspects of our networks.

Our failure to comply withexisting laws and regulations or to obtain all approvals, authorizations andpermits required to operate telecommunications equipment or the findings ofgovernment inspections may also result in the imposition of fines or penaltiesor more severe sanctions including the suspension, amendment or termination ofour licenses, approvals, authorizations and permits, or in requirements that wecease certain of our business activities, or in criminal and administrativepenalties applicable to our officers. Moreover, an agreement or transactionentered into in violation of Russian law may be invalidated and/or unwound by acourt decision. Any such decisions, requirements or sanctions, or any increasein governmental regulation of our operations, couldresult in a disruption of our business and substantial additional compliancecosts and could materially adversely affect our business, financial condition,results of operations and prospects.

***Developingcorporate and securities laws and regulations in Russia could limit our abilityto attract future investment.***

The regulation andsupervision of the securities market, financial intermediaries and issuers areconsiderably less developed in Russia than, for example, in the United Statesand Western Europe. Securities laws, including those relating to corporategovernance, disclosure and reporting requirements have only recently beenadopted while other laws concerning anti-fraud, insider trading and fiduciaryduties of directors and officers are still relatively undeveloped. In addition,the Russian securities market is regulated by several different authorities,which are often in competition with each other. These include:

·       theFederal Service for the Financial Markets;

·       theRussian Federal Antimonopoly Service;

·       theCentral Bank of Russia; and

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·       variousprofessional self-regulatory organizations.

The regulations of these various authorities are notalways coordinated and may be contradictory.

In addition, Russian corporate and securities rules andregulations can change rapidly, which may materially adversely affect ourability to conduct securities-related transactions. While some importantareas are subject to virtually no oversight, the regulatory requirementsimposed on Russian issuers in other areas result in delays in conductingsecurities offerings and in accessing the capital markets. It is often unclearwhether or how regulations, decisions and letters issued by the variousregulatory authorities apply to us. As aresult, we may be subject to fines and/or other enforcement measures despiteour best efforts at compliance, which could have a material adverse effect onour business, financial condition and results of operations.

***There is little minority shareholder protection inRussia.***

Minority shareholder protection under Russian lawprincipally derives from supermajority shareholder approval requirements forcertain corporate actions, as well as from the ability of a shareholder todemand that the company purchase the shares held by that shareholder if thatshareholder voted against or did not participate in voting on certain types ofactions. Companies are also required by Russian law to obtain the approval ofdisinterested shareholders for certain transactions with interested parties. Inpractice, enforcement of these protections has been poor. Shareholders of somecompanies have also suffered as a result of fraudulent bankruptcies initiatedby hostile creditors.

The supermajority shareholder approval requirement ismet by a vote of 75% of all voting shares that are present at a shareholders’meeting. Thus, controlling shareholders owning slightly less than 75% ofoutstanding shares of a company may have a 75% or more voting power if certainminority shareholders are not present at the meeting. In situations wherecontrolling shareholders effectively have 75% or more of the voting power at ashareholders’ meeting, they are in a position to approve amendments to thecharter of the company or significant transactions including asset transfers,which could be prejudicial to the interests of minority shareholders. It ispossible that our controlling shareholder in the future may not run us and oursubsidiaries for the benefit of minority shareholders, and this could have amaterial adverse effect on the value of the shares and ADSs.

While the Federal Law onJoint Stock Companies of December 26, 1995, or the Joint Stock CompaniesLaw, provides that shareholders owning not less than 1% of the company’s stockmay bring an action for damages on behalf of the company, Russian courts todate do not have much experience with such lawsuits. Russian law does notcontemplate class action litigation. Accordingly, your ability to pursue legalredress against us may be limited, reducing the protections available to you asa holder of the shares and ADSs.

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***Shareholderliability under Russian legislation could cause us to become liable for theobligations of our subsidiaries.***

The Civil Code ofthe Russian Federation dated January 26, 1996 and the Joint StockCompanies Law generally provide that shareholders in a Russian joint stockcompany are not liable for the obligations of the joint stock company and bearonly the risk of loss of their investment. This may not be the case, however,when one entity is capable of determining decisions made by another entity. Theentity capable of determining such decisions is deemed an “effective parent.”The entity whose decisions are capable of being so determined is deemed an “effectivesubsidiary.” Under the Joint Stock Companies Law, an 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 the companies; and

·       theeffective parent gives obligatory directions to the effective subsidiary.

In addition, an effectiveparent is secondarily liable for an effective subsidiary’s debts if aneffective subsidiary becomes insolvent or bankrupt resulting from the action orinaction of an effective parent. This is the case no matter how the effectiveparent’s ability to determine decisions of the effective subsidiary arises. Forexample, this liability could arise through ownership of voting securities orby contract. In these instances, other shareholders of the effective subsidiarymay claim compensation for the effective subsidiary’s losses from the effectiveparent which caused the effective subsidiary to take action or fail to takeaction knowing that such action or failure to take action would result inlosses. Accordingly, we could be liable in some cases for the debts of oursubsidiaries. This liability could have a material adverse effect on ourbusiness, results of operations and financial condition.

***Shareholder rights provisions under Russian law couldimpose additional obligations and costs on us.***

Russian lawprovides that shareholders that vote against or abstain from voting on certainmatters have the right to sell their shares to the company at market value inaccordance with Russian law. The decisions that trigger this right to sellshares 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.

Our (or, as the case maybe, our subsidiaries’) obligation to purchase shares in these circumstances,which is limited to 10% of the company’s net assets calculated in accordancewith Russian accounting standards at the time the matter at issue is voted upon,could have a material adverse effect on our business, financial condition,results of operations and prospects.

***Limitations onforeign investment could impair the value of your investment and could hinderour access to additional capital.***

Russian and Ukrainianlegislation governing foreign investment activities does not prohibit orrestrict foreign investment in the telecommunications industry. However, a lackof consensus exists over the manner and scope of government control over thetelecommunications industry. While draft legislation protecting the rights offoreign investors specifically in the telecommunications industry has beenconsidered at various times, the Law on Foreign Investment in the RussianFederation does not provide 

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anyspecific protections in this regard, nor are there specific protections inUkraine. Because the telecommunications industry is widely viewed asstrategically important to Russia and Ukraine, governmental control over thetelecommunications industry may increase, and foreign investment in or controlover the industry may be limited. Any such increase in governmental control orlimitation on foreign investment could impair the value of your investment andcould hinder our access to additional capital.

***The implementationof the Federal Law on Communications imposed an additional financial burden onus and may restrict our operations, which could materially adversely affect ourfinancial condition and results of operations.***

The Federal Law on Communications, which came into forceon 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. In 2006,the levy was calculated as 1.2% of the difference between the total revenuesfrom telecommunications services and revenues generated by interconnection andtraffic transmission services. Starting in 2007, the levy is charged as 1.2% ofgross revenues from telecommunications services excluding VAT.

In addition, an amendment to the Federal Law onCommunications, which became effective July 1, 2006, implemented theCalling Party Pays, or CPP, principle prohibiting mobile operators fromcharging their subscribers for incoming calls. Prior to the implementation ofthe CPP, subscribers of fixed line operators could initiate calls to mobilephone users free of charge. Under the new system, fixed line operators begancharging their subscribers for such calls and transfer a percentage of thecharge to mobile operators terminating such calls. The percentage transferredto mobile operators is regulated by Rossvyazokhrankultura and is known as thesettlement rate. The settlement rate, however, does not cover our expenses forterminating calls initiated by subscribers of fixed line operators and,therefore, we partially offset the resulting losses by charging most of oursubscribers an additional amount for the first minute of outgoing calls.If the increase in revenues resulting from this additional charge, as well asany increases in our traffic volume associated with the CPP, is not sufficientto offset any losses we incur due to the low settlement rate established by Rossvyazokhrankultura,then the CPP principle may have a negative impact on our average monthlyservice revenues per subscriber and margins. In addition, potential regulatorychanges that may be enacted in the future, such as mobile numbering portabilityand the introduction of new rules surrounding the mobile virtual networkof operators could weaken our competitive position in the mobiletelecommunications market and, as a result, materially adversely affect ourfinancial position and results of operations.

The new Ukrainian Law on Telecommunications also cameinto force on January 1, 2004. However, regulations implementing the newlaw have not yet been promulgated and certain regulatory bodies established bythe new law have not yet commenced their regulatory functions. For example, theregulatory body tasked with regulating the telecommunications industry andissuing telecommunications licenses in Ukraine, the NCRC was formed in January 2005and, in June 2005, began to perform its regulatory functions. However, theappointment of the NCRC members is currently being challenged in the Ukrainiancourts. Although the first two court rulings confirmed the validity of themembers’ appointment, a hearing before the Higher Administrative Court ofUkraine is still pending. If the Higher Administrative Court invalidates theappointment of the NCRC members, uncertainty will ensue with respect to theNCRC and its role in the regulation of the Ukrainian telecommunicationsindustry. As a result, our financial position and results of operations may beadversely affected.

In addition, the newUkrainian Law on Telecommunications, among other things, may require companieswith a dominant position in the telecommunications market to develop publictelecommunications services if directed to do so by the regulatory authorities.As UMC’s estimated market 

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share inmobile telecommunications services in Ukraine is 41%, implementation of the newlaw may materially adversely affect our financial condition and results ofoperations. See “Item 4. Information on Our Company—B. Business Overview—Regulationin Ukraine—Legislation.”

***The lack of adeveloped share registration system in Russia may result in improper recordownership of our shares, including the shares underlying the ADSs.***

Ownership of Russian jointstock company shares (or, if the shares are held through a nominee orcustodian, then the holding of such nominee or custodian) is determined byentries in a share register and is evidenced by extracts from that register.Currently, there is no central registration system in Russia. Share registersare maintained by the companies themselves or, if a company has more than50 shareholders or so elects, by licensed registrars. Regulations havebeen issued regarding the licensing conditions for such registrars, as well asthe procedures to be followed by both companies maintaining their own registersand licensed registrars when performing the functions of registrar. Inpractice, however, these regulations have not been strictly enforced, andregistrars generally have relatively low levels of capitalization andinadequate insurance coverage. Moreover, registrars are not necessarily subjectto effective governmental supervision. Due to the lack of a developed shareregistration system in Russia, transactions in respect of a company’s sharescould be improperly or inaccurately recorded, and share registration could belost through fraud, negligence, official and unofficial governmental actions oroversight by registrars incapable of compensating shareholders for theirmisconduct. This creates risks of loss not normally associated with investmentsin other securities markets. Further, the depositary, under the terms of thedeposit agreement, will not be liable for the unavailability of shares or forthe failure to make any distribution of cash or property with respect theretodue to the unavailability of the shares.

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

Generally, taxespayable by Russian companies are substantial and numerous. These taxes include,among others:

·       incometaxes;

·       VAT;

·       unifiedsocial tax; and

·       propertytax.

The tax environment in Russia historically has beencomplicated 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 significant changes to theRussian taxation system. Global tax reforms commenced in 1999 with theintroduction of Part One of the Tax Code of the Russian Federation, or theTax Code, which sets general taxation guidelines. Since then, Russia has beenin the process of replacing legislation regulating the application of majortaxes such as corporate income tax, VAT and property tax with new chapters ofthe Tax Code.

In practice, the Russian tax authorities generallyinterpret the tax laws in ways that rarely favor taxpayers, who often have toresort 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, 

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regional and local levels,creating uncertainties and inconsistent enforcement. Tax declarations, togetherwith related documentation such as customs declarations, are subject to reviewand investigation by a number of authorities, each of which may impose fines,penalties and interest charges. Generally, in an audit, taxpayers are subjectto inspection with respect to the three calendar years which immediatelypreceded the year in which the audit is carried out. Previous audits do notcompletely exclude subsequent claims relating to the audited period becauseRussian tax law authorizes upper-level tax inspectorates to review theresults of previous tax audits conducted by subordinate tax inspectorates. Inaddition, on July 14, 2005, the Russian Constitutional Court issued adecision that allows the statute of limitations for tax liabilities to beextended beyond the three-year term set forth in the tax laws if a courtdetermines that a taxpayer has obstructed or hindered a tax audit. Because noneof the relevant terms is defined, tax authorities may have broad discretion toargue that a taxpayer has “obstructed” or “hindered” an audit and ultimatelyseek penalties beyond the three-year term. In some instances, new taxregulations have been given retroactive effect.

Moreover, financial results of Russian companiescannot be consolidated for tax purposes. Therefore, each of our Russiansubsidiaries pays its own Russian taxes and may not offset its profit or lossagainst the loss or profit of any of our other subsidiaries. In addition,intercompany dividends are subject to a withholding tax of 9%, if beingdistributed to Russian companies, and 15%, if being distributed to foreigncompanies. If the receiving company itself pays a dividend, it may offset taxwithheld against its own withholding liability of the onward dividend althoughnot against any withholding made on a distribution to a foreign company. Thesetax requirements impose additional burdens and costs on our operations, includingmanagement resources.

The foregoing conditionscreate tax risks in Russia that are more significant than typically found incountries with more developed tax systems, imposing additional burdens andcosts 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 at compliance,and could materially adversely affect ourbusiness, financial condition, results of operations and prospects and thevalue of our shares and ADSs.

***The implications ofthe tax system in Ukraine are uncertain and various tax laws are subject todifferent interpretations.***

Ukraine currently has a number of laws related tovarious taxes imposed by both central and regional governmental authorities.Applicable taxes include VAT, corporate income tax (profits tax), customsduties, payroll (social) taxes and other taxes. These tax laws have not been inforce 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 Constitution prohibitsretroactive enforcement of any newly enacted tax laws and the Law on TaxationSystem specifically requires legislation to adopt new tax laws at least sixmonths prior to them becoming effective, such rules have largely beenignored. In addition, tax laws are often vaguely drafted, making it difficultfor us to determine what actions are required for compliance. Differingopinions regarding the legal interpretation of tax laws often exist both amongand within governmental ministries and organizations, including the taxadministration, creating uncertainties and areas of conflict for taxpayers andinvestors. In practice, the Ukrainian tax authorities tend to interpret the taxlaws in an arbitrary way that rarely favors taxpayers.

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Tax declarations/returns,together with other legal compliance areas (*e.g.*, customsand currency control matters), may be subject to review and investigation byvarious administrative divisions of the tax authorities, which are authorizedby law to impose severe fines, penalties and interest charges. Thesecircumstances create tax risks in Ukraine substantially more significant thantypically found in countries with more developed tax systems. Generally, taxdeclarations/returns in Ukraine remain open and subject to inspection for athree-year period. However, this term may not be observed or may beextended under certain circumstances, including in the context of a criminalinvestigation. While we believe that we are currently in compliance with thetax laws affecting our operations in Ukraine, it is possible that relevantauthorities may take differing positions with regard to interpretative issues,which may result in a material adverse effect on our results of operations andfinancial condition.

***Vaguely draftedRussian transfer pricing rules and lack of reliable pricing informationmay impact our business and results of operations.***

Russian transfer pricing rules effective since1999 give Russian tax authorities the right to control prices for transactions betweenrelated entities and certain other types of transactions between independentparties, such as foreign trade transactions or transactions with significantprice fluctuations. The Russian transfer pricing rules are vaguelydrafted, and are subject to interpretation by Russian tax authorities andcourts, and have been used for politically motivated investigations andprosecutions. Although we believe that we comply with Russian tax law ontransfer pricing, the uncertainties in interpretation of transfer pricinglegislation may result in the tax authorities challenging our prices and makingadjustments which could affect our tax position. If such price adjustmentsbecome effective by a court order or otherwise, our results of operations couldbe materially adversely affected. In addition, we could face significant lossesassociated with the assessed amount of underpaid prior tax and related interestand penalties.

In addition, a number ofdraft amendments to the transfer pricing law have recently been introducedwhich, if implemented, would considerably toughen the existing law. Theproposed changes would, among other things, shift the burden of proving marketprices from the tax authorities to the taxpayer, cancel the existing permitteddeviation threshold and introduce specific documentation requirements forproving market prices.

***The regulatoryenvironment for telecommunications in Russia and Ukraine is uncertain andsubject to political influence or manipulation, which may result in negativeand arbitrary regulatory and other decisions against us on the basis of otherthan legal considerations and in preferential treatment for our competitors.***

We operate in an uncertain regulatory environment. Thelegal framework with respect to the provision of telecommunications services inRussia and Ukraine and the other countries where we operate or may operate inthe future is not well developed, and a number of conflicting laws, decrees andregulations apply to the telecommunications sector.

Moreover, regulation isconducted largely through the issuance of licenses and instructions, andgovernmental officials have a high degree of discretion. In this environment,political influence or manipulation could be used to affect regulatory, tax andother decisions against us on the basis of other than legal considerations. Forexample, Russian government authorities investigated Vimpelcom in late 2003 ongrounds that it was illegally operating in Moscow pursuant to a license issuedto its wholly-owned subsidiary rather than to Vimpelcom itself. In addition,some of our competitors may receive preferential treatment from the government,potentially giving them a substantial advantage over us. For example, accordingto press reports, MegaFon and Kyivstar, our competitors in Russia and Ukraine,respectively, received preferential treatment in regulatory matters in thepast.

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**Risks Relating tothe Shares and ADSs and the Trading Market**

***Because thedepositary may be considered the owner of the shares underlying the ADSs, theseshares may be arrested or seized in legal proceedings in Russia against thedepositary.***

Many jurisdictions, such as the United Kingdom and theUnited States, recognize a distinction between legal owners of securities, suchas the depositary, and the beneficial owners of securities, such as the ADSholders. In these jurisdictions, the shares held by the depositary on behalf ofthe ADS holders would not be subject to seizure in connection with legalproceedings against the depositary that are unconnected with the shares.

Russian law may not, however, recognize a distinctionbetween legal and beneficial ownership of securities. Russian law generallytreats a depositary as the owner of shares underlying the ADSs and,accordingly, may not recognize ADS holders' beneficial ownership therein.

Thus, in proceedingsbrought against a depositary, whether or not related to shares underlying theADSs, Russian courts may treat those underlying shares as the assets of thedepositary, open to seizure or arrest. In the past, a lawsuit was filed againsta depositary other than the depositary seeking the seizure of various Russiancompanies' shares represented by ADSs issued by that depositary. In the eventthat this type of suit were to be successful in the future against the depositary,and the shares underlying our ADSs were to be seized or arrested, the ADSholders involved would lose their rights to such underlying shares and all ofthe money invested in them.

***Voting rights withrespect to the shares represented by our ADSs are limited by the terms of thedeposit agreement for our ADSs and relevant requirements of Russian law.***

ADS holders will have no direct voting rights withrespect to the shares represented by the ADSs. They will be able to exercisevoting rights with respect to the shares represented by ADSs only in accordancewith the provisions of the deposit agreement relating to the ADSs and relevantrequirements of Russian law. Therefore, there are practical limitations uponthe ability of ADS holders to exercise their voting rights due to theadditional procedural steps involved in communicating with them. For example,the Joint Stock Companies Law and our charter require us to notify shareholdersno less than 30 days prior to the date of any meeting and at least 70 daysprior to the date of an extraordinary meeting to elect our Board of Directors.Our ordinary shareholders will receive notice directly from us and will be ableto exercise their voting rights by either attending the meeting in person orvoting by power of attorney.

ADS holders by comparison, will not receive noticedirectly from us. Rather, in accordance with the deposit agreement, we willprovide the notice to the depositary. The depositary has undertaken, in turn,as soon as practicable thereafter, to mail to you the notice of such meeting,voting instruction forms and a statement as to the manner in which instructionsmay be given by ADS holders. To exercise their voting rights, ADS holders mustthen instruct the depositary how to vote the shares represented by the ADSsthey hold. Because of this additional procedural step involving the depositary,the process for exercising voting rights may take longer for ADS holders thanfor holders of the shares and we cannot assure ADS holders that they will receive voting materials in time to enable them toreturn voting instructions to the depositary in a timely manner. ADSs for whichthe depositary does not receive timely voting instructions will not be voted.

In addition, althoughRussian 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. ADS holders may thus have significant difficultyin exercising voting rights with respect to the shares underlying the ADSs. We cannotassure you 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.

***ADS holders may be unable to repatriate distributionsmade on the shares and ADSs.***

We anticipate that anydividends we may pay in the future on the shares represented by the ADSs willbe declared and paid to the depositary in rubles and will be converted intoU.S. dollars by the depositary and distributed to holders of ADSs, net of thedepositary’s fees and expenses. The ability to convert rubles into U.S. dollarsis subject to the availability of U.S. dollars in Russia’s currency markets.Although there is an existing, albeit limited by size, market within Russia forthe conversion of rubles into U.S. dollars, including the interbank currencyexchange and over-the-counter and currency futures markets, the furtherdevelopment of this market is uncertain. At present, there is a limited marketfor the conversion of rubles into foreign currencies outside of Russia and limitedmarket in which to hedge ruble and ruble-denominated investments.

***ADS holders may be unable to benefit from the UnitedStates-Russia income tax treaty.***

Under Russian law,dividends paid to a non-resident holder of the shares generally will be subjectto Russian withholding tax at a rate of 15% for legal entities andorganizations and at a rate of 30% for individuals. The domestic tax rateapplicable to dividends payable by Russian companies to non-residentindividuals will be reduced from 30% to 15% effective from January 1, 2008. Thistax may be reduced to 5% or 10% for legal entities and organizations and to 10%for individuals under the Convention between the United States of America andthe Russian Federation for the Avoidance of Double Taxation and the Preventionof Fiscal Evasion with respect to Taxes on Income and Capital (the “UnitedStates-Russia income tax treaty”) for U.S. tax residents. However, theRussian tax rules applicable to ADS holders are characterized bysignificant uncertainties. In 2005 and 2006, the Ministry of Finance of theRussian Federation expressed an opinion that ADS holders (rather than thedepositary) should be treated as the beneficial owners of the underlying sharesfor the purposes of double tax treaty provisions applicable to taxation ofdividend income from the underlying shares, provided that the tax residenciesof the 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 the United States-Russia income tax treaty. See “Item 10. AdditionalInformation—E. Taxation—Russian Income and Withholding Tax Consequences” foradditional information.

***Capital gain from the sale of shares and ADSs may besubject to Russian income tax.***

Under Russian tax legislation, gains realized bynon-resident legal entities or organizations from the disposition of Russianshares and securities, as well as financial instruments derived from suchshares, such as the ADSs, may be subject to Russian income tax or withholdingincome tax if immovable property located in Russia constitutes more than 50% ofour assets. However, no procedural mechanism currently exists to withhold andremit this tax with respect to sales made to persons other than Russiancompanies and foreign companies with a registered permanent establishment inRussia. Gains arising from the disposition of the foregoing types of securitieson foreign stock exchanges by non-resident holders who are legal entities ororganizations are not subject to taxation in Russia.

The taxation of income of non-resident individualsdepends on whether this income is received from Russian or non-Russian sources.The Russian tax laws do not give a clear indication as to how the sale of 

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ADSs should be sourced,other than that income from the sale of securities “in Russia” should beconsidered as Russian source income. As there is no further definition of whatshould be considered to be a sale “in Russia,” the Russian tax authorities havea certain amount of freedom to conclude what transactions take place in oroutside Russia, including looking at the place of the transaction, the place ofthe issuer of the shares or other similar criteria.

Non-residents who areindividuals are taxable on Russian-source income. Provided that 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, then such incomeshould not be taxable in Russia. However, gains arising from the disposition ofthe same securities and derivatives in Russia by U.S. holders who areindividuals not resident in Russia for tax purposes may be subject to taxeither at the source in Russia or based on an annual tax return, which they maybe required to submit with the Russian tax authorities.

***Foreign judgments may not be enforceable against us.***

Our presence outside the United States may limit yourlegal recourse against us. We are incorporated under the laws of the RussianFederation. Substantially all of our directors and executive officers named inthis document reside outside the United States. All or a substantial portion ofour assets and the assets of our officers and directors are located outside theUnited States. As a result, you may not be able to effect service of processwithin the United States on us or on our officers and directors. Similarly, youmay not be able to obtain or enforce U.S. court judgments against us, ourofficers and directors, including actions based on the civil liabilityprovisions of the U.S. securities laws. In addition, it may be difficult foryou to enforce, in original actions brought in courts in jurisdictions outsidethe United States, liabilities predicated upon U.S. securities laws.

There is no treaty betweenthe United States and the Russian Federation providing for reciprocalrecognition and enforcement of foreign court judgments in civil and commercialmatters. These limitations may deprive you of effective legal recourse forclaims related to your investment in the ADSs. The deposit agreement provides foractions brought by any party thereto against us to be settled by arbitration inaccordance with the Commercial Arbitration Rules of the AmericanArbitration Association, provided that any action under the U.S. federalsecurities laws or the rules or regulations promulgated thereunder may,but need not, be submitted to arbitration. The Russian Federation is a party tothe United Nations (New York) Convention on the Recognition and Enforcement ofForeign Arbitral Awards, but it may be difficult to enforce arbitral awards inthe Russian Federation due to a number of factors, including the inexperienceof Russian courts in international commercial transactions, official andunofficial political resistance to enforcement of awards against Russiancompanies in favor of foreign investors and Russian courts’ inability toenforce such orders and corruption.

**Other Risks**

***We have not independently verified information we havesourced from third parties.***

We have sourced certaininformation contained in this document from third parties, including privatecompanies and Russian government agencies, and we have relied on the accuracyof this information without independent verification. The official datapublished by Russian federal, regional and local governments may be substantiallyless complete or researched than those of more developed countries. Officialstatistics may also be produced on different bases than those used in Westerncountries. Any discussion of matters relating to Russia in this document must,therefore, be subject to uncertainty due to concerns about the completeness orreliability of available official and public information. In addition, theveracity of some official data released by the Russian government may bequestionable. In 1998, the 

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Directorof the Russian State Committee on Statistics and a number of his subordinateswere arrested and subsequently sentenced by a court in 2004 in connection withtheir misuse of economic data.

***Because no standarddefinition of a subscriber, average monthly service revenue per subscriber(ARPU), average monthly usage per subscriber (MOU) or churn exists in themobile telecommunications industry, comparisons between certain operating dataof different companies may be difficult to draw.***

The methodology forcalculating subscriber numbers, ARPU, MOU and churn varies substantially in themobile telecommunications industry, resulting in variances in reported numbersfrom that which would result from the use of a uniform methodology. Therefore,comparisons of certain operating data between different mobile cellularcommunications companies may be difficult to draw.

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

**A.**                Historyand Development

Mobile TeleSystems CJSC, or MTS CJSC, our predecessor,was formed in 1993. The founding shareholders included MGTS and three otherRussian telecommunications companies, which collectively held 53% of ouroriginal share capital, and two German companies, Siemens AG and T-MobileDeutschland GmbH, an affiliate of Deutsche Telekom AG, which collectively heldthe remaining 47%. JSFC Sistema, or Sistema, currently owns 53.1% of our sharecapital. See “Item 7. Major Shareholders and Related Party Transactions—A.Major Shareholders.”

MTS CJSC inaugurated service in the Moscow licensearea in 1994 and began expanding into nearby regions in 1997. Since that time,we have continued to grow by applying for GSM licenses in new regions,investing in new GSM licensees, increasing our ownership percentage in theselicensees 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 RegistrationChamber on March 1, 2000, which is our date of incorporation, and with theMoscow Registration Chamber on March 22, 2000. Our initial share issuancewas registered by the Russian Federal Commission on the Securities Market onApril 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-Mobilecompleted offerings of approximately 5.0% and 15.1% of our shares,respectively, in the form of GDRs through an unsponsored GDR program. InSeptember 2005, T-Mobile sold its remaining 10.1% interest in us on theopen market.

Our legal name is Mobile TeleSystems OJSC, and we areincorporated under the laws of the Russian Federation. Our head office islocated at 4 Marksistskaya Street, Moscow 109147, Russian Federation, and thetelephone 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.

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Article 2.1 of ourcharter provides that our principal purpose is to obtain profits through theplanning, marketing and operation of a radiotelephone mobile cellular networkin the Russian Federation. We are recorded in the Unified State Register ofLegal entities with registration number 1027700149124.

**Expansion**

**Russia**

In furtherance of our goalto be a nationwide operator in Russia, we have extended our focus beyond ouroriginal market of Moscow and the Moscow region with a view towards developingour existing 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 andProspects—Acquisitions” and Note 3 to our audited consolidated financialstatements.

We spent $1,077.8 millionin 2006 for network development in Russia, including $853.1 million in cashexpenditures on property, plant and equipment, and $224.7 million for thepurchase of intangible assets. In addition, we expect to spend approximately $971.0million in 2007 for further network development.

**Belarus**

InSeptember 2001, we won a tender held by the Telecommunications Ministry ofthe Belarus Republic to form a joint venture with a GSM 900/1800 licenseto operate in Belarus. Pursuant to the tender conditions: 

·       weformed a company in Belarus, MTS Belarus, and contributed approximately$2.5 million in exchange for 49% of the share capital of the company (theother 51% of which is held by a state-owned enterprise);

·       wepaid a lump 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

·       wewill pay 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, MTSBelarus received all of the governmental approvals and licenses required tocommence operations in Belarus and it began operations on June 27, 2002.MTS Belarus is an equity investment, and its results are not consolidated inour financial statements.

Under the terms of thetender, MTS Belarus’ license will be valid for ten years, after which it may beprolonged for 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 stateenterprises, which collectively have a controlling stake in Velcom and severalother companies.

Belarus had a populationof approximately 9.8 million and a nationwide mobile penetration rate ofapproximately 61% as of December 31, 2006, according toAC&M-Consulting.

**Ukraine**

In March 2003, wepurchased a 57.7% stake in UMC for $199.0 million. We purchased a 16.33%stake from KPN, a 16.33% stake from Deutsche Telekom, and a 25.0% stake fromUkrtelecom. In June 2003, we purchased an additional 26.0% stake in UMCfrom 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 

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in UMCfrom TDC for $91.7 million in July 2003 pursuant to a put and calloption agreement. Prior to our entering into the agreements for the purchase ofUMC, UMC did not make payments when due under certain loans from certain of itsshareholders. In connection with our agreement to acquire UMC, UMC agreed torestructure, and we guaranteed, such indebtedness. As of December 31,2004, these loans were fully repaid.

**Uzbekistan**

In August 2004, weacquired 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 was 48 months from the acquisition date.  In August2006, we signed an amendment to the call and put option agreement, whicheliminates the call option and extends the exercise period of the put optionto July 2008. The purchase price for the put option willbe determined by an international investment bankto be selected jointly by both parties within 10 days of thesubmission of a put notice.

**Turkmenistan**

In two separate purchasesin June and November 2005, we acquired 100% of BCTI, the leadingwireless operator in Turkmenistan, for $46.7 million in cash.

**Capital Expenditures**

We spent in total $1,722.0million in 2006 for network development in Russia and other countries, whichincluded $1,450.0 million in cash expenditures on property, plant andequipment, and $272.0 million for the purchase of intangible assets. Inaddition, we expect to spend approximately $1,785.0 million in 2007 for furthernetwork development, which we plan to financemostly through operating cash flows, and to the extent necessary, throughadditional external financing activities.

**Belarus**

MTS Belarus spent $124.4million in 2006 for network development in Belarus and expects to spendapproximately $143.0 million in 2007 for further network development. MTS Belarushas developed GSM 900 and 1800 networks in Belarus’ major cities and regions,including Minsk and the Minsk region, the Gomel region, the Mogilev region, theGrodno region, the Vitebsk region and the Brest region, as well as throughoutcertain major highways, including the Moscow-Brest highway and trainroute. MTS Belarus has also developed its network in certain areas nearBelarus’ border with Ukraine and Russia, and plans to further extend andimprove the technical capabilities of its network throughout Belarus. We do notinclude the capital expenditures of MTS Belarus in our capital expendituresdescribed above as MTS Belarus’ results are not consolidated in our financialstatements.

**Ukraine**

UMC spent $576.4 millionin 2006 for network development in Ukraine, including $531.2 million in cashexpenditures on property, plant and equipment, and $45.2 million for thepurchase of intangible assets. In addition, UMC expects to spend approximately$705.0 million in 2007 for further network development.

**Uzbekistan**

Uzdunrobita spent $51.6million in 2006 for network development in Uzbekistan, including $49.6 millionin cash expenditures on property, plant and equipment, and $2.0 million for thepurchase of intangible assets. In addition, Uzdunrobita expects to spendapproximately $88.0 million in 2007 for further network development.

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**Turkmenistan**

BCTI spent $16.3 millionin 2006 for network development in Turkmenistan, which consisted ofexpenditures on property, plant and equipment. In addition, BCTI expects to spend approximately $21.0 million in2007 for network development.

**B.**               BusinessOverview

We are one of the leading providers of mobile cellularcommunications services in the Russian Federation, Ukraine and certain otherCIS countries, employing technology based primarily on GSM. In 2006, wegenerated net revenues of $6,384 million and had a subscriber base of 72.8million (51.2 million in Russia, 20.0 million in Ukraine, 1.4 million inUzbekistan and 0.2 million in Turkmenistan) at December 31, 2006, 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, we offer oursubscribers value-added services, including voice mail, short message service,or SMS, general packet radio service, or GPRS, and various SMS- and GPRS-basedinformation and entertainment services (including multi-media messageservice, or MMS). We also offer our subscribers the ability to roamautomatically throughout Europe and in much of the rest of the world, and as ofDecember 31, 2006, we had bilateral roaming agreements with 420 wirelessoperators in 200 countries. 

Wehave grown rapidly since 1999 through organic growth, as well as acquisitions.The table below sets forth our total subscribers as of the end of, and netrevenues for each of, the last five years:
| Period     | ** ** | ** **              | ** ** | **Subscribers**(1) | ** ** | **Net revenues** | ** ** |
|------------|------------|-------------------------|------------|--------------------|------------|-----------------------|------------|
| ** ** | ** ** | **(in thousands)** | ** ** |
| 2002       |       |                    | 6,644      |               |       | $                     | 1,361,756  |   |
| 2003       |       |                    | 16,719     |               |       | $                     | 2,546,198  |   |
| 2004       |       |                    | 34,224     |               |       | $                     | 3,886,994  |   |
| 2005       |       |                    | 58,194     |               |       | $                     | 5,011,018  |   |
| 2006       |       |                    | 72,858     |               |       | $                     | 6,384,254  |   |

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(1)                 We define a subscriber as an individual or organizationwhose account shows chargeable activity within 61 days (or 183 daysin the case of our prepaid brand tariffs) or whose account does not have anegative balance for more than this period. Prior to October 1, 2004, UMCused a 90-day period for such purposes with respect to its “Jeans” and“SIM-SIM” subscribers. The subscriber amounts do not include MTS Belarus’subscribers.

According to AC&M-Consulting, we had a leading 34%market share of total wireless subscribers in Russia at December 31,2006.  Our market share in the Moscowlicense area, which encompasses the City of Moscow and the Moscow region, washigher at 42%. The Moscow license area accounts for approximately 15% of ourtotal subscriber base. In Ukraine, we had a leading 41% market share atDecember 31, 2006, according to AC&M-Consulting.  Our subscriber base continued to grow in2007. At May 31, 2007, we had approximately 74.7 million subscribers,of which 52.2 million were in Russia, 20.4 million were in Ukraine, 1.9 millionwere in Uzbekistan and 0.2 million in Turkmenistan.

Russia is our principal market, both in terms ofsubscribers and revenues. At December 31, 2006, approximately 70% of oursubscriber base was in Russia and approximately 27% was in Ukraine. For theyear ended December 31, 2006, approximately 73% of our revenues came fromoperations in Russia and 23% from operations in Ukraine.

Overall wireless penetrationin Russia was at approximately 105% at December 31, 2006, and higher inMoscow at 156%, according to AC&M-Consulting. Mobile cellular penetrationin Ukraine was almost the same as in Russia at approximately 104% atDecember 31, 2006, according to AC&M-Consulting. Mobile cellularpenetration in Uzbekistan was at approximately 9% at December 31, 2006,according to 

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ourestimates. Mobile cellular penetration in Turkmenistan was at approximately 3%at December 31, 2006, according to our estimates. 

As of December 31,2006, we had licenses to operate in 85 regions of Russia with a population ofapproximately 145.2 million people, or approximately 98% of the country’s totalpopulation, for the entire territory of Ukraine with a population ofapproximately 47.5 million people, for the entire territory of Uzbekistan witha population of approximately 26.8 million people and for the entire territoryof Turkmenistan with a population of approximately 6.9 million people. As ofDecember 31, 2006, we had commercial operations in 84 regions of Russia.

To maintain and increase our market share and brandawareness, we use a combination of print media, radio, television, direct mailand outdoor advertising, focusing on brand and image advertising, as well aspromotion of particular tariff plans. Supporting these efforts, we havedeveloped an extensive distribution network comprised of 498 of our own salesand customer service centers and approximately 41,000 additional points of saleoperated by our dealers, as of December 31, 2006. 

We seek to minimize ourexposure to the credit risk of our subscribers through our advance-paymentbilling system, which is used by over 90% of our subscribers in Russia andapproximately 93% of our subscribers in Ukraine. Under this system, oursubscribers prepay for their access, usage and value-added services fees.

MTS Belarus had 3.2million subscribers and a leading market share of 53.8% at December 31,2006, according to AC&M-Consulting. The subscriber base of MTS Belarus grewto 3.4 million at March 31, 2007. Belarus, a country with a population ofapproximately 9.8 million, had a mobile cellular penetration rate of 61% atDecember 31, 2006, according to AC&M-Consulting. 

**Business Strategy**

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 a focuson the former Soviet Republics, excluding the Baltic states. In June 2006, ourBoard of Directors adopted a new development strategy called “3+1” with threekey principles as follows:

·       Strengtheningour leadership position in Russia.

·       Seizinggrowth opportunities and synergies in the CIS.

·       Creatingvalue in certain growth markets.

In addition to pursuingthese three principles, we intend to explore opportunities for innovation,vertical integration and convergence which correspond to the “+1” component ofour newly adopted “3+1” strategy.

To achievethese goals, we plan to continue to implement the followingstrategies:

·       Developour operations in the regions we currently service by focusing onincreasing revenues in these markets.

·       Providenew and varied tariff plans and value-added services, that appeal to ourvarious subscriber groups with the aim of having better brand perception andcustomer loyalty than our competitors.

·       Expandour operations and further develop our commercial services in Ukraine,Belarus and other countries of the CIS as attractive opportunitiesarise through the acquisition of existing operators or new licenses.

·       Enhance innovation andtechnology, especially in the more developed markets of Russia and Ukraine.

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·       Leverage scale andsynergies within the CIS.

·       Become more cost efficientin the countries where we operate.

·       Become a leader withrespect to the quality of our management, employees and company culture.

·       Identify attractiveacquisition opportunities in emerging markets based on selective criteria.

·       Explore opportunities for horizontaland vertical integration and convergence.

In the past few years, we have rapidly expanded intothe Russian regions and selected CIS countries through launches of operationsin territories in which we had licenses and through acquisitions of othermobile operators. Starting in 2003, we have become particularly focused on theintegration of our existing businesses into a single company with a unifiedmarketing approach and centralized network and operations management. Inaddition, we intend to continue to consolidate our ownership in regionalsubsidiaries by acquiring remaining minority stakes. In 2006, we reorganized ourcorporate and management structure into a single corporate center and threebusiness units, each of which is responsible for our operations in Russia,Ukraine and other foreign subsidiaries, respectively. The aim of the restructuringwas to increase our efficiency and business focus through greater transparencyand a clearer division of responsibilities between the corporate center andbusiness units.

Our capital expenditures (consisting of purchases ofproperty, plant and equipment and intangible assets) in 2005 and 2006 were$2,181.3 million and $1,722.0 million, respectively, and we expect toinvest approximately $1,785.0 million in 2007. These investments are requiredto 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 into other countriesof the CIS through the acquisition of existing operators or new licenses asattractive opportunities arise.

Implementation of thesestrategies is subject to a number of risks. See “Item 3. Key Information—D.Risk Factors” for a description of these and other risks we face.

**Current Operations**

**Subsidiaries**

For a list of our major subsidiaries and our ownershippercentages in these subsidiaries, see Note 2 to our audited consolidatedfinancial 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 improve managementefficiency and consolidate administratively our majority-owned subsidiaries,our shareholders approved in February 2006 a further reorganization of MTSOJSC in the form of a merger with nine of our wholly-owned subsidiaries,including Gorizont RT, TAIF Telcom, MTS RTK, Sibchallenge, Tomsk CellularCommunications (“TSS”), BM Telekom, Far East Cellular Systems-900 (“FECS-900”),Siberian Cellular Systems-900 (“SCS-900”) and Uraltel. We completed the mergerin March 2006. On April 1, 2007, the Russian authorities approved themerger of both ReCom and Telesot Alania into MTS OJSC.

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**License Areas**

The following table shows,as of May 31, 2007, information with respect to the license areas in whichwe and our subsidiaries and affiliates provide or expect to provide GSMservices:
|                                    | ** ** | **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 |
| 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, 2012      |   | MTS OJSC |   | May 30, 2012 |
| 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         |       | 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 |
|                                    |            |                  |            |                        |  |  |  |  |  |  |

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| Tambov region                               |   | MTS OJSC        |   | April 28, 2008     |   | MTS OJSC         |   | April 28, 2008     |
|---------------------------------------------|--------|-----------------|--------|-------------------------|--------|------------------|--------|-------------------------|
| Tatarstan Republic                          |   | MTS OJSC        |   | June 26, 2012      |   | MTS OJSC         |   | June 26, 2012      |
| 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        |   | April 28, 2008     |   | MTS OJSC         |   | April 28, 2008     |
| 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, 2012   |   | MTS OJSC         |   | January 10, 2012   |
| 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     |
| 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, 2012   |   | MTS OJSC         |   | January 10, 2012   |
| 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, 2012  |   | MTS OJSC         |   | February 21, 2012  |
| Omsk region                                 |   | MSS             |   | December 20, 2011  |   | MSS              |   | December 20, 2011  |
| 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                  |   | MTS OJSC        |   | December 21, 2010  |   | MTS OJSC         |   | 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      |

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| **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 commencedcommercial operations as of the date of this document. 

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. We have met these targets or received extensions to thesedates in those regional license areas in which we have not commencedoperations. Neither the government nor other parties have taken or attempted totake legal actions to suspend, terminate or challenge the legality of any ofour licenses. We have not received any notice of violation of any of ourlicenses, and we believe that we are in compliance with all material terms ofour licenses. 

**Services Offered**

**Network Access**

We primarily offer mobilecellular voice, data and facsimile communication services to our subscribers onthe basis of various tariff plans. In general, we offer tariff plans that donot require subscribers to pay a monthly subscription fee. However, certaintariff plans require subscribers to pay a monthly subscription fee and aper-minute charge for usage. See “—Tariffs.”

**Automatic Roaming**

Roaming allows our customers, both subscribers andguest roamers, to receive and make international, local and long-distance callswhile traveling outside of their home network. Roaming is provided throughindividual agreements between us and other GSM operators. Unlike many non-GSMproviders that require additional equipment or prior notification, our roamingservice is instantaneous, automatic and requires no additional equipment.

As of December 31, 2006, we had bilateral roamingcontracts with 420 wireless operators in approximately 200 countries, includingwith regional operators in Russia. We continually seek to expand our roamingcapability and are currently in negotiations with additional operators. InRussia, as of December 31, 2006, in addition to our network coverage areain 82 of the 86 regions of Russia, GSM service is available to our subscribersin the regions of Russia where we do not currently operate through our roamingagreements with 13 regional operators.

Roaming agreementsregulate the relations and billing procedures between operators. The hostoperator sends the roamer’s home operator a bill for the roaming servicesprovided to the roamer. The roamer’s home operator pays the host operatordirectly for the roaming services and then includes the amount due for theprovision of roaming services in the roamer’s monthly bill.

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**Value-AddedServices**

We offer severalvalue-added services to our customers. These services may be included in thetariff plan selected by the subscriber or subscribers may pay additionalmonthly charges and, in some cases, usage charges for them. Some basicvalue-added services that we offer include:

·       CallDivert/Forwarding;

·       CallBarring;

·       CallerID Display and anti-Caller ID Display;

·       CallWaiting;

·       ConferenceCalling;

·       MelodyRing Tones;

·       WiFi;

·       MissedCall Alert;

·       MobileOffice;

·       Itemizationof Monthly Bills;

·       Voicemail;

·       Informationand Directory Service;

·       UnstructuredSupplementary Services Data, or USSD;

·       InternationalAccess Service;

·       AutomaticCustomer Care System;

·       CustomerCare System via the Internet;

·       ShortMessage Service, or SMS;

·       GeneralPacket Radio Service, or GPRS;

·       Multi-MediaMessage Service, or MMS;

·       WirelessApplication Protocol, or WAP;

·       WEBportal;

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

·       SIM-browser;

·       I-mode;

·       RealIP;

·       APNremote access point;

·       Location-BasedService, or LBS;

·       FixedMobile Convergence;

·       Intelligentcall assistant;

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·       Point-to-pointtransfer; and

·       Mobilebanking.

We also provide many voiceand SMS-based value-added services in cooperation with various contentproviders.

**Other Services**

In addition to cellularcommunication services, we offer corporate clients a number oftelecommunications services such as design, construction and installation oflocal voice and data networks capable of interconnecting with fixed lineoperators, installation and maintenance of cellular payphones, lease of digitalcommunication channels, access to open computer databases and data networks,including the Internet, and provision of fixed, local and long-distancetelecommunications services, as well as video conferencing.

**Sales and Marketing**

**Target Customers**

Our target customers historically included companies,professionals, high-income individuals, reporters, government organizations,businesspersons and diplomats. However, with mobile cellular penetration inthese segments becoming saturated, we began offering mobile cellular servicesto a much wider group of the population. Over time, we adjusted our servicemodel to provide differentiated levels of service to meet the needs ofdistinctive customer segments as such segments have developed. In 2002, welaunched the “Jeans” group of tariff plans, which appealed to mass-marketsubscribers as these prepaid plans had, and continue to have, low connectionand no monthly fees. We also continue to actively target high-end customers whoprovide us with larger profit margins through high ARPU and MOU. For example,the “Profi” and “Exclusive” tariff plans offer a higher level of customerservice, technical support and a wide range of services, including personalizedservice and support with minimum waiting time. Today, we are considered amass-market mobile network operator with a wide range of subscribers in allcustomer segments.

To promote subscriberloyalty, we offer discounts with respect to our tariff plans for customerswilling to enter into extended contracts with us. This strategy also helps tomitigate churn rates among our subscribers in a highly competitive market.

**Advertising andMarketing**

Our advertising andpublic relations initiatives include:

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

·       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 tariff plans for various target audiences and pricing discounts.

We use a combination ofnewspaper, magazine, radio, television and outdoor advertising, includingbillboards and signs on buses and kiosks, and exhibitions to build brandawareness and stimulate demand. We also advertise on-line to market and promoteour products and services to younger tech-savvy consumers. Our indirectadvertising includes sponsorship of selected television programs, sportingevents, concerts and other popular events. We also coordinate the advertisingpolicies of our dealers to capitalize 

47

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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 brands as national brands. In addition, we focus ouradvertising and marketing on the affordability and variety of our tariff plans,on the broad coverage of our network and the use and availability of nationalroaming.

**Renewed Brand**

In May 2006, Sistema introduced a universal brandfeaturing a new egg-shaped logo for each of the telecommunications companiesoperating within the Sistema Telecom group, including us. We believe that ournew brand symbolizes leadership and a dynamic and innovative approach to doingbusiness. The re-branding reflects a shift in our marketing strategy witha renewed focus on the simplification of our communications to the generalpublic. One of the goals through our re-branding efforts is to create a simpleset of tariff plans with clear advantages over our competitors andeasy-to-understand descriptions of the wide range of our services and productofferings. In addition, we aim to simplify the purchasing experience for ourcustomers by creating a universal format for our sales offices, transformingthem into visually appealing, practical and convenient venues where buyers canobtain product information and test our latest products and services.

The changes relating to our brand renewal had animpact on each of our operational regions. We have launched a federaladvertising campaign with new advertising and informational materials, and haverevised our website with the new brand and logo. We redesigned each of oursales offices with new signs that reflect the service standards and philosophyof the new brand.

Under this universalbrand, our subscribers will have access to a wide range of telecommunicationsproducts and services, including Internet access, mobile and fixed-line telephones,single billing and a single interface for all of the subscriber’stelecommunications needs. We believe that our re-branding efforts will increaseour recognition among existing and potential clients, promote cross-sales ofthe companies using the brand and enhance subscriber loyalty.

**Sales andDistribution**

As of December 31, 2006, we had 466 sales andcustomer service centers in Russia, 36 points of sale in Ukraine, 25 points ofsale in Uzbekistan and 10 points of sale in Turkmenistan. In response to thedemand shift to mass-market subscribers, we have developed an extensivedistribution network through independent dealers that operate numerous pointsof sale in places with high consumer activity, such as supermarkets, shoppingcenters, air terminals and markets. Commencing January 1, 2006, we beganlinking commissions payable to a dealer on a monthly basis to the amount ofrevenues we receive. In the six-month period from the date a subscriber isactivated by a dealer, the dealer receives the lesser of the full commissionamount or 50% of the revenues received from the subscriber during the period.We believe that this method for paying commissions to dealers provides dealerswith greater incentives to add new subscribers, reduces the risk of dealer fraudand improves our cash-flow management, as dealers are not credited after asubscriber is activated.

The dealer commission in the Moscow region currentlyranges between $25 and $120 per subscriber and dealer commissions in the otherregional license areas in Russia are between $4 and $50. Dealer commissions inUkraine range from $35 to $45. We limit our credit exposure to dealers bycontrolling the cash flow from customers. If a new customer pays in cash, thedealer remits the full amount received to us within three days. If the customerchooses to pay by bank transfer or by credit card, the customer pays usdirectly, and we pay the dealer its commission at the end of the month.

During 2006, approximately84% of our new subscribers in Russia and 93% in Ukraine enrolled throughindependent dealers, and we enrolled the remainder directly. We intend tocontinue expanding 

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ourinternal distribution network, as well as our independent dealer distributionnetwork. Independent dealers have also begun servicing some aspects of oursubscribers’ accounts, such as activating international roaming, handling SIMcard replacements and payment collection, as well as promoting our value-added services.

**Competition**

**The Russianwireless telecommunications market**

The Russian wireless telecommunications market ischaracterized by rapid growth in subscribers and revenues. As ofDecember 31, 2006, overall wireless penetration in Russia was 104.6%, orapproximately 151.9 million subscribers, according to AC&M-Consulting.

Demand for wireless communications services in Russiahas grown rapidly over the last ten years due to rising disposable incomes,increased business activity and declining prices due to intensified competitionamong wireless communications providers. The Russian market has achieved highlevels of penetration in Moscow and St. Petersburg, with more than 156 and 139subscribers per 100 residents, respectively, at December 31, 2006,according to AC&M-Consulting. The average penetration rate in regionalmarkets reached 96 subscribers per 100 residents at December 31, 2006.

Thefollowing table sets forth key data on Russia’s wireless telecommunicationsmarket: 
|                        | ** ** | **As of December 31,**                                      | ** ** |
|------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **             | ** ** | **  2002  **                                           | ** ** | **  2003  ** | ** ** | **  2004  ** | ** ** | **  2005  ** | ** ** | **  2006  ** | ** ** |
| ** **             | ** ** | **(Amounts in millions, except for percentages)** | ** ** |
| Subscribers(1)         |       |                                                                       | 18.0       |   |   |   | 36.2 |   |   |   | 74.4 |   |   |   | 125.8 |   |   |   | 151.9 |   |   |
| Subscriber penetration |       |                                                                       | 12         | % |   |   | 25 | % |   |   | 51 | % |   |   | 87 | % |   |   | 105 | % |   |

----

Source:AC&M-Consulting.

(1)                 Based on registered subscribers (SIM cards only). Thereis no uniform definition of active subscribers in the Russian wireless market.

According to AC&M-Consulting and our own data, weaccounted for 44.6% and 42.2% of subscribers in Moscow, 32.7% and 30.5% ofsubscribers in St. Petersburg and 35.2% and 33.7% of total Russian subscribersas of December 31, 2005 and 2006, respectively.

The competition has evolved in recent years to existprimarily between us, Vimpelcom and MegaFon, each of which has effectivenational coverage in Russia. Competition today is based largely on local tariffprices and secondarily on network coverage and quality, the level of customerservice provided, roaming and international tariffs and the range of servicesoffered. For a description of the risks we face from increasing competition,see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—Weface increasing competition in the Russian and Ukrainian markets that mayresult in reduced operating margins and loss of market share, as well asdifferent pricing, service or marketing policies.”

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The following tableillustrates the number of wireless subscribers for each network operator inRussia as of December 31, 2004, 2005 and 2006: 
|                  | ** ** | **As of December 31,** | ** ** |
|------------------|------------|---------------------------------------|------------|
| **Operator**     | ** ** | ** **                            | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **       | ** ** | **(Amounts in millions)**   | ** ** |
| MTS(1)           |       | 26.5                                  |       | 44.2 |   | 51.2 |   |
| Vimpelcom(1)     |       | 25.7                                  |       | 43.1 |   | 48.1 |   |
| MegaFon group(1) |       | 13.6                                  |       | 22.8 |   | 29.6 |   |
| Others(2)        |       | 8.0                                   |       | 15.7 |   | 23.0 |   |
|                  |            |                                       |            |  |  |  |  |  |  |

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

(2)                 Source: AC&M-Consulting.

***Vimpelcom***

Vimpelcom, which operates GSM 900/1800 networks, isone of our primary competitors in Russia, and it is the second largest GSMwireless operator in Russia in terms of subscribers. We believe that Vimpelcomwill continue to be our primary competitor for the foreseeable future.

According to Vimpelcom, ithad approximately 48.1 million subscribers in Russia at December 31, 2006,including 10.1 million in the Moscow license area. At December 31, 2006,according to AC&M-Consulting, Vimpelcom had a 38.2% market share in Moscowand a 31.7% market share of total wireless subscribers in Russia.

***MegaFon***

In addition to Vimpelcom, we also compete withMegaFon, which is the third largest operator in Russia in terms of subscribers.The MegaFon group holds GSM 900/1800 licenses to operate in all 86 sub-federalpolitical units of the Russian Federation.

According to MegaFon, ithad a subscriber base of 29.6 million in Russia at December 31, 2006,including 5.0 million subscribers in the Moscow license area. At December 31,2006, according to AC&M-Consulting, MegaFon had a 34.7% market share in St.Petersburg and an 19.5% market share of total wireless subscribers in Russia.

***Other Operators***

In addition to our principal competitors, Vimpelcomand MegaFon, we also compete with local GSM and D-AMPS operators in severalRussian regions.

In certain regions of theUrals part of Russia, our primary competitor is Uralsvyazinform, which hadapproximately 4.4 million subscribers as of December 31, 2006. In certainregions of the Volga part of Russia, we compete with SMARTS, which hadapproximately 3.6 million customers as of December 31, 2006. In addition,in certain parts of Siberia, we compete with Sibirtelecom, which hadapproximately 3.1 million customers as of December 31, 2006. The precedingsubscriber numbers, in each case, are according to AC&M-Consulting.

**The Ukrainianwireless telecommunications market**

Since 2003, the Ukrainian wireless telecommunicationsmarket has enjoyed rapid growth, in part, due to broader economic recovery inUkraine, changes in ownership of the two major operators and the more recentintroduction of calling-party pays billing arrangements and the launch ofthe new Beeline brand in April 2006 by Ukrainian Radiosystems, or URS, asubsidiary of Vimpelcom. The two largest wireless 

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telecommunicationsproviders in Ukraine are UMC and Kyivstar who share 85% of the market.Competition between these two companies is based on the service and networkquality, prices and brand perception. The remaining key competitors in Ukraineare Astelit, which offers the Life brand, and URS. Astelit and URS compete witheach other primarily by offering aggressive pricing plans.

In 2006, overall wireless penetration in Ukraineincreased from 64.0% to 103.1%, or approximately 19.1 million subscribers,according to various press releases from Ukrainian mobile operators.

Thefollowing table shows the number of subscribers as of the dates indicated andthe coverage area of UMC and our competitors in Ukraine: 
| Operator       | ** ** | ** ** | ** ** | **December 31,  2005**          | ** ** | **December 31,  2006** | ** ** | **Coverage Area** | ** ** |
|----------------|------------|------------|------------|--------------------------------------|------------|-----------------------------|------------|------------------------|------------|
| ** **     | ** ** | ** ** | ** ** | **(amounts in thousands)** | ** ** | ** **                  | ** ** |
| Kyivstar       |       |       | 13,925     |                                 |       |                        | 21,510     |                   |       | Nationwide |   |
| UMC            |       |       | 13,327     |                                 |       |                        | 20,003     |                   |       | Nationwide |   |
| DCC/Astelit    |       |       | 2,390      |                                 |       |                        | 5,550      |                   |       | Nationwide |   |
| URS/Vimpelcom  |       |       | 210        |                                 |       |                        | 1,876      |                   |       | Major  cities and towns |   |
| Golden Telecom |       |       | 51         |                                 |       |                        | 51         |                   |       | Kiev,  Odessa |   |
| Others         |       |       | 31         |                                 |       |                        | —     |                   |       | Major cities |   |

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Source: Subscriber information based the relevantoperator’s data.

In Ukraine, we competeprimarily with Kyivstar, a GSM operator with 21.5 million subscribers asof December 31, 2006. Kyivstar is owned by Telenor and Alfa Group.Kyivstar offers wireless services using GSM 900 and GSM 1800 technologies.Kyivstar is also licensed to provide fixed-line domestic longdistance/international long distance, or DLD/ILD, services. DCC holds a licenseto provide wireless cellular services using the D-AMPS standard and, throughits subsidiary Astelit, holds a GSM-1800 license. In addition, Turkcellhas acquired a controlling interest in DCC. URS is a wholly-owned subsidiary ofVimpelcom, which is beneficially owned by Alfa Group and Telenor. It hasnationwide GSM 900/1800 licenses and provides wireless mobile services throughits brand Beeline. Golden Telecom Ukraine, which is also beneficially owned byAlfa Group, Telenor and Rostelecom, offers wireless services using GSM 1800technology in the cities of Kiev and Odessa and has a nationwide roamingarrangement with URS. In July 2006, we received a license to providetelecommunications services on the entire territory of Ukraine using the CDMA-450standard.

**The Uzbekistanwireless telecommunications market**

The Uzbekistan wireless telecommunications market ischaracterized by low penetration rates. In 2006, overall wireless penetrationin Uzbekistan increased from 4% to 10%, or approximately 2.5 millionsubscribers, according to our estimates.

Thefollowing table shows the number of subscribers as of the dates indicated andthe coverage area of Uzdunrobita and our competitors in Uzbekistan: 
| Operator                          | ** ** | ** **                           | ** ** | **December 31,  2005** | ** ** | **December 31,  2006** | ** ** | **Coverage Area** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **(amounts in thousands)** | ** ** | ** **                  | ** ** |
| Uzdunrobita (MTS)                 |       |                                 | 580.3      |                        |       |                        | 1,449.9    |                   |       | Nationwide |   |
| Unitel  (Vimpelcom)               |       |                                 | 298.4      |                        |       |                        | 766.5      |                   |       | Nationwide |   |
| Coscom                            |       |                                 | 103.7      |                        |       |                        | 297.3      |                   |       | Nationwide |   |
| Others (Uzmakom GSM,  Buztel GSM) |       |                                 | 71.0       |                        |       |                        | 117.3      |                   |       | Major cities |   |

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Source: Subscriber information based the relevantoperator’s data.

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Uzdunrobitaoffers wireless services using TDMA, GSM 900 and GSM 1800 technologies. InUzbekistan, we compete primarily with Unitel, a GSM operator owned by Vimpelcomwith 766,500 subscribers as of December 31, 2006. We also compete withCoscom, which provides wireless services in Uzbekistan using GSM 900/1800technology and is owned by MCT Corporation, Telenor and Rostelecom. Inaddition, in April 2007, we received a license to offer Internet accessusing WiMAX technology on the entire territory of Uzbekistan, which we plan tolaunch in Tashkent in the beginning of 2008. In April 2007, we were alsoallocated a 3G license which is valid through 2016 and covers the entireterritory of Uzbekistan.

**The Turkmenistanwireless telecommunications market**

The Turkmenistan wirelesstelecommunications market is characterized by low penetration rates. In 2006,overall wireless penetration in Turkmenistan increased from 1.6% to 3.2%, orapproximately 220,788 subscribers, according to our estimation.

The following table shows the number of subscribers as of the datesindicated and the coverage area of Turkmenistan and our competitors in Turkmenistan:
| Operator   | ** ** | ** **                           | ** ** | **December 31,  2005** | ** ** | **December 31,  2006** | ** ** | **Coverage Area** | ** ** |
|------------|------------|--------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|------------------------|------------|
| ** ** | ** ** | **(amounts in thousands)** | ** ** | ** **                  | ** ** |
| BCTI (MTS) |       |                                 | 68.3       | ** **                  |       |                        | 183.8      | ** **             |       |   | Nationwide | ** ** |   |
| Altyn Asyr |       |                                 | 26.8       | ** **                  |       |                        | 37.0       | ** **             |       |   | Nationwide | ** ** |   |

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Source: Subscriber information based on ourestimates.

BCTI offerswireless services using GSM 900 and GSM 1800 technologies. In Turkmenistan, wecompete only with a state-owned GSM operator Altyn Asyr with 37,000 subscribersas of December 31, 2006.

**Tariffs**

We customize our marketing efforts andpricing policies in each region of Russia by considering such factors asaverage income levels, the competitive environment and subscriber needs, all ofwhich vary from region to region. Consistent with our marketing strategy, wehave developed tariff plans to appeal to a broader market.

We launched tariff plans geared atmass-market subscribers on November 15, 2002, in Moscow and in 37 otherregions in Russia. These tariffs were launched in Ukraine in August 2003and were comprised of a set of prepaid tariffs that generally included featuressuch as no monthly subscription fee, per-second billing, free incoming callsfrom MTS subscribers and, for certain tariff plans, advance payment creditexpiration dates. Starting in June 2006, we launched a new set of prepaid tariffplans geared at mass-market subscribers in all regions of Russia, which includeno monthly subscription fee, free incoming calls and special features fordifferent segments of the mass-market subscribers. To offset losses forproviding free incoming calls under CPP, we increased the price for the firstminute of all outgoing calls made by our prepaid subscribers. Asof December 31, 2006, prepaid subscribers accounted for 90% and 93% of ourtotal subscribers in Russia and Ukraine, respectively.

We introduced a unified system of tariffplans to achieve such benefits as better perception of tariff plans andclarity, simplicity and transparency for prospective subscribers throughoutRussia. In addition, we introduced additional tariff plans with differentconnection fees, per minute call charges and a wide range of value-addedservices. Although we offer the same categories of tariff plans throughoutRussia, the prices of these plans differ from region to region taking intoaccount such factors as the average income, 

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competitiveenvironment and subscriber needs in a particular region. Generally speaking,our tariff plans are more expensive in the Moscow license area. 

By advertising on a national rather thanregional or local level, we have been able to streamline and reduce ouradvertising and marketing expenses through unified advertising campaignsthroughout Russia. Furthermore, we are able to convey to consumers a moreuniform perception of our brand and services.

Currently,each of our tariff plans combines different monthly network access fees (withthe exception of the prepaid tariff plans), per minute usage charges and value-addedservices in packages designed to appeal different market segments. Our tariffplans are designed to be simple and appeal to a particular segment of themarket taking into account such factors as customer needs and consumptionlevels. Our tariff plans are currently divided into four categories—“Prepaid,”“Profi,” “Exclusive” and “Corporate”—with each category designed to targetspecific segments as follows:

·       *Prepaid*:   Prepaid tariff plans are geared towards consumers who usetheir mobile phones for personal communication. These plans do not have monthly subscription fees and the per-minute feecharges depend largely on the tariff plan chosen.  Starting in June 2006, we launched a new lineof prepaid tariff plans allowing subscribers to choose among several plans thatbest meet his or her wireless telecommunications needs and preferences.  For example, we offer a tariff plan gearedtowards students and youth, permitting inexpensive calls between subscribers ofthe same plan and a discounted price on SMS and MMS. We also offer afamily-oriented tariff plan that permits family members to make calls amongthemselves at discounted prices. Subscribers to our prepaid plans can reduce the price of their calls byusing tariff options which have a subscription fee.  There are at least four prepaid plansavailable in each of the Russian regions where we operate.  After our customers subscribe to a particularprepaid plan, they have the option of switching to a different prepaid plan bysending an SMS message to a designated number. 

·       *Profi*:   “Profi” tariff plans are geared toward heavy users who usetheir mobile phones for personal and business communications. These plansfeature monthly fees for a certain predetermined number of minutes and reducedfees for subscribers who exceed this limit. “Profi” subscribers choose betweena local and federal number with the local number being more expensive, and froma wide range of value-added services, including caller ID, or CLIP, conferencecalling, call transferring and call waiting/holding. Regular subscribers of the“Profi” plans are provided an additional 15% discount on their local and mobilecalls and a 15% increase of allotted minutes at no extra charge. In addition,subscribers of some of the “Profi” plans are offered access to our personal customercare service and credit payment system.

·       *Exclusive*:   “Exclusive” tariff plans are designed for heavy users whocall primarily within the Moscow region. “Exclusive” subscribers are providedan unlimited number of local minutes, an opportunity to pay through our creditpayment system and access to personal customer care service. For those“Exclusive” subscribers issued a local number, monthly fees are up to $212 andthose using a federal number pay up to $118 per month. In addition, regular“Exclusive” subscribers receive a 15% discount.

·       *Corporate*:   We offer up to five tariff plans in each region targeted tomeet the demands of our corporate clients and allowing them to optimize theircommunication expenses in accordance with their individual consumption patterns.These plans feature specialized customer care, payment through our creditsystem and volume and tenure discounts. In addition, we provide customizedpricing offers and technical solutions to our biggest clients.

Our tariff plans offer a variety of pricingschemes. The following description of tariffs and charges are, in each case,exclusive of VAT. As of December 31, 2006, the per-minute tariff for callsto Moscow from Moscow (including prepaid tariff plans) varied from $0.02 perminute to $0.22 per minute. The per minute 

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prices in theregions outside of the Moscow license area (including prepaid tariff plans)ranged from $0.007 per minute to $0.22 per minute. Higher rates apply todomestic long distance calls and we assessed a surcharge for all internationalcalls that ranged from $1.15 per minute for calls to Europe to $1.74 per minutefor calls to other parts of the world. Our value-added services, such as CallerID and Call Waiting, are included in all current tariff plans at no additionalcharge and carry a charge of up to $2 per month in those tariff plans that areno longer offered by us, depending on the plan and the region.  Periodically, we run various promotionalcampaigns, either on the federal or regional level, which temporarily changeour regular prices.

We also offer unified tariff plans in allterritories of Ukraine in which we operate, including private contract,business and prepaid plans. In addition, we developed new tariff plans forUkraine that focus on the differing needs of subscribers in the various marketsegments during 2006. These new plans are divided into three categories, eachpromoted under its own name, and offer a wide variety of monthly paidcontracts, including packages with unlimited traffic. We also offerprepaid plans in Ukraine.  For example,SIM-SIM tariffs comprise a family of prepaid plans offering universal tariffsnoted for their simplicity, as well as special reduced tariffs for callsmade within the UMC network, for calls made to preferred designated numbers andfor heavy SMS users, among others. Other prepaid tariff plans also offerspecial reduced tariffs for calls made and SMSs sent within the UMC network.UMC Business tariff plans are targeted for corporate users offering discountedtariffs for calls made between intra-company users.

As of December 31,2006, the standard per minute prices in Ukraine varied from $0.08 per minute to$0.25 per minute. The standard per minute price for calls made within the UMCnetwork ranged from $0.04 per minute to $0.17 per minute. Higher rates appliedto international calls ranging from $0.17 per minute to $3.56 per minute. 

**CustomerPayments and Billing**

We enroll new subscribers, except forcertain corporate and exclusive clients, in an advance-payment program,under which the subscriber prepays a specific amount of money to use ourservices. As of December 31, 2006, approximately 98.1% of ourconsolidated subscriber base was enrolled in the advance-payment programand 1.9% used the credit system.

Our advance-payment system monitorseach subscriber account and sends a seven-day advance warning on thesubscriber’s mobile telephone when the balance on the subscriber’s accountdecreases below a certain threshold, which is approximately the averageconsumption by the subscriber for a ten-day period. Then the system sends atelephonic reminder or SMS twice in the following seven-day period and anadditional reminder one day prior to termination, including the current levelof the subscriber’s remaining balance and a recommendation as to the sum thatshould be advanced to us based on the subscriber’s historical usage.

Under the credit payment system, customersare billed monthly in arrears for their network access and usage. If theinvoice is not paid on time, the customer may be liable for a late paymentcharge of up to 0.3% of the amount due for each day payment is past due. Welimit the amount of credit extended to customers based on the customer’spayment history, type of account and past usage. As of December 31, 2006,subscribers using the credit system of payment had a maximum credit limit of$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 our subscriberbase 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. 

We are in the process of replacing multiplebilling systems used by us in the different countries and regions where weoperate with a new unified billing system, which will allow us to offer all ofour 

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subscribers auniform and consistently high level of service. The new billing system is alsocapable of monitoring account usage in real time and provides us with theability to offer flexible tariff plans with various usage discounts andsubscriber loyalty bonuses.  In addition,we will be able to provide our corporate subscribers withmore sophisticated customized billing solutions.For example, our corporate subscribers who use multiple phone numbers indifferent regions of Russia will receive a single invoice,whereas our old billing systemcould not support such a service.We expect to complete the migration of our prepaid subscribers onto a new billing system inRussia in 2007. Thetransition to the new billing system in the other countries where we operatewill take longer to complete.

In 2005 and the first half of 2006, ourtariffs in Russia were primarily quoted in currency units equivalent to U.S.dollars, except for some regions of Russia where tariffs are quoted in rubles.Invoices quoted in U.S. dollar-equivalent units specified the amount owedin such units and required translation into rubles in order to make payments. Inthe second half of 2006, we introduced a fixed exchange rate for convertingU.S. dollar-denominated tariffs and charges into Russian rubles. Since January1, 2007, we have had ruble-denominated tariffs and charged our subscribers inRussian rubles. We offer our subscribers various ways to pay for our services,including by cash or credit card, wire transfer, on account, prepaid cards andexpress-payment cards.

All tariffs forUMC subscribers are quoted in hryvnias. We offer our subscribers in Ukrainevarious ways to pay for our services, including by cash or credit card, wiretransfer, on account and prepaid cards.

**CustomerService**

We believe that to attract and retaincustomers, we must provide a high level of service in the key areas of customerassistance, care and billing. In each of the markets where we operate, we havea call center that provides customer service 24 hours a day, seven days aweek. Customer service representatives answer inquiries regarding disconnectiondue to lack of payment, handset operation, roaming capabilities, servicecoverage and billing. A special group of customer service representativeshandles customer claims and assists customers who wish to change theirservices.

During 2006, we launched the call centerperformance management program to improve subscriber accessibility to customerservices and establish higher standards of customer care through all of ourcall centers.  Pursuant to this program,we successfully implemented the intellectual routing of calls designed toprovide our more valuable and loyal customers with quicker access to customersupport services when calling us.  We arealso continuing to transform our call centers into effective channels forclient relationship management, or CRM. 

We have establishedcustomer retention departments in each of our macro-regions to developand implement customer retention programs with respect to all key customersegments and each of our primary service offerings. Our customer retentionpersonnel are responsible for training front line employees on handlingcustomer claims and suggestions, as well as following up with those customerswho disconnected from our network to understand the reasons for thedisconnection and properly respond to the changing needs of our customers. 

**NetworkTechnology**

We believe thatgeographic coverage, capacity and reliability of the network are keycompetitive factors in the sale of mobile cellular telecommunications services.Our network is based primarily on GSM 900 infrastructure, augmented by GSM 1800equipment. We use GSM 1800 equipment in high-use areas, because 1800 MHz basestations are more efficient in relieving capacity constraints in high trafficareas. 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 

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coverage,rather than capacity, is a limiting factor, networks based on GSM 900infrastructure are typically superior to those based on GSM 1800, because theyrequire fewer base stations to achieve coverage and, therefore, cost less. Inmost markets, including Russia and Ukraine, the most efficient application ofGSM technology is to combine GSM 900 and GSM 1800 infrastructure in a unifiednetwork, which is commonly referred to as a dual-band GSM network.

**NetworkInfrastructure**

We use switching and other networkequipment supplied by Motorola, Siemens, Ericsson, Huawei, Alcatel and othermajor network equipment manufacturers. 

In the Moscow license area, we haveallocated frequencies spanning 2  ́ 11.4 MHz of spectrum in the GSM 900 frequency band and 2  ́ 24.6 MHz of spectrum in the GSM1800 frequency band for operation of a dual GSM 900/1800 network.

In St. Petersburg and the Leningrad region,we have allocated frequencies spanning 2  ́ 9.6 MHz of spectrum in the GSM 900 frequency band(including 2  ́ 1.6MHz in the E-GSM band) and 2  ́ 18.2 MHz of spectrum in the GSM 1800 frequency band foroperation of a dual GSM 900/1800 network.

We have frequencies allocated to us for theoperation of GSM 900 and GSM 1800 frequency bands in all regions ofUkraine. The radio frequencies allocated to us for the operation ofGSM 900 span from 2  ́ 2.8 MHz of spectrum in the Kiev and Zakarpattya regions to 2  ́ 5.2 MHz in Kiev city. We alsohave been allocated frequencies spanning from 2  ́ 16.0 MHz in the Tchernigov region to 2  ́ 26.4 MHz in the Dnepropetrovsk region for operation ofGSM 1800 base stations. In addition, we have applied for an additional137.6 MHz of GSM 1800 frequency allocations for 19 major licenseareas in Ukraine and intend to apply for additional frequency allocations inthe 1800 MHz band.

We believe thatwe have been allocated adequate spectrum in each of our license areas.

**GPRS andInternet Access**

In many regions, we have upgraded ournetwork to enable us to offer GPRS services, which permit our subscribersaccess to the Internet, WAP and MMS. As of December 31, 2006, GPRSservices were available to our subscribers in 78 regions in Russia, includingmajor metropolitan areas such as Moscow, St. Petersburg and Novosibirsk.We also offered GPRS services in all regions of Ukraine. In addition, weintroduced international GPRS roaming to our subscribers in 2004, enabling themto use various GPRS-based services while traveling abroad.

In 2004, we entered into an exclusivestrategic partnership with NTT DoCoMo under which we launched the i-mode mobileinternet platform in all the macro-regions of Russia during 2005, except theFar East, where the i-mode platform was launched in June 2006. Throughi-mode, subscribers are offered easy access to numerous internet sites withpremium content, e-mail and other applications using specialized handsetsdeveloped especially for i-mode users.

We also entered into an agreement withResearch In Motion in May 2005 to offer BlackBerry services to oursubscribers in Russia. We plan to launch BlackBerry as soon as we receiveapproval from Rossvyazokhrankultura. BlackBerry services will enable oursubscribers to easily access e-mail, phone, text messaging, Internet, organizerand corporate data applications from a single, integrated device. It willoperate on our GSM/GPRS network in Russia with international roaming supportedin the countries where we have GPRS roaming agreements.

In addition, welaunched a trial 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 

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servicesin the Moscow metropolitan area and expanded EDGE services in 2006 to cover themost developed markets where we operate. 

**Third-GenerationTechnology**

Third-generation networks, using UMTStechnology, will allow subscribers to send video images and access the Internetusing their handsets at transmission speeds of up to 2 Mbps per second. We haveconducted trials of third-generation networks utilizing rented networkequipment. 

In July 2006, UMC was licensed to providetelecommunications services using CDMA 450 technology. CDMA 450 is a 3Gtelecommunication standard ratified by the International TelecommunicationUnion. We plan to provide the following services to our CDMA 450 subscribers inUkraine: wireless virtual data transmission networks, remote access tocorporate subscribers, high-speed access to the Internet and multimediaservices, such as video-on-demand. We intend to commence commercial servicesusing CDMA 450 technology in Ukraine in 2007.

In April 2007, the Russian Ministry ofInformation and Communications announced the results of a tender for 3G licenses.We are one of three companies, along with Vimpelcom and Megafon, who received anationwide 3G license in Russia. The license is valid through 2017 and coversthe entire territory of Russia. In accordance with the conditions set forth inthe tender documentation, we, Vimpelcom and Megafon are required to begin undertakingthe construction of a 3G network over a period of two years from the time thelicense was received.  We expect that our3G network will use 1950-1965 MHz, 2015-2020 MHz and 2140-2155 MHz frequencies,and will compliment our existing GSM network. We are planning to initially launch3G services in the largest cities in Russia starting in the second half of 2007.

In addition, theCommunications and Information Agency of Uzbekistan allocated a 3G license to usin April 2007. The license is valid through 2016 and covers the entireterritory of the country. We are planning to begin the development of a 3Gnetwork in Uzbekistan in 2007 after we complete a tender to choose an equipmentsupplier. We aim to launch the 3G network in Tashkent in 2008 followed bySamarkand, Bukhara and Andijan, and expect that the 3G network will compliment ourexisting GSM network in Uzbekistan. Subscribers outside the 3G network’scoverage will automatically be switched to the GSM network.  

**BaseStation Site Procurement and Maintenance**

The process of obtaining appropriate sitesrequires that our personnel coordinate, among other things, site-specificrequirements for engineering and design, leasing of the required space,obtaining all necessary governmental permits, construction of the facility andequipment installation. In Russia, we use site development software supplied byLucent Technologies 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 to 55 years,with the term of a majority of agreements being three to five years. Underthese agreements, we have the right to use premises located in attics or on topfloors of buildings for base stations and space on roofs for antennas. In areaswhere a suitable base station site is unavailable, we construct towers toaccommodate base station antennae. We anticipate that we will be able tocontinue to use our existing GSM 900 base station sites and to co-locateGSM 1800 base stations at some of the same sites. 

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To providequality service to subscribers, our maintenance department, staffed24 hours per day, performs daily network integrity checks and responds toreported problems. Our technicians inspect base stations and carry outpreventative maintenance at least once every six months. 

**InterconnectArrangements and Telephone Numbering Capacity**

Cellular operators must interconnect withlocal, inter-city and international telephony operators to obtain access totheir networks and, via these operators, to the networks of other operatorsaround the world. We have local interconnection agreements, includingagreements for the provision of telephone numbering capacity, with severaltelecommunications operators in Moscow and in the other regions of Russia andin Ukraine, including the public switched telephone network operator in thecity of Moscow, MGTS, as well as other companies within the Comstar group, allof which are affiliated with Sistema, and Ukrtelecom, UTEL, Golden Telecom andother public switched telephone network operators in Ukraine. See “Item 7.Major Shareholders and Related Party Transactions—B. Related Party Transactions.”For use of 11-digit telephone numbering capacity and the associatedinterconnection, we have agreements with Rostelecom. Local interconnectiontypically entails payment of a one-time connection fee, a monthly fee persubscriber connected and a usage charge based on minutes of traffic, or somecombination thereof.

To provide our subscribers in Russia withdomestic long-distance services, we have interconnection agreements withRostelecom and Interregional Transit Telecom, or MTT, and, to provide internationalservices, with Rostelecom and Golden Telecom. Most fees for connecting users ofother operators’ fixed line and wireless networks to our network, orinterconnect fees, are based on usage by minute and vary depending on thedestination called.

Russian legislation requires that publicswitched telephone networks may not refuse to provide interconnection ordiscriminate against one operator in comparison to another; in practice,however, it has been our experience that some regional network operators dodiscriminate among mobile cellular operators by offering differentinterconnection rates to different mobile operators. See “Item 3. KeyInformation—D. Risk Factors—Risks Relating to Our Business—If we cannotinterconnect cost-effectively with other telecommunications operators, we maybe unable to provide services at competitive prices and therefore lose marketshare and revenues.” Certain interconnect fees are subject to governmentregulation, such as those set by Rostelecom.

The Ministry of Information Technologiesand Communications 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 Russianregulator recently took the view that numbering capacity assigned to oneoperator could not be rented to other operators. Accordingly, we have enteredinto a new arrangement whereby fixed line operators make their numbersavailable to our subscribers via agency contracts between the subscribers andus acting on behalf of such fixed line operators. Our right to use numberingcapacity ranges from five years to an unlimited period of time. As ofDecember 31, 2006, we had numbering capacity (federal and local) for over 18.5million subscribers in the Moscow license area. For a description of how weamortize the acquisition costs of numbering capacity, see Note 2 to ouraudited consolidated financial statements.

Interconnection and traffic transit betweenthe networks of cellular operators in Russia are organized through the networkof MTT, one of the largest alternative operators in Russia, or through directchannels connecting the switches of the different cellular operators located inone city.

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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 network development(if we decide to utilize a local license granted to UMC) is insufficient.

**Network MonitoringEquipment**

We have operation and maintenance centers in Moscow,St. Petersburg, Nizhny Novgorod, Samara, Ekaterinburg, Omsk, Tomsk,Novosibirsk, Irkutsk, Kazan, Ufa, Krasnoyarsk, Chita, Blagoveshchensk, Vladivostokand Yuzhno-Sakhalinsk. We constantly control and monitor the performanceof our network, call completion rate and other major key technical performanceindicators. We use monitoring systems to optimize our network and to locate andidentify the cause of failures or problems, and also to analyze our networkperformance and obtain network statistics. We have agreements with differentsuppliers for technical support services that allow us to obtain theirassistance in trouble shooting and correcting problems with our network withinthe warranty period.

Our networks in Ukraine,Uzbekistan and Turkmenistan are monitored by our Kiev, Tashkent and Ashgabatoperations and maintenance centers, respectively. In addition to monitoringperformance of the network, our Kiev, Tashkent and Ashgabat operations andmaintenance centers analyze network quality parameters and provide reports andrecommendations to management.

**Handsets**

Almost all of our handset sales consist of dual-bandGSM 900/GSM 1800 handsets. These dual-band handsets are currently inwidespread use on networks in Western Europe and, because they send and receivecommunications on both GSM 900 and GSM 1800 frequencies, they canrelieve possible congestion on our network and increase the ability of ourcustomers to roam. We also offer our subscribers tri-band handsets. Thesehandsets, 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 endedDecember 31, 2006, we provided net handset subsidies of $30.4 millionin Ukraine. These subsidies are expected to be compensated within two years ofa subscriber’s enrollment through the subscriber’s usage of our services.However, in view of the experience and practice of mobile services providers inmore mature markets, increased competition may compel us to more heavilysubsidize handsets in the future.

We have entered into arrangements with Sony Ericsson,Nokia, Motorola, Samsung, Siemens, Alcatel and others to purchase handsets. Weoffer approximately 80 GSM 900/GSM 1800 handset models, themajority of which are manufactured by Samsung and Nokia. We are not dependenton any particular supplier for handsets. The handset manufacturers providetraining to our sales force, customer service personnel, dealers andengineering staff and cooperate with us on marketing and promotion. To ensurequality control and to maintain the MTS brand image, we encourage our dealersto purchase handsets for use on our network directly from us. Dual-bandhandsets range in cost from approximately $30 to $1,500.

We and our dealers alsooffer an array of mobile telephone accessories, with the average new subscriberspending from $1 to $167 on such accessories in addition to the cost of thehandset. 

**Regulation in theRussian Federation**

In the RussianFederation, the federal government regulates telecommunications services. Theprincipal law regulating telecommunications in the Russian Federation is theFederal Law on Communications, which provides, among other elements, for thefollowing:

·       licensingof telecommunications services;

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·       requirementsfor obtaining a radio frequency allocation;

·       equipmentcertification;

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

·       faircompetition;

·       freedomof pricing other than pricing by companies with monopoly power; and

·       liabilityfor violations of Russian legislation on telecommunications.

The new Federal Law on Communications came into forceon January 1, 2004 and replaced the law of 1995 regulating the samesubject matter. The Federal Law on Communications creates a framework in whichgovernment authorities may enact specific regulations. Regulations enactedunder the legislative framework in place prior to the enactment of the FederalLaw on Communications continue to be applied to the extent they do not conflictwith the Federal Law on Communications. The lack of interpretive guidance fromthe regulatory authorities regarding the new regulations and the uncertaintysurrounding their compatibility with the regulations still in effect impedesour ability to assess effectively the impact of the new regulations under theFederal Law on Communications on our business.

The Federal Law onCommunications, 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 wherefrequency and numbering capacity are limited may be issued only on the basis ofa tender. In addition, the new law provides for the establishment of a“universal services 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 Our Countries of Operation—Legal Risks andUncertainties—The implementation of the Federal Law on Communications imposedan additional financial burden on us and may restrict our operations, whichcould materially adversely affect our financial condition and results ofoperations.” The Federal Law on Communications also attempts to simplify thesuccession of licenses to merged or otherwise reorganized companies byinstituting a license re-issuance procedure, whereas under the previous law,merged or reorganized companies were required to apply to the Ministry ofCommunications for the issuance of a new license in such circumstances.

**Regulatory Authorities**

The Russian telecommunications industry is regulatedby several governmental agencies. These agencies, whose functions are notalways clearly defined, form a complex, multi-tier system of regulationthat resulted, in part, from the implementation of the Federal Law onCommunications, 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 Our Countries of Operation—Political and SocialRisks—Political and governmental instability in Russia and Ukraine couldmaterially adversely affect our business, financial condition, results ofoperations and prospects and the value of our shares and ADSs.”

*TheMinistry of Information Technologies and Communications*isthe federal 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 

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the area of communicationsif authorized to do so by federal legislation (including presidential andgovernmental decrees).

The following bodies also regulate thetelecommunications industry.

*The Federal Service forSupervision in the Area of Mass Media, Communications and Protection ofCultural Heritage*is a federal executive body thatsupervises and controls certain areas of communications and informationtechnologies, including:

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

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

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

·       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; 

·       theenforcement of equipment certification requirements; 

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

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

*TheFederal 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 numerical resources and certification of equipment for compliancewith technical requirements

*StateRadio Frequencies Commission.*   The State Radio Frequencies Commission is an inter-agencycoordination body acting under the Ministry of Information Technologies andCommunications which is responsible for the regulation of radio frequencyspectrum and develops a long-term policy for frequency allocation in theRussian Federation.

*Other regulatoryauthorities.*   Inaddition, the Federal Antimonopoly Service supervises competition regulationsand enforces the Federal Law on the Natural Monopolies and the regulationsenacted thereunder. The Federal Tariffs Service regulates certain tariffs inthe sphere of telecommunications, including the tariffs on the local and DLDcalls by subscribers of PSTNs and installation and subscription fees. TheFederal Service for Supervision in the Area of Consumer Rights Protection andHuman Well-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 datedFebruary 11, 2005.

**Licensing ofTelecommunications Services and Radio Frequency Allocation**

Telecommunications licenses are issued based on the FederalLaw on Communications, and, with regard to wireless telecommunicationsservices, on the Approval of Regulations for Holding a Competitive Tender forReceipt of Licenses Associated with the Provision of Cellular RadiotelephoneServices, enacted in June 1998. Under these regulations, effectiveJanuary 1, 2004, licenses may be issued and renewed for periods rangingfrom three to twenty-five years. Several different licenses to conductdifferent 

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communication services maybe issued to one entity. Provided the licensee has conducted its activities inaccordance with the applicable law and terms of the license, renewals may beobtained upon application to Rossvyazokhrankultura. Officials of Rossvyazokhrankulturahave broad discretion with respect to both issuance and renewal procedures. 

A company mustcomplete a multi-stage process before the commercial launch of itscommunications network. A company must:

·       receivea license from Rossvyazokhrankultura to 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 Rossvyazokhrankultura for network operations. To receive thispermission, a wireless telecommunications services provider must develop afrequency allocation and site plan, which is then reviewed and certified by Rossvyazokhrankulturafor electromagnetic compatibility of the proposed cellular network with otherradio equipment operating in the license area. Rossvyazokhrankultura hasdiscretion to modify this plan, if necessary, to ensure such compatibility.

Under the old Federal Law on Communications andrelated licensing regulations, the transfer of a license, including assignmentor pledge of a license as collateral, was prohibited except for transfer oflicenses for the provision of wireless telecommunications services awardedthrough a competitive tender. Effective January 1, 2004, the prohibitionson the transfer of licenses were relaxed and, in particular, in case ofmergers, licenses may be re-issued upon application by a transferee as a newlicense 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 the terms of alicense are not fulfilled or the service provider violates applicablelegislation, the license may be suspended or terminated. Licenses may be suspendedfor various reasons, including:

·       failureto comply with Russian law or the terms and conditions of the license;

·       failureto provide services for over three months from the start-of-service date setforth in the license; and

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

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

·       failureto remedy 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

·       failureto fulfill obligations undertaken in the process of a tender or auction.

The license may also be terminated in a number ofcases, including liquidation of a license holder or failure to pay a licensefee on time. A suspension or termination of a license may be appealed in court.

Frequencies are allocated for a maximum term of tenyears, which may be extended upon the application of a frequency user. Underthe Federal Law on Communications, frequency allocations may be changed forpurposes of state management, defense, security and protection of legal orderin the Russian Federation with the license holder to be compensated for relatedlosses. Further, frequency allocations may be suspended or terminated for anumber of reasons, including failure to comply with the conditions on whichfrequency was allocated.

The following one-time license fees are payable inrespect of each region covered by the license: 15,000 rubles, for servicesinvolving use of a frequency spectrum, lease of communication channels running 

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beyond one region ofRussia as well as in number of other cases specified by law; and1,000 rubles in other cases. The license fee for a license receivedthrough a tender or auction is determined by the terms of such tender orauction.

In addition to licensing fees, a government decreeenacted on June 2, 1998 requires payment of fees for the use of radiofrequencies 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. Furthermore, theFederal Law on Communications provides for the establishment of a “universalservices reserve fund” for the purpose of supporting communications companiesoperating in less developed regions of Russia through the financing,construction and maintenance of telecommunications networks in low-profit andunprofitable sectors. This reserve fund is aimed at eliminating the practice ofcross-subsidies by compensating operators for certain mandatory, loss-makinglocal services in rural and sparsely populated areas. The universal servicefund concept has been used in some developed countries and in Eastern Europe.It is funded by a levy imposed on all communication services providers, includingus, in the amount of 1.2% of revenues fromtelecommunications services less the amount of taxes paid by each of itssubscribers. See “Item 3. Key Information—D. Risk Factors—RisksRelating to Our Countries of Operation—Legal Risks and Uncertainties—The implementationof the Federal Law on Communications imposed an additional financial burden onus and may restrict our operations, which could materially adversely affect ourfinancial condition and results of operations.” 

The Federal Law onCommunications empowers the Russian government to determine and annually reviewthe list of licensing requirements applicable to various communication servicesbeing licensed. The most recent list of licensing requirements was enacted byGovernment Decree No. 87 dated February 18, 2005 and amended byGovernment Decree No. 837dated December 29, 2005. Licenses also generally contain a number of otherdetailed conditions, including a date by which service must begin, technicalstandards and certain other terms and conditions. We have either commencedservice by the applicable deadline or received an extension of the applicabledeadline for all of our licenses.

**EquipmentCertification**

A government decree adopted on December 31, 2004,sets forth the types of communications equipment that is subject to mandatorycertification. Communications equipment must be certified, or its compliancewith 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 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, certainhigh-frequency equipment, a list of which was approved by Government ResolutionNo. 539 of October 12, 2004, manufactured or used in the RussianFederation requires special permission from Rossvyazokhrankultura. Thesepermissions are specific to the entity that receives them and do not 

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allowthe use of the equipment by other parties. Failure to receive suchcertification could result in the mandatory cessation of the use of suchequipment.

**Competition,Interconnection and Pricing**

The Federal Law onCommunications requires federal regulatory agencies to encourage competition inthe provision of communication services and prohibits the abuse of a dominantposition to limit competition. The Federal Law on Communications provides thattelecommunications tariffs may be regulated in cases provided for bylegislation. 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, datedOctober 24, 2005, authorized the Federal Tariffs Service to set thefollowing tariffs for the 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 to fixed lineoperators, we are still subject to them when receiving telephone calls fromfixed lines.

In accordance with the Federal Law on NaturalMonopolies, the Federal Tariffs Service maintains a Register of NaturalMonopolies whose tariffs are controlled and regulated by the state. A telecommunicationsoperator may be included in this register upon the decision of the FederalTariffs Service based on the Service’s analysis of the operator’s activitiesand the market conditions. At present, none of our subsidiaries is included inthe Register of Natural Monopolies.

The Federal Antimonopoly Service is authorized by lawto maintain a register of companies holding a market share in excess of 35%.Companies entered in this register may become subject to certain restrictionsin conducting their business, including limitations in decisions relating toprice formation, geographical expansion, associations and agreements withcompetitors. Acquisitions of assets or shares in or by other entities involvingsuch companies are subject to particular scrutiny by the Federal AntimonopolyService. As of December 31, 2006, MTS OJSC and its subsidiary MSS arecategorized by the Federal Antimonopoly Service as companies with a marketshare exceeding 35%. See also “Item 3. Key Information—D. RiskFactors—Risks Relating to Our Business—If we are found to have a dominantposition in our markets, the government may regulate our tariffs and restrictour operations.”

The Federal Law on Communications provides for aspecial regulation of PSTN operators occupying a “substantial position,” *i.e.*, operators which together with their affiliates have,in the Russian Federation generally or in a geographically defined specificnumerical zone, 25% or more of installed capacity or capacity to carry outtransmission of not less than 25% of traffic. In particular, the Federal Law onCommunications and implementing rules adopted by Government DecreesNo. 161, dated March 28, 2005 and No. 627, datedOctober 19, 2005, both effective from January 1, 2006, provide forgovernment regulation of interconnection tariffs established by such operators.In addition, such operators are required to develop standard interconnectioncontracts and publish them as a public offer for all operators who intend touse such interconnection services. Notwithstanding the above, fixed lineoperators not considered to occupy a “substantial position” and not included inthe Register of Natural Monopolies, as well as mobile operators, are free toset their own tariffs.

In March 2006, theFederal Law on Communications was amended to incorporate a CPP scheme effectiveas of July 1, 2006. Prior to the implementation of the CPP principle,subscribers of fixed line operators could initiate calls to mobile phone usersfree of charge. Under the new system, fixed line 

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operatorsbegan charging their subscribers for such calls and transfer a percentage ofthe charge to mobile operators terminating such calls. The percentagetransferred to mobile operators is regulated by Rossvyazokhrankultura and isknown as the settlement rate. The settlement rate, however, does not cover ourexpenses for terminating calls initiated by subscribers of fixed line operatorsand, therefore, we partially offset the resulting losses by charging most ofour subscribers an additional amount for the first minute of outgoing calls. Asof December 31, 2006, the increase in revenues resulting from this additionalcharge, as well as the increases in our traffic volume associated with the CPPwas not sufficient to offset the losses incurred due to the low settlement rateestablished by Rossvyazokhrankultura. 

**Regulation inUkraine**

**RegulatoryAuthorities**

*TheState Department on Communications and Informatization, or SDCI*(formerlythe State Committee on Communications and Informatization, or SCCI), regulatedthe telecommunications industry through December 31, 2004 largely throughthe issuance of regulations, establishment of requirements relating to thequality of telecommunications services and technical requirements relating totelecommunications networks and facilities. The SDCI also supervised thetechnical conditions and development of the telecommunications industry,including the development of standards and technical rules and supervisionof the GSM, D-AMPS, NMT and TDMA networks. The SDCI was established inSeptember 2004 as a division of the Ministry of Transport andCommunications of Ukraine, or MTCU. The MTCU was established in July 2004as a result of the merger of the Ministry of Transport and the SCCI. The SDCIis headed by a director nominated by the Minister of Transport andCommunications and appointed by the Cabinet of Ministers of Ukraine. Following itsestablishment in January 2005, the NCRC assumed most of the SDCI’sfunctions. The SDCI remains responsible mainly for establishing and overseeingtechnical policies and standards.

*TheNational Commission for the Regulation of Communications, or NCRC,*establishedin January 1, 2005, pursuant to the new Telecommunications Law described in“—Legislation” below, is an independent regulatory body consisting of sevenmembers and a chairperson. The members and chairperson of the NCRC arenominated by the Prime Minister and appointed by the President of Ukraine for afive-year term. The NCRC is responsible for issuing licenses fortelecommunications services commencing January 1, 2005, as well as variousother responsibilities of the SDCI from that date. The SDCI, on the other hand,remains responsible mainly for establishing and overseeing technical policiesand standards

*TheState Center for Radio Frequencies of Ukraine, or SCRF.*   While licenses for radiofrequencies for wireless communications are issued by the NCRC, SCRF is theauthority responsible for all technical issues related to the use of radiofrequency resources and, in such capacity, is also involved in the issuance ofradio frequency licenses. In particular, the SCRF determines frequencyavailability and the technical aspects of frequency allocation, as well asprovides the NCRC with an expert opinion in relation to each application forradio 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 ofCommunications, or SIC,*established by the newTelecommunications Law, is a division of the NCRC. The SIC is responsible forthe general supervision of the telecommunications market and the use of radiofrequency resources. The SIC also monitors compliance with license terms,physically inspects operators and providers of telecommunications services and,together with the SCRF, reviews cases relating to administrative violations inthe areas of telecommunications and radio frequencies.

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**Legislation**

The principal legislation regulating the telecommunicationsindustry consists of the Law on Telecommunications dated November 18,2003, or the Telecommunications Law, and the Radio Frequencies Law datedJune 1, 2000, or the Radio Frequencies Law. 

The Telecommunications Law provides for, among otherthings, equal rights for individuals and legal 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 are alsodetermined by this legislation. The Telecommunications Law also governs therelations between the state and local governmental bodies, telecommunicationsoperators and users of telecommunications services and radio frequencies.

The Telecommunications Law addresses new areas oftelecommunications services in Ukraine, including numbering requirements,tariff and settlement regulations, interconnection, public telecommunicationsservices, market access rules and licensing issuance and renewal. The TelecommunicationsLaw also significantly expands the definition of the telecommunicationsservices market, including in its scope Internet Protocol telecommunications,transmission of data and facsimile communications.

The Telecommunications Law also restructured theregulatory bodies governing the area of telecommunications. It provided for thecreation of the NCRC, which, as of January 1, 2005, is assigned manyfunctions previously held by the SDCI. The NCRC is authorized, *inter alia*, to issue regulations for the telecommunicationsservices, issue telecommunications licenses to operators and providers, issuefrequency licenses, request information from operators, providers andauthorities, impose administrative penalties and maintain the register of theoperators and providers. The NCRC is also authorized to conduct hearings and toresolve disputes among operators concerning the interconnection oftelecommunications networks. The powers of the SDCI in the telecommunicationsarea are now relegated primarily to that of technical standards overseer.

Foreign investments in Ukrainian telecommunicationsoperators are not limited; however, in order to provide telecommunicationsservices in Ukraine an entity must be located on the territory of Ukraine andregistered in accordance with Ukrainian legislation.

The Radio Frequencies Lawsets forth comprehensive rules regarding the allocation, assignment,interrelation and use of radio frequencies, the licensing of the users of radiofrequencies and other relevant issues. The 2004 amendments to the RadioFrequencies Law introduced new procedures for issuance, re-execution andtermination of frequency licenses and operation permits.

**Licensing ofTelecommunications Services and Radio Frequency Allocation**

Ukrainian legislation provides for two types oftelecommunications licenses: telecommunications licenses and frequencylicenses. Prior to January 1, 2005, the SDCI issued telecommunications andfrequency licenses based on the Law on Licensing Certain Types of BusinessActivity dated June 1, 2000, the Telecommunications Law and the RadioFrequencies Law. Commencing January 1, 2005, the NCRC has assumedresponsibility for issuing telecommunications licenses and frequency licensespursuant to the Telecommunications Law and the 2004 amendments to the RadioFrequencies Law.

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Telecommunicationslicenses are issued for the following specific types of telecommunicationsservices:

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

·       mobiletelecommunications services;

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

·       intercityand international telecommunications services.

Other telecommunications services do not requirelicenses.

An operator that is granted a telecommunicationslicense may not commence the provision of wireless telecommunications servicesuntil it receives a frequency license. The issuance of a frequency license is,in turn, subject to the availability of radio frequencies in the respectiveregions of Ukraine. Frequency licenses are issued for specific bandwidthswithin certain frequency spectrums in specific regions. The GSM spectrum ispresently considered to be the most commercially attractive fortelecommunications operators. It is currently deemed to be virtually impossibleto obtain a license for GSM frequencies in major Ukrainian cities because mostof the GSM radio frequencies in such cities are already licensed to theexisting GSM operators, including us.

Under applicable legislation, licenses fortelecommunications services may be issued and renewed for periods of not lessthan five years, with the actual period generally ranging from 10 to15 years. Renewal of a license is made by an application submitted to theNCRC at least four months prior to the expiration of the license term. NCRCofficials have broad discretion with respect to both the issuance and therenewal of licenses. The Telecommunications Law further provides that the NCRCmust award licenses on a first come-first serve basis within 30 days fromsubmission of an application. If resources are limited or consumer interests sorequire, the NCRC may adopt a decision to limit the number of licenses. In thisevent, the law requires that such decision be made public along with therationale and that the licenses be allocated through a tender.

In accordance with the Radio Frequencies Law, the NCRCissues a frequency license concurrently with the issuance of the license forthe type of telecommunications services requiring use of radio frequencyresources. A telecommunications operator that has a respectivetelecommunications license may apply for licenses for additional radiofrequency bands. Frequency licenses may not be issued for a period shorter thanthe term of the relevant telecommunications license.

Under applicable legislation, a public tender or anauction for a radio frequency license must be held by the NCRC if demand forradio frequency resources exceeds available resources. Radio frequency licensesissued on the basis of a public tender or an auction for the same type of radiotechnology must include identical conditions regarding the radio frequencybands and development period.

Applicable legislation prohibits the transfer of alicense by the licensee, including by means of assignment or pledge of alicense as collateral, and agreements regarding the provision oftelecommunications services must be executed and performed by the actuallicensee.

Licenses generally contain a number of detailedconditions, including the date by which service must be commenced, therequirement to use only certified equipment, the technical standards which mustbe observed and the requirement to comply with all environmental regulations.Frequency licenses issued after January 1, 2005 will also contain the dateby which the radio frequency resources must be fully utilized.

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Telecommunications operators are subject to strictregulations, especially regarding electromagnetic compatibility; constructionand technical maintenance of a telecommunications network must be carried outin accordance with specific regulations applicable in Ukraine.Telecommunications operators must submit periodic reports to the NCRC on theamount and quality of services provided under the telecommunications license.We believe that we are in material compliance with the applicable laws andregulations related to our Ukrainian licenses.

Some licenses also provide that services for personsentitled to certain social benefits must be provided at or below maximumtariffs established by Ukrainian legislation in effect at that time.

If the terms of alicense are not fulfilled or the service provider violates legislation, thelicense may be suspended or terminated. Both telecommunications serviceslicenses and radio frequency licenses may be terminated for various reasons,including:

·       failureto comply 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;

·       refusalto provide documents requested by the NCRC or the SIC;

·       failureto remedy 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:

·       failureto commence 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

·       failureto use radio frequency resources to the full extent within the time periodspecified in the license.

Decisions of the NCRC ontermination of licenses may be appealed in court.

**EquipmentCertification**

The Telecommunications Law requires that all technicaldevices and equipment to be used in interconnected communications networks inUkraine, including fixed line and wireless networks, be certified. The Ministryof Transport and Communications of Ukraine sets the technical standards forequipment to be used in telecommunications networks in Ukraine and issues theequipment compliance certificates. If the equipment a prospective operatorintends to use is certified in Ukraine by either the manufacturer or thevendor, there is no need for the operator to go through the equipmentcertification process. However, if the equipment is not certified in Ukraine orif it is certified by a third party that is unwilling or unable to give theoperator its permission to utilize its certification, then the operator willneed to apply for the certification of the equipment in its own name.

The Radio Frequencies Lawprovides that users of radio frequency resources must obtain permits for theoperation of radio-electronic and radio-emitting equipment, exceptfor equipment used on a permit-

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freebasis in accordance with this law. In order to obtain such operation permit, acompany is required to file an application with the SCRF. The Radio FrequenciesLaw also requires producers 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 that one of thepurposes of the licensing of telecommunications services is to encouragecompetition and de-monopolization in the telecommunications industry.

The AMC is the state administrative body charged withthe administration of competition legislation and the protection and regulationof economic competition in Ukraine, including economic competition amongindustry participants in the telecommunications sector.

Ukrainian antimonopoly legislation prohibits a companyoperating in Ukraine from using its dominant position in its market to gain anunfair or anti-competitive advantage in the provision of its services orproducts. A legal entity is deemed to be in a dominant position if such entityhas no competitor in the market or is not subject to substantial competitiondue to restricted access or entry barriers for other business entities.Moreover, Ukrainian antimonopoly legislation sets forth that a company havingmore than 35% of the market share in a given product market may be deemed to bein the dominant position on such market, unless it proves that it is subject tosubstantial 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’telecommunications networks;

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

·       notdiscriminate against other players in telecommunications market.

Although UMC currently has over a 41% market share ofthe wireless communications market in Ukraine, it has not been declared adominant market force by the AMC. In September 2003, the AMC began areview of the telecommunications services market for the purpose of determiningthe status of competition and the existence of dominant market forces. In August 2004,the AMC notified UMC and its largest competitor, Kyivstar, that the preliminaryresults of its review of the wireless telecommunications industry indicatedthat each of UMC and Kyivstar qualified as having a dominant position in themarket. The AMC offered UMC and Kyivstar the opportunity to submit theirobjections to these preliminary findings and indicated that it would issue adecision following its review thereof. In December, 2004, the AMC announced itsissuance of a decision in which it confirmed that neither UMC nor Kyivstarqualified as having a dominant position in the wireless communications market.

In November 2005, theAMC recommended that UMC and Kyivstar abolish the connection fees bothoperators charge their subscribers. In April 2006, UMC responded bynotifying the AMC that it had partially abolished the connection fees itcharged to those subscribers participating in its monthly tariff plans, butwould not alter the connection fees charged to subscribers of pre-paid tariffplans. The AMC has not taken any further actions relating to this matter.

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**Tariffs**

Telecommunicationstariffs are regulated by the NCRC for:

·       “publictelecommunication” services;

·       accessto the telecommunications networks (use of electric communications channels) ofthe operator with the dominant position on the market; and

·       thelease of telecommunications channels owned by operators with a dominantposition on the market.

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

In May, 2006, the NCRC established maximum tariffs forboth fixed-line public telecommunications services and for access to wirelessnetworks from fixed-line networks. Such tariffs shall become effective when thedecision by the NCRC establishing the tariffs is registered by the UkrainianMinistry of Justice.

Although there are no additional regulations limitingthe rates at which tariffs may be set for wireless telecommunications services,the AMC, where competition laws are violated, can find tariffs unfair andinjurious to competition. In such cases, the AMC may request the violatingtelecommunications operator to remedy the situation, in particular, by amendingits tariff schedule.

Subject to the above,wireless operators are free to set tariffs at levels they consider appropriate.

**Interconnection**

As of January 1, 2005, interconnection activityis 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 to interconnectionagreements between network operators as prescribed by the regulatoryauthorities. Such agreements are required under the law to contain certainprovisions. An operator with a dominant market position cannot refuse an offerto conclude an interconnection agreement with another operator, if the offerorhas offered points of interconnection that were previously published by the NCRCin the catalog of interconnection proposals.

The NCRC is authorized toconduct hearings and to resolve disputes among operators concerning theinterconnection of telecommunications networks. The decision of NCRC is bindingupon the parties in the dispute but a party to the dispute may appeal suchdecision in court.

**Seasonality**

Our results of operationsare impacted by certain seasonal trends. Generally, revenue is higher duringthe second and third quarter due to increased mobile phone use by subscriberswho travel in the summer from urban areas to more rural areas where fixed linepenetration is relatively low, as well as an increase in roaming revenues andguest roaming revenues during these quarters. In the fourth quarter, operatingincome and average revenue per user tend to be low as the increase in newsubscribers tends to outpace the increase in phone usage. However, quarterlytrends can be influenced by a number of factors, including promotions, and maynot be consistent from year to year.

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**C.****               OrganizationalStructure**

Thetable below presents our significant operating and holding entities and ourownership interests therein as of December 31, 2006. Our ownershipinterest and voting power in each of the entities is identical. All of theentities, with the exception of MTS Belarus, UMC, Uzdunrobita, BCTI, MTSFinance and MTS Bermuda Ltd. are organized and operate under the laws of theRussian Federation. 
|                    | ** ** | **Accounting Method** | ** **   | **Ownership  Interest** | ** ** |
|--------------------|------------|----------------------------|--------------|-------------------------|------------|
| MTS Finance(1)     |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| MTS-Capital        |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| UMC                |       |                       | 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 | % |   |
| MTS Kostroma       |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| Novitel            |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| Uzdunrobita        |       |                       | Consolidated |                    |       |   | 74.0 | % |   |
| Sibintertelecom    |       |                       | 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-Bermuda Ltd.   |       |                       | Consolidated |                    |       |   | 100.0 | % |   |
| Dagtelecom         |       |                       | Consolidated |                    |       |   | 74.99 | % |   |
| MTS Belarus        |       |                       | Equity       |                    |       |   | 49.0 | % |   |

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(1)                 Represents beneficial ownership interest.

**D.**              Property, Plant andEquipment

We occupy premises in Moscow at 4 MarksistskayaStreet, 4 Marksistskaya Street Bldg. 34, 1/3 Vorontsovskaya StreetBldg. 2, 1 Vorontsovskaya Street Bldg. 5, 5/2 Vorontsovskaya Street, 13/14 VorontsovskayaStreet Bldg. 10, 12/12 Pankratievskaya Street, 10 Teterinsky Pereulok,32/1 Bolshaya Semenovskaya Street, 7/22 Derbenevskaya Embankmentand 6 Vtoroy Vyazovskiy Proezd, which we use for administration, as well asoperation of mobile switching centers. We also lease buildings in Moscow forsimilar purposes, including marketing and sales and other service centers. Weare currently considering an option to consolidate our premises into a singleoffice building somewhere in the Moscow area in order to decrease maintenancecosts and increase operational efficiency. We also own office buildings in someof our regional license areas and in Ukraine, and we lease office space on anas-needed basis. Although we believe that our properties are adequate for ourcurrent needs, additional space is available to us if and when it is needed.

The primary elements of our network are base stations,base station controllers, transcoders and mobile switching centers. GSMtechnology is based on an “open architecture,” which means that equipment fromone supplier can be combined with that of another supplier to expand thenetwork. Thus, there are no technical limitations to using equipment from othersuppliers. Several major suppliers currently offer GSM 900/1800 mobile cellularequipment and the market for suppliers is competitive.

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Of the 20,812 base stations comprising our network inRussia as of December 31, 2006, 13,149 operated in the 900 MHz band and7,663 operated in the 1800 MHz band. We also operated 540 base stationcontrollers and approximately 155 switches in Russia as of December 31,2006.

Of the 9,059 base stations comprising our network inUkraine as of December 31, 2006, 3,967 operated in the 900 MHz band and5,092 operated in the 1800 MHz band. We also operated 246 base stationcontrollers and 35 switches in Ukraine as of December 31, 2006.

Of the 1,018 base stations comprising our network inUzbekistan as of December 31, 2006, 479 operated in the 900 MHz band and539 operated in the 1800 MHz band. We also operated 20 base station controllersand 13 switches in Uzbekistan as of December 31, 2006.

Of the 118 base stations comprising our network inTurkmenistan as of December 31, 2006, 79 operated in the 900 MHz band and39 operated in the 1800 MHz band. We also operated 7 base station controllersand 2 switches in Turkmenistan as of December 31, 2006.

In addition, certain ofour subsidiaries entered into capital lease agreements for network equipmentwith Invest-Svyaz—Holding, a wholly-owned subsidiary of Sistema. See “Item7. Major Shareholders and Related Party Transactions—B. Related PartyTransactions.”

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

None.

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

*The following discussion of our financial conditionand results of operations should be read in conjunction with our consolidatedfinancial statements, related notes and other information included elsewhere inthis document. In particular, we refer you to the risks discussed in “Item 3.Key Information—D. Risk Factors” for information regarding governmental,economic, fiscal, monetary or political policies or factors that couldmaterially adversely affect our operations or your investment in our shares andADSs. In addition, this section contains forward-looking statements thatinvolve risk and uncertainties. Our actual results may differ materially fromthose discussed in forward-looking statements as a result of variousfactors, including those described under “Item 3. Key Information—D. RiskFactors” and “Cautionary Statement Regarding Forward-Looking Statements.”Our reporting currency is the U.S. dollar and our consolidated financialstatements have been prepared in accordance with U.S. GAAP.*

**Overview**

We are the largest mobile operator in Russia,Uzbekistan and Turkmenistan and the second largest in Ukraine in terms ofsubscribers and revenues, according to AC&M-Consulting. Revenues for theyear ended December 31, 2006, were $6,384.3 million, an increase of 27.4%from the year ended December 31, 2005. Net income for the year ended December 31,2006, was $1,075.7 million, down 4.5% from the year ended December 31,2005. At December 31, 2006, we had a subscriber base of 72.9 million(51.2 million in Russia, 20.0 million in Ukraine, 1.5 million inUzbekistan and 0.2 million in Turkmenistan).

Our revenues have increased through organic growth, aswell as through acquisitions. During March to July 2003, we acquired100% 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. For the years ended December 31, 2005 and 2006, UMCaccounted for approximately 24.0% and 23.3%, respectively, of our totalrevenues. We acquired a 74% stake in Uzdunrobita, a mobile operator inUzbekistan, in August 2004, and Uzdunrobita’s results of operations havebeen included in our audited consolidated financial statements beginning July 2004.For the years ended December 31, 2005 and 2006, Uzdunrobita had totalrevenues of $86.5 million and $136.7 million, respectively. In two separate purchases in June and 

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November 2005,we acquired 100% of BCTI, a mobile 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. For the year ended December 31, 2006, BCTI had total revenuesof $105.8 million. We spent $355.7 million, $178.9 million and $38.2million in cash (net of cash acquired) in 2004, 2005 and 2006, respectively, toacquire businesses.

We require significant funds to support our subscribergrowth, primarily for increasing network capacity and developing networks innew license areas. Our cash outlays for capital expenditures (consisting ofpurchases of property, plant and equipment and intangible assets) in 2004, 2005and 2006 were $1,358.9 million, $2,181.3 million and$1,722.0 million, respectively. We have financed our cash requirementsthrough our operating cash flows and borrowings. Net cash provided by operatingactivities in 2004, 2005 and 2006 was $1,711.6 million, $1,803.6 millionand $2,389.9 million, respectively. Since 2002, we have raised a total of$1.8 billion through six U.S. dollar-denominated unsecured notesofferings in international capital markets. In April 2006, we entered intoa syndicated loan facility with several international financial institutions,allowing us to borrow up to $1,330.0 million in two tranches of $630.0 millionand $700.0 million, of which $860.0 million remained outstanding as of December 31,2006. As of December 31, 2006, we had total indebtedness of approximately$3.1 billion, including capital lease obligations, compared to approximately$2.9 billion as of December 31, 2005. Our total interest expense for theyears ended December 31, 2005 and 2006, was $132.5 million and $177.1million, net of amounts capitalized, respectively.

We hold a 49% equityinvestment in a mobile operator in Belarus, MTS Belarus, which had 3.2 millionsubscribers as of December 31, 2006. MTS Belarus is an equity investment,and its results are not consolidated in our financial statements, but insteadare accounted for in our equity in net income of associates. The remainingstake in MTS Belarus is owned by a Belarus state-owned enterprise.

**Segments**

Prior to January 1, 2005, we had severaloperating segments corresponding to separate legal entities within our group.For reporting purposes, we grouped them as follows: (1) our company,Mobile TeleSystems OJSC, or MTS OJSC, which holds licenses for and operates inthe 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 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 in 2004, weseparated our operations in Russia 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 April 2006, we merged with an additional nine of our wholly-ownedsubsidiaries in Russia: Gorizont-RT, TAIF Telcom, MTS-RTK, Sibchallenge, TomskCellular Communications, or TSS, BM Telekom, Far East Cellular Systems-900,or FECS-900, Siberian Cellular Systems-900, or SCS-900, andUraltel. In April 2007, the Russian authorities approved the merger of ourwholly-owned subsidiaries ReCom and Telesot Alania with us.

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In August 2006, wedecided to structure each of the macro-regions in Russia under one governingbody entitled “MTS Russia” as each of the macro-regions in Russia possessessimilar operational characteristics and economic environment. We review on a separatebasis each of the other countries where we operate due to each country’sdifferent geographical, economic and regulatory environment. Furthermore, eachcountry where we operate requires its own unique marketing and investmentstrategies. See Note  24 to our audited consolidated financial statementsfor segment information.

**Subscriber Data**

Thefollowing table shows our subscribers by country as of the dates indicated:
|                               | ** ** | **At December 31,** | ** ** |
|-------------------------------|------------|-------------------------------|------------|
| ** **                    | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                    | ** ** | **(in thousands)**       | ** ** |
| **Subscribers****(1)**        | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Russia                        |       | 26,540                        |       | 44,219 |   | 51,222 |   |
| Ukraine                       |       | 7,373                         |       | 13,327 |   | 20,003 |   |
| Uzbekistan                    |       | 311                           |       | 580 |   | 1,450 |   |
| Turkmenistan                  |       | —                        |       | 68 |   | 184 |   |
| Total consolidated            |       | 34,224                        |       | 58,194 |   | 72,859 |   |
| MTS Belarus  (unconsolidated) |       | 1,214                         |       | 2,134 |   | 3,208 |   |

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(1)                 We define a subscriber as an individual or organizationwhose account shows chargeable activity within 61 days (or 183 daysin the case of our pre-paid tariffs) or whose account does not have a negativebalance for more than this period.

We had approximately 51.2 million subscribers inRussia at December 31, 2006, of which 11.2 million were in the Moscowlicense area that encompasses the City of Moscow and the Moscow region.According to AC&M-Consulting, approximately 18.0% of all mobile cellularsubscribers in Russia reside in the Moscow license area, where penetration byactive SIM card stood at approximately 156.4% as of December 31, 2006.Overall penetration in Russia was lower, at approximately 104.6%, according toAC&M-Consulting. Our subscribers in Russia outside of the Moscow licensearea totaled approximately 40.0 million as of December 31, 2006. Accordingto AC&M-Consulting, as of December 31, 2006, we had a leading 33.7%market share of total mobile cellular subscribers in Russia. Our market sharein the Moscow license area was approximately 42.2% as of December 31,2006, according to AC&M-Consulting. We had approximately 20.0 millionsubscribers in Ukraine as of December 31, 2006, and, according toAC&M-Consulting, a 40.6% market share of total mobile cellular subscribersin Ukraine. In addition, we had approximately 1.5 million subscribers inUzbekistan, representing a 57.9% market share, according to our estimates.

Wedefine our churn as the total number of subscribers who cease to be asubscriber 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,**                           | ** ** |
|----------------------|------------|----------------------------------------------------------------------|------------|
| ** **           | ** ** | **     2004     ** | ** ** | **     2005     ** | ** ** | **     2006     ** | ** ** |
| **Subscriber Churn** | ** ** |                                                                 | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Russia               |       |                                                                 | 27.5       | % |   |   | 20.7 | % |   |   | 23.3 | % |   |
| Ukraine              |       |                                                                 | 15.8       | % |   |   | 21.8 | % |   |   | 29.9 | % |   |

 

The churn rate is highly dependent on competition inour license areas and those subscribers who migrate as a result of suchcompetition. The increase in our churn rate in Russia during 2006 occurred 

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mainly due to aggressivepricing policies and promotions undertaken by our competitors. The churn ratein Ukraine has increased significantly due to increased competition withVimpelcom and Astelit during 2006.

Whileour subscribers and revenues have been growing, our average monthly servicerevenue per subscriber has been decreasing. We calculate our average monthlyservice revenue per subscriber by dividing our service revenues for a givenperiod, including guest roaming and interconnect fees, by the average number ofour subscribers during that period and dividing by the number of months in thatperiod. The following table shows our average monthly service revenue perRussian and Ukrainian subscriber and average monthly minutes of use per Russianand Ukrainian subscriber for the periods indicated. 
|                                                     | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                          | ** ** | **  2004  **           | ** ** | **2005** | ** ** | **  2006  ** | ** ** |
| **Average monthly service revenue  per subscriber** | ** ** |                                       | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |
| Russia(1)                                           |       |                                       | $          | 12 | ** ** |   | $ | 8 |   |   | $ | 8 | ** ** |   |
| Ukraine                                             |       |                                       | $          | 13 | ** ** |   | $ | 10 |   |   | $ | 7 | ** ** |   |
| **Average monthly minutes of use  per subscriber**  | ** ** |                                       | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |
| Russia                                              |       |                                       | 157        | ** ** |   | 128 |   |   | 129 | ** ** |   |
| Ukraine                                             |       |                                       | 114        | ** ** |   | 117 |   |   | 142 | ** ** |   |

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(1)                 As of June 30, 2006, we changed the methodologyfor reporting average revenue per user for our Russian subscribers, a common calculationused throughout the telecommunications industry as a measure of companyeffectiveness and performance. Whereas previously we had excluded interconnectfees, we now include all network revenue in our calculation. Despite the changein methodology, the average monthly service revenue per subscriber in Russia in2004 would remain the same because of the insignificant amount of interconnectrevenues generated for that year.

Average monthly service revenue per subscriber inRussia decreased from $12 for the year ended December 31, 2004, to $8 forthe years ended December 31, 2005 and 2006. In 2005, average monthlyservice revenue per subscriber and average monthly minutes of use persubscriber in Russia decreased due to strong competition and a more diversesubscriber base. In 2006, the average monthly service revenue per subscriberand average monthly minutes of use per subscriber in Russia stabilized. InUkraine, average monthly service revenue per subscriber decreased from $10 forthe year ended December 31, 2005 to $7 for the year endedDecember 31, 2006 primarily due to competitive pressures on price levels.Average monthly minutes of use per subscriber in Ukraine increased from 117minutes in 2005 to 142 minutes in 2006 due to the introduction of subscribertariffs aimed at stimulating traffic, such as inexpensive intra-network rates.

Thefollowing table shows the mix between prepaid and other subscribers, such ascontract and corporate customers, for Russia and Ukraine for the periodsindicated. For a description of our prepaid tariff plans, see “Item 4.Information on Our Company—B. Business Overview—Tariffs.”  
|                              | ** ** | **At December 31,** | ** ** |
|------------------------------|------------|-------------------------------|------------|
| ** **                   | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Russia**                   | ** ** |                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Prepaid                      |       |                          | 77         | % |   |   | 88 | % |   |   | 90 | % |   |
| Other                        |       |                          | 23         | % |   |   | 12 | % |   |   | 10 | % |   |
| **Ukraine**                  | ** ** |                          | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Prepaid  (including SIM-SIM) |       |                          | 86         | % |   |   | 90 | % |   |   | 93 | % |   |
| Other                        |       |                          | 14         | % |   |   | 10 | % |   |   | 7 | % |   |

 

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**Revenues**

Our principalsources of revenue are:

·       servicerevenues, including usage and interconnect fees, monthly subscription fees,roaming and value-added services fees, and connection fees; and

·       revenuesfrom sales of handsets and accessories.

We set our fees and priceswith reference to the competitive environment and we expect price competitionto increase in the future. Our fees are not currently regulated by anyorganization or governmental authority in Russia, while in Ukraine there havebeen cases where governmental authorities imposed restrictions on our tariffs.

**Service Revenuesand Connection Fees**

*Servicerevenues.*   Usagefees include amounts charged directly to our subscribers, both for their usageof our network and for their usage of other operators’ GSM networks whenroaming outside of our service area. We generally bill our subscribers for alloutgoing calls. In the past, we charged our subscribers in Russia for allincoming calls.

An amendment to the Federal Law on Communications,which became effective July 1, 2006, implemented the CPP principleprohibiting mobile operators from charging their subscribers for incomingcalls. Prior to the implementation of the CPP, subscribers of fixed lineoperators could initiate calls to mobile phone users free of charge. Under thenew system, fixed line operators began charging their subscribers for suchcalls and transfer a percentage of the charge to mobile operators terminatingsuch calls. The percentage transferred to mobile operators is regulated byRossvyazokhrankultura and is known as the settlement rate. The settlement rate,however, does not cover our expenses for terminating calls initiated bysubscribers of fixed line operators. Due to the launch of free incoming calls,we have increased our rates through theintroduction of a fee on the first minute of a call, which varies from $0.01 to$0.02 per first minute depending on the subscriber’s home region. This new feeon the first minute takes into account the fact that incoming calls are freeand the fees paid by subscribers should not exceed those paid prior toJuly 1, 2006 when CPP was introduced.

The prices for outgoing calls to other cellularoperators and to the public service telephone network are usually higher thancharges for outgoing calls within our network. The usage fees charged for acall originating on our network depend on a number of factors, including thesubscriber’s tariff plan, call duration, the time of day when the call wasplaced and the call destination. Usage fees as a percentage of total revenueswere 70.5% in 2004, 73.5% in 2005 and 69.3% in 2006, respectively. Usage feesas a percentage of total revenues decreased in 2006 largely due to the increasein interconnect fees as a percentage of total revenues. The further developmentof our prepaid tariff plans, which have no monthly subscription fees, willsupport growth in the usage fees as a percentage of total revenues. Thepercentage of total revenues represented by usage fees as compared to monthlysubscription fees will continue to be affected by changes in our tariff plans,as well as the relative product mix between usage fee-based tariff plans versusmonthly subscription fee-based tariff plans.

Monthly subscription fees consist of fixed monthlycharges for network access and access to additional services. Monthlysubscription fees as a percentage of our total revenues represented 12.7% in2004, 11.7% in 2005 and 10.9% in 2006, respectively. The main reason for thedecline of the monthly subscription fees as a percentage of total revenues is adecrease in the share of subscribers with a monthly subscription fee in thesubscriber mix. Many of our monthly subscription fee-based tariff plans alsoinclude a usage fee-based component for minutes used over a certain number ofpre-paid minutes. The percentage of total revenues represented by usage fees ascompared to monthly subscription fees will continue to be affected by thefactors discussed in the previous paragraph.

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Roaming fees include amounts charged to other cellularoperators for their subscribers, *i.e.*,guest roamers, utilizing our network while traveling in our service area. Webill other cellular operators for calls of guest roamers carried on ournetwork. Roaming fees as a percentage of our total revenues represented 2.4% in2004, 2.0% in 2005 and 1.7% in 2006, respectively. We generally expect roamingfees to decline as a percentage of total revenues as we expect the increase inour subscribers to continue to outpace the increase in guest roamers. Inaddition, roaming tariffs between mobile operators have a tendency to decreaserelative to the increase 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 content-based services. For theyears ended December 31, 2004, 2005 and 2006, monthly average SMS usagewas 17, 13 and 11 text messages sent per subscriber in Russia, respectively.These services as a percentage of our total revenues decreased from 10% in 2004and 2005 to 9% in 2006. Such services are primarily reflected as usage fees,but we generally expect value-added services as a proportion of total revenuesto increase due to the introduction of new value-added services and an increasein the usage of value-added services by our subscribers. We expect that revenuefrom value-added services will vary based upon penetration rates, customerusage, pricing and advertising and promotional programs.

*Connection fees.*   Connection fees consist ofcharges incurred by subscribers for the initial connection to our network andsign-up for value-added services. We defer connection fees and recognize themas revenues over the estimated average subscriber life in our network asdescribed in Note 2 to our audited consolidated financial statements.Connection fees represented 1.2% of our total revenues in 2004, 0.9% in 2005and 1.1% in 2006, respectively. We expect connection fee revenues to remain ata low level as a percentage of total revenues.

**Sales of Handsetsand Accessories**

We sell handsets and accessories directly tosubscribers 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 2.2% of our total revenuein 2004, 1.4% in 2005 and 1.5% in 2006, respectively. Our average selling priceof handsets has declined significantly in recent years, but remained stable inthe years ended December 31, 2005 and 2006. 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 the demand forour handsets and accessories to continue to decrease due to the availability ofcheaper market handsets offered by dealers entering the market. In addition,many new subscribers already own handsets, either purchased on the market orbecause they are churn clients from other operators. We expect as subscribersare added to our network and the price of handsets continues to decrease, oursales of handsets and accessories as a percentage of total revenues willdecline.

**Expenses**

Our principalexpenses are:

·       costof services, including interconnection, line rental and roaming expenses;

·       costof handsets and accessories;

·       salesand marketing expenses;

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

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·       provisionfor doubtful accounts;

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

·       interestexpenses; and

·       provisions for incometaxes.

**Cost of Services**

*Interconnectionand 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.”

With the introduction of CPP, our revenues and coststructure have changed with interconnect fees and costs representing a largerportion of our revenues and expenses than in previous years. In addition,traffic patterns have changed as consumers have adapted to the new marketenvironment with CPP.

We expect that interconnect expenses payable by us toother operators for termination of traffic generated by our subscribers willincrease as our subscriber base and traffic volumes grow. We expect line rentalcosts to vary based on the number of base stations, base station controllers,the number and capacity of rented lines and competition among providers ofrented lines, as well as availability and usability of substitutes such asmicrowave links owned by us.

*Roaming Expenses.**  *Roaming expenses consist of amountscharged by other cellular operators under agreements for roaming servicesprovided to our subscribers while outside our service area.

**Cost of Handsetsand Accessories**

This type of expense includes primarily the cost ofhandsets and accessories sold to dealers and subscribers, and the cost of SIMcards provided to our customers. We have entered into supply agreements withvarious producers and suppliers of handsets and accessories to satisfy our requirementsat what we believe to be competitive prices. We expect the cost per handset todecline due to our ability to work directly with suppliers to secure volumediscounts, technological advances and competitive pressures in the market forhandsets.

In Ukraine, we subsidize handsets for contractsubscribers as part of our retention and new subscriber acquisition plans. Inthe years ended December 31, 2004, 2005 and 2006, we provided net handsetsubsidies in Ukraine for a total cost of $52.7 million, $57.2 million and$30.4 million, respectively, which are reported as a loss on sales of handsets.We do not subsidize handset sales in Russia and in July 2006, wesignificantly limited the handset subsidies we provide to our subscribers inUkraine.

Generally, we provide SIMcards to our customers free of charge. Cost of SIM cards used amounted to$80.6 million in 2004, $122.7 million in 2005 and $87.0 million in 2006,respectively. The growth in SIM cards expense in 2005 was primarily the resultof an increase in subscribers acquired and internal churn within our subscriberbase.

**Sales and MarketingExpenses**

Our sales andmarketing expenses primarily consist of:

·       expensesfor advertising and promotion; and

·       dealercommissions on new connections and cash collected from subscribers.

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Sales and marketing expenses reflect, among otherthings, advertising, promotions and other costs associated with the expansionof services in our license areas and are expected to increase as subscribernumbers and market competition increase. In addition, we expect these costs toincrease as we further develop our brand and introduce value-added services.

Commencing on January 1, 2006, in the Moscowlicense area, dealer commission contracts have been gradually migrated to a newpayment scheme. Specifically, we have begun linking commissions for newlyacquired subscribers payable to a dealer on a monthly basis to the amount ofrevenues we receive during the six-month period from the date a subscriber isactivated by such dealer. In addition, we have established caps or a maximumcommission amount payable to our dealers. We believe that the new method forpaying commissions to dealers provides dealers with greater incentives to renewsubscriptions, reduces the risk of dealer fraud and improves our cash-flowmanagement.

Wemeasure subscriber acquisition costs, or SAC, to monitor the cost-effectivenessof our sales and marketing expenses. We define SAC as total sales and marketingexpenses and handset subsidies for a given period. SAC per gross additionalsubscriber is calculated by dividing SAC during a given period by the totalnumber of gross subscribers added by us during the period. The following tableshows SAC in Russia and Ukraine for the periods indicated:
|                                         | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|
| ** **                              | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Subscriber Acquisition Costs  (SAC)** | ** ** | ** **                                 |       | ** ** |   | ** ** |   |
| Russia                                  |       | $21                                        |       | $19 |   | $23 |   |
| Ukraine                                 |       | $19                                        |       | $14 |   | $10 |   |

 

SAC increased in Russia in 2006 due to an increase inmarketing expenses, in particular, the launch of our new brand inMay 2006. In addition, we acquired fewer subscribers in 2006 as comparedto 2005, effectively increasing our SAC.

In Ukraine, SAC continuedto decline in 2006 due to an increase in new subscribers.

**General andAdministrative Expenses**

Our general andadministrative expenses consist primarily of:

·       employeesalaries and bonuses;

·       socialcontributions payable to state funds;

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

·       officemaintenance expenses;

·       networkrepair and maintenance; and

·       rentalof premises.

Total general andadministrative 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.

**Provision forDoubtful Accounts**

We generally expect ourprovision for doubtful accounts as a percentage of total revenues to remainstable or decline as a result of initiatives we have taken to improve creditcontrol. In the future, our provision for doubtful accounts may increase if weincrease the availability of tariff plans under the credit 

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paymentsystem. See “Item 4. Information on Our Company—B. Business Overview—CustomerPayments and Billing.” However, our expense for provision for doubtful accountsfor the year ended December 31, 2006, totaled $84.9 million, or 1.3%of total revenues, in comparison with $50.4 million, or 1.0% of totalrevenues, of provision expense incurred in 2005 mainly due to an expansion ofour subscriber base into the mass-market low income segment consisting ofsubscribers with unstable income sources and less predictable consumerbehavior. In 2004, our expense for provision for doubtful accounts for the yearended December 31, 2004, totaled $26.5 million, or 0.7% of total revenues.In addition, the billing systems in certain of our regions experience delaysbetween the time that a subscriber’s balance reaches zero and the temporarydisconnection of such subscriber from our network causing an increase in ourdoubtful accounts.

**Depreciation ofProperty, Network Equipment and Amortization of Intangible Assets**

We expect depreciationexpense, which is principally associated with the depreciation of networkequipment, to continue to increase in line with our network development programand the buildout associated with our regional license areas. Correspondingly,we also expect amortization of telephone numbering capacity, license costs andother intangible assets to increase in line with our regional developmentprograms.

**Interest Expense**

We expect interest expenseto continue to increase, which is principally associated with external debtincurred to finance our network development program and the buildout associatedwith our regional license areas.

**Provision forIncome Taxes**

Taxation on income of Russian companies is regulatedby a number of laws, government decrees and implementation instructions.

The income tax base for Russian companies is definedas income received from sales of goods, works and services and property rightsand income from non-sale operations, reduced by the amount of certain businessexpenses incurred in such operations. Certain expenses are deductible whileothers have limitations on their deductibility.

Effective January 1, 2002, the statutory incometax rate in Russia was established at 24%. From January 1, 2004, theUkrainian statutory income tax rate was established at 25%.

Generally, taxdeclarations remain open and subject to inspection with respect to the threecalendar years which immediately preceded the year in which the audit iscarried out. We believe that we have adequately provided for tax liabilities inour consolidated financial statements; however, the risk remains that relevantauthorities could take differing positions with regard to interpretive issuesand the effect could be significant.

**Acquisitions**

Our results of operations for the periods presentedare significantly affected by acquisitions. Results of operations of acquiredbusinesses are included in our audited consolidated financial statements forthe periods after their respective dates of acquisition.

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Belowis the list of our major acquisitions during 2004, 2005 and 2006. 
| Company          | ** ** | ** **                                       | ** ** | **License area** | ** ** | **Date of  acquisition** | ** ** | **Stake  acquired** | ** ** | **Purchase  price*  (in millions)** | ** ** |
|------------------|------------|--------------------------------------------------|------------|-----------------------|------------|-------------------------------|------------|---------------------|------------|------------------------------------------|------------|
| **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       | ** ** |   |
|             | ** ** | ** **                                       | ** ** | ** **            | ** ** |                          | ** ** | ** **          |       |                                     | **$**      | **346.6** | ** ** |   |
| **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       | ** ** |   |
|             | ** ** | ** **                                       | ** ** | ** **            | ** ** |                          | ** ** | ** **          |       |                                     | **$**      | **207.6** | ** ** |   |
| **2006**         | ** ** | ** **                                       | ** ** | ** **            | ** ** |                          | ** ** | ** **          |       |                                     | ** ** | ** ** |   |
| Dagtelecom       |       | Republic  of Dagestan                            |       | July  2006            |       |                          | 74.99      | %                   |       |                                     | 14.7       | ** ** |   |
|             | ** ** | ** **                                       | ** ** | ** **            | ** ** |                          | ** ** | ** **          |       |                                     | **$**      | **14.7** | ** ** |   |

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*                     Excluding acquisition-related costsand debt assumed.

**Other investments**

In December 2005, we acquired a 51.0% stake in TarinoLimited (“Tarino”) for $150.0 million in cash.Tarino was at that time the indirect owner, through its wholly-ownedsubsidiaries, of Bitel, a Kyrgyz company holding a GSM900/1800 license for the entire territory of Kyrgyzstan.

Concurrently with the purchase of a 51.0% stake,we entered into a put and call option agreement withthe shareholder of Tarino to acquire the remaining 49.0% interest in Tarino.The call option was exercisable by us from November 22, 2005 to November 17,2006, and the put option was exercisable by the seller from November 18,2006 to December 8, 2006. The call and put option price was $170.0million. The put and call option were recorded at fair value, which approximated$nil at December 31, 2005, in the consolidated balance sheet. At December31, 2006, a liability of $170.0 million was recorded.

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After a decision of the Kyrgyz Supreme Court on December 15,2005, Bitel’s offices were seized and, as a result, we could not regainoperational control over Bitel’s operations in 2005. Accordingly, we accountedfor our 51.0% investment in Bitel at cost as at December 31, 2005. During2006, we brought this ownership dispute over Bitel to the Prosecutor General ofKyrgyzstan to determine whether a further investigation could be undertaken bythe Kyrgyz authorities.  In January 2007,the Prosecutor General informed us that there are no grounds for the ProsecutorGeneral’s office to get involved in the dispute and that no basis existed forus to appeal the decision of the Kyrgyz Supreme Court. 

Inconnection with the above mentioned put option exercise and the uncertainty asto the resolution of the dispute with Nomihold, we have recognized a liabilityin the amount of $170.0 million with a corresponding charge to othernon-operation expenses in audited consolidated financial statements as ofDecember 31, 2006 and for the year then ended.

For a detailed discussionof investments in Bitel, see “Item 8.A.7. Litigation” and Note 20 to ouraudited consolidated financial statements.

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**Results ofOperations**

Basedon the restructuring of our group commenced in 2006, we currently report ourfinancial information by country. See “Item5. Operating and Financial Review and Prospects—Segments” for additionalinformation regarding the reorganization. As of December 31, 2006,we separately reported our financial information for two countries: Russia andUkraine. We have restated the corresponding items of segment information forthe years ended December 31, 2004 and 2005.
|                                                                                                                                  | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                       | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                                                                                       | ** ** | **(in thousands)**                    | ** ** |
| **Net operating revenues**                                                                                                       |       |                                       |       |   |   |   |   |
| Russia                                                                                                                           |       | $                                          | 3,043,893  |   | $ | 3,700,601 |   | $ | 4,665,530 |   |
| Ukraine                                                                                                                          |       | 832,313                                    |       | 1,201,827 |   | 1,490,278 |   |
| Other                                                                                                                            |       | 26,783                                     |       | 119,932 |   | 242,455 |   |
| Eliminations(1)                                                                                                                  |       | (15,995                                    | )          | (11,342 | ) | (14,009 | ) |
| Net operating revenues  as reported                                                                                              |       | $                                          | 3,886,994  |   | $ | 5,011,018 |   | $ | 6,384,254 |   |
| **Costs of services, excluding depreciation and  amortization shown separately below and cost of handsets and accessories** |       |                                       |       |   |   |   |   |
| Russia                                                                                                                           |       | $                                          | 491,690    |   | $ | 640,630 |   | $ | 1,030,929 |   |
| Ukraine                                                                                                                          |       | 221,226                                    |       | 343,990 |   | 387,007 |   |
| Other                                                                                                                            |       | 2,766                                      |       | 14,195 |   | 29,048 |   |
| Eliminations(1)                                                                                                                  |       | (15,995                                    | )          | (11,342 | ) | (14,009 | ) |
| Cost of services and  cost of handsets and accessories as  reported                                                              |       | $                                          | 699,687    |   | $ | 987,473 |   | $ | 1,432,975 |   |
| **Sundry operating expenses****(2)**                                                                                             |       |                                       |       |   |   |   |   |
| Russia                                                                                                                           |       | $                                          | 534,560    |   | $ | 707,920 |   | $ | 884,946 |   |
| Ukraine                                                                                                                          |       | 88,937                                     |       | 143,099 |   | 159,688 |   |
| Other                                                                                                                            |       | 8,035                                      |       | 25,290 |   | 69,093 |   |
| Sundry operating  expenses as reported                                                                                           |       | $                                          | 631,532    |   | $ | 876,309 |   | $ | 1,113,727 |   |
| **Sales and marketing expenses**                                                                                                 |       |                                       |       |   |   |   |   |
| Russia                                                                                                                           |       | $                                          | 381,090    |   | $ | 475,532 |   | $ | 419,463 |   |
| Ukraine                                                                                                                          |       | 79,355                                     |       | 129,651 |   | 179,317 |   |
| Other                                                                                                                            |       | 538                                        |       | 2,909 |   | 9,055 |   |
| Sales and marketing  expenses as reported                                                                                        |       | $                                          | 460,983    |   | $ | 608,092 |   | $ | 607,835 |   |
| **Depreciation and amortization expenses**                                                                                       |       |                                       |       |   |   |   |   |
| Russia                                                                                                                           |       | $                                          | 539,767    |   | $ | 722,977 |   | $ | 819,316 |   |
| Ukraine                                                                                                                          |       | 124,935                                    |       | 153,795 | ** ** | 233,744 | ** ** |
| Other                                                                                                                            | ** ** | 11,028                                     | ** ** | 30,341 | ** ** | 42,921 | ** ** |
| Depreciation and  amortization as reported                                                                                       |       | $                                          | 675,729    |   | $ | 907,113 |   | $ | 1,095,981 |   |
| **Operating Income**                                                                                                             |       |                                       |       |   |   |   |   |
| Russia                                                                                                                           |       | $                                          | 1,096,787  |   | $ | 1,153,542 |   | $ | 1,510,876 |   |
| Ukraine                                                                                                                          |       | 317,860                                    |       | 431,292 |   | 530,522 |   |
| Other                                                                                                                            |       | 4,416                                      |       | 47,197 |   | 92,338 |   |
| Operating income as reported                                                                                                     |       | $                                          | 1,419,063  |   | $ | 1,632,031 |   | $ | 2,133,736 |   |

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(1)                 Represents the elimination of intercompany transactionresults, primarily roaming arrangements.

(2)                 For the purposes of this analysis “Sundryoperating expenses” consist of general and administrative expenses, provisionfor doubtful accounts and other operating expenses.

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**Year EndedDecember 31, 2006 compared to Year Ended December 31, 2005**

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

*Consolidatedrevenues*for the year ended December 31, 2006increased by $1,373.3 million, or 27.4%, to $6,384.3 million from$5,011.0 million for the year ended December 31, 2005. This increasewas primarily due to the significant growth in our subscriber base from 58.2million as of December 31, 2005 to 72.9 million as of December 31,2006. The growth was mainly attributable to our sales and marketing efforts andthe expansion of our network, as well as the full consolidation in 2006 ofBCTI, which we acquired in June 2005 and the general improvement in economicconditions and disposable income levels in Russia and Ukraine. A portion ofrevenue growth was also due to the significant increase of our interconnectfees in Russia from $38.7 million for the year ended December 31, 2005 to$372.5 million for the year ended December 31, 2006. The increase was caused bysignificant growth of interconnect rates for the termination of incomingtraffic from other operators. The increase in revenues from subscriber growthand interconnect was partially offset by the introduction of CPP principle inRussia (*i.e.*, no revenue from incoming callspreviously charged to our subscribers) and a decrease in tariffs in Moscow andother highly competitive license areas, an increase in mass-market subscribersin our subscriber mix and our continued expansion into the regions of Russiaoutside of the Moscow license area where tariffs are lower. 

For the year ended December 31, 2006, servicerevenues and connection fees increased by $1,344.8 million, or 27.2%, to$6,287.1 million compared to $4,942.3 million for the year endedDecember 31, 2005 due to the growth in the number of our subscribers andinterconnect fees, as explained above. Revenues from the sales of handsets andaccessories increased by $28.4 million, or 41.4%, to $97.2 million for theyear ended December 31, 2006 compared to the year ended December 31,2005, due to an increase in the number of handsets sold.

*Consolidatedcost of services and cost of handsets and accessories*forthe year ended December 31, 2006 increased by 45.1% to$1,433.0 million from $987.5 million for the year endedDecember 31, 2005. The increase in costs was primarily attributable tosubscriber growth and related growth in traffic related expenses, in particularinterconnect costs. For the year ended December 31, 2006, interconnect andline rental expenses grew to $822.7 million from $459.2 million forthe year ended December 31, 2005 due to increased interconnect ratesprimarily caused by the introduction of CPP principle and line rental chargesand roaming expenses grew to $186.5 million from $134.5 million. Theincrease in cost of services for the year ended December 31, 2006 was alsoattributed to an increase in other direct costs incurred by us due to thegrowth of services from content providers that we paid for in the amount of$75.4 million. For the year ended December 31, 2006, cost of handsets andaccessories sold, including SIM cards provided to customers, decreased to$209.3 million from $254.6 million for the year endedDecember 31, 2005 due to a decrease in 2006 of newly acquired subscriberscompared to 2005. 

*Consolidatedgross margin*was $4,951.3 million, or 77.6% ofconsolidated revenues for the year ended December 31, 2006, compared to$4,023.5 million, or 80.3% of consolidated revenues for the year endedDecember 31, 2005. The decrease in our consolidated gross marginpercentage was due to increased interconnect and line rental charges as aresult of traffic growth, increased interconnect rates, the introduction of CPPprinciple and a further expansion of our network.

*Russiarevenues*for the year ended December 31, 2006increased by 26.1% to $4,665.5 million from $3,700.6 million for theyear ended December 31, 2005. Our subscriber base in Russia increased by15.8% from 44.2 million as of December 31, 2005 to 51.2 millionas of December 31, 2006. The effect on revenues due to the increase in oursubscriber base was partially offset by a decrease in tariffs in Russia and anincrease in mass-market subscribers in our subscriber mix. The introduction ofCPP principle, prohibiting mobile operators from charging their subscribers forincoming calls, also had a negative effect on our revenues, which was mitigatedby growth in interconnect revenues from the termination of incoming calls and theadoption of new marketing initiatives, which stimulated higher usage amongsubscribers.

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*Russiacost of services and cost of handsets and accessories*forthe year ended December 31, 2006 increased by 60.9% to$1,030.9 million from $640.6 million for the year endedDecember 31, 2005. The growth occurred mainly as a result of a $331.1million increase in interconnection charges and line rental expenses driven byan increase in interconnect rates and the number of leased lines, and a $58.8million increase in roaming expenses due to an increase in subscribers. Cost ofhandsets and accessories decreased to $135.7 million, or 2.9% of segmenttotal revenues, for the year ended December 31, 2006 from$152.5 million, or 4.1% of segment total revenues, for the year endedDecember 31, 2005 due to a decrease in 2006 of newly acquired subscriberscompared to 2005.

*Russiagross margin*increased by 18.8% to$3,634.6 million in the year ended December 31, 2006 from$3,060.0 million in the year ended December 31, 2005. Russia’s gross margin percentage decreasedto 77.9% in the year ended December 31, 2006 from 82.7% in the year endedDecember 31, 2005. The main reason for the decrease in the gross margin percentageby 4.8% was greater interconnect charges in the cost structure as a result ofan increase in traffic volume and interconnect rates mainly due to theintroduction of CPP.

*Ukrainerevenues*increased by 24.0% to $1,490.3 millionin the year ended December 31, 2006 from $1,201.8 million in the yearended December 31, 2005. The main reason for the growth in sales revenueswas an increase in UMC’s subscriber base from 13.3 million as ofDecember 31, 2005 to 20.0 million as of December 31, 2006, which waspartially offset by a decrease in tariffs in Ukraine and an increase inmass-market subscribers in the subscriber mix.

*Ukrainecost of services and cost of handsets and accessories*forthe years ended December 31, 2006 and 2005 were $387.0 million and$344.0 million, respectively. The growth occurred primarily due to anincrease of $28.3 million in interconnection and line rental expenses, whichwas partly offset by a $32.1 million decrease in cost of handsets andaccessories. Interconnection and line rental expenses increased to$247.0 million, or 16.6% of segment total revenues, in the year endedDecember 31, 2006 from $218.7 million, or 18.2% of segment totalrevenues, in the year ended December 31, 2005 mainly due to an increase inthe number of leased lines and overall growth in traffic on the network. Costof handsets and accessories decreased to $70.3 million, or 4.7% of segmenttotal revenues, in the year ended December 31, 2006 from $100.4 million,or 8.4% of segment total revenues, in the year ended December 31, 2005mainly due to a significant decrease in handset subsidies during 2006.

*Ukrainegross margin*for the year ended December 31, 2006grew to $1,103.3 million from $857.8 million for the year endedDecember 31, 2005. As a percentage of total revenues, gross marginincreased to 74.0% in the year ended December 31, 2006, from 71.4% in theyear ended December 31, 2005. This increase in gross margin was mainly dueto increased service revenue driven by the significant growth of our subscriberbase in Ukraine and the decreased handset subsidies.

*Othercountries revenues*for the year ended December 31,2006 increased by 102.3% to $242.5 million from $119.9 million forthe year ended December 31, 2005. Our subscriber base in Uzbekistan andTurkmenistan increased by 166.7% from 0.6 million as of December 31,2005 to 1.6 million as of December 31, 2006, which was the result ofour expansion into these countries. The increase in revenues was mainly due togrowth in the subscriber base and the full consolidation of BCTI’s results,which we acquired in June 2005.

*Othercountries cost of services and cost of handsets and accessories*forthe year ended December 31, 2006 increased by 104.2% to $29.0 millionfrom $14.2 million for the year ended December 31, 2005. The growthoccurred primarily due to a $6.3 million increase in interconnection and linerental expenses in Turkmenistan and a $7.7 million increase in otherdirect costs in Uzbekistan. Interconnection and line rental expenses increasedto $9.0 million in Turkmenistan, or 3.7% of segment total revenues, in theyear ended December 31, 2006 from $2.7 million, or 2.3% of total segmentrevenues, in the year ended December 31, 2005 mainly due to an increase inthe number of base stations in use and overall traffic 

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growth in the network.Other direct costs increased to $8.4 million in Uzbekistan, or 3.5% oftotal segment revenues, in the year ended December 31, 2006 from$0.7 million, or 0.6% of total segment revenues, in the year endedDecember 31, 2005 mainly due to increased payments to content providersand registration fees.

*Other countries grossmargin*increased by $107.7 million, or 101.9%,from $105.7 million in the year ended December 31, 2005 to $213.4 millionin the year ended December 31, 2006, primarily due to an increase in the revenuesas a result of growth in the number of subscribers and full consolidation ofBCTI’s results as discussed above. Our gross margin percentage for the othercountries segment decreased slightly to 88.0% in the year endedDecember 31, 2006 from 88.2% in the year ended December 31, 2005.

***Sundry operating expenses***

*Consolidatedsundry operating expenses*for the year endedDecember 31, 2006 increased by 27.1% to $1,113.7 million from$876.3 million for the year ended December 31, 2005. The increase insundry operating expenses was largely attributable to a general increase inexpenses caused by operational growth. In addition, the full consolidation in2006 of BCTI’ financial results contributed $38.8 million to consolidatedsundry operating expenses for the year ended December 31, 2006. In theyear ended December 31, 2006, salary expenses and related socialcontributions increased by $94.2 million due to an increase in personnelcompensation levels. Provision for doubtful accounts increased by $34.5 millionin the year ended December 31, 2006 due to an overall increase in servicerevenues and corresponding receivables from subscribers. In addition, ouroperating expenses increased to $87.8 million for the year endedDecember 31, 2006 from $67.2 million for the same time period in 2005mainly due to an increase in payments made to the “universal services reservefund” in the amount of $54.2 million, which commenced in May 2005. Rentexpenses increased from $79.9 million for the year ended December 31, 2005 to$123.4 million due to the increased rent for base station sites and the overallnumber of sites used. Generally, sundry operating expenses as a percentage of totalrevenues decreased slightly to 17.4% for the year ended December 31, 2006from 17.5% in the year ended December 31, 2005.

*Russiasundry operating expenses*for the year endedDecember 31, 2006 increased by 25.0% to $884.9 million from$707.9 million for the year ended December 31, 2005. Sundry operatingexpenses as a percentage of segment total revenues decreased slightly to 19.0%for the year ended December 31, 2006 from 19.1% for the year endedDecember 31, 2005. The major reasons for the absolute growth of expenseswere an increase in other operating expenses by $21.9 due to increased paymentsmade to the “universal services reserve fund,” an increase in salaries, bonusesand related social contributions for our personnel of $76.7 million, anincrease in rent expenses of $36.3 million due to the growth in rent costs forbase station sites and the number of sites used and an increase in theprovision for doubtful accounts by $36.8 million in line with an increase inservice revenues and corresponding receivables from subscribers.

*Ukrainesundry operating expenses*for the year endedDecember 31, 2006 were $159.7 million, or 10.7% of segment totalrevenues, while for the year ended December 31, 2005, these expenses were$143.1 million, or 11.9% of segment total revenues. The increase in theseexpenses in absolute terms during 2006 was the result of an overall increase inUMC’s operational activities. The main reason for the increase in sundryoperating expenses in absolute terms was related to a $12.6 million increase insalary expenses and related social contributions due to a personnel increase,as well as an increase in rent and maintenance expenses by $6.4 million in2006, as compared to 2005.  The increasein rent and maintenance expenses was due to the growth in rent costs for basestation sites and the number of sites used.

*Other countries sundryoperating expenses*for the year ended December 31,2006 increased by 173.1% to $69.1 million from $25.3 million for theyear ended December 31, 2005. The main reason for the increase was theresult of the full consolidation of BCTI’s financial results, which contributedan additional $35.2 million to sundry operating expenses for the period endedDecember 31, 2006.

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***Sales and marketing expenses***

*Consolidatedsales and marketing expenses*for the year endedDecember 31, 2006 decreased slightly to $607.8 million from$608.1 million for the year ended December 31, 2005. Althoughcommissions to dealers decreased by $73.1 million in 2006, advertising andpromotion expenses increased by $72.8 million, which resulted in sales andmarketing expenses remaining stable in 2006 as compared to 2005. The decreasein commissions to dealers was primarily due to changes made to the way in whichwe made dealer commission settlements. See also “Item 4. Information on OurCompany—B. Business Overview3⁄4Sales andDistribution.” The increase in advertising and promotion expenses was relatedto increased overall marketing efforts, and especially the marketing expensesin connection with the launch of a new brand in May 2006, as well as the growthin costs for television commercials. Sales and marketing expenses as apercentage of total revenues decreased to 9.5% for the year endedDecember 31, 2006 from 12.1% for the year ended December 31, 2005,indicating an improvement in our marketing efforts as the sales and marketingexpenses in the aggregate remained approximately the same in 2006 as comparedto 2005.

*Russiasales and marketing expenses*for the year endedDecember 31, 2006 decreased by 11.8% to $419.5 million from$475.5 million for the year ended December 31, 2005 due to theoptimization of dealer commission payment policies resulting in less commissionbeing paid to dealers. However, this decrease in amounts paid to dealers waspartially offset by an increase in advertising and promotion expenses, asdescribed above. Sales and marketing expenses as a percentage of segment totalrevenues decreased to 9.0% for the year ended December 31, 2006 from 12.8%for the year ended December 31, 2005. 

*Ukrainesales and marketing expenses*for the year endedDecember 31, 2006 were $179.3 million, or 12.0% of segment totalrevenues, and $129.7 million, or 10.8% of segment total revenues, for theyear ended December 31, 2005. The increase in sales and marketing expenseswas largely the result of our strategy to develop our subscriber base throughorganic growth. Absolute growth in these expenses for the year endedDecember 31, 2006 occurred mainly as the result of overall growth in UMC’sactivity. The increase in sales and marketing expenses as a percentage ofsegment total revenues was caused by an increase in spending on advertising andpromotional campaigns organized in 2006. Sales and marketing expenses as apercentage of segment total revenues increased to 5.8% for the year endedDecember 31, 2006 from 4.8% for the year ended December 31, 2005. 

*Other countries sales andmarketing expenses*for the year endedDecember 31, 2006 increased by 213.8% to $9.1 million from$2.9 million for the year ended December 31, 2005, as a result of theexpansion of our operations in Uzbekistan and Turkmenistan. The main reasonsfor this increase were the growth in advertising expenses in order to promoteour services and to continue our expansion in these markets, as well as an increasein dealers’ commissions caused by growth in our subscriber base. Sales andmarketing expenses as a percentage of segment total revenues increased slightlyto 3.7% for the year ended December 31, 2006 from 2.4% for the year endedDecember 31, 2005.

***Depreciation and amortization expenses***

*Consolidateddepreciation and amortization*of property, networkequipment, telephone numbering capacity, license costs and other intangibleassets for the year ended December 31, 2006 increased by 20.8% to$1,096.0 million from $907.1 million for the year endedDecember 31, 2005. The increase was attributable to the increased assetbase resulting from our continuing expansion of our network. Depreciation andamortization expenses as a percentage of total revenues decreased to 17.2% forthe year ended December 31, 2006 from 18.1% for the year endedDecember 31, 2005 mainly due to the economies of scale effect.

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*Russiadepreciation and amortization*for the year endedDecember 31, 2006 increased by 13.3% to $819.3 million from$723.0 million for the year ended December 31, 2005 mainly due tosignificant investments in our fixed and intangible assets, related to thebilling system. Depreciation and amortization expenses as a percentage ofsegment total revenues decreased to 17.6% for the year ended December 31,2006 from 19.5% for the year ended December 31, 2005.

*Ukrainedepreciation and amortization*for the year endedDecember 31, 2006 was $233.7 million, or 15.7% of segment total revenues,and $153.8 million, or 12.8% of segment total revenues, for the year endedDecember 31, 2005. Absolute growth in depreciation and amortizationexpense was mainly due to the continued buildout of UMC’s network in Ukraine.

*Other countriesdepreciation and amortization*for the year ended December 31,2006 increased by 41.6% to $42.9 million from $30.3 million for theyear ended December 31, 2005 and decreased as a percentage of segmenttotal revenues to 17.7% from 25.3%. The increase in the depreciation andamortization expense in absolute terms was driven primarily by the continuedbuildout of our network with respect to our subsidiaries.

***Operating Income***

*Consolidatedoperating income*for the year ended December 31,2006 increased by 30.7% to $2,133.7 million for the year ended December 31,2006, from $1,632.0 million for the year ended December 31, 2005.Operating income as a percentage of total revenues increased slightly to 33.4%for the year ended December 31, 2006 compared to 32.6% for the year ended December 31,2005. Growth of operating income in absolute terms was mainly driven by growthin revenues, whereas growth of operating income margin was primarily due to adecrease in sales and marketing and depreciation and amortization expenses,which was partly offset by growth in cost of services and cost of handsets andaccessories as a percentage of total revenues.

*Russiaoperating income*for the year ended December 31,2006 increased by 31.0% to $1,510.9 million from $1,153.5 million forthe year ended December 31, 2005 and increased slightly as a percentage ofsegment revenues to 32.4% for the year ended December 31, 2006 from 31.2%for the year ended December 31, 2005, mainly due to the reasons describedabove under consolidated operating income.

*Ukraineoperating income*for the year ended December 31,2006 was $530.5 million, or 35.6% of segment total revenues, and$431.3 million, or 35.9% of segment total revenues, for the year ended December 31,2005. Absolute growth in operating income was primarily the result of overallgrowth in UMC’s subscriber base and the continued buildout of its network.

*Other regions operating*income for the year ended December 31,2006 increased by 95.6% to $92.3 million, or 38.1% of segment totalrevenues, from $47.2 million, or 39.4% of segment revenues, for the yearended December 31, 2005. The main reasons for the increase in operatingincome were an increase in the number of subscribers and full consolidation ofBCTI’s financial results in 2006.

***Currency exchange and transaction gains***

*Consolidated currencyexchange and transaction gains*for the year ended December 31,2006 was $24.1 million, compared to $10.3 million for the year ended December 31,2005. We conduct our operations primarily within the Russian Federation,Ukraine, Uzbekistan and Turkmenistan. We are subject to currency fluctuations,including the U.S. dollar versus ruble/hryvnia/som/manat and the U.S. dollarversus euro. See also “Item 11. Quantitative and Qualitative Disclosures aboutMarket Risk—Foreign Currency Risk.”

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***Interest expense***

*Consolidated interestexpense*for the year ended December 31, 2006increased by 33.7% to $177.1 million from $132.5 million for the yearended December 31, 2005, primarily as the result of additional interestexpense incurred in conjunction with additional debt assumed in 2006.

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

*Consolidated equity in netincome of associates*for the year ended December 31,2006 increased to a gain of $58.1 million, compared to a gain of $42.4 millionfor the year ended December 31, 2005 primarily due to the increase in netincome of associates and the significant growth in profit of MTS Belarus.

***Bitel investment and write off***

As of December 31,2006, the investment in Bitel in the amount of $150.0 million was fullyimpaired. Furthermore,  with theimpairment of the underlying asset, a liability of $170.0 million for anexpired put option was recorded with an associated charge to non-operatingexpenses. See Note 20 to our audited consolidated financial statements fordetails.

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

*Consolidated otherexpenses*for the year ended December 31, 2006increased to $65.9 million, as compared to $13.2 million for the year ended December 31, 2005. The main reasonfor this increase relates to the conversion losses in BCTI in the amount of$25.6 million for the year ended December 31, 2006.

***Provision for income taxes***

*Consolidated provision forincome taxes*for the year ended December 31, 2006increased by 40.3% to $576.1 million from $410.6 million for the yearended December 31, 2005. The effective tax rate increased to 34.6% in theyear ended December 31, 2006 from 26.3% in the year ended December 31,2005 mainly as a result of an increase in foreign currency exchange gainstaxable for purposes of our statutory accounts, write off of Bitel investmentand an accrual of liability not deductible for tax purposes. See Note 14 to ouraudited consolidated financial statements for details.

***Minority interest***

*Minority interest*forthe year ended December 31, 2006 decreased by $12.8 million to $14.0million from $26.9 million for the year ended December 31, 2005 as aresult of the purchase of the remaining 46.1% stake in ReCom in December 2005.

***Net income***

*Net income*forthe year ended December 31, 2006 decreased by $50.7 million, or 4.5%, to$1,075.7 million, compared to $1,126.4 million for the year ended December 31,2005. Net income as a percentage of revenues was 16.8% in the year ended December 31,2006 and 22.5% in the year ended December 31, 2005. The main reason forthe decrease in net income was a write off of the Bitel investment and anaccrual of additional liability in the aggregate amount of $320.0 million.

**Year Ended December 31,2005 compared to Year Ended December 31, 2004**

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

*Consolidatedrevenues*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 

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primarily due to thesignificant growth in our subscriber base from 34.2 million as of December 31,2004 to 58.2 million as of December 31, 2005. The growth was mainlyattributable to our sales and marketing efforts and the expansion of ournetwork, as well as improving general economic conditions and disposable incomelevels in Russia and Ukraine. A portion of revenue growth was also due to theacquisition of BCTI in June 2005, which contributed $33.4 million to ourtotal revenues for the year ended December 31, 2005, as well as the fullconsolidation in 2005 of Uzdunrobita, which we acquired in July 2004. Theincrease 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 comparedto the year ended December 31, 2004, due to a reduction in the number ofhandsets sold while the average selling price for handsets remained at the samelevel.

*Consolidatedcost of services and cost of handsets and accessories*forthe year ended December 31, 2005 increased by 41.1% to $987.5 millionfrom $699.7 million for the year ended December 31, 2004. Theincrease in costs was primarily attributable to subscriber growth and relatedgrowth 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 due to anincrease in the volume of traffic. For the year ended December 31, 2005,cost of handsets and accessories sold, including SIM cards provided tocustomers, grew to $254.6 million from $218.6 million for the yearended December 31, 2004 due to an increase in 2005 of newly acquiredsubscribers compared to 2004.

*Consolidatedgross 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 other operatorsfor access to their networks in 2005 and, to some extent, the increased costsassociated with SIM and Jeans cards used by new subscribers.

*Russiarevenues*for the year ended December 31, 2005increased by 21.6% to $3,700.6 million from $3,044.0 for the year ended December 31,2004. Our subscriber base in Russia increased by 66.6% from 26.5 millionas of December 31, 2004 to 44.2 million as of December 31, 2005.

*Russiacost of services and cost of handsets and accessories*forthe year ended December 31, 2005 increased by 30.3% to $640.6 millionfrom $491.7 million for the year ended December 31, 2004. The growthoccurred mainly as a result of a $130.6 million increase in interconnectioncharges and line rental expenses driven by an increase in the number of leasedlines. Cost of handsets and accessories decreased to $61.9 million, or1.7% of segment revenues, for the year ended December 31, 2005 from$69.6 million, or 2.3% of segment revenues, for the year ended December 31,2004.

*Russiagross*marginincreased by 19.9% to $3,060.0 million in the year ended December 31,2005 from $2,552.2 million in the year ended December 31, 2004. Russia’s gross margin percentagedecreased to 82.7% in the year ended December 31, 2005 from 83.8% in theyear ended December 31, 2004. The main reason for the decrease in thegross margin percentage by 1.1% was an increase of costs of services relativeto revenue growth.

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*Ukrainerevenues*increased by 44.4% to $1,201.8 millionin the 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.

*Ukrainecost of services and cost of handsets and accessories*forthe years ended 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 segment revenues,in the year ended December 31, 2005 from $112.8 million, or 13.6% ofsegment revenues, in the year ended December 31, 2004 mainly due to anincrease in the number of leased lines and overall growth in traffic on thenetwork. Cost of handsets and accessories increased to $100.4 million, or8.4% 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.

*Ukrainegross margin*for the year ended December 31, 2005grew to $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.

*Othercountries revenues*for the year ended December 31,2005 increased by 347.4% to $119.9 million from $26.8 million for theyear ended December 31, 2004. Our subscriber base in these countriesincreased by 100.0% from 0.3 million as of December 31, 2004 to0.6 million as of December 31, 2005, which is the result of ourexpansion into the countries both through organic growth and acquisitions. Theincrease in revenues was mainly due to growth in the subscriber base, but wasalso partially attributable to the $32.0 million in revenues contributed byBCTI, a subsidiary acquired in June 2005. In addition, we acquired acontrolling stake in Uzdunrobita in July 2004 and, as a result,consolidated its revenues in the amount of $26.8 million for five months in2004, as compared to $86.5 million for the year ended December 31, 2005.

*Othercountries cost of services and cost of handsets and accessories*forthe year ended December 31, 2005 increased by 407.1% to $14.2 millionfrom $2.8 million for the year ended December 31, 2004. The growthoccurred primarily due to a $9.3 million increase in interconnection and linerental expenses. Interconnection and line rental expenses increased to$11.5 million, or 9.6% of segment revenues, in the year ended December 31,2005 from $2.3 million, or 8.6% 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.

*Other countries grossmargin*increased by $81.7 million, or 340.4%,from $24.0 million in the year ended December 31, 2004 to$105.7 million in the year ended December 31, 2005, primarily due toan increase in the number of subscribers and acquisitions of new subsidiariesdiscussed above. Our gross margin percentage for the other countries segmentdecreased to 88.2% in the year ended December 31, 2005 from 89.7% in theyear ended December 31, 2004.

***Sundry operating expenses***

*Consolidatedsundry operating expenses*for the year ended December 31,2005 increased by 38.8% to $876.3 million from $631.5 million for theyear ended December 31, 2004. The increase in sundry operating expenseswas largely 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 ended

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December 31, 2005,salary expenses and related social contributions increased by$79.2 million due to an increase in personnel. Provision for doubtfulaccounts increased by $23.9 million in the year ended December 31, 2005due 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 total revenues increased to 17.5% for the year ended December 31,2005 from 16.2% in the year ended December 31, 2004.

*Russiasundry operating expenses*for the year ended December 31,2005 increased by 32.4% to $707.9 million from $534.6 million for theyear ended December 31, 2004. Sundry operating expenses as a percentage ofsegment revenues increased to 19.1% for the year ended December 31, 2005from 17.6% for the year ended December 31, 2004. The major reasons forthis growth were the introduction of the “universal services reserve fund”discussed above, an increase in salaries, bonuses and related socialcontributions for additional personnel of $59.2 million and an increase inthe provision for doubtful accounts by $21.7 million in line with an increasein service revenues.

*Ukrainesundry operating expenses*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 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.

*Other countries sundryoperating expenses*for the year ended December 31,2005 increased by 216.3% to $25.3 million from $8.0 million for theyear ended December 31, 2004. The most significant increases were in theareas of salaries and related social contributions for additional personnel of$6.7 million and non-income taxes of $7.9 million. Sundry operatingexpenses as a percentage of segment revenues decreased to 21.1% for the yearended December 31, 2005, as compared to 29.9% for the year ended December 31,2004.

***Sales and marketing expenses***

*Consolidatedsales and marketing expenses*for the year ended December 31,2005 increased by 31.9% to $608.1 million from $461.0 million for the yearended December 31, 2004. 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 $57.5 million in commissions to dealers and an increase of$89.6 million in advertising and promotion expenses. The increase in commissionsto dealers was primarily due to an increase in the volume of sales throughdealers. 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 total revenuesincreased to 12.1% for the year ended December 31, 2005 from 11.9% for theyear ended December 31, 2004.

*Russiasales and marketing expenses*for the year ended December 31,2005 increased by 24.8% to $475.5 million from $381.1 million for theyear ended December 31, 2004. Sales and marketing expenses as a percentageof segment revenues increased to 12.8% for the year ended December 31,2005 from 12.5% for the year ended December 31, 2004 due to increases inadvertising costs.

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*Ukrainesales and marketing expenses*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 percentage of segment revenueswas caused by an increase in advertising and promotion expenses from 3.6% to4.8% of segment revenues due to extensive advertising campaigns organized in2005. Dealers’ commissions remained at 6.0% of segment revenues for the yearsended December 31, 2005 and 2004.

*Other countries sales andmarketing expenses*for the year ended December 31,2005 increased by 440.7% to $2.9 million from $0.5 million for theyear ended December 31, 2004, as a result of the expansion of ouroperations in other countries. The main reasons for this increase were thegrowth in advertising expenses (in order to promote our services in the othercountries and continue our expansion) and dealers’ commissions caused byincreases in our subscriber base. Sales and marketing expenses as a percentageof segment revenues increased to 2.4% for the year ended December 31, 2005from 1.9% for the year ended December 31, 2004.

***Depreciation and amortization expenses***

*Consolidateddepreciation and amortization*of property, networkequipment, telephone numbering capacity, license costs and other intangibleassets for the year ended December 31, 2005 increased by 34.2% to$907.1 million from $675.7 million for the year ended December 31,2004. Depreciation and amortization expenses as a percentage of total revenuesincreased to 18.1% for the year ended December 31, 2005 from 17.4% for theyear ended December 31, 2004. The increase was attributable to theincreased asset base resulting from our continuing expansion of our network andacquisition of regional operators in and outside Russia.

*Russiadepreciation and amortization*for the year ended December 31,2005 increased by 33.9% to $723.0 million from $540.0 million for theyear ended December 31, 2004. Depreciation and amortization expenses as apercentage of segment revenues increased to 19.5% for the year ended December 31,2005 from 17.7% for the year ended December 31, 2004 mainly due tosignificant investments in our intangible assets due to the implementation of anew billing system and the accelerated amortization of the previous one.

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

*Other countriesdepreciation and amortization*for the year ended December 31,2005 increased by 175.5% to $30.3 million from $11.0 million for theyear ended December 31, 2004 and decreased as a percentage of segmentrevenues to 25.3% from 41.0%. The increase in the depreciation and amortizationexpense was driven primarily by the continued buildout of our network in ourother countries.

***Operating Income***

*Consolidatedoperating income*for the year ended December 31,2005 increased by 15.0% to $1,632.0 million, including $431.3 millionof UMC’s results 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 total revenues decreased to 32.6% for the year ended December 31,2005 compared to 36.5% for the year ended December 31, 2004, mainly due tothe following factors: increased interconnection and line rental expenses,additional depreciation and amortization expenses discussed above and a levyimposed in connection with the 

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“universal servicesreserve fund” established in accordance with the Federal Law on Communicationscommencing in May 2005.

*Russiaoperating income*for the year ended December 31,2005 increased by 5.2% to $1,153.5 million from $1,096.8 million for theyear ended December 31, 2004 and decreased as a percentage of segmentrevenues to 31.2% for the year ended December 31, 2005, from 36.0% for theyear ended December 31, 2004, mainly due to charges incurred in connectionwith the “universal services reserve fund” commencing in May 2005.

*Ukraineoperating income*for the year ended December 31,2005 was $431.3 million, or 35.9% of segment revenues, and$317.9 million, or 38.2% of segment revenues, for the year ended December 31,2004. Absolute growth in operating income was primarily the result of overallgrowth in UMC’s subscriber base and the continued buildout of its network. Adecrease in operating income as a percentage of segment revenues occurredmainly due to increased interconnection and line rental expenses, as well as anincrease in advertising and marketing expenses.

*Other countries operatingincome*for the year ended December 31, 2005increased by 968.8% to $47.2 million, or 39.4% of segment revenues, from$4.4 million, or 16.4% of segment revenues, for the year ended December 31,2004. The main reason for the increase in operating income as a percentage ofsegment revenues was the acquisition of BCTI and the continuing expansion ofour operations in these countries.

***Currency exchange and transaction gains***

*Consolidated currencyexchange and transaction gains*for the year ended December 31,2005 was $10.3 million, compared to $6.5 million for the year ended December 31,2004. We conduct our operations primarily within the Russian Federation, Ukraine,Uzbekistan and Turkmenistan. We are subject to currency fluctuations, includingthe U.S. dollar versus ruble/hryvnia/som/manat and the U.S. dollar versus euro.See also Item 11. Quantitative and Qualitative Disclosures about Market Risk—ForeignCurrency Risk.”

***Interest expense***

*Consolidated interestexpense*for the year ended December 31, 2005increased by 22.7% to $132.5 million from $108.0 million for the yearended December 31, 2004, primarily as the result of additional interestexpense incurred in conjunction with additional debt assumed in 2005.

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

*Consolidated equity in netincome of associates*for the year ended December 31,2005 increased to a gain of $42.4 million, compared to a gain of $24.1 millionfor the year ended December 31, 2004 primarily due to the increase in netincome of associates and the significant growth in profit of MTS Belarus.

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

*Consolidated otherexpenses (income)*for the year ended December 31,2005 decreased to a loss of $13.2 million, as compared to a gain of $9.3million for the year ended December 31, 2004. The main reason for thischange relates to the conversion losses in BCTI in the amount of $6.7 millionfor the year ended December 31, 2005 and an Uzdunrobita put/call optionfair value accounting of a $5.2 million gain in the year ended December 31,2004.

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***Provision for income taxes***

*Consolidated provision forincome taxes*for the year ended December 31, 2005increased by 15.8% to $410.6 million from $354.7 million for the yearended December 31, 2004. The effective tax rate increased to 26.3% in theyear ended December 31, 2005 from 25.8% in the year ended December 312004 mainly as a result of an increase in foreign currency exchange gainstaxable for purposes of our statutory accounts and an increase in ournon-deductible expenses.

***Minority interest***

*Minority interest*forthe year ended December 31, 2005 decreased by $3.4 million to $26.9million from $30.3 million for the year ended December 31, 2004 as aresult of purchases of additional stakes from minority shareholders in regionalcompanies, the major ones being ReCom, Telesot Alania, Uraltel andSibintertelecom.

***Net income***

*Netincome*for the year ended December 31, 2005increased by $138.5 million, or 14.0%, to $1,126.4 million, compared to$987.9 million for the year ended December 31, 2004, due to overallgrowth in our operations and the factors discussed above. Net income as apercentage of revenues was 22.5% in the year ended December 31, 2005 and25.4% in the year ended December 31, 2004. The main reason for thedecrease in net income as a percentage of revenues was the relative increase asa percentage of revenues in costs of services and depreciation expenses.

In accordance with certainprovisions of the license agreement with the government of Turkmenistan, weshare net profit derived from the operations of BCTI located in Turkmenistan.The amount 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 through December 21,2005, and 20% of the net profit commencing on December 21, 2005.

**Liquidity andCapital Resources**

In July 2000, wecompleted our initial public offering of American Depositary Shares on the New YorkStock Exchange. The proceeds from the offering, net of underwriting discount,were $349 million. Since that time, we have accessed the internationalcapital markets through the sale of unsecured notes six times in an aggregateprincipal amount of $1.8 billion. As of December 31, 2006, we hadindebtedness of approximately $3,078.4 million, including $6.7 million incapital lease obligations. On April 21, 2006, we entered into a syndicatedloan facility 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. As of December 31, 2006, $860.0 was outstanding under this facility.We expect to use the proceeds for general corporate purposes, includingacquisitions and refinancing of existing indebtedness. See Note 11 to ouraudited consolidated financial statements for a description of ourindebtedness.

**CapitalRequirements**

We need capital tofinance the following:

·       capitalexpenditures, consisting of purchases of property, plant and equipment andintangible assets;

·       acquisitions;

·       repaymentof debt;

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·       changesin working capital; and

·       generalcorporate activities, including dividends.

We anticipate that capital expenditures, acquisitions,repayment of long-term debt and dividends will represent the most significantuses of funds for several years to come.

Our cash outlays for capital expenditures in 2004,2005 and 2006 were $1,358.9 million, $2,181.3 million and $1,722.0million, respectively. We expect to continue to finance most of our capitalexpenditure needs through our operating cash flows, and to the extent required,to incur additional indebtedness through borrowings or additional capitalraising activities. Historically, a significant portion of our capitalexpenditures have been related to the installation and buildout of our networkand expansion into new license areas. We expect that capital expenditures willremain a large portion of our cash outflows in connection with the continuedinstallation and buildout of our network. We expect our capital expenditures in2007 to be approximately $1.8 billion. These investments are required tosupport the growth in our subscriber base (*i.e.,*to improve network capacity) and to develop our network in the regions. Ouractual capital expenditures may vary significantly from our estimates.

In addition to capital expenditures, we spent$355.7 million, $178.9 million and $38.2 million in 2004, 2005 and2006, respectively, to acquire businesses. We may continue to expand ourbusiness through acquisitions. Our cash requirement relating to potentialacquisitions can vary significantly based on market opportunities.

We expect to refinance our existing debt when itbecomes due. Our outstanding notes are due between the years of 2008 and 2012.The syndicated loan facility agreement signed in April 2006 allows us to borrow up to $1,330.0 millionand is available in two tranches. Under the first tranche, we have drawn atotal amount of $630.0 million as of December 31, 2006. Under the secondtranche, we have drawn a total amount of $230.0 million as of December 31,2006. We expect to use the proceeds for general corporate purposes andrefinancing our existing indebtedness.

Sistema, which controls 53.1% of our outstandingshares and consolidates our results in its financial statements, has asignificant amount of outstanding debt and requires funds for debt service.These funds may come, in part, from dividends paid by its subsidiaries,including us. On June 26, 2004, our shareholders approved cash dividendsin the amount of $220.0 million (including dividends on treasury shares of$1.1 million), which have also been fully paid. On June 21, 2005, ourshareholders approved cash dividends in the amount $402.6 million (includingdividends on treasury shares of $1.5 million), which have been fully paid.In June 2006, our shareholders approved annual cash dividends in theamount of $562.0 million (including dividends on treasury shares of$1.5 million) for the year 2005, which have also been fully paid. TheBoard of Directors recommended that the annual general meeting of shareholdersbe held on June 29, 2007 to approve annual cash dividends in the amount of$747.4 million (including dividends on treasury shares of $6.0 million) for theyear 2006, payable in 2007. We generally intend to finance our dividendrequirements through operating cash flows, and accordingly, our payment ofdividends may make us more reliant on external sources of capital to financeour capital expenditures and acquisitions.

We expect to incur significant capital expendituresand devote considerable management resources in connection with the developmentof our 3G network. See “Item 4. Information on Our Company—B. Business Overview—Third-GenerationTechnology” for additional information.

In addition, we are in theprocess of implementing an enterprise resource planning system that willrequire additional expenditures and devotion of significant managementresources.

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**Capital Resources**

We plan to finance our capital requirements through amix of operating cash flows and financing activities, as described above. Ourmajor sources of cash have been cash provided by operations and the proceeds ofour U.S. dollar-denominated notes issuances and loans. We expect thatthese sources will continue to be our principal sources of cash in the future.

The availability of financing is influenced by manyfactors, including our profitability, operating cash flows, debt levels, creditratings, contractual restrictions and market conditions. We cannot assure youthat we will be able to continue to obtain large amounts of financing in thefuture, through note offerings or otherwise.

At December 31, 2006,our indebtedness was comprised of the following: 
| Indebtedness                                                                                    | ** ** | ** ** | ** ** | **Currency** | ** **                                    | **Annual interest rate  (Actual rate at December 31, 2006)** | ** ** | **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%                                         |                                                                                            |       |                            | 399,178     |   |   |
| ING Bank N.V., The Bank of Tokyo-Mitsubishi,  Bayerische Landesbank, HSBC, Raiffeisen, Sumitomo |       | USD        |       |         | LIBOR+0.8%– 1.0%  (6.17%– 6.36%)    |                                                                                            |       |                            | 860,000     |   |   |
| HSBC Bank plc and ING BHF-Bank AG                                                               |       | USD        |       |         | LIBOR+0.43% (5.80%)                           |                                                                                            |       |                            | 149,984     |   |   |
| Citibank International plc and ING Bank N.V.                                                    |       | USD        |       |         | LIBOR+0.30% (5.67%)                           |                                                                                            |       |                            | 150,208     |   |   |
| EBRD                                                                                            |       | USD        |       |         | LIBOR+1.51%– 3.10%  (6.88% – 8.47%) |                                                                                            |       |                            | 250,000     |   |   |
| Commerzbank AG, ING Bank AG and HSBC Bank plc                                                   |       | USD        |       |         | LIBOR+0.30% (5.67%)                           |                                                                                            |       |                            | 118,324     |   |   |
| ABN AMRO N.V.                                                                                   |       | USD/EUR    |       |         | LIBOR+0.35% (5.72%)  EURIBOR+0.35% (4.20%)    |                                                                                            |       |                            | 75,930      |   |   |
| Barclays Bank plc                                                                               |       | USD        |       |         | LIBOR+0.13% - 0.15%   (5.50% - 5.52%)         |                                                                                            |       |                            | 98,672      |   |   |
| HSBC Bank plc, ING Bank AG and Bayerische Landesbank                                            |       | USD        |       |         | LIBOR+0.30% (5.67%)                           |                                                                                            |       |                            | 117,109     |   |   |
| ING BHF Bank and Commerzbank AG                                                                 |       | EUR        |       |         | EURIBOR+0.65% (4.5%)                          |                                                                                            |       |                            | 34,360      |   |   |
| Commerzbank Belgium S.A./N.V.                                                                   |       | USD        |       |         | LIBOR + 0.40%  (5.77%)                        |                                                                                            |       |                            | 14,034      |   |   |
| Other debt                                                                                      |       |       |       |         |                                          |                                                                                            |       |                            | 4,000       |   |   |
| **Total debt**                                                                                  | ** ** | ** ** |       |         |                                          |                                                                                            |       |                            | **$**       | **3,071,799** |   |   |
| **Less current portion**                                                                        | ** ** | ** ** | ** ** |         |                                          |                                                                                            |       |                            | **147,260** |   |   |
| **Total  long-term debt**                                         | ** ** | ** ** | ** ** |         |                                          |                                                                                            |       |                            | **$**       | **2,924,539** |   |   |

 

Thefollowing table presents aggregate scheduled maturities of debt principaloutstanding as of December 31, 2006:
|                                                   | ** ** | **Amount**              | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|
| ** **                                        | ** ** | **(in thousands)** | ** ** |
| Payments due in the year  ended December 31, |       |                    |       |   |   |
| 2007                                              |       |                    | $          | 147,260 |   |   |
| 2008                                              |       |                    | 600,502    |   |   |
| 2009                                              |       |                    | 839,856    |   |   |
| 2010                                              |       |                    | 602,567    |   |   |
| 2011                                              |       |                    | 163,674    |   |   |
| Thereafter                                        |       |                    | 717,940    |   |   |
|                                              |       |                    | $          | 3,071,799 |   |   |

 

In addition, we had capital lease obligations in theamount of $5.7 million and $6.7 million as of December 31, 2005 and December 31,2006, respectively. The terms of our material debt obligations and capitallease obligations are described in Notes 11 and 12, respectively, to ouraudited consolidated financial statements.

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Our ability to incur further indebtedness is limited bythe covenants in our outstanding notes, including a debt/cash flow incurrencetest and restrictions on our ability to grant liens on our properties and toenter into sale and lease-back transactions. Our syndicated loan facilitycontains similar and other covenants, including debt/OIBDA and OIBDA/interestexpense maintenance covenants. In addition, Sistema, which controls 53.1% ofour outstanding shares and consolidates our results in its financialstatements, is subject to various covenants in the indentures relating to itsnotes in the aggregate principal amount of $700 million, which imposerestrictions on Sistema and its restricted subsidiaries, including us, withrespect to, among others, incurrence of indebtedness and liens. See “Item 3.Key Information—D. Risk Factors—Risks Relating to Our Financial Condition—Indenturesrelating to our notes and our controlling shareholder Sistema’s notes contain,and some of our loan agreements contain, restrictive covenants, which limit ourability to incur debt and to engage in various activities.”

Asummary of our cash flows and cash outlays for capital expenditures andacquisitions of subsidiaries follows:
|                                                      | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                           | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                     | ** ** |
| **Cash flows:**                                      | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net cash provided  by operating activities           |       | $                                           | 1,711,589  |   | $ | 1,803,610 |   | $ | 2,389,903 |   |
| Net cash used in  investing activities               |       | (1,543,201                                  | )          | (2,458,347 | ) | (1,790,549 | ) |
| Net cash provided  by/(used in) financing activities |       | 10,773                                      |       | 461,528 |   | (464,066 | ) |
| Net  increase/(decrease) in cash                     |       | $                                           | 183,774    |   | $ | (195,866 | ) | 141,705 |   |
| **Cash  outlays for:**                               | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital  expenditures(1)                             |       | $                                           | (1,358,944 | ) | $ | (2,181,347 | ) | $ | (1,721,968 | ) |
| Acquisition of  subsidiaries, net of cash acquired   |       | $                                           | (355,744   | ) | $ | (178,917 | ) | $ | (38,288 | ) |

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(1)                 Includes acquisitions of property, plant and equipmentand intangible assets.

For the year ended December 31, 2006, net cashprovided by operating activities was $2,389.9 million, an increase of 32.5%from the year ended December 31, 2005. This increase was primarilyattributable to a growth in total revenues and operating income due to anincrease in our subscriber base. During the year ended December 31, 2006, werecorded a positive free cash flow of $645.9 million for the first time in thelast three years, which is calculated by us as net cash provided by operatingactivities less capital expenditures, investments and acquisition ofsubsidiaries.

Net cash used in investing activities in the yearended December 31, 2006 was $1,790.6 million, a decrease of 27.2%from the year ended December 31, 2005. This decrease is mainly the resultof a decrease in cash spent on the acquisition of property, plant and equipmentand intangible assets from $2,181.3 million for the year endedDecember 31, 2005 to $1,722.0 million for the year endedDecember 31, 2006 due to our policy of optimizing capital expenditures withgreater emphasis on capacity over coverage spending in Russia and improvingnetwork quality.

Net cash used in financing activities in the yearended December 31, 2006 was $464.1 million, compared to $461.5million provided in the year ended December 31, 2005. In 2006, we paiddividends in the total amount of $558.8 million, which also included dividendspaid to minority shareholders of certain of our subsidiaries. In addition, wepaid $109.9 million for the repurchase of ADSs pursuant to a previouslyestablished share repurchase program. The primary reason for the decrease innet cash provided by financing activities was due to the repayment of existingdebt, which was partly offset by net proceeds from new bank loans.

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For the year ended December 31, 2005, net cashprovided by operating activities was $1,803.6 million, an increase of 5.4%from the year ended December 31, 2004. This increase was primarily attributableto a growth in total revenues due to an increase in our subscriber base.

Net cash used in investing activities in the yearended December 31, 2005 was $2,458.3 million, an increase of 59.3%from the year ended December 31, 2004. This increase is mainly the resultof two factors: an increase in cash spent on the acquisition of property, plantand equipment and intangible assets from $1,358.9 million for the yearended December 31, 2004 to $2,181.3 million for the year ended December 31,2005, and decreased net cash inflow from disposals of short-term investments inthe amount of $203.6 million during the year ended December 31, 2005.

Net cash provided byfinancing activities in the year ended December 31, 2005 was$461.5 million. We paid dividends in the total amount of $407.2 millionduring the year ended December 31, 2005, which also included dividendspaid to minority shareholders of certain of our subsidiaries. These outflowswere offset by net proceeds from notes issuance in the amount of $398.9 millionand $462.0 million in net cash inflow from new bank loans, which were partlyoffset by debt issuance costs and the repayment of existing debt.

**Liquidity**

As of December 31, 2006, we had total cash andcash equivalents of $220.0 million ($105.9 million in rubles,$46.0 million in U.S. dollars, $20.9 million in Ukrainian hryvnias,$37.3 million in Uzbek soms and $9.9 million in other currencies). Inaddition, as of December 31, 2005 and 2006, we had short-term investmentsof $28.1 million and $56.0 million, respectively, mostly in U.S. dollar-denominatedinstruments at the Moscow Bank of Reconstruction and Development (MBRD), arelated party. As of December 31, 2006, we had unused availability underour credit facilities to draw another $625.3 million. For details ofexternal financing see Note 11 to our audited consolidated financialstatements. 

As of December 31, 2006, we had a working capitaldeficit of $91.2 million compared to a deficit of $637.8 million asof December 31, 2005. The increase in working capital was attributable to a$618.6 million decrease in the current portion of our debt as a result of debtrefinancing, which was partly offset by an accrual of a $170.0 million forBitel’s expired put option. An increase in current trade payables and accrualsin the amount of $169.9 million was offset by increased prepaid expenses andinventories as of December 31, 2006.

As of December 31, 2005, we had a working capitaldeficit of $637.8 million compared to a deficit of $189.0 million asof December 31, 2004. The increase in working capital deficit wasprimarily attributable to a $692.9 increase in current liabilities, including a$395.0 million increase in the current portion of our debt. An increase incurrent trade payables and accruals in the amount of $216.8 million was offsetby increased prepaid expenses and inventories as of December 31, 2005.

We expect to repay all long-term debts as they becomedue from our operating cash flows or through re-financings. We believe that ourworking capital together with our plans for external financing will provide uswith sufficient funds for our present and future requirements.

As most of our operatingsubsidiaries are incorporated in Russia, their ability to pay dividends to usis limited by provisions of Russian law. For example, Russian law requiresthat, among other things, dividends can only be paid in an amount not exceedingnet profits as determined under Russian accounting standards, denominated inrubles, 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, 2004, 2005 and 2006 thatwas distributable under Russian legislation amounted to $527.9 million, $444.4million and $1,181.0 million, respectively. 

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**Inflation**

TheRussian economy has been characterized by high rates of inflation:
| Year | ** ** | ** ** | ** ** | **Inflation rate** | ** ** |
|------|------------|------------|------------|-------------------------|------------|
| 2002 |       |       | 15.1       | %                       |       |
| 2003 |       |       | 12.0       | %                       |       |
| 2004 |       |       | 11.7       | %                       |       |
| 2005 |       |       | 10.9       | %                       |       |
| 2006 |       |       | 9.0        | %                       |       |

 

TheUkrainian economy has been characterized by varying rates of inflation:
| Year | ** ** | ** ** | ** ** | **Inflation rate** | ** ** |
|------|------------|------------|------------|-------------------------|------------|
| 2002 |       |       | (0.6       | )%                      |       |
| 2003 |       |       | 8.2        | %                       |       |
| 2004 |       |       | 12.3       | %                       |       |
| 2005 |       |       | 10.3       | %                       |       |
| 2006 |       |       | 9.1        | %                       |       |

 

Prior to June 20, 2006, wedenominated our tariffs in units linked to the U.S. dollar in most of theregions in which we operate, except for Ukraine (UMC), Turkmenistan (BCTI) andKrasnodar region (Kuban-GSM). Commencing June 20, 2006, we begancharging our subscribers in rubles by linking the ruble amount we charged to afixed U.S. dollar exchange rate. Starting January 1, 2007, we fully convertedour tariffs into rubles. While a majority of our costs aredenominated in U.S. dollars or are tightly linked to the U.S. dollar, certainof our costs, such as salaries and rents, are sensitive to rises in the generalprice level in Russia and Ukraine. Moreover, in 2004, 2005 and 2006, 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. To avoidcurrency risks, we intend to move to ruble-denominated invoicing with oursuppliers within Russia in 2007.

**Credit RatingDiscussion**

Our credit ratings impact our ability to obtain short-and long-term financing, and the cost of such financing. In determining ourcredit ratings, the rating agencies consider a number of factors, including ouroperating cash flows, total debt outstanding, commitments, interestrequirements, liquidity needs and availability of liquidity. Other factorsconsidered may include our business strategy, the condition of our industry andour position within the industry. Although we understand that these and otherfactors are among those considered by the rating agencies, each agency mightcalculate and weigh each factor differently.

Ourcredit ratings as of the date of this document are as follows: 
| Rating Agency                 | ** ** | ** **   | ** ** | **Long-Term  Debt Rating** | ** ** | **Outlook/Watch** | ** ** |
|------------------------------------|------------|--------------|------------|---------------------------------|------------|-------------------|------------|
| Moody’s(1)                    |       | Ba3          |       |                            | Positive   |              |       |
| Standard & Poor’s(2) |       | BB-/ Positiv | e          |                            | Stable     |              |       |

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(1)                 Rated on May 10, 2007.

(2)                 Rated on February 1, 2007.

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None of our existingindebtedness has any triggers related to our credit ratings.

**Critical AccountingPolicies**

Critical accountingpolicies are those policies that require the application of management’s mostchallenging, subjective or complex judgments, often as a result of the need tomake estimates about the effect of matters that are inherently uncertain andmay change in subsequent periods. Critical accounting policies involvejudgments and uncertainties that are sufficiently sensitive to result inmaterially different results under different assumptions and conditions. Webelieve that our most critical accounting policies are those described below.For a detailed discussion of these and other accounting policies, see Note 2to our audited consolidated financial statements.

**Managementestimates**

The preparation of ouraudited consolidated financial statements in accordance with U.S. GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses for the reporting period. Actual results could differ from thoseestimates. Our significant estimates include the recoverability of intangibleassets and other long-lived assets, valuation allowances on deferred tax assetaccruals and valuation of financial instruments. In addition, every quarter, we create ageneral reserve for doubtful accounts based on management’s periodic review for recoverability of accountsreceivable, prior experience and billing data. If we learn that a particular debtcannot be recovered (for example, due to bankruptcy or liquidation), we createa special reserve for that particular account and it is no longer counted forthe purposes of the general reserve. 

**Revenue Recognition**

Revenues are recognized on an accrual basis, whenservices are actually provided or title to equipment passes to customer,regardless of when the resulting monetary or financial flow occurs.

We categorize therevenue sources in the statements of operations as follows:

·       Servicerevenue and connection fees: (a) subscription fees, (b) usage fees,(c) value-added services fees, (d) interconnect fees,(e) roaming fees charged to other operators for guest roamers utilizingour network and (f) connection fees; and

·       Salesof handsets and accessories.

We defer initialconnection fees paid by subscribers from the time of the initial signing of thecontract with a subscriber and activation of value-added services over theestimated average subscriber life in our network. We periodically evaluateactual churn of our subscribers and adjust our estimates of average subscriberlives accordingly. The effect of the change in our estimates of averagesubscriber lives was not material in 2006. If we change our estimates of theaverage subscribers life in the future, the amounts of connection fees andamortization of the acquired customer base we recognize in income would changeaccordingly.

**License Costs**

We capitalize the cost oflicenses acquired in business combinations and directly from the government. Asthe telecommunications industries in Russia, Ukraine, Uzbekistan andTurkmenistan do not have sufficient experience with renewal of licenses orextensions of license terms, we amortize each license on a straight-line basisover the term of the license commencing from the date such license area becomescommercially operational. We review these licenses and their remaining usefullife and, if necessary, revise the useful lives based on our actualutilization. The estimated useful lives of licenses may 

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varydepending on market or regulatory conditions, and any revision to the estimateduseful lives may result in a cost write off or an increase in amortizationcosts.

**Useful Lives ofProperty Plant and Equipment**

We calculate depreciation expense for property, plantand equipment on a straight-line basis over their estimated useful lives. Weestablish useful lives for each category of property, plant and equipment basedon our assessment of the use of the assets and anticipated technologyevolution. We review and revise if appropriate the assumptions used in thedetermination of useful lives of property, plant and equipment at least on anannual basis.

As a result of financialstatement restatements by numerous U.S. public companies and publication of aletter by the Chief Accountant of the SEC regarding the interpretation oflongstanding lease accounting principles, we have corrected our accountingpractices for leasehold improvements in the fourth quarter of 2004. The primaryeffect of this accounting correction was to accelerate to earlier periodsdepreciation expenses with respect to certain components of previouslycapitalized leasehold improvements. See Note 2 to our audited consolidatedfinancial statements for detail.

**Impairment ofLong-lived Assets**

We periodically evaluatethe 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.”Whenever events or changes in circumstances indicate that the carrying amountsof those assets may not be recoverable, we compare 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, we record 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 assetsoccurred during the three years ended December 31, 2004, 2005 and 2006, asimpairment indicators were not present during these years.

**Impairment ofGoodwill**

Goodwill represents anexcess of the cost of business acquired over the fair market value ofidentifiable net assets at the date of acquisition. Goodwill is reviewed forimpairment at least annually or whenever it is determined that one or moreimpairment indicators exist. We determine whether impairment has occurred byassigning goodwill to the reporting unit identified in accordance with SFAS No.142 “Goodwill and Other Intangible Assets,” and comparing the carrying amountof the reporting unit to the fair value of the reporting unit. If an impairmentof goodwill has occurred, we recognize a loss for the difference between thecarrying amount and the implied fair value of goodwill. To date, no impairmentof goodwill has occurred.

**TranslationMethodology**

Prior to January 1, 2007, the functional currency forall of our subsidiaries was the U.S. dollar, excluding UMC, macro-region South(including former subsidiary Kuban-GSM and other subsidiaries in the Southmacro-region) and BCTI where the functional currency was and remains the localcurrency. Starting from January 1, 2007, our subsidiaries in the RussianFederation introduced ruble tariffs for settlements with the majority of itscustomers. As a result of these changes, we reevaluated the functional currencycriteria under SFAS No. 52, “Foreign Currency Translation,” and determinedthat, beginning January 1, 2007, the functional currency of our subsidiariesdomiciled in Russia would be the ruble. The change was adopted prospectivelybeginning January 1, 2007 in accordance with SFAS No. 52. No restatement ofcomparative amounts will be made for the change in functional currency. 

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The financial statements of our subsidiaries in Russiaas of January 1, 2007, will be translated into the U.S. dollar using thecurrent rate method. Assets and liabilities will be translated at the rate ofexchange prevailing at the balance sheet date. Stockholders’ equity will betranslated at the applicable historical rate. Revenue and expenses will betranslated at the monthly average rates of exchange. Translation gains andlosses will be included as part of accumulated other comprehensive income. 

For our subsidiaries where the functional currency isthe U.S. dollar, monetary assets and liabilities have been remeasured from thelocal currency to the functional currency at the period-end exchange rates.Non-monetary assets and liabilities have been remeasured at historical rates.Revenues, expenses and cash flows have been remeasured at historical rates.Translation differences resulting from the use of these rates have beenaccounted for as currency exchange and transaction gains in our consolidatedstatements of operations.

For UMC and macro-regionSouth, 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. Revenuesand expenses have been translated at the period-average exchange rate. Inaddition, a “new cost basis” for all non-monetary assets of macro-region Southhas 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 macro-region South, in the amount of$89.9 million was reported as accumulated other comprehensive income inour audited consolidated balance sheet as of December 31, 2006.

**Taxation**

Generally, tax declarations remain open and subject toinspection for a period of three years following the tax year. While most ofour tax declarations have been inspected without significant penalties, theseinspections do not eliminate the possibility of re-inspection.

We believe that we have adequately provided for taxliabilities 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 23 to our auditedconsolidated financial statements.

We recognize deferred taxassets and liabilities 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 enactedtax rates expected to be in effect at the time these differences are realized.We record valuation allowances for deferred tax assets when it is likely thatthese assets will not be realized.

**New AccountingPronouncements**

In February 2006, the FASB issued SFAS No. 155,“Accounting for Certain Hybrid Financial Instruments,” an amendment to SFAS No.133, “Accounting for Derivative Instruments and Hedging activities” and SFAS No.140, “Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities.” SFAS No. 155 addresses the application of SFASNo. 133 to beneficial interests in securitized financial assets and permits theremeasurement of fair value for any hybrid financial instrument that containsan embedded derivative that otherwise would require bifurcation. It requiresthe evaluation of interests in securitized assets to identify interests thatare freestanding derivatives or that are hybrid financial instruments thatcontain an embedded derivative requiring bifurcation, and amends SFAS No. 140eliminating the prohibition on a qualifying special purpose entity from holdinga derivative financial instrument that pertains to a beneficial interest otherthan another derivative financial instrument. SFAS No. 155 also clarifiescertain other issues concerning the classification of derivatives. ThisStatement if effective for all financial instruments acquired or issued afterthe beginning of an entity’s 

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fiscal year that startsafter September 15, 2006 and is not expected to have a material impact on ourfinancial position and results of operations.

In June 2006, the FASB issued Interpretation No. 48,or FIN No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation ofSFAS No. 109,” which is effective for the fiscal year beginning after December15, 2006. FIN No. 48 clarifies the accounting for uncertainty in income taxesrecognized in the financial statements by prescribing a recognition thresholdand measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.The Interpretation also requires enterprises to make explicit disclosures atthe end of each reporting period about uncertainties in their income taxpositions, including detailed roll-forward of tax benefits taken that do notqualify for financial statement recognition. We will adopt FIN No. 48 as ofJanuary 1, 2007. The cumulative effect of applying the provisions of theInterpretation will be reported as an adjustment to retained earnings as ofJanuary 1, 2007. The adoption of FIN No. 48 did not have a material effect onour consolidated financial position and results of operations. 

In September 2006, the FASB issued SFAS No. 157, “Fairvalue measurement.” SFAS No. 157 defines fair value, establishes a frameworkfor measuring fair value and expands the disclosure requirements of fair valuemeasurement. SFAS No. 157 is applicable to other accounting pronouncements thatrequire or permit fair value measurement and, accordingly, does not require anyfair value measurement. SFAS No. 157 is effective for financial statementsissued for fiscal years beginning after November 15, 2007, and interim periodswithin those fiscal years. 

In September 2006, the SEC staff issued StaffAccounting Bulletin No. 108. or SAB 108, “Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements.” SAB 108 eliminates the different practices surrounding how publiccompanies quantify financial statement misstatements. It establishes anapproach that requires quantification of financial statement misstatementsbased on the effects of the misstatements on the financial statements and therelated financial statement disclosures. SAB 108 must be applied to annualfinancial statements for the first fiscal year ending after November 15, 2006.We do not expect SAB 108 to have a material impact on our financial position orresults of operations.

In February 2007, the FASBissued SFAS No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities,” including an amendment of FASB Statement No. 115, “Accounting forCertain Investments in Debt and Equity Securities,” which permits an entity tomeasure certain financial assets and financial liabilities at fair value. SFASNo. 159 offers an irrevocable option to carry the vast majority of financialassets and liabilities at fair value, with changes in fair value recorded in earnings(the fair value option). The Statement's objective is to improve financialreporting by allowing entities to mitigate volatility in reported earningscaused by the measurement of related assets and liabilities using differentattributes, without having to apply complex hedge accounting provisions. SFASNo. 159 is effective as of the beginning of an entity's first fiscal yearbeginning after November 15, 2007. Early adoption is permitted as of thebeginning of the previous fiscal year provided that the entity (1) makes thatchoice in the first 120 days of that fiscal year, (2) has not yet issuedfinancial statements, and (3) elects to apply the provisions of FASB StatementNo. 157, “Fair Value Measurements.” We are currently evaluating the provisions ofSFAS No. 159 to determine the potential impact, if any, its adoption will haveon our financial statements.

**Trend Information**

**Sales**

In 2006, our revenues increased by 27.4% from$5,011.0 million to $6,384.3 million. Our subscriber base increasedto 72.9 million subscribers as of December 31, 2006, from58.2 million as of December 31, 2005, or by 25.3%. In 2005, ourrevenues increased by 28.9% from $3,887.0 million to$5,011.0 million. Our 

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subscriber base increasedto 58.2 million subscribers as of December 31, 2005 from 34.2 millionas of December 31, 2004, or by 70.2%. We expect further growth of ourrevenues and subscriber base in 2007.

Average monthly service revenue per subscriber inRussia fell from $12 in 2004 to $8 in 2005 due to the introduction of lowertariffs in the Moscow license area and generally lower tariffs in the regions,as well as penetration to mass-market. In the year ended December 31,2006, average monthly service revenue per subscriber in Russia remained stableat $8 in 2006. Average monthly service revenue per subscriber was driven byhigher use among subscribers in response to lower average prices per minute.

UMC experienced subscriber growth from7.4 million subscribers at December 31, 2004 to 13.3 million atDecember 31, 2005 and to 20.0 million at December 31, 2006. We expect thistrend to slow down in 2007 due the high market penetration of more than 103% inUkraine at the end of 2006. The competition among mobile telecommunicationsproviders intensified in 2006 as a result of the development of new nationalbrands, Beeline and Life. Average monthly service revenue per subscriberdecreased in 2006 to $7 from $10 in 2005 as a result of extensivemass-marketing campaigns in response to aggressive pricing policies implementedby our competitor Kyivstar, as well as low price offerings from Beeline andpricing promotions from Life, including free calls within the network and nocall set up fees. 

Uzdunrobita experienced subscriber growth from 0.6million subscribers at December 31, 2005 to 1.5 million subscribers atDecember 31, 2006, an increase of 150%, and we expect this trend tocontinue in 2007 due to Uzdunrobita’s leading position in terms of subscribersand Uzbekistan’s low penetration rate of 10% at the end of 2006. Average monthlyservice revenue per subscriber peaked at $11 in 2006.

Turkmenistan experiencedsubscriber growth from 0.1 million subscribers at December 31, 2005to 0.2 million at December 31, 2006, and we expect this trend to continue in2007 due to Turkmenistan’s low penetration rate of 3.2% at the end of 2006.

**Inventory**

Overall, our inventory was$196.3 million at December 31, 2006, compared to $156.7 million atDecember 31, 2005 and $89.5 million at December 31, 2004. Theincrease is mainly explained by an increase in purchases made in 2006 as partof our capital expenditure spending to support expansion and networkmaintenance requirements. We expect our capital expenditures to remain stablein 2007.

**Churn**

We define churn as thetotal number of subscribers who cease to be a subscriber during the period(whether involuntarily due to non-payment or voluntarily), expressed as apercentage of the average number of our subscribers during that period. Oursubscriber churn in Russia decreased from 27.5% in 2004 to 20.7% in 2005 andsubsequently increased to 23.3% for the year ended December 31, 2006. Webelieve that subscriber churn is highly dependent on competition and the numberof mass-market subscribers in our overall subscriber mix. Mass-marketsubscribers generally choose to prepay their mobile phone usage by purchasingpre-paid packages and are more likely to switch providers to take advantage oflow-tariff promotions. As a result, competition for these subscribers willlikely lead to sustained downward pressure on tariffs. In addition, we plan toimplement a policy of not charging our existing subscribers when they switch toanother one of our tariff plans and to launch special loyalty programs.

**Off-balance SheetArrangements**

We believe that ourexisting off-balance sheet arrangements do not have and are not reasonablylikely to have a current or future effect on our financial condition, changesin financial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources that is material to investors.

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**Obligations underguarantee contracts**

As ofDecember 31, 2005 and 2006, our off-balance sheet arrangements consistedof debt guarantees issued to related parties as follows:
|                           | ** ** | **Guaranteed  amount  outstanding at  December 31,** | ** ** |
|---------------------------|------------|----------------------------------------------------------------|------------|
| ** **                | ** ** | **2005**                                                       | ** ** | **2006** | ** ** |
| ** **                | ** ** | **(in millions)**                                         | ** ** |
| Invest-Svyaz–Holding |       | $                                                              | 3.5        |   | — |   |
| MTS Belarus               |       | 9.0                                                            |       | 3.0 |   |
| **Total**                 | ** ** | **$**                                                          | **12.5**   | ** ** | **$** | **3.0** | ** ** |
|                           |            |                                                                |            |  |  |  |  |

 

In 2005, we issued guarantees to various financialinstitutions on behalf of Invest-Svyaz–Holding, a wholly-owned subsidiaryof Sistema. Invest-Svyaz–Holding’s primary business is leasing varioustypes of telecommunications and other assets to us. See Note 17 to ouraudited consolidated financial statements for additional information regardingthese 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. Theissued guarantees expired in May 2006.

We issued financialguarantees on behalf of MTS Belarus, our equity investee to assist it with itsfinancing needs. See Note 19 to our audited consolidated financialstatements. Under each of the guarantees outstanding as of December 31,2006, we could be required to compensate financial institutions in the event ofthe borrower’s default. As of December 31, 2006, these guarantees arereflected in our consolidated balance sheet at their fair values of $3.0 million.The guarantees expired in April 2007.

**Obligations underderivative contracts**

In connection with our acquisition of 74% of theshares in Uzdunrobita in August 2004, we entered into call and put optionagreements with the existing shareholders of the company to acquire theremaining 26% of the shares. The call and put option agreements stipulates aminimum purchase price of $37.7 million plus 5% per annum commencing fromthe acquisition date. In August 2006, we signed an amendment tothe call and put option agreements, which eliminates the call option andextends the exercise period of the put option to July 2008, which is 48months from July 2006. The purchase price for the put option willbe determined by an international investment bankto be selected jointly by both parties within 10 daysof the date of a put notice. The amendment to the call and putoption agreements has resulted in the decrease in the fair value of the optionto $nil and a recognition of interest expense in the amount of $5.9 million forthe year ended December 31, 2006. See Note 3 to our audited consolidatedfinancial statements.

In January 2006, we entered into variable-to-fixedinterest rate swap agreement with HSBC Bank PLC to hedge our exposure tovariability of future cash flows caused by the change in LIBOR related to thesyndicated loan. We agreed with HSBC Bank PLC to pay a fixed rate of 3.29% andreceive a variable interest of LIBOR on EUR 26.0 million for the period fromApril 28, 2006 up to October 29, 2013. The instrument qualifies as a cash flowhedge under the requirements of SFAS No. 133 as amended by SFAS No. 149. As ofDecember 31, 2006, we recorded an asset of $1.0 million in relation to thiscontract in the accompanying consolidated balance sheet and an income of $0.8million, net of tax of $0.2 million, as other comprehensive income in the accompanyingconsolidated statement of changes in shareholders equity in relation to thechange in fair value of this agreement.

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% 

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stake,we entered into a put and call option agreement with the shareholder of Tarinoto acquire the remaining 49.0% interest in Tarino. The put and call optionprice is $170.0 million. The put and call options were recorded at fair value,which approximated $nil at December 31, 2005 in the consolidated balancesheet. At December 31, 2006, a liability of $170.0 million was recorded in ouraudited consolidated financial statements in connection with this option. SeeNote 20 to our audited consolidated financial statements.

**Tabular Disclosureof Contractual Obligations**

Wehave various contractual obligations and commercial commitments to make futurepayments, including debt agreements, capital lease obligations (includinginterest) and certain committed obligations. The following table summarizes ourfuture obligations under these contracts due by the periods indicated as ofDecember 31, 2006:
|                                       | ** ** | **Payments due by period** | ** **  |
|---------------------------------------|------------|-------------------------------------------|-------------|
| ** **                            | ** ** | **Less than  1 year**           | ** **  | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** | **Total** | ** ** |
| **Contractual Obligations:**          |       |                                      |        |   |   |   |   |   |   |   |   |
| Long-Term  Principal Debt Obligations |       | $                                         | 147,260     |   | $ | 1,440,358 |   | $ | 766,241 |   | $ | 717,940 |   | $ | 3,071,799 |   |
| Interest Payments                     |       | 221,115                                   |        | 321,933 |   | 160,549 |   | 44,074 |   | 747,671 |   |
| Capital Lease  Obligations            |       | 4,215                                     |        | 3,577 |   | 8 |   | — |   | 7,800 |   |
| Operating Lease  Obligations          |       | 69,932                                    |        | 58,227 |   | 27,739 |   | 42,559 |   | 198,457 |   |
| Purchase Obligations(1)               |       | 290,862                                   |        | 8,708 |   | — |   | — |   | 299,570 |   |
| **Total**                             | ** ** | **$**                                     | **733,384** | ** ** | **$** | **1,832,803** | ** ** | **$** | **954,537** | ** ** | **$** | **804,573** | ** ** | **$** | **4,325,297** | ** ** |

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(1)                 Include future payments under purchase agreements toacquire property, plant and equipment and costs related thereto.

Interest payments arecalculated based on indebtedness as of December 31, 2006, scheduled maturitiesfor the debt and interest rates effective as of December 31, 2006.

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**Item 6.**         *Directors, Senior Management and Employees*

**A.**                Directorsand Senior Management

**Key Biographies**

Ourdirectors and executive officers, and their dates of birth and positions as ofthe date of this document 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(2)       |       | 1967       |       | Director, President and  Chief Executive Officer                           |
| Vsevolod V. Rozanov(2)(3)  |       | 1971       |       | Vice President—Chief  Financial Officer                               |
| Tatiana V. Evtushenkova(2) |       | 1976       |       | Vice President—Strategy  and Corporate Development                    |
| Mikhail V. Shamolin(2)     |       | 1970       |       | Vice President—Director  of MTS Russia Business Unit                  |
| Dr. Yury A.  Gromakov |       | 1946       |       | Vice  President—Technology and Network Development                    |
| Sergey G. Aslanyan(2)      |       | 1973       |       | Vice President—Network  and Information Technology                    |
| Andrei B. Terebenin(2)(3)  |       | 1962       |       | Vice President—Corporate  Communications                              |
| Pavel D. Belik(2)          |       | 1966       |       | Vice President—Security                                               |
| Cynthia A. Gordon(2)       |       | 1962       |       | Vice President—Chief  Marketing Officer                               |
| Sergey S. Skatershchikov   |       | 1972       |       | Vice President—Strategy  and Development                              |
| Pavel E. Pavlovsky(2)      |       | 1969       |       | Vice President, Director  of MTS Ukraine Business Unit                     |
| Sergey B. Nikonov(2)       |       | 1960       |       | Vice President—Staff  Management and Administration                   |
| Oleg Y. Raspopov           |       | 1966       |       | Acting Vice-President,  Director of MTS Foreign Subsidiaries Business Unit |
| Dr. Michael Hecker(2)      |       | 1970       |       | Director—Strategy                                                     |
| Ruslan S. Ibragimov(2)(3)  |       | 1963       |       | Director—Chief Legal Counsel                                          |

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(1)                 Member of Audit Committee.

(2)                 Member of Management Board.

(3)                 Member of Disclosure Committee.

**Sergey D. Schebetov** has served as Chairman of our Board of Directors sinceMarch 2006. Mr. Schebetov also serves as the Chairman of the Board ofDirectors of Comstar UTS, a subsidiary of Sistema. He also serves on the Boardof Directors of four Sistema-affiliated companies (Concern RTI-Systems, SistemaMass-media, MGTS and Sistema-Hals). From 2006 to 2007, Mr. Schebetovserved as the Chief Executive Officer of Sistema Telecom, a subsidiary ofSistema which oversees all of Sistema’s telecommunications business, and, from2001 to 2005, Mr. Schebetov served as the Head of the CorporateDevelopment Department of Sistema. From 1999 to 2001, he served as theDevelopment Director of Integrum-Techno, an IT company and, from 1997-1999,Mr. Schebetov served as the Vice President of the corporate financedepartment of ATON Capital Group, an investment company.

**VladimirS. Lagutin**has served as Deputy Chairman of our Boardof Directors since March 2006 and, from October 2003 toMarch 2006, he served as the Chairman of our Board of Directors. FromJuly 2003 to January 2006, Mr. Lagutin served as the GeneralDirector of Sistema Telecom, and served as the General Director of MGTS from1995 to July 2003. In addition, Mr. Lagutin serves as the Chairman ofthe Boards of Directors of MGTS and serves on the Boards of Directors of SistemaTelecom and OJSC CSC. 

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All of these companies aresubsidiaries of Sistema. Mr. Lagutin also serves on the Board of Directorsof Sistema.

**AlexeiN. Buyanov**has served as one of our Directors sinceJune 2003. Mr. Buyanov has served as First Vice President of Sistemasince September 2002. From 1998 to 2002, he served as our Vice President,Finance. He also serves on the board of directors of various other companiesaffiliated with Sistema.

**AlexanderE. Gorbunov**has served as one of our Directors sinceMarch 2006. Mr. Gorbunov has served as the Head of the CorporateDevelopment Department of Sistema since July 2005. From 2003 to 2005,he held the position of Director of Strategy with us and, from 2002 to 2003,Mr. Gorbunov was in charge of the Strategic Analysis and PlanningDepartment of Sistema Telecom. Prior to this, Mr. Gorbunov wasemployed by the Moscow and Boston offices of Bain & Company.

**HelmutReuschenbach**has served as one of our Directors sinceNovember 2004. Mr. Reuschenbach has served as a Director atLazard & Co. GmbH Frankfurt since 2001. Prior to that, he was atDeutsche Telekom AG where he served as Treasurer and Senior Executive VicePresident for Finance for six years. Prior to 1994, he was the Chief FinancialOfficer and a member of the Board of Directors of Mercedes-Benz S.A. inBelgium and also served as Chief Executive Officer of Daimler-Benz CoordinationCenter S.A. and Daimler-Benz Financial Company S.A. From 1989 to 1993,Mr. Reuschenbach served as Vice President for Finance at Daimler-Benz AGin Stuttgart. Previously, he has served as Director of Finance at AEGAktiengesellschaft in Frankfurt, Director of Finance and Administration at AEGItaliana S.p.A. in Milan and Corporate Finance Manager at AEG-TELEFUNKENAktiengesellschaft in Frankfurt.

**SirPeter Middleton**has served as one of Directors sinceJune 2005. Sir Peter Middleton also serves as the Chairman of the CamelotGroup plc, President of the British Bankers Association, Chairmanof the Barclays Group Asia Pacific Advisory Committee, Deputy Chairman ofUnited Utilities, Chairman of Sheffield Urban Regeneration Company(Sheffield One), Chairman of CEDR (Centre for Effective Dispute Resolution) andChairman of Reyniers & Co.

**LeonidA. Melamed**has served as our Director, President andChief Executive Officer since June 2006. Mr. Melamed has served invarious management positions at Rosno since its founding in 1991 and continuesto serve as a member of Rosno’s Board of Directors. From September 2003 toApril 2006, he served as the General Director-Chief Executive Officer and,from March 2001 to September 2003, he served as the First DeputyDirector General-Executive Director. Prior to that, from September 1997 toMarch 2001, Mr. Melamed served as First Deputy Director General ofRosno. From February 1992 to June 1992, Mr. Melamed served asDirector of Rosno’s Center for Medical Insurance and, from June 1992 toJune 2003, he held the position of Deputy Chairman of the ManagementBoard. From June 1993 to March 2001, Mr. Melamed served as FirstDeputy Chairman of the Management Board. In 2004, Mr. Melamed was electedChairman of the Expert Council in Insurance Legislation, which is part of theRussian State Duma Committee on Credit Organizations and Financial Markets.

**VsevolodV. Rozanov**has served as our Vice President and ChiefFinancial Officer since April 2006. From August 2004 toApril 2006, he served as Deputy General Director and Chief FinancialOfficer 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.

**TatianaV. Evtushenkova**has served as our VicePresident—Strategy and Corporate Development since October 2002. FromDecember 1999 to October 2002, Ms. Evtushenkova served as theDirector of the Investment Department at Sistema Telecom, a subsidiary of Sistema.Prior to joining Sistema Telecom, she worked in the investment banking divisionof Salomon Smith Barney. Ms. Evtushenkova is the daughter of Vladimir P.Evtushenkov, the controlling shareholder and Chairman of the Board of Sistema.

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**MikhailV. Shamolin**has served as our Vice President—Directorof MTS Russia Business Unit since August 2006. From July 2005 to August 2006, Mr. Shamolin served as our VicePresident—Sales and Customer Service. From 2004 to 2005, Mr. Shamolinworked at Interpipe Corp. (Ukraine) as Managing Director of the FerroalloysDivision. From 1998 to 2004, he held various consulting positions atMcKinsey & Co.

**Dr. YuryA. Gromakov**has served as our VicePresident—Technology and Network Development since March 2002, and servedas our Vice President of Technology and Network Development from 1994 untilFebruary 2002. He has been involved in mobile communications for over30 years and holds a degree of Doctor of Technical Sciences, the highestscientific degree in Russia, and has been awarded a degree as Honorable RadioOperator of Russia. Dr. Gromakov is also a member of the InternationalAcademy of the Science of Information and Information Processes andTechnologies.

**SergeyG. Aslanyan**has served as our Vice President—Networkand Information Technology since August 2006. From December 2003 to August 2006, Mr. Aslanyan served as our VicePresident and Chief Information Officer. Prior to joining us, Mr. Aslanyanworked at TNK-BP Management as the Deputy Director of Information Technology.He worked at PricewaterhouseCoopers from 1997 to 2001. 

**AndreiB. Terebenin**has served as our VicePresident—Corporate Communications since January 2006. Prior to joining us, Mr.Terebenin served as the General Director of R.I.M. Porter Novelli, a leadingpublic relations network agency from 1999 to 2005. From 1991 to 1999, he heldmanagement positions at AIG Russia, Dun & Bradstreet CIS and the financialmagazine “Economica & Zhizn.”

**PavelD. Belik**has served as our Vice President—Securitysince October 2005. From February 2005 to October 2005, Mr. Belik served as ourDirector of Security in the Moscow macro-region. Prior to joining us, Mr. Belikserved in the Federal Security Service of the Russian Federation for more than20 years.

**CynthiaA. Gordon**has served as our Vice-President—ChiefMarketing Officer since January 2007. Prior to joining us, Ms. Gordon served as Vice President—BusinessMarketing at Orange from 2003 to 2006. She served as a marketing director at Orange, United Kingdom, from 2001to 2003, at Demon/Scottish Telecom from 2000 to 2001 and at ACC International(AT&T) from 1998 to 1999.  From 1989to 1998, Ms. Gordon held various senior marketing positions at British Telecom,One to One (T-Mobile), Lloyds TSB and Abbey National.  

**SergeyS. Skatershchikov**has served as our Vice President—Strategyand Development since February 2007. Prior to joining us, Mr. Skatershchikovserved as Director for Corporate Finance at Dresdner Bank CJSC. From September2003 to March 2005, he served as General Director of Indexatlas, Ltd. FromAugust 2002 to April 2003, Mr. Skatershchikov served as Deputy Director forExternal Financing at Objedinennye Machinostroitelnye Zavody, Ltd. 

**PavelE. Pavlovsky**has served as our Vice President—Directorof MTS Ukraine Business Unit since February 2007. From November 2006 to January2007, Mr. Pavlovsky served as our Vice President—Head of Foreign SubsidiariesBusiness Unit. From June 2005 to November 2006, he served as our Director ofDepartment of Foreign Companies’ Business and, from December 2003 to June 2005,as our Deputy Director of Department of Corporate Development. Prior to joiningus, Mr. Pavlovsky served as Investment Director of Finartis, Ltd. from January2003 to December 2003.

**SergeyB. Nikonov**has served as our Vice President—StaffManagement and Administration since August 2006. From October 2005 to July2006, Mr. Nikononv served as Deputy General Director and AdministrativeDirector at Silovye Machiny OJSC. From October 2003 to September 2005, heserved as Deputy General Director at ROSNO. Mr. Nikonov served as DeputyManager of Staff Administration at GazpromBank CJSC from March 2003 toSeptember 2003. 

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**OlegY. Raspopov**has served as our Acting Vice President—Directorof MTS Foreign Subsidiaries Business Unit since May 2007. Mr. Raspopov servedas Head of Department of Extra Input Management from June 2006 to May 2007. In2004, he founded and managed the insurance brokerage house Energoprotection. From2002 to 2004, Mr. Raspopov served as Advisor to CFO at RAO UES of Russia and asmember of the Board of Directors of several companies affiliated with RAO UESof Russia, such as Ren-TV, NTV, LEADER Insurance Co.  From 2001 to 2002, he worked as a lawyer atGazpromenergoservice.

**Dr.Michael Hecker**has served as our Director—Strategysince January 2007. From May 2006 to December 2006, Mr. Hecker served as our Headof the Strategy Department and Director for Strategic Projects. Prior tojoining us, he worked at A.T. Kearney Europe from 2000 to 2006 where he heldseveral consulting positions.

**RuslanS. Ibragimov**has served as our Director—Chief LegalCounsel since February 2007. Mr. Ibragimov joined us in June 2006 and wasappointed to the position of Director for legal matters and, additionally,headed our Legal Department. Prior to joining us, he was a member of the lawfirm Ibragimov, Kagan and Partners. From 1997 to 2002, Mr. Ibragimov served asDeputy Director and Senior Partner at RSM Top-Audit, a tax and legal consultingfirm. From 1992 to 1996, he headed legal departments at various commercialbanks.

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 2006 an aggregate amount of approximately $14.5 millionfor services in all capacities provided to us; this amount was comprised of$5.8 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 sharesof common stock to our subsidiary Rosico pursuant to these plans at a price of$1.024 per share for the total amount of $13.9 million. Following themerger of Rosico into us in June 2003, these shares were transferred toour wholly-owned subsidiary, MTS LLC.

Underthe stock bonus plan, during the period from September 12, 2000, throughSeptember 22, 2000, 3,587,987 shares of common stock were purchased fromRosico at a nominal price 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      | % |   |

 

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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 atAugust 14, 2001. The stock option agreement for a board member terminatedif the board member was terminated as a board member prior to our 2002 annualshareholders’ meeting. The stock option agreement for a key employee terminatedif the employee 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 onJuly 15, 2003). In addition, options relating to 45,344 shares werecancelled pursuant to 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 theOctober 2002 option agreements. In addition, options relating to 119,715shares were cancelled 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 of the shares at the date of grant and will vest24 months from the date of the grant. The stock option agreement for aboard member would have terminated if the board member was terminated as aboard member before our 2004 annual shareholders’ meeting. The stock optionagreement for a key employee would have terminated if the employee left usbefore 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 would have terminated if the board member was terminated as aboard 

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member before our 2005annual shareholders’ meeting. The stock option agreement for a key employee wouldhave terminated if the employee left us before July 15, 2006. 

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 vest23 months from the date of the grant. The stock option agreement for aboard member would have terminated if the board member was terminated as aboard member before our 2006 annual shareholders’ meeting. The stock optionagreement for a key employee will terminate if the employee leaves us beforeJuly 15, 2007. 

Prior to December 31, 2005, we accounted for stockoptions issued to employees under the recognition and measurement provisions ofAPB Opinion No. 25 “Accounting for Stock Issued to Employees, Compensation,” aspermitted by FASB Statement No. 123 “Accounting for Stock-Based Compensation”and SFAS No. 148 “Accounting for Stock Based Compensation—Transition andDisclosure, an Amendment to FASB Statement No. 123.” Under the requirements ofthese statements, we elected to use the intrinsic value of options on themeasurement date as a method of accounting for compensation to employees.According to the terms of the option plan, the exercise price of the optionsequaled the average market share price during the hundred day period precedingthe grant date. The difference in the exercise price of the option and marketprice at the date of grant was shown as unearned compensation in theconsolidated statements of changes in shareholders’ equity and was amortized toexpense over the two-tear vesting period.

Effective from January 1, 2006, we adopted theprovisions of FASB Statement No. 123R “Share based payments” (SFAS No. 123R),using the modified-prospective-application transition method. Under thistransition method, the compensation cost of $1.7 million recognized in 2006included the compensation cost for all share-based awards granted prior to, butnot yet vested as of December 31, 2006, determined based on the grant date fairvalue estimated in accordance with the original requirements of SFAS No. 123,using the same assumptions and taking into account the estimated forfeitures.Our consolidated financial statements for the periods prior to 2006 have notbeen restated in accordance with SFAS No.123R. Total compensation costs of $0.9million and $1.5 million were recognized during the years ended December 31,2004 and 2005, respectively. The effect from forfeitures comprised $1.1 millionand $0.3 million for the years ended December 31, 2004 and 2005, respectively.The effect of the estimated forfeitures upon adoption of SFAS 123R is notsignificant. 

As a result of adopting SFAS No.123R, our net incomefor the year ended December 31, 2006, was $1.5 million lower than if we hadcontinued to account for share-based compensation under APB No. 25. 

The reported basic and diluted earnings per share of $0.63for the year ended December 31, 2006 would not have changed significantly if wehad not adopted SFAS No.123R. 

As of December 31, 2006, there was $0.7 million oftotal unrecognized compensation cost related to non-vested share-basedcompensation arrangements. This amount is expected to be recognized over aweighted-average period of 0.54 years.

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 typically elected by the annual 

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meeting of shareholders forone year terms until the next annual meeting of shareholders and may bere-elected an unlimited number of times. The Board currently consists of sevenmembers, although it may be increased  byshareholder resolution. The Board has the authority to make overall managementdecisions for us, except those matters reserved to the shareholders. It mustmeet at least once every six weeks, 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 theestablishment of, and guidelines for, three new Board committees: restructuringcommittee, budgeting committee and quality committee. The restructuringcommittee was established to oversee and address matters related to thedevelopment and implementation of a new organizational structure for ourbusiness. The budgeting committee was established to prepare recommendations tothe Board of Directors on issues relating to the preparation, approval and supervisionof our 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 June 2006, after the completion of our restructuring and theestablishment of our new organizational structure, the restructuring committeewas dissolved.

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.

**Audit Committee**

Our Audit Committee consists of three membersappointed by the Board of Directors. The current members are HelmutReuschenbach, Sir Peter Middleton and Alexei Buyanov. Sir Peter Middleton andMr. Reuschenbach, who serves as Chairman of the Audit Committee, are bothindependent members of the Board of Directors. Mr. Buyanov is exempt fromthe independence requirement under SEC Rule 10A-3 because he is anon-voting member of the Audit Committee with observer status only. The AuditCommittee is primarily responsible for the integrity of our financialstatements, our compliance with legal and regulatory requirements, assuring thequalifications and independence of our independent auditors and overseeing theaudit process, including audit fees, resolving matters arising during thecourse of audits and coordinating internal audit functions.

According to the bylaws,the Audit Committee shall convene with our external auditors at least fourtimes a year, but may convene more frequently if the Audit Committee chooses todo so.

**Remuneration andAppointments Committee**

Our Remuneration and Appointments Committee****was established on March 28, 2006 and consists ofthree members appointed by the Board of Directors. The current members areSergey Schebetov, Vladimir Lagutin and Helmut Reuschenbach, who serves asChairman of the Remuneration and Appointments Committee. The Remuneration andAppointments Committee is primarily responsible for developing a remunerationstructure and compensation levels for management executives.

According to the bylaws,the Remunerationand Appointments Committee shall be convened by the Chairman ofthe Remunerationand Appointments Committee , at his sole discretion, or at thesuggestion of any member of this committee, a member of the Board of Directors orour President.

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**President**

Our President is electedby the Board of Directors for a term of up to three years. The rights,obligations and the times and amounts of payment for the President’s servicesare determined by a contract between him and us, as represented by our Chairmanor by a person authorized by our Board of Directors. The President isresponsible for day-to-day management of our activities, except for mattersreserved to our shareholders or the Board of Directors and the ManagementBoard. The President reports to the shareholders’ meeting and to the Board ofDirectors and is responsible for carrying out decisions made by theshareholders and by the Board of Directors and the Management Board. LeonidMelamed was appointed our acting President in April 14, 2006 and electedas our President and CEO pursuant to an extraordinary shareholders’ meetingheld on June 14, 2006.

**Management Board**

In October 2006, werevised our Charter to establish a new governing body called the ManagementBoard. The Management Board is an executive body which oversees certain aspectsof our ongoing activities. The Management Board can consist of up to fifteenmembers with each member being nominated by the President and approved by theBoard of Directors. The Management Board is formed for a period of timedetermined by the Board of Directors, but the duration of the ManagementBoard’s term cannot exceed that of the President, who is elected by the Boardof Directors for a term of up to three years. The Chairman of the ManagementBoard is the President. Currently, our Management Board consists of twelvemembers. See “—Directors and Senior Management.”

**DisclosureCommittee**

In April 2007, weestablished a new advisory body called the Disclosure Committee. The DisclosureCommittee supervises our compliance with disclosure standards in connectionwith all public information regarding us. These disclosure standards are basedon principles of timeliness, reliability and completeness. The DisclosureCommittee can consist of up to nine members with each member being nominated bythe President on an annual basis. The Chairman of the Disclosure Committee isthe Vice President—Chief Financial Officer. Currently, our Disclosure Committeeconsists of seven members.

**Review Commission**

Our ReviewCommission supervises our financial and operational activities. Members of theReview Commission are nominated and elected by our shareholders at annualmeetings of shareholders. A director may not simultaneously be a member of theReview Commission. As of December 31, 2006, our Review Commission hadthree members:

·       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 29, 2007.

**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 

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listingstandards and those followed by U.S. domestic companies under New York StockExchange listing standards. This disclosure is posted on our website(http://www1.mtsgsm.com/profile/corporate_governance/). 

**D.**              Employees

At December 31, 2006, we had 24,125 employees.Over 17.2% of these employees, or 4,146, worked in Moscow (including employeesof our corporate headquarters). Of our 20,210 employees in Russia, we estimatethat 478 were executives (including the President and other officers); 4,130were technical and maintenance employees; 10,649 were sales, marketing andcustomer service staff; and 4,953 were administration and finance staff. In2006, we reduced our employee headcount in Russia due to increased operationalefficiency.

As of December 31, 2006, 2,771 of our employeesworked in Ukraine. Of these employees, we estimate that 15 were executives; 923were technical and maintenance employees; 1,295 were sales, marketing andcustomer service staff; and 538 were administration and finance staff.

As of December 31, 2006, 967 of our employeesworked in Uzbekistan. Of these employees, we estimate that 35 were executives;280 were technical and maintenance employees; 257 were sales, marketing andcustomer service staff; and 395 were administration and finance staff.

As of December 31, 2006, 177 of our employeesworked in Turkmenistan. Of these employees, we estimate that 7 were executives;21 were technical and maintenance employees; 94 were sales, marketing andcustomer service staff; and 55 were administration and finance staff.

Thefollowing chart sets forth the number of our employees at December 31,2004, 2005 and 2006: 
|              | ** ** | **At December 31,** | ** ** |
|--------------|------------|-------------------------------|------------|
| ** **   | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2006** | ** ** |
| Russia       |       | 20,818                        |       | 24,253 |   | 20,210 |   |
| Ukraine      |       | 1,754                         |       | 2,421 |   | 2,771 |   |
| Uzbekistan   |       | 813                           |       | 844 |   | 967 |   |
| Turkmenistan |       | —                        |       | 150 |   | 177 |   |
| Total        |       | 23,385                        |       | 27,668 |   | 24,125 |   |

 

Our employees are notunionized, we have not experienced any work stoppages and we consider ourrelations with employees to be strong.

**E.****               ShareOwnership**

**We believethat the aggregate beneficial interest of our directors, senior management andemployees as of December 31, 2006 was less than 1% of our outstandingcommon stock.**

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**Item 7.**                        *Major Shareholders and Related Party Transactions*

**A.**                MajorShareholders

Thefollowing table sets forth, as of May 31, 2007, 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, 2007** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **Name**                                                                | ** ** | ** **                                                            | ** ** | **Number** | ** ** | **Percentage** | ** ** |
| Sistema(1)(2)                                                           |       | 636,224,752                                                           |       |   | 32.2 | % |   |
| Sistema Holding  Limited(2)                                             |       | 193,473,900                                                           |       |   | 9.8 | % |   |
| Invest-Svyaz(3)                                                         |       | 160,247,802                                                           |       |   | 8.1 | % |   |
| VAST(4)                                                                 |       | 60,219,432                                                            |       |   | 3.0 | % |   |
| ING Bank  (Eurasia) ZAO(5)                                              |       | 806,500,323                                                           |       |   | 40.8 | % |   |
| Other Public  Float (including our directors and executive officers)(6) |       | 120,737,800                                                           |       |   | 6.1 | % |   |
| Total(7)                                                                |       | 1,977,404,009                                                         |       |   | 100.0 | % |   |
|                                                                         |            |                                                                       |            |  |  |  |  |  |  |

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(1)                 Vladimir P. Evtushenkov has a controlling interest inSistema, and would be considered under U.S. securities laws as the beneficialowner of our shares held by Sistema, Sistema Holding Limited, Invest-Svyazand VAST. Mr. Evtushenkov is also the chairman of the board of directorsof Sistema.

(2)                 In connection with its April 2003 Eurobondoffering, Sistema pledged 193,473,900 shares of our common stock held bySistema Holding Limited to Deutsche Trustee Company Limited.

(3)                 Invest-Svyaz is a Russian closed joint stockcompany wholly-owned by Sistema. In 2005, Invest-Svyaz–Holding wasreorganized into two separate entities: Invest-Svyaz, which serves as aholding company of our shares and is one of our major shareholders and Invest-Svyaz–Holding,a company also wholly-owned by Sistema, whose primary business is leasingvarious types of telecommunications and other assets to us.

(4)                 VAST is a limited partnership formed under the laws ofRussia. Sistema owns 100% of VAST. An extract from our shareholders registerdated June 14, 2006 contains an entry prohibiting any transfer of theseshares.

(5)                 ING Bank (Eurasia) is the local custodian for oursponsored ADR program and the unsponsored GDR programs.

(6)                 We believe that our directors and executive officers asa group own less than 1% of our shares.

(7)                 Our wholly-owned subsidiary, Mobile TeleSystems LLC,owns 4,761,129 of our shares in connection with our Management Stock Bonus andStock Option Plans. In December 2006, we also bought back 11,161,000 of ourshares in the form of ADSs for a total consideration of $110 million. Theseshares are excluded 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. In December 2006,we also bought back 11,161,000 of our shares in the form of ADSs, whichresulted in a reduction of shareholders’ equity in the annual consolidatedfinancial statements. This transaction increased Sistema’s effective ownershipin us from 52.8% at December 31, 2005 to 53.1% by December 31, 2006.

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As of May 31, 2007,the total number of ADSs outstanding was 155,310,125 representing underlyingownership of 776,550,625 shares, or approximately 39.3% of our outstanding commonstock. Of these 155,310,125 ADSs, approximately 19.6% were held by U.S.investors, as of May 31, 2007. The shares underlying the ADSs are depositedwith JPMorgan Chase Bank, formerly known as Morgan Guaranty Trust Company ofNew 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 31,2007 and December 31, 2006, we had cash positions at MBRD in the amount of$321.1 million and $86.5 million in current accounts, respectively. Interestaccrued and collected on the deposits for the period ended March 31, 2007amounted to $2.3 million. The related interest accrued and collected on thedeposits for the year ended December 31, 2006 amounted to $4.8 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, 2007 and the year endedDecember 31, 2006 amounted to$2.1 million and $11.3 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.Advertising costs related to Maxima and Mediaplanning for the period ended March 31, 2007 amounted to $24.1 million and $7.6million, respectively, and to $117.8 million and $45.1 million for the yearended December 31, 2006, 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 sinceJuly 2004. Related fees for the period ended March 31, 2007 and theyear ended December 31, 2006 amounted to approximately$5.4 million and $52.1 million, respectively. Management believes that theseagreements were entered into on market terms.

**Moscow City Telephone Network (MGTS)**

We have interconnectionand line rental agreements with MGTS, a subsidiary of Sistema. We also rent acable plant from MGTS for the installation of fiber optic cable, as well as buildings for administrative offices and premisesfor switching and base station equipment. Interconnection and rentalexpenses for the period endedMarch 31, 2007 and the year endedDecember 31, 2006 amounted to $2.3 million and $13.1 million, respectively.Management believes that all these transactions were entered into onmarket terms. 

**Comstar UTS**

Wehave interconnection and line rental agreements with Comstar UTS, asubsidiary of Sistema, which was formed in May 2004 through the merger ofComstar, MTU-Inform and Telmos. Amounts expensed under these arrangements for the period ended March 31, 2007 and theyear ended December 31, 2006 

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were $5.6million and $31.2 million, respectively. Management believes that thesearrangements were entered into on market terms. 

**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 26% to 30%, 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, 2006: 
|                                                                                           | ** ** | **Amount**              | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                | ** ** | **(in thousands)** | ** ** |
| **Payments due in the years ended December 31,  2007** | ** ** |                    | ** ** | ** ** |   |
| Total minimum  lease payments (undiscounted)                                              |       |                    | $          | 653 |   |   |
| Less amount  representing interest                                                        |       |                    | (47        | ) |   |
| Present value of  net minimum lease payments                                              |       |                    | 606        |   |   |
| Less current  portion of lease obligations                                                |       |                    | (606       | ) |   |
| Non-current portion of  lease obligations                                                 |       |                    | —     |   |   |
|                                                                                           |            |                         |            |  |  |  |

 

Principal and interestpaid to Invest–Svyaz–Holding for the period ended March 31, 2007 amountedto $nil and $nil, respectively, and to $2.7 million and $0.5 million,respectively, for the year ended December 31, 2006. Management believesthat these agreements were entered into on market terms. 

**Sitronics Telecom Solutions**

During 2006, we enteredinto a number of agreements with Sitronics Telecom Solutions (formerlyknown as Strom Telecom) and Sitronics, each of which is a subsidiary of Sistema,for a total amount of approximately $98.5 million. Pursuant to these contracts,we purchased billing systems and communication software support systems forapproximately $18.0 million and $231.2 million for the period endedMarch 31, 2007 and the year ended December 31, 2006, respectively.Management believes that these agreements were entered into on market terms. 

**MTT**

In 2006, we entered intointerconnection and line rental agreements with MTT, a subsidiary of Sistema.Amounts expensed under these agreements for the period ended March 31,2007 and the year ended December 31, 2006 amounted to $11.9 million and $69.3million, respectively. Management believes that these agreements were enteredinto on market terms. 

**SmartCards**

During 2006, we enteredinto a number of agreements with SmartCards, a subsidiary of Sistema, topurchase SIM cards. Pursuant to these agreements, we purchased SIM cards for atotal amount of approximately $37.0 million in the year ended December 31, 2006and $8.4 million in the three months ended March 31, 2007.

**Sistema Telecom**

In May 2006, Sistemaintroduced a universal brand featuring a new egg-shaped logo for each of thetelecommunications companies operating within the Sistema group, including us.The brand is owned by Sistema Telecom, a subsidiary of Sistema. The expensesrelated to the use of the brand name incurred by 

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us andpaid during the period ended March 31, 2007 and in the year ended December 31,2006, amounted to $3.6 million and $9.7 million, respectively.

**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 General Prosecutor ofUkraine filed a claim against us and others in the Kiev Commercial Courtseeking to unwind the sale by Ukrtelecom of its 51% stake in UMC to us. Thecomplaint also sought an order prohibiting us from alienating 51% of our stakein UMC until the claim was resolved on the merits. The claim was based on aprovision of the Ukrainian privatization law that included Ukrtelecom among alist of “strategic” state holdings prohibited from alienating or encumberingits assets during the course of its privatization. While the Cabinet ofMinisters of Ukraine in May 2001 issued a decree specifically authorizingthe sale by Ukrtelecom of its entire stake in UMC, the General Prosecutorasserted that the decree contradicted the privatization law and that the saleby Ukrtelecom was therefore illegal and should be unwound. On August 12,2004, the Kiev Commercial Court rejected the General Prosecutor’s claim. OnAugust 26, 2004, the General Prosecutor requested the Constitutional Courtof Ukraine to review whether certain provisions of the Ukrainian privatizationlaw limiting the alienation of assets by privatized companies were applicableto the sale by Ukrtelecom of UMC shares to us. As of the date of this document,the Constitutional Court of Ukraine has not yet responded to the GeneralProsecutor’s request.

In December 2005, we acquired a 51.0% stakein Tarino for $150.0 million in cash from Nomihold Securities 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. Following a decision of theKyrgyz Supreme Court on December 15, 2005, Bitel’s corporate offices wereseized by a third party. As a result of these events, we currently donot exercise operational control over Bitel and are in the process of defendingour ownership stake in the company in the courts of the Kyrgyz Republic,British Virgin Islands and United Kingdom. Concurrentlywith the purchase of a 51.0% stake, we entered into a put and call optionagreement with Nomihold Securities to acquire the remaining49.0% interest in Tarino pursuant to which Nomihold Securities obtainedthe right to sell its remaining 49.0% stake in Tarino Limited to MTS Financefor $170.0 million. In January 2007, Nomihold Securities commenced anarbitration proceeding against MTS Finance in the London Court of InternationalArbitration in order to compel us to fulfill the terms of the put optionagreement. If we ultimately fail to prevail in this proceeding, we could beforced to pay Nomihold Securities $170.0 million plus any additional amountsthat the court might award to Nomihold Securities.

In addition, three Isle of Man companies affiliatedwith us (KFG Companies) have been named defendants in lawsuits filed by Bitelin the Isle of Man seeking the return of dividends received by these threecompanies in the first quarter of 2005 from Bitel in the amount ofapproximately $25.2 million plus compensatory damages, and to recoverapproximately $3.7 million in losses and accrued interest. In the event thatthe defendants do not prevail in these lawsuits, we may be liable to Bitel forsuch claims. The KFG Companies have also asserted counterclaims against Bitel,and claims against other defendants, including Altimo and Altimo Holding, forthe wrongful appropriation and control of Bitel.

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In a separate arbitration proceeding initiated againstthe KFG Companies by Kyrgyzstan Mobitel Investment Company Limited (KMIC) underthe rules of the London Court of International Arbitration, the arbitrationtribunal in a recent award found that the KFG Companies breached a May 31,2003 Transfer Agreement concerning the shares of Bitel. The Transfer Agreementwas made between the KFG Companies and IPOC International Growth Fund Limited(IPOC) although IPOC subsequently assigned its interest to KMIC, and KMIC wasthe claimant in the arbitration. The tribunal ruled that the KFG Companiesbreached the Transfer Agreement when they failed to establish a date on whichthe equity interests in Bitel were to be transferred to KMIC and by failing totake other steps to transfer the Bitel interests. This breach occurred prior toMTS Finance’s acquisition of the KFG Companies. The arbitration tribunal ruledthat KMIC is entitled only to damages in an amount to be determined in futureproceedings. We are not able to predict the outcome of these proceedings or theamount of damages to be paid, if any.

For additionalinformation, see Notes 20 and 25 to our audited consolidated financialstatements.

**Tax Audit**

In 2006, the Russian tax authorities assessed us witha tax claim of $48.8 million following a tax audit. We have challenged in court$46.3 million of the tax claim. In February and May 2007, the Moscow ArbitrationCourt and a Moscow Court of Appeals supported our position and rejected the taxauthorities’ claim. However, the tax authorities may still appeal the decision.

In January 2007, the U.S. Internal Revenue Services,or the IRS, began auditing BCTI’s compliance with U.S. Federal tax legislationfor the year ended December 31, 2004. As of the date of this document, theaudit has not been finalized and no official decisions have been issued by the IRS.Nonetheless, our tax consultants advised that we may be exposed to a potentialprofit tax for the years 2003 to 2006 in the amount of up to $28.3 million. Ourmanagement has assessed the maximum potential liability to be $3.3 million and,as a result, we have recognized that amount in our statement of operations forthe year ended December 31, 2006.

In the ordinary course ofbusiness, we may be party to various legal and tax proceedings, and subject toclaims, some of which relate to the developing markets and evolving fiscal andregulatory environments in which we operate. In the opinion of management, ourliability, if any, in all pending litigation, other legal proceedings orother matters will not have a material effect on our financial condition,results of operations or liquidity. We believe that we have adequately providedfor tax liabilities in the accompanying consolidated financial statements;however, the risk remains that relevant authorities could take differingpositions with regard to interpretive issues and the effect could besignificant. See also Note 23 to our annual consolidated financial statements.

**8.A.8.**                 DividendDistribution Policy

On June 22, 2005, our shareholders approved cashdividends in the amount $402.6 million (including dividends on treasury sharesof $1.5 million), which have been fully paid. On June 23, 2006, ourshareholders approved cash dividends in the amount of $561.6 million (includingdividends on treasury shares of $1.5 million) which have also been fully paid.The Board of Directors recommended that the annual general meeting ofshareholders to be held on June 29, 2007, approve annual cash dividends in theamount of $747.4 million (including dividends on treasury shares of $6.0million) for the year 2006, payable in 2007. On May 15, 2007, the Board ofDirectors approved a dividend policy, whereby we will aim to make dividendpayments to our shareholders in the amount of at least 50% of our annual netincome under U.S. GAAP. The dividend amount could vary depending on a number offactors, including the outlook for earnings growth, capital expenditurerequirements, cash flow from operations, potential acquisition opportunities,as well as our debt position.

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Annual dividend payments,if any, must be recommended by our Board of Directors and approved by ourshareholders. We anticipate that any dividends we may pay in the future on theshares represented by the ADSs will be declared and paid to the depositary inrubles and will be converted into U.S. dollars by the depositary anddistributed to holders of ADSs, net of the depositary’s fees and expenses.Accordingly, the value of dividends received by holders of ADSs will be subjectto fluctuations in the exchange rate between the ruble and the dollar.

**B.**               SignificantChanges

See Note 25 to our auditedconsolidated financial statements for details.

**Item 9.**                        *Offer and Listing Details*

(Only Items 9.A.4 and 9.Care applicable.)

**A.4.**      MarketPrice Information

Thefollowing table sets forth the annual high and low market prices per ADS on theNew York Stock Exchange for each of the fiscal years ended December 31,2002, 2003, 2004, 2005 and 2006; the high and low market prices per ADS foreach full financial quarter during the fiscal years ended December 31,2005 and 2006; and the high and low market prices per ADS for each of the mostrecent six months. The table also sets forth the high and low market prices pershare of 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 2007         |       |                        | 249.0 RUR  |                       |       |          | 227.9 RUR  |         |       | $ | 57.99 |   | $ | 52.40 |   |
| April 2007       |       |                        | 267.5 RUR  |                       |       |          | 235.1 RUR  |         |       | $ | 61.15 |   | $ | 54.88 |   |
| March 2007       |       |                        | 263.5 RUR  |                       |       |          | 214.0 RUR  |         |       | $ | 58.20 |   | $ | 46.02 |   |
| February 2007    |       |                        | 261.0 RUR  |                       |       |          | 224.5 RUR  |         |       | $ | 57.00 |   | $ | 46.00 |   |
| January 2007     |       |                        | 263.9 RUR  |                       |       |          | 211.1 RUR  |         |       | $ | 58.50 |   | $ | 45.66 |   |
| December 2006    |       |                        | 230.2 RUR  |                       |       |          | 211.1 RUR  |         |       | $ | 51.27 |   | $ | 47.01 |   |
| First Quarter 2007    |       |                        | 263.9 RUR  |                       |       |          | 211.1 RUR  |         |       | $ | 58.50 |   | $ | 45.66 |   |
| Fourth Quarter  2006  |       |                        | 230.2 RUR  |                       |       |          | 181.0 RUR  |         |       | $ | 51.27 |   | $ | 37.26 |   |
| Third Quarter  2006   |       |                        | 205.0 RUR  |                       |       |          | 147.3 RUR  |         |       | $ | 41.31 |   | $ | 27.92 |   |
| Second Quarter  2006  |       |                        | 190.3 RUR  |                       |       |          | 137.4 RUR  |         |       | $ | 35.51 |   | $ | 26.00 |   |
| First Quarter  2006   |       |                        | 209.5 RUR  |                       |       |          | 184.4 RUR  |         |       | $ | 39.06 |   | $ | 32.81 |   |
| 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 |   |
| 2006                  |       |                        | 230.2 RUR  |                       |       |          | 137.4 RUR  |         |       | $ | 51.27 |   | $ | 26.00 |   |
| 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 |   |

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(1)                 Effective January 3, 2005, the ADSratio was changed from 1 ADS per 20 ordinary shares to 1 ADS per 5 ordinaryshares, a 1:4 ADS split.

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**C.**               Markets

Our common stock has beenlisted on the Moscow Interbank Currency Exchange since December 2003. AmericanDepositary Shares, each representing five of our common stock, have been listedon 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.**                 *Additional Information*

**A.**                Share Capital

Not applicable.

**B.**               Charter and CertainRequirements of Russian Legislation

We describe below materialprovisions of our charter in effect on the date of this document and certainrequirements of Russian legislation. In addition to this description, we urgeyou to review our charter to learn its complete terms.

**Our Purpose**

Article 2.1 of our charter provides that ourprincipal purpose is to obtain profits through the planning, marketing, andoperation of a radiotelephone mobile cellular network in the RussianFederation.

We are registered with theMinistry of Taxes and Duties of the Russian Federation under the stateregistration number 1027700149124.

**General Matters**

Pursuant to our charter,we have the right to issue registered common stock, preferred stock, and othersecurities provided for by legal acts of the Russian Federation with respect tosecurities. Our capital stock currently consists of 1,993,326,138 commonshares, each with a nominal value of 0.1 rubles, all of which are issued andfully paid. Under Russian legislation charter capital refers to the aggregatenominal value of the issued and outstanding shares. We are also authorized toissue an additional 103,649,654 common shares with a nominal value of 0.1rubles each. No preferred shares are authorized or outstanding. Preferred stockmay only be issued if corresponding amendments have been made to our charterpursuant to a resolution of the general meeting of shareholders. We have issuedonly common stock. The Joint Stock Companies Law requires us to dispose of anyof our shares that we acquire within one year of their acquisition or, failingthat, reduce our charter capital. We refer to such shares as treasury sharesfor the purposes hereof. Russian legislation does not allow for the voting ofsuch treasury shares. As of June 15, 2007, we had more than a 1,000shareholders for purposes of the Joint Stock Companies Law.

**Rights Attaching toShares**

Holders of ourcommon stock have the right to vote at all shareholders’ meetings. As requiredby the Joint Stock Companies Law and our charter, all shares of our commonstock have the same nominal value and grant identical rights to their holders.Each fully paid share of common stock, except for treasury shares, gives itsholder the right to:

·       freelytransfer the shares without consent of other shareholders;

·       receivedividends;

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·       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;

·       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

·       anyamendment of our charter or approval of a restated version of our charter in amanner that restricts the holder’s rights;

·       uponliquidation, receive a proportionate amount of our property after ourobligations are fulfilled;

·       havefree access to certain company documents, receive copies for a reasonable feeand, if holding alone or with other holders, 25% or more of the voting stock,have access to accounting documents; and

·       exercise other rights of ashareholder provided by our charter, Russian legislation and decisions ofshareholders’ meeting approved in accordance with its competence.

**Preemptive Rights**

The Joint Stock CompaniesLaw and our charter provide existing shareholders with a preemptive right topurchase shares or securities convertible into shares during an opensubscription in the amount proportionate to their existing shareholdings. Inaddition, the Joint Stock Companies Law provides shareholders with a preemptiveright to purchase shares or securities convertible into shares, in an amountproportionate to their existing shareholdings, during a closed subscription ifthe shareholders voted against or did not participate in the voting on thedecision approving such subscription. The preemptive right does not apply to aclosed subscription to the existing shareholders provided that suchshareholders may each acquire a whole number of shares or securitiesconvertible into shares being placed in an amount proportion to their existingshareholdings. We must provide shareholders with written notice of the proposedsale of shares at least 45 days prior to the offering, during which timeshareholders may exercise their preemptive rights.

**Dividends**

The Joint Stock Companies Law and our charter setforth the procedure for determining the quarterly and annual dividends that wemay distribute to our shareholders. We may declare dividends based on our firstquarter, six month, nine month or annual results. Dividends are recommended toa shareholders’ 

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meeting by a majority voteof the board of directors and approved by the shareholders’ meeting by amajority vote. A decision on quarterly, six month and nine month dividends mustbe taken within three months of the end of the respective quarter at theshareholders’ meeting; and a decision on annual dividends must be taken at theannual general shareholders’ meeting. The dividend approved at the shareholders’meeting may not be more than the amount recommended by the board of directors.Dividends to be paid based on the shareholders’ decision shall be paid up untilthe end of the year on which the decision to make the payment has been adopted,unless the shareholders’ decision provides for a lesser term. Dividends aredistributed to holders of our shares as of the record date for the shareholders’meeting approving the dividends. See “—General Shareholders’ Meetings—Noticeand Participation” below.

The Joint StockCompanies Law allows dividends to be declared only out of net profitscalculated under Russian accounting standards and as long as the followingconditions have been met:

·       thecharter capital of the company has been paid in full;

·       thevalue of the company’s net assets on the date of the adoption of the decisionto pay dividends is not less (and would not become less as a result of theproposed dividend payment) than the sum of the company’s charter capital, thecompany’s reserve fund and the difference between the liquidation value and thepar value of the issued and outstanding preferred stock of the company;

·       thecompany has repurchased all shares from shareholders having the right to demandrepurchase; and

·       the company is not, andwould not become, insolvent as the result of the proposed dividend payment.

**Distributions toShareholders on Liquidation**

Under Russianlegislation, liquidation of a company results in its termination without thetransfer of rights and obligations to other persons as legal successors. TheJoint Stock Companies Law and our charter allows us to be liquidated:

·       bya three-quarters majority vote of a shareholders’ meeting; or

·       bya court order.

Following a decision to liquidate us, the right tomanage 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.

The Civil Code ofthe Russian Federation gives creditors the following order of priority duringliquidation:

·       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.

·       Claimsof creditors 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 

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creditors except for thecreditors of the first and second priorities described above, provided thatclaims of such creditors arose before the pledge agreements in respect of thecompany’s property were made. To the extent that the proceeds of sale of thepledged property are not sufficient to satisfy secured claims, the latter aresatisfied simultaneously with claims of the fourth priority creditors asdescribed above.

·       TheFederal Law on Insolvency (Bankruptcy), however, provides for a different orderof priority for creditors’ claims in the event of bankruptcy.

The remainingassets of a company are distributed among shareholders in the following orderof 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 ofcommon and preferred shares.

**Liability ofShareholders**

The Civil Code ofthe Russian Federation and the Joint Stock Companies Law generally provide thatshareholders in a Russian joint stock company are not liable for theobligations of a joint stock company and bear only the risk of loss of theirinvestments. This may not be the case, however, when one company is capable ofdetermining decisions made by another company. The company capable ofdetermining such decisions is called an “effective parent.” The company whosedecisions are capable of being so determined is called an “effective subsidiary.”The effective parent bears joint and several responsibility for transactionsconcluded by the effective subsidiary 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 parent is notitself liable for the debts of the effective parent’s effective subsidiary,unless that shareholder is itself an effective parent of the effective parent.Accordingly, a shareholder will not be personally liable for our debts or thoseof our effective subsidiaries unless such shareholder controls our business andthe conditions set forth above are met.

In addition, an effectiveparent is secondarily liable for an effective subsidiary’s debts if aneffective subsidiary becomes insolvent or bankrupt resulting from the action oromission 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.

**Alteration ofCapital**

***Charter Capital Increase***

We may increase ourcharter capital by

·       issuingnew shares; or

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·       increasingthe nominal value of previously issued shares.

A decision on any issuance of shares or securitiesconvertible into shares by closed subscription, or an issuance by opensubscription of common shares or securities convertible into common shares constituting25% 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 provided inour charter, a decision to increase the charter capital may be taken by ourboard of directors. In addition, the issuance of shares above the numberprovided in our charter necessitates a charter amendment, which requires athree-quarters affirmative vote of a shareholders’ meeting.

The Joint Stock Companies Law requires that the valueof newly issued shares be determined by the board of directors based on theirmarket value but not less than their nominal value, except in limitedcircumstances where (i) existing shareholders exercise a preemptive rightto purchase shares at not less than 90% of the price paid by third parties, or (ii) feesup to 10% are paid to intermediaries, in which case the fees paid may bededucted from the price. The price may not be set at less than the nominalvalue of the shares. The board of directors shall value any in-kindcontributions for the new shares, based on the appraisal report of anindependent appraiser.

Russian securitiesregulations set out detailed procedures for the issuance and registration ofshares 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 ofthe shares, registration and public disclosure of the results of the placementof shares.

***Charter Capital Decrease; Share Buy-Backs***

The Joint Stock Companies Law does not allow a companyto reduce its charter capital below the minimum charter capital required bylaw, which is 100,000 rubles for an open joint stock company. The Joint StockCompanies Law and our charter require that any decision to reduce our charter capital,whether through the repurchase and cancellation of shares or a reduction in thenominal value of the shares, be made by a majority vote of a shareholders’meeting. Additionally, within 30 days of a decision to reduce our chartercapital, we must issue a written notice to our creditors and publish thisdecision. Our creditors would then have the right to demand, within30 days of such notice or publication or receipt of our notice, earlytermination of relevant obligations by us, as well as compensation for damages.

The Joint Stock Companies Law and our charter allowour shareholders or the board of directors to authorize the repurchase of up to10% of our shares in exchange for cash. The repurchased shares pursuant to aboard decision must be resold at the market price within one year of theirrepurchase or, failing that, the shareholders must decide to cancel such sharesand decrease the charter capital. Repurchased shares do not bear voting rights.

Shares repurchased pursuant to a decision of our shareholders’meeting to decrease the overall number of shares are cancelled at theirredemption.

The Joint StockCompanies Law allows us to repurchase our shares only if, at the time ofrepurchase:

·       ourcharter capital is paid in full;

·       weare not and would not become, as a result of the repurchase, insolvent;

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·       thevalue of our net assets at the time of repurchase of our shares is not less(and would not become less, as a result of the proposed repurchase) than thesum of our charter capital, the reserve fund and the difference between theliquidation value and par value of our issued and outstanding preferred shares;and

·       wehave repurchased all shares from shareholders having the right to demandrepurchase of their shares in accordance with Russian law, as describedimmediately below.

The Joint StockCompanies Law and our charter provide that our shareholders may demandrepurchase of all or some of their shares as long as the shareholder demandingrepurchase voted against or did not participate in the voting on the decisionapproving 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 up to 10% ofour net assets calculated under Russian accounting standards on the date of theadoption of the decision which gives rise to a share redemption demanded by theshareholders. If the value of shares in respect of which shareholders haveexercised their right to demand repurchase exceeds 10% of our net assets, wewill repurchase shares from each such shareholder on a pro-rata basis.Repurchase of the shares is at a price agreed on by the board of directors, butshall not be less than the market price determined by an independent appraiser.

**Registration andTransfer of Shares**

Russian legislation requires that a joint stockcompany maintain a register of its shareholders. Ownership of our registeredshares is evidenced solely by entries made in such register. Any of ourshareholders may obtain an extract from our register certifying the number ofshares that such shareholder holds. Since May 10, 2000, Registrar NIKoilOJSC has maintained our register of shareholders.

The purchase, sale orother transfer of shares is accomplished through the registration of thetransfer in the shareholder register, or the registration of the transfer witha depositary if shares are held by a depositary. The registrar or depositarymay not require any documents in addition to those required by Russianlegislation in order to transfer shares in the register. Refusal to registerthe shares in the name of the transferee or, upon request of the beneficialholder, in the name of a nominee holder, is not allowed, except in certaininstances provided for by Russian legislation, and may be challenged in court.

**Reserve Fund**

Russian legislationrequires that each joint stock company establish a reserve fund to be used onlyto cover the company’s losses, redeem the company’s bonds and repurchase thecompany’s shares in cases when other funds are not available. Our charterprovides for a reserve fund of 15% of our charter capital, funded throughmandatory annual transfers of at least 5% of our net profits until the reservefund has reached the 15% requirement.

**Disclosure ofInformation**

Russian securitiesregulations require us to make the following periodic public disclosures andfilings:

·       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 

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accounts and auditors,important developments during the reporting quarter, and other informationabout our financial and business activity;

·       filingwith the FSFM and publishing any information concerning material facts andchanges in our financial and business activity, including our reorganization,certain changes in the amount of our assets, decisions on share issuances,certain changes in ownership and shareholding as well as shareholderresolutions;

·       disclosinginformation on various stages of share placement, issuance and registrationthrough publication of certain data as required by the securities regulations;

·       disclosing our charter andinternal corporate governance documents on our website;

·       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

·       other information asrequired by applicable Russian securities legislation.

**GeneralShareholders’ Meetings**

***Procedure***

The powers of ashareholders’ meeting are set forth in the Joint Stock Companies Law and in ourcharter. A shareholders’ meeting may not decide on issues that are not includedin the list of its competence by the Joint Stock Companies Law and our charter.Among the issues which the shareholders 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;

·       determinationof the number, nominal value, class/type of authorized shares and the rightsgranted by such shares;

·       changesin our 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 Joint Stock CompaniesLaw; and

·       otherissues, as provided for by the Joint Stock Companies Law and our charter.

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Voting at ashareholders’ meeting is generally based on the principle of one vote per shareof common stock, with the exception of the election of the board of directors,which is done through cumulative voting. Decisions are generally passed by amajority vote of the voting shares present at a shareholders’ meeting. However,Russian law requires a three-quarters majority vote of the voting sharespresent at a shareholders’ meeting to approve the following:

·       charteramendments;

·       reorganizationor liquidation;

·       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’ meetingsis met if holders of shares (or their representatives) accounting for more than50% of the issued voting shares are present. If the 50% quorum requirement isnot met, another shareholders’ meeting with the same agenda may (and, in caseof an annual shareholders’ meeting must) be scheduled and the quorumrequirement is satisfied if holders of shares (or their representatives)accounting for at least 30% of the issued voting shares are present at thatmeeting.

The annualshareholders’ 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 counting commission;

·       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 shareholders owning in theaggregate at least 2% of the issued voting shares may introduce proposals forthe agenda of the annual shareholders’ meeting and may nominate candidates forthe board of directors, counting commission and review commission. Any agendaproposals or nominations must be provided to the company no later than 105calendar days after the preceding financial year end.

Extraordinary shareholders’ meetings may be called bythe board of directors on its own initiative, or at the request of the reviewcommission, the independent auditor or a shareholder or group of shareholdersowning in the aggregate at least 10% of the issued voting shares as of the dateof the request. 

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The decision by the boardof directors to call or reject the call for an extraordinary shareholders’meeting shall be sent to the party that requested the meeting within three daysafter such a decision was made.

A general meeting of shareholders may be held in aform of a meeting or by absentee ballot. The form of a meeting contemplates theadoption of resolutions by the general meeting of shareholders through theattendance of the shareholders or their authorized representatives for thepurpose of discussing and voting on issues of the agenda, provided that if aballot is mailed to shareholders for participation at a meeting convened insuch 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.

The followingissues cannot be decided by a shareholders’ meeting by absentee ballot:

·       electionof the members of the board of directors;

·       electionof the review commission;

·       approvalof a company’s independent auditor; and

·       approval of the annualreport, the annual financial statements, including balance sheet, profit andloss statement, and any distribution of profits, including approval of annualdividends and losses, if any.

***Notice and Participation***

All shareholders entitled to participate in a generalshareholders’ meeting must be notified of the meeting, whether the meeting isto be held in the form of a meeting or by absentee ballot, no less than30 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 70 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 registers in theregister of shareholders, then a notification of the shareholders’ meetingshall be sent to the nominal holder. The nominal holder must notify its clientsin accordance with Russian legislation or an agreement with the client.

The list of shareholders entitled to participate in ageneral shareholders’ meeting is to be compiled on the basis of data in ourshareholders register on the date established by the board of directors, whichdate may neither be earlier than the date of adoption of the board resolutionto hold a general shareholders’ meeting nor more than 50 days before thedate of the meeting (or, in the case of an extraordinary shareholders’ meetingto elect the board of directors, not later than 65 days before the date ofthe meeting).

The right toparticipate in a general meeting of shareholders may be exercised by ashareholder as follows:

·       bypersonally participating in the discussion of agenda items and voting thereon;

·       bysending an authorized representative to participate in the discussion of agendaitems and to vote thereon;

·       bysubmitting a written ballot reflecting the shareholders’ voting on the agendaitems; or

·       by delegating the right tosubmit such written ballot to an authorized representative.

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**Board of Directors**

Our charter provides that our entire board ofdirectors is up for election at each annual general shareholders’ meeting. Ourboard 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 Joint Stock Companies Law requires at least afive-member board of directors for all joint stock companies, at least a seven-memberboard of directors for a joint stock company with more than 1,000 holders ofvoting shares, and at least a nine-member board of directors for a joint stockcompany with more than 10,000 holders of voting shares. Only natural persons(as opposed to legal entities) are entitled to sit on the board. Members of theboard of directors are not required to be shareholders of the company. Theactual number of directors is determined by the company’s charter or a decisionof the shareholders’ meeting. Our charter provides that our board of directorsconsists of at least seven members, which number may be increased pursuant to adecision of the general meeting of shareholders. Currently, our board ofdirectors consists of seven members.

The Joint StockCompanies Law prohibits a board of directors from acting on issues that fallwithin the exclusive competence of the general shareholders’ meeting. Our boardof directors has the power to perform the general management of the company,and to decide, among others, the following issues:

·       determinationof our business priorities;

·       conveningannual and extraordinary shareholders’ meetings, except in certaincircumstances specified in the Joint Stock Companies Law;

·       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 Joint StockCompanies Law;

·       determinationof the price of our property and of our securities to be placed or repurchased,as provided for by the Joint Stock Companies Law;

·       repurchaseof our shares, bonds, and other securities in certain cases provided for by theJoint Stock Companies Law;

·       election and removal of ourPresident;

·       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;

·       theuse of our 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 theJoint Stock Companies Law;

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·       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 Joint Stock Companies Law and our charter.

Our charter generallyrequires a majority vote of the directors present for an action to pass, withthe exception of actions for which Russian legislation requires a unanimous voteor a majority vote of the disinterested and independent directors, as describedtherein. A board meeting is considered duly assembled and legally competent toact when a majority of elected directors is present.

Thespecial Regulation “About the Board of Directors of OJSC Mobile TeleSystems”was approved by the annual shareholders’ meeting on June 23, 2006. Inaccordance with clause 1.8 of the Regulation, the members of the board ofdirectors have the right to:

·       receiveinformation regarding our operations;

·       proposeissues to be discussed by the board of directors;

·       reviewthe minutes of the board of directors meetings;

·       expresstheir own point of view during the board of directors meetings;

·       requestto include in the minutes of the meetings their personal opinion concerningissues on the agenda and decisions made with respect thereto; and

·       receivea remuneration and/or compensation of expenses related to the execution oftheir duties as members of the board of directors in accordance with decisionsof the general shareholders’ meeting.

Inaccordance with clause 1.9 of the Regulation, the members of the board ofdirectors must:

·       actin our interests;

·       executetheir duties in a confident and scrupulous manner;

·       actwithin their rights and in accordance with the purposes of the board ofdirectors;

·       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;

·       informus on a timely basis about their participation in the management of othercompanies and changes in such participation;

·       restrainfrom voting on issues of personal interest;

·       informthe board 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 their personal and our interests.

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**Interested Party Transactions**

Under the JointStock Companies Law, certain transactions defined as “interested partytransactions” require approval by disinterested directors or shareholders ofthe company. “Interested party transactions” include transactions involving amember of the board of directors or member of any executive body of the company(including the company’s chief executive office and/or the company’s managingorganization), any person that owns, together with any affiliates, at least 20%of a company’s issued voting shares or any person who is able to direct theactions of the company, if that person and/or that person’s spouse, parents,children, adoptive parents or children, brothers or sisters or affiliates,is/are:

·       aparty to, or beneficiary of, a transaction with the company, whether directlyor as a representative or intermediary;

·       theowner of at least 20% of the issued shares of a legal entity that is a partyto, or beneficiary of, a transaction with the company, whether directly or as arepresentative or intermediary; or

·       amember of the board of directors or a member of any management body of acompany that is a party to, or beneficiary of, a transaction with the company,whether directly or as a representative or intermediary, or a member of the boardof directors or of any management body of a management organization of such acompany.

The Joint Stock Companies Law requires that aninterested party transaction by a company with more than 1,000 shareholders beapproved by a majority vote of the independent directors of the company who arenot interested in the transaction. For purposes of this rule, an “independentdirector” is a person who is not, and within the year preceding the decision toapprove the transaction was not, a general director/president, a member of anyexecutive body or an affiliate of the company, or a member of the board ofdirectors or any management body of the company’s management organization.Additionally, such person’s spouse, parents, children, adoptive parents orchildren, brothers or sisters may not, and within the year preceding the dateof the decision to approve the transaction did not, occupy positions in theexecutive bodies of the company or positions on the board of directors or ofany management body of the company’s management organization. For companieswith 1,000 or fewer shareholders, an interested party transaction must beadopted by a majority vote of the directors who are not interested in thetransaction if the number of these directors is sufficient to constitute aquorum.

Approval by amajority of shareholders who are not interested in the transaction is requiredif:

·       thevalue of such transaction or a number of interrelated transactions is 2% ormore of the balance sheet value of the company’s assets determined underRussian accounting 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;

·       thenumber of directors who are not interested in the transaction is not sufficientto constitute a quorum; or

·       allthe members of the board of directors of the company are interested parties, ornone of them is an independent director.

Approval by a majority of shareholders who are notinterested in the transaction may not be required, until the next annualshareholders’ meeting, for an interested party transaction if such transactionis substantially similar to transactions concluded by the company and theinterested party in the ordinary course of business before such party became aninterested party with respect to the transaction.

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The approval ofinterested party transactions is not required in the following instances:

·       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; 

·       thecompany merges with another company, and the latter owns more than three-fourthsof the voting capital stock of the company; or

·       the transactions that aremandatory for the company pursuant to Russian law and must be concluded on thebasis of fixed prices and tariffs adopted by a competent state body.

**Major Transactions**

The Joint Stock CompaniesLaw defines a “major transaction” as a transaction, or a number of interrelatedtransactions, involving the acquisition or disposal, or a possibility ofdisposal (whether directly or indirectly) of property having a value of 25% ormore of the balance sheet value of the assets of a company determined underRussian accounting standards, with the exception of transactions conducted inthe ordinary course of business or transactions involving the placement ofcommon stock, or securities convertible into common stock. Major transactionsinvolving assets having a value ranging from 25% to 50% of the balance sheetvalue of the assets of a company require unanimous approval by all members ofthe board of directors or, failing to receive such approval, a simple majorityvote of a shareholders’ meeting. Major transactions involving assets having avalue in excess of 50% of the balance sheet value of the assets of a companyrequire a three-quarters majority vote of a shareholders’ meeting.

**Change in Control**

***Anti-takeover Protection***

Russian legislationrequires the following:

·       Aperson intending to acquire 30% or more 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), will be entitled tomake a public tender offer to other holders of such shares or securitiesconvertible into such shares.

·       Aperson that has acquired 30% or more of the totality of an open joint-stockcompany’s ordinary shares and voting preferred shares (including, for suchpurposes, shares already owned by such person and its affiliates, but excludingshares that were acquired pursuant to previous voluntary or mandatory offers)will generally 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 the price which is not less than the pricedetermined based on a weighted market price of the shares, or on a pricesupplied by an independent appraiser if the shares have no or insufficienttrading history. From the moment of acquisition of 30% or more of the sharesuntil the moment of delivery of an offer to the security holders, the personmaking an offer and its affiliates will be able to register for quorum and voteonly 30% of the shares of the company (regardless of the size of their actualholdings). These rules are also applied (or reapplied) to acquisitionsresulting in a person or a group of persons owning more than 50% and 75% of acompany’s outstanding shares.

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·       Aperson that as a result of such an offer becomes (individually or with itsaffiliates) the owner of more than 95% of the company’s ordinary shares andvoting preferred shares, must buy out the remaining shares of the company aswell as other securities convertible into such shares upon request of theholders of such shares or other securities, and may require such holders tosell such shares and other securities, at a price based on the prices of thepreceding acquisition by the offeror.

·       Anoffer of 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.

·       Oncesuch an offer has been made, competing offers for the same securities can bemade by third parties and, in certain circumstances, acceptance of the initialoffer may be withdrawn by the security holders who choose to accept suchcompeting offer. From the making of such an offer until 20 days after itsexpiry (which period may in certain cases exceed 100 days) the company’sshareholders’ meeting will have the sole power to make decisions on chartercapital increase, issuance of securities, approval of certain majortransactions, and on certain other 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.

**Approval of theFederal Antimonopoly Service**

Pursuant to the FederalLaw on Competition, the Federal Antimonopoly Service must approve in advanceacquisitions of voting capital stock of a joint stock company involving (1) companieswith a combined value of assets or combined annual revenues under RussianAccounting Standards exceeding a certain threshold, or (2) companies registeredas having more than a 35% share of a certain commodity market, and which wouldresult in a shareholder (or a group of affiliated shareholders) holding morethan 25%, 50% or 75% of the voting capital stock of such company, or in atransfer between such companies of assets or rights to assets, the value ofwhich exceeds a certain amount.

**Disclosure ofOwnership**

Effective July 1,2006, a holder of our common shares is required to publicly disclose anacquisition of 5% or more of the outstanding common shares of the company, aswell any change in the amount of common shares held by such holder, if as aresult of such change the percentage of common shares held by the holderbecomes greater or lesser than 5, 10, 15, 20, 25, 30, 50 or 75 percent of theoutstanding common shares of the company.

**Notification ofForeign Ownership**

Foreign persons registeredas individual entrepreneurs in Russia who acquire shares in a Russian jointstock company and foreign companies that acquire shares in a Russian jointstock company may need to notify the Russian tax authorities within one monthfollowing such acquisition. However, the procedure for notifying the Russiantax authorities by foreign companies that are not registered with such taxauthorities at the time of their share acquisition remains unclear.

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**C.**               MaterialContracts

The following is adescription of contracts that we and/or our subsidiaries are a party to andthat are or may be material to our business:

**Syndicated Loansand Credit Facilities**

On April 21, 2006, we signed a syndicated loanfacility with several international financial institutions, including: The Bankof Tokyo-Mitsubishi UFJ, Ltd., Bayerische Landesbank, HSBC Bank plc, ING Bank N.V.,Raiffeisen Zentralbank Oesterreich AG, Sumitomo Mitsui Banking CorporationEurope Limited. The facility allows us to borrow up to $1,330.0 million and isavailable in two tranches of $630.0 million and $700.0 million. We used theproceeds for general corporate purposes, including acquisitions and refinancingof existing indebtedness. The first tranche bears interest of LIBOR+0.80% perannum and matures in three years. The second tranche matures inApril 2011, bears interest of LIBOR+1.00% per annum within the first threeyears and LIBOR+1.15% per annum thereafter and is repayable in 13 equalquarterly installments, commencing in April 2008. As of December 31, 2006,the outstanding balance under the loan was $860.0 million. We believe that asof December 31, 2006, we were in compliance with all existing covenants. 

In December 2005, we signed an agreement withCitibank International plc and ING Bank N.V. for a $130.8 million committedcredit facility. In June 2006, the agreement was amended to increase the amountof available credit by $36.6 million. These funds were used to purchasetelecommunications equipment from Ericsson AB. The loan bears interest atLIBOR+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 accordancewith the agreement. The commitment fee is 0.10% per annum on the undrawnportion of the facility. The loan is subject to certain covenants, including, *inter alia*, covenants restricting our ability to convey ordispose of our properties and assets to another person. We believe thatas of December 31, 2006, we were in compliance with all existingcovenants. The facility is repayable on a biannual basis in equal installmentsover nine years. As of December 31, 2005 and 2006, the balances outstanding underthe loan were $111.0 million and $150.2 million, respectively. As ofDecember 31, 2006, the credit facility was fully drawn down.

In November 2005, we entered into a creditfacility with HSBC Bank plc, ING Bank Deutschland AG and Bayerische Landesbankfor up to $123.8 million.  In May 2006,the agreement was amended to increase the amount of available credit by $17.3million.  We used these funds to financethe acquisition of telecommunications equipment from Alcatel SEL AG. The loanbears interest at LIBOR+0.30% per annum. An arrangement fee of 0.20% of theoriginal facility amount and an agency fee of $0.01 million per annum will bepaid in accordance with the agreement. The commitment fee is 0.10% per annum onthe undrawn portion of the facility. The debt issuance costs in the amount of$19.3 million were capitalized. The loan is subject to certain covenants, including,*inter alia*, covenants restricting ourability to convey or dispose our properties and assets to another person. Webelieve that as of December 31, 2006, we were in compliance with allexisting covenants. The facilities are repayable on a biannual basis in equalinstallments over nine years.

In October 2005, we entered into an agreementwith Commerzbank AG, HSBC Bank plc and ING Bank Deutschland AG for a $125.8million committed credit facility. We used these funds to purchasetelecommunications equipment from Siemens AG. The loan bears interest ofLIBOR+0.30% per annum. An arrangement fee of 0.20% of the original facilityamount and $0.01 million per annum will be paid in accordance with theagreement. The commitment fee is 0.10% per annum on the undrawn portion of thefacility. The loan is subject to certain covenants, including, *inter alia*, covenants restricting our ability to convey ordispose of our properties and assets to another person. We believe thatas of December 31, 2006, we were in compliance with all existingcovenants. The facilities are repayable on a biannual basis in equalinstallments over nine years. As of December 31, 2005 and 2006, theoutstanding balances under the loan 

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were $92.8 million and$118.3 million, respectively. As of December 31, 2006, the credit facilitywas fully drawn down. 

In February 2005, we entered into a creditfacility with Barclays Bank plc to finance the acquisition of equipment fromMotorola Limited. The facility allows borrowing of up to $25.7 million anduncommitted additional borrowing of up to $64.3 million. In December 2005,the agreement with Barclays Bank plc was amended to increase the amount ofavailable credit by $23.3 million. The original facility bears interest atLIBOR+0.15% per annum and the additional uncommitted facility bears interest atLIBOR+0.13% per annum. An arrangement fee of 0.4% of the original facilityamount and of 0.4% of each additional commitment facility amount will be paidin accordance with the agreement. The commitment fee is 0.175% per annum. Thedebt issuance costs in the amount of $10.4 million were capitalized. Thefacilities are redeemable in equal semi-annual installments by January 31,2014. The loan 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, 2006, we werein compliance with all existing covenants. As of December 31, 2005 and 2006, the outstanding balances underthe facility were $80.1million and $98.7 million, respectively. As of December 31, 2006,the credit facility was fully drawn down.

In December 2004, we entered into a credit facilityagreement with EBRD for a total amount of $150.0 million. In May 2006, the creditfacility was increased by $111.5 million and the maturity date was extended toJune 15, 2014 through an amendment to the agreement. The original creditfacility in the amount of $150.0 million bears interest at LIBOR+3.10% perannum and the additional credit facility in the amount of $111.5 million bearsinterest at LIBOR+1.51% per annum. The commitment fee is 0.50% per annum. Thedebt issuance costs in the amount of $1.5 million were capitalized. As ofDecember 31, 2005 and 2006, the balances outstanding under the loan were$138.5 million and $250.0 million, respectively. The loan is subject to certainrestrictive covenants including, *inter alia*,certain financial ratios. We believe that as of December 31, 2006, we were incompliance with all existing covenants. 

In November 2004, we signed a loan agreement with ABNAMRO Bank N.V. for $56.6 million and EUR 8.4 million. In March 2005, theagreement was amended to increase the EUR facility to EUR 31.3 million. We usedthese funds to acquire telecommunications equipment from Ericsson AB to expandour network. The loan is repayable on a biannual basis in equal installmentsover nine years and bears interest at USD LIBOR/EURIBOR+0.35% per annum. Thedebt issuance costs in the amount of $9.8 million were capitalized. Theloan is subject to certain covenants, including, *inter alia*,covenants restricting our ability to make any substantial changes to the generalnature or scope of our business. We believe that as of December 31, 2006, we werein compliance with all existing covenants. As of December 31, 2005 and 2006, thebalances outstanding under the facility were $83.2 million and $75.9 million,respectively.

In October 2004, we entered into two creditfacility agreements with HSBC Bank plc and ING BHF-BANK AG for a totalamount $121.4 million. In April 2005, the lenders agreed to increase theamount of available credit facility by $28.3 million. The funds received underthe facilities were used to purchase telecommunications equipment and softwarefrom Siemens AG and Alcatel SEL AG for technical upgrades and the expansion ofour network. The facility bears interest at LIBOR+0.43% per annum. A commitmentfee of 0.20% per annum and an arrangement fee of 0.25% will be paid inaccordance with the loan agreement. The principal and interest amounts wererepaid in 17 equal half year installments, starting July 2005 for thefirst agreement and September 2005 for the second agreement. The debtissuance costs in the amount of $25.9 million were capitalized. As ofDecember 31, 2005 and 2006, the outstanding balances under theseagreements were $171.8 million and $150.0 million, respectively. Thefacilities mature in July and September 2013, and are subject tocertain restrictive 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, 2006, we werein compliance with all existing covenants. 

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In October 2004, we entered into a loan agreement withCommerzbank Belgium S.A./N.V to borrow up to $18.3 million. We used the loanproceeds to finance the purchase of telecommunications equipment from AlcatelBell N.V. The loan bears interest at LIBOR+0.4% per annum. The commitment feeis 0.225% per annum and the management fee is 0.25% of the loan amount. Thedebt issuance costs in the amount of $1.3 million were capitalized. As ofDecember 31, 2005 and 2006, the outstanding balances were $13.3 million and$14.0 million, respectively. As of December 31, 2006, the credit facilitywas fully drawn down.

On December 30, 2003, weentered into a credit facility with ING BHF Bank and Commerzbank AG to financethe acquisition of telecommunications equipment from Siemens AG. The aggregateamount available under this credit facility is EUR 47.4 million. In 2004, theagreement was amended to increase the amount available under the facility byEUR 9.2 million. The loan bears interest at EURIBOR+0.65% per annum. The amountoutstanding is redeemable in ten equal semi-annual installments starting onJuly 31, 2004. As of December 31, 2005 and 2006, the amounts outstandingunder the loan were $43.2 million and $34.4 million, respectively.

**Notes Indenturesand Guarantees**

We completed a $400.0 million notes offeringthrough Mobile TeleSystems Finance S.A. on January 30, 2003. The 9.75%notes were issued under an indenture dated January 30, 2003. Interest onthe notes is payable in arrears on January 30 and July 30 of eachyear, commencing on July 30, 2003. These notes are guaranteed by us andmature on January 30, 2008. They are listed on the Luxembourg StockExchange. The net proceeds from this offering of $396.1 million were usedfor general corporate purposes, including the acquisition of 57.7% and 26.0%stakes in Ukrainian Mobile Communications in March and June 2003,respectively, and other acquisitions of mobile operators in Russia.

We completed a $400.0 million notes offeringthrough Mobile TeleSystems Finance S.A. on October 14, 2003. The 8.375%notes were issued under an indenture dated October 14, 2003. Interest onthe notes is payable in arrears on April 14 and October 14 of eachyear, commencing on April 14, 2003. These notes are guaranteed by us andmature 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 connection withour acquisitions of mobile operators in Russia and Ukraine.

We completed a $400.0 million notes offeringthrough Mobile TeleSystems Finance S.A. on January 28, 2005. The 8.00%notes were issued under an indenture dated January 28, 2005. Interest onthe notes is payable in arrears on January 28 and July 28 of eachyear, commencing on July 28, 2005. These notes are guaranteed by us andmature 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 various occurrences,each of which would constitute an event of default. If an event of default,other than an event of default arising from events of bankruptcy, insolvency orbankruptcy-related reorganization, occurs and is continuing, either thetrustee or the holders of at least 25% in principal amount of the outstandingnotes may accelerate the maturity of all of the notes. After acceleration, butbefore a judgment or decree based on acceleration, the holders of a majority inaggregate principal amount of the outstanding notes may, under circumstancesset forth in the indenture, rescind the acceleration if all events of default,other than the nonpayment of principal of the notes which have become duesolely because of the acceleration, have been cured or waived as provided inthe indenture. If an event of default arising from events of our bankruptcy,insolvency or bankruptcy-related reorganization 

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occurs and is continuing,then the principal of, and accrued interest on, all of the notes willautomatically become immediately due and payable without any declaration orother act on the part of the holders of notes or the trustee.

Each of the indentures contains covenants limiting:(a) the ability of the issuer, us and our subsidiaries to incur debt;(b) the ability of the issuer, us and our subsidiaries to create liens;(c) the ability of the issuer, us and our subsidiaries to lease propertiessold or transferred by us; (d) our ability to enter into loan facilitieswith affiliates; (e) our ability to merge or consolidate with anotherperson 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 we experiencecertain types of mergers, consolidations or other changes in control, noteholderswill have the right to require us to redeem the notes at 101% of theirprincipal amount, plus accrued interest. We are also required to take allcommercially reasonable steps necessary to maintain a rating of the notes fromMoody’s or Standard & Poor’s. The notes also have cross defaultprovisions with publicly traded debt issued by Sistema.

If we fail to meet these covenants, after certainnotice 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 endedDecember 31, 2006.

Pursuant to the guaranteescontained in each indenture, we fully and unconditionally guaranteed all paymentsof principal and interest on the notes. These guarantees are our generalunsecured obligation, senior to all our existing and future subordinatedobligations, equal to all our existing and future unsecured obligations, andeffectively junior to all our existing and future secured obligations and allexisting and future obligations of our subsidiaries.

**D.**              Exchange Controls

The Federal Law onCurrency Regulation and Currency Control which came into effect onJune 18, 2004, sets forth certain restrictions on settlements betweenresidents of Russia with respect to operations involving foreign securities(including GDRs), including requirements for settlement in Russian rubles.

**Repatriation ofExport Proceeds**

Russian companies mustrepatriate 100% of their receivables from the export of goods and services(with a limited number of exceptions concerning, in particular, certain typesof secured financing) within seven days of the date on which they were received(also with a limited number of exemptions).

**Restrictions on theremittance of dividends, interest or other payments to non-residents**

The Federal Law on Foreign Investments in the RussianFederation of July 9, 1999, specifically guarantees foreign investors theright to repatriate their earnings from Russian investments. However, theevolving Russian exchange control regime may materially affect your ability todo so.

Currently, ruble dividendson common shares may be converted into U.S. dollars without restriction.However, the ability to convert rubles into U.S. dollars is also subject to theavailability of U.S. dollars in Russia’s currency markets. Although there is anexisting market within Russia for the conversion of rubles into U.S. dollars,including the interbank currency exchange and over-the-counter and currencyfutures markets, the further development of this market is uncertain.

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**E.**               Taxation

The followingdiscussion describes the material United States federal and Russian income andwithholding tax consequences to you if you are a U.S. holder (generally, a “UnitedStates person,” as the term is defined in the United States Internal RevenueCode of 1986, as amended (the “Code”)) of common stock or ADSs and a residentof the United States for purposes of the United States-Russia income taxtreaty 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

·       notalso a resident of the Russian Federation for purposes of the United States-Russiaincome tax treaty.

The benefits under the United States-Russiaincome tax treaty discussed in this document generally are not available toU.S. persons who hold ADSs or common stock in connection with the conduct of abusiness in the Russian Federation through a permanent establishment as definedin the United States-Russia income tax treaty. Subject to certainexceptions, a U.S. person’s permanent establishment under the United States-Russiaincome tax treaty is a fixed place of business through which such personcarries on business activities in the Russian Federation (generally including,but not limited to, a place of management, a branch, an office and a factory).Under certain 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 followingdiscussion is based on:

·       theCode, the Treasury regulations promulgated thereunder, and judicial andadministrative interpretations thereof;

·       Russianlegislation; and

·       theUnited States-Russia income tax treaty (and judicial and administrativeinterpretations thereof);

all as in effect on thedate of this document. All of the foregoing are subject to change, possibly ona retroactive basis, after the date of this document. This discussion is alsobased, in part, on representations of the depositary, and assumes that eachobligation in the deposit agreement and any related agreements will beperformed in accordance with its terms. The discussion with respect to Russianlegislation is based on our understanding of current Russian law and Russiantax rules, which are subject to frequent change and varying interpretations.

We believe, and the following discussion assumes, thatfor United States federal income tax purposes, we were not a passive foreigninvestment company for the taxable year ending in 2006, we will not be apassive foreign investment company for the current taxable year and we will notbecome a passive foreign investment company in the future. However, passiveforeign investment company determinations are made annually and may involvefacts that are not within our control. If we were to be a passive foreigninvestment company, materially adverse tax consequences could apply toinvestors who are “United States persons” as defined in the Code.

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The following discussionis not intended as tax advice to any particular investor. It is also not acomplete analysis or listing of all potential United States federal or Russianincome and withholding tax consequences to you of ownership of common stock orADSs. We urge you to consult your own tax adviser regarding the specific UnitedStates federal, state, and local and Russian tax consequences of the ownershipand disposition of the common stock or ADSs under your own particular factualcircumstances.

**Russian Income andWithholding Tax Consequences**

The Russian tax rules applicable to U.S. holdersare characterized by significant uncertainties and limited interpretiveguidance. Russian tax authorities have provided limited guidance regarding thetreatment of ADS arrangements, and there can be no certainty as to how theRussian tax authorities will ultimately treat those arrangements. In 2005, theRussian Ministry of Finance stated that ADS holders must be treated as thebeneficial owners of the underlying shares for purposes of the double taxtreaty provisions applicable to taxation of dividend income from the underlyingshares. However, double tax treaty relief is available only if the tax treatyresidence of the holder is duly confirmed. It is currently unclear whetherdepositories will be willing or able to provide residency certificates for ADSholders or implement procedures for holders to benefit from applicable taxtreaties. Thus, while a U.S. holder may technically be entitled to benefit fromthe provisions of the United States-Russia income tax treaty, in practicesuch relief may be difficult or impossible to obtain.

However, if the Russiantax authorities were not to treat U.S. holders as the beneficial owners of theunderlying shares, then the benefits discussed below regarding the UnitedStates-Russia income tax treaty would not be available to U.S. holders.Russian tax law and procedures are also not well developed, and local taxinspectors have considerable autonomy and often interpret tax rules withoutregard to the rule of law. Both the substantive provisions of Russian taxlaw and the interpretation and application of those provisions by the Russiantax authorities may be subject to more rapid and unpredictable change than injurisdictions with more developed capital markets.

**Taxation ofDividends**

Dividends paid to U.S. holders generally will besubject to Russian withholding tax at a 15% rate for legal entities and up to a30% rate for individual holders (15% starting January 1, 2008). The taxburden may be reduced to 5% to 10% under the United States-Russia incometax treaty for U.S. holders; a 5% rate applies for U.S. holders who are legalentities owning 10% or more of the company’s outstanding shares, and a 10% rateapplies to dividends paid to U.S. holders, including individuals and legalentities owning less than 10% of the company’s outstanding shares. See “—UnitedStates-Russia Income Tax Treaty Procedures.”

Notwithstanding the foregoing, treaty relief may notbe available to non-resident holders of ADSs. In 2005 and 2006, the Ministry of Finance expressed an opinion that ADSholders (rather than the depositary) should be treated as the beneficial owners of dividends for the purposes ofthe double tax treaty provisions applicable to taxation of dividendincome from the underlying ordinary shares, provided that the tax residenciesof the ADS holders are duly confirmed.However, in the absence of any specific provisions in the Russian taxlegislation with respect to the concept of tax treaty beneficialownership and taxation of income of beneficial owners, it is unclear how theRussian tax authorities and courts wouldultimately treat the ADS holders in this regard. Moreover, from a practicalperspective, it may not be possible for the depositary to collect residenceconfirmations from all ADS holders andsubmit such information to us and, in addition, we may be unaware of the exactamount of income payable to each holder.

Therefore, with respect to legal entities ororganizations who are U.S. holders, we may be obligated to withhold income taxat the rate of 15% from dividend payments made to the depositary, unless priorto making such dividend payments to thedepositary, we are provided with confirmation that U.S. holders are 

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beneficialowners of dividends within the meaning of the United States-Russia income taxtreaty and all administrativerequirements for claiming treaty benefits are met. Although non-residentholders of ADSs may apply for a refund of a portion of the tax withheldunder an applicable tax treaty, the procedure to do so may be time consumingand no assurance can be given that the Russian tax authorities will grant arefund. See “—United States-Russia Income Tax Treaty Procedures.”

With respect to individuals whoare U.S. holders of ADSs, we may also be obligated to withhold incometax at the rate of 15% from dividend payments made to the depositary. Wherewithholding of personal income tax is not performed, individuals who are U.S. holders of ADSs will then be required to submitan annual personal tax return to the Russian tax authorities and pay Russian income tax at the rate of 30% (15%starting from January 1, 2008). Whensubmitting the tax return, individuals who are U.S. holders may claim an application of the reduced rates ofwithholding tax established by the relevant treaty, provided that the procedures described in “UnitedStates-Russia Income Tax Treaty Procedures” are complied with. Obtaining the respective approvals from thetax authorities may be time-consuming and burdensome.

If the appropriate documentation has not been providedto us before the dividend payment date, we are required to withhold tax at thefull rate, and U.S. holders qualifying for a reduced rate under the UnitedStates-Russia income tax treaty then would be required to file claims forrefund within three years with the Russian tax authorities.

For individuals claimingtreaty relief, the documents substantiating the right for treaty benefitsshould be submitted to the Russian tax authorities within one year after theend of the year to which these benefits relate. In practice, where withholding is performed, the tax authorities may refuse to refund or credit the 15% tax withheldfrom payment of dividends to the depositary and, therefore, it is possible thatindividuals who are U.S. holders maybe subject to up to a 45% (30% starting from January 1, 2008) effective tax rate on their share ofdividends.

**Taxation of CapitalGains**

U.S. holders generally should not be subject to anyRussian income or withholding taxes in connection with the sale, exchange, orother disposition of ADSs or common stock outside of Russia if the shares orADSs are not sold to a Russian resident. Sales or other dispositions of ADSs orcommon stock to Russian residents, however, may be subject to Russian income orwithholding taxes, and for such a sale by a U.S. holder, the Russian residentpurchaser may be required to withhold 20% to 30% of any gain realized on thesale (gross proceeds less expenses incurred—for individuals). However, there isno 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.

Non-residents who are individuals are taxable onRussian-source income. Provided that gains arising from the disposition of theforegoing types of securities and derivatives outside of Russia by U.S. holderswho are individuals not resident in Russia for tax purposes will not beconsidered Russian source income, such income should not be taxable in Russia.The Russian tax laws do not give clear indication as to how the sale of ADSsshould be sourced for individuals, other than that income from the sale ofsecurities “in Russia” should be considered as Russian source income. As thereis no further definition of what should be considered to be a sale “in Russia,”the Russian tax authorities have a certain amount of freedom to conclude whattransactions take place in or outside Russia, including looking at the place ofthe transaction, the place of the issuer of the shares or other similar criteria.Therefore, gains arising from the disposition of the same securities andderivatives in Russia by U.S. holders who are individuals not resident inRussia for tax purposes may be subject to tax either at the source in Russia orbased on an annual tax return, which they may be required to submit to theRussian tax authorities.

U.S. holders may be able to claim the benefits of areduced rate of withholding under the United States-Russia income taxtreaty on the disposition of shares of common stock or ADSs to Russian 

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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 theresidence of the purchaser, a U.S. holder which is a legal entity should not besubject to any Russian income or withholding taxes in connection with the sale,exchange, or other disposition of ADSs if immovable property situated in Russiaconstitutes 50% or less of our assets or if ADSs are sold via foreign exchangeswhere they are legally circulated.

**United States-RussiaIncome Tax Treaty Procedures**

Under current rules, to claim the benefit of a reducedrate of withholding 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 certificationby mailing completed forms, together with the holder’s name, taxpayeridentification number, the tax period for which certification is required, andother applicable information, to the United States Internal Revenue Service.The procedures for obtaining certification are described in greater detail inthe instructions to Internal Revenue Service Form 8802. As obtaining therequired certification from the Internal Revenue Service may take at least sixto eight weeks, U.S. holders should apply for such certification as soon aspossible.

For individuals, advance relief from withholding taxeswill generally be impossible as it is very unlikely that the supportingdocumentation for the treaty relief can be provided to the tax authorities andapproval from the latter obtained before the payment takes place.

Self-assessment of treaty relief is not allowed inRussia. Therefore, in order to apply for a treaty relief, an application withsupporting documents should be submitted to the Russian tax authorities. Inpractice, application of double tax treaty provisions may be time consuming andburdensome as the Russian tax authorities may require many additional documents.Accordingly, the application of the Russian double tax treaty relief may befurther aggravated by the difficulties resulting from the lack of a directdocumentary link between income received by the individual from the depositaryand the tax withheld by us on dividend distributions.

If tax is withheld by a Russian resident on dividendsor other amounts at a rate different from provided in the tax treaty, a U.S.holder may apply for a tax refund by filing a package of documents with theRussian local tax inspectorate to which the withholding tax was remitted withinthree years from the withholding date for U.S. holders which are legalentities, and within one year from the end of the year in which the withholdingoccurred for individual U.S. holders. The package should include theappropriate form (1011DT (2002) for non-dividend income and 1012DT (2002) fordividend income), confirmations of residence of the foreign holder (IRS Form 6166),a copy of the agreement or other documents substantiating the payment ofincome, documents confirming the beneficial ownership of the dividendsrecipient and the transfer of tax to the budget. Under the provisions of theTax Code, the refund of the tax should be effected within one month after thesubmission of the documents. However, procedures for processing such claimshave not been clearly established, and there is significant uncertaintyregarding the availability and timing of such refunds.

Neither the depositary norus has or will have any obligation to assist an ADS holder with the completionand filing of any tax forms.

**United StatesFederal Income Tax Consequences**

The following is ageneral description of the material United States federal income taxconsequences that apply to you if you are, for United States federal income taxpurposes, a beneficial owner of ADSs or 

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commonstock who is a citizen or resident of the United States, a corporation(including any entity treated as a corporation for United States federal incometax purposes) created or organized in or under the laws of the United States,any state thereof or the District of Columbia, an estate the income of which issubject to U.S. tax regardless of its source, or a trust, if a United Statescourt can exercise primary supervision over the administration of the trust andone or more United States persons can control all substantial trust decisions,or if the trust was in existence on August 20, 1996 and has properlyelected to continue to be treated as a United States person. If a partnership(including any entity treated as a partnership for United States federal incometax purposes) is a beneficial owner of ADSs or common stock, the United Statesfederal income tax treatment of a partner in the partnership will generallydepend on the status of the partner and the activities of the partnership.Since your United States federal income and withholding tax treatment may varydepending upon your particular situation, you may be subject to special rules notdiscussed below. Special rules will apply, for example, if you are:

·       aninsurance company;

·       atax-exempt organization;

·       afinancial institution;

·       aperson subject to the alternative minimum tax;

·       aperson who is a broker-dealer in securities;

·       anS corporation;

·       anexpatriate subject to Section 877 of the Code;

·       anowner of, directly, indirectly or by attribution, 10 percent or more ofthe outstanding shares of our common stock; or

·       anowner holding ADSs or common stock as part of a hedge, straddle, syntheticsecurity or conversion transaction.

In addition, this summary is generally limited topersons holding common stock or ADSs as “capital assets” within the meaning of Section 1221of the Code and whose functional currency is the U.S. dollar. The discussionbelow also does not address the effect of any United States state or local taxlaw or foreign tax law.

For purposes of applying United States federal incomeand withholding tax law, a holder of an ADS should be treated as the owner ofthe underlying shares of common stock represented by that ADS.

The United States Treasuryhas expressed concerns that parties to whom ADSs are pre-released may be takingactions that are inconsistent with the claiming, by United States personsholding ADSs, of foreign tax credits for United States federal income taxpurposes. Such actions would also be inconsistent with the claiming of thereduced rate of tax applicable to dividends received by certain non-corporateUnited States persons, as described below. Accordingly, the analysis of thecreditability of Russian taxes described below, and the availability of thereduced tax rate for dividends received by certain non-corporate United Statespersons, could be affected by future actions that may be taken by the UnitedStates Treasury.

**Taxation ofDividends on Common Stock or ADSs**

For United States federal income tax purposes, thegross amount of a distribution, including any Russian withholding taxes, withrespect to common stock or ADSs will be treated as a taxable dividend to theextent of our current and accumulated earnings and profits, computed inaccordance with United States federal income tax principles. For taxable yearsbeginning before January 1, 2011, if you are a non-

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corporate taxpayer suchdividends may be taxed at the lower applicable capital gains rate provided (1) certainholding period requirements are satisfied, (2) either (a) our ADSscontinue to be listed on the New York Stock Exchange (or other nationalsecurities exchange that is registered under section 6 of the SecuritiesExchange Act of 1934, as amended, or the Nasdaq Stock Market) or (b) weare eligible for the benefits of the United States-Russia income tax treaty,and (3) we are not, for the taxable year in which the dividend was paid,or in the preceding taxable year, a “passive foreign investment company.”Non-corporate U.S. holders are strongly urged to consult their own tax advisorsas to the applicability of the lower capital gains rate to dividends receivedwith respect to ADSs or shares of common stock. Distributions in excess of ourcurrent and accumulated earnings and profits will be applied against and willreduce your tax basis in common stock or ADSs and, to the extent in excess ofsuch tax basis, will be treated as gain from a sale or exchange of such commonstock or ADSs. You should be aware that we do not intend to calculate ourearnings and profits for United States federal income tax purposes and, unlesswe make such calculations, you should assume that any distributions withrespect to common stock or ADSs generally will be treated as a dividend, evenif that distribution would otherwise be treated as a return of capital or ascapital gain pursuant to the rules described above. If you are acorporation, you will not be allowed a deduction for dividends received inrespect of distributions on common stock or ADSs, which is generally availablefor dividends paid by U.S. corporations.

If a dividend distribution is paid in rubles, theamount includible in income will be the U.S. dollar value of the dividend,calculated using the exchange rate in effect on the date the dividend isincludible 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 taxpursuant to the United States-Russia income tax treaty to the extent theUnited States dollar value of the refund differs from the dollar equivalent ofthat amount on the date of receipt of the underlying dividend.

Russian withholding tax at the rate applicable to youunder the United States-Russia income tax treaty should be treated as aforeign income tax that, subject to generally applicable limitations andconditions, is eligible for credit against your U.S. federal income taxliability or, at your election, may be deducted in computing taxable income.If, however, the holder of an ADS is not treated as the owner of the underlyingcommon stock represented by the ADS for U.S. federal income tax purposes, thenRussian withholding tax would not be treated as a foreign income tax eligiblefor credit as described in the preceding sentence. If Russian tax is withheldat a rate in excess of the rate applicable to you under the United States-Russiaincome tax treaty, you may not be entitled to credits for the excess amount,even though the procedures for claiming refunds and the practical likelihoodthat refunds will be made available in a timely fashion are uncertain.

For United States foreigntax credit purposes, a dividend distribution will be treated as “passivecategory income” but could, in the case of certain U.S. holders, constitute “generalcategory income” for taxable years beginning after December 31, 2006. The rules relatingto the determination of the foreign tax credit, or deduction in lieu of theforeign tax credit, are complex and you should consult your own tax advisorswith respect to those rules.

**Taxation on Sale orExchange of Common Stock or ADSs**

The sale of common stock or ADSs will generally resultin the recognition of gain or loss in an amount equal to the difference betweenthe amount realized on the sale and your adjusted basis in such common stock orADSs. That gain or loss will be capital gain or loss if the common stock orADSs are capital assets in your hands and will be long-term capital gain orloss if the common stock or ADSs have been held for more than one year. If youare an individual, such realized long-term capital gain is generally subject toa 

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reduced rate of UnitedStates federal income tax. Limitations may apply to your ability to offsetcapital losses against ordinary income.

Deposits and withdrawals of common stock by you inexchange for ADSs will not result in the realization of gain or loss for U.S.federal income tax purposes.

Gain realized on the saleof common stock or ADSs will generally be treated as U.S. source income andtherefore the use of foreign tax credits relating to any Russian taxes imposedupon such sale may be limited. You are strongly urged to consult your own taxadvisors as to the availability of tax credits for any Russian taxes withheldon the sale of common stock or ADSs.

**InformationReporting and Backup Withholding**

Dividends and proceedsfrom the sale or other disposition of common stock or ADSs that are paid in theUnited States or by a U.S.-related financial intermediary will be subjectto U.S. information reporting rules and U.S. backup withholding tax,unless you are a corporation or other exempt recipient. In addition, you willnot be subject to backup withholding if you provide your taxpayeridentification number and certify that no loss of exemption from backupwithholding has occurred. Holders that are not U.S. persons generally are notsubject to information reporting or backup withholding, but such holders may berequired to provide certification as to their non-U.S. status.

**F.**                Dividends andPaying Agents

Not applicable.

**G.**              Statement by Experts

Not applicable.

**H.**              Documents on Display

The documents that areexhibits to or incorporated by reference in this document can be read at theU.S. Securities and Exchange Commission’s Public Reference Room at 100 FStreet, NE, Washington, D.C. 20549. You may obtain information on the operationof 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.**                   SubsidiaryInformation

Not applicable.

**Item 11.**                 *Quantitative and Qualitative Disclosures about Market Risk*

We are exposed to marketrisk from changes in both foreign currency exchange rates and interest rates.Foreign exchange risks exist to the extent our costs are denominated incurrencies other than dollars. We are subject to market risk deriving fromchanges in interest rates, which may affect the cost of our financing.

**Interest Rate Risk**

We are exposed to variability in cash flow riskrelated to our variable interest rate debt and exposed to fair value riskrelated to our fixed-rate notes. As of December 31, 2006, $1,868.6million, or 60.7% of our 

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total indebtedness,including capital leases, was variable interest rate debt, while $1,209.9million, or 39.3% of our total indebtedness, including capital leases, wasfixed interest rate debt.

For indebtedness withvariable interest rates, the table below presents principal cash flows andrelated weighted average interest rates by contractual maturity dates as of December 31,2006.

**ContractualMaturity Date as of December 31, 2006**
| Bank                                                                                            | ** ** | ** **                                                          | ** ** | **Currency** | ** ** | **2007**    | ** ** | **2008**    | ** ** | **2009**    | ** ** | **2010**    | ** ** | **2011**    | ** ** | **Thereafter** | ** **  | **Total**  | ** ** | **Annual  interest rate  (Actual  interest rate at  December 31,  2006)** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|--------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|----------------|-------------|------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **(amounts in thousands of U.S. dollars)** | ** ** |
| ING Bank N.V., The Bank of Tokyo-Mitsubishi,  Bayerische Landesbank, HSBC, Raiffeisen, Sumitomo |       |                                                                | USD        |         |       | $           | —     |        | $          | —      |       | $           | 630,000    |        | $          | —         |        | $          | —     |                                                                                          |       | $ | — |   |   | $ | 630,000 |   |   | 6.17 | % |   |
| ING Bank N.V., The Bank of Tokyo-Mitsubishi,  Bayerische Landesbank, HSBC, Raiffeisen, Sumitomo |       |                                                                | USD        |         |       | —      |       | 53,077      |       | 70,769      |       | 70,769      |       | 35,385      |       |           | —      |       |       | 230,000                                                                                       |       |   | 6.36 | % |   |
| Citibank International plc and ING Bank N.V                                 |       |                                                                | USD        |         |       | 19,741      |       | 19,740      |       | 19,740      |       | 19,741      |       | 19,741      |       |           | 51,505      |       |       | 150,208                                                                                       |       |   | 5.80 | % |   |
| HSBC Bank plc and ING BHF—BANK AG                                 |       |                                                                | USD        |         |       | 21,796      |       | 21,820      |       | 21,801      |       | 21,801      |       | 21,800      |       |           | 40,967      |       |       | 149,985                                                                                       |       |   | 5.80 | % |   |
| EBRD                                                                                            |       |                                                                | USD        |         |       | 18,462      |       | 18,462      |       | 18,462      |       | 18,462      |       | 18,462      |       |           | 46,152      |       |       | 138,462                                                                                       |       |   | 8.47 | % |   |
| Commerzbank AG, ING Bank AG and HSBC Bank plc                                              |       |                                                                | USD        |         |       | 14,791      |       | 14,790      |       | 14,790      |       | 14,790      |       | 14,790      |       |           | 44,373      |       |       | 118,324                                                                                       |       |   | 5.67 | % |   |
| HSBC Bank plc, ING Bank AG and Bayerische Landesbank                                            |       |                                                                | USD        |         |       | 14,622      |       | 14,622      |       | 14,622      |       | 14,622      |       | 14,622      |       |           | 44,000      |       |       | 117,108                                                                                       |       |   | 5.80 | % |   |
| EBRD                                                                                            |       |                                                                | USD        |         |       | 14,872      |       | 14,872      |       | 14,872      |       | 14,872      |       | 14,872      |       |           | 37,178      |       |       | 111,538                                                                                       |       |   | 6.88 | % |   |
| Barclays bank plc                                                                               |       |                                                                | USD        |         |       | 13,156      |       | 13,156      |       | 13,156      |       | 13,156      |       | 13,156      |       |           | 32,892      |       |       | 98,672                                                                                        |       |   | 5.52 | % |   |
| ABN AMRO N.V.                                                                                   |       |                                                                | USD        |         |       | 6,287       |       | 6,287       |       | 6,287       |       | 6,287       |       | 6,287       |       |           | 12,574      |       |       | 44,009                                                                                        |       |   | 5.72 | % |   |
| ING BHF Bank and Commerzbank AG                                                                 |       |                                                                | EUR        |         |       | 13,744      |       | 13,744      |       | 6,872       |       | —      |       | —      |       |           | —      |       |       | 34,360                                                                                        |       |   | 4.50 | % |   |
| ABN AMRO N.V.                                                                                   |       |                                                                | EUR        |         |       | 4,560       |       | 4,560       |       | 4,560       |       | 4,560       |       | 4,560       |       |           | 9,121       |       |       | 31,921                                                                                        |       |   | 4.20 | % |   |
| Commerzbank                                                                                     |       |                                                                | USD        |         |       | 3,508       |       | 3,510       |       | 3,508       |       | 3,508       |       | —      |       |           | —      |       |       | 14,034                                                                                        |       |   | 5.77 | % |   |
| **Total variable debt**                                                                         | ** ** |                                                                |       |         | ** ** | **145,539** | ** ** | **198,640** | ** ** | **839,439** | ** ** | **202,567** | ** ** | **163,674** | ** ** | ** **     | **318,762** | ** ** | ** ** | **1,868,621**                                                                                 | ** ** |   |   |   |   |
| **Weighted  average interest rate**                                                        | ** ** |                                                                |       |         | ** ** | **6.03**    | **%**      | **6.12**    | **%**      | **6.18**    | **%**      | **6.25**    | **%**      | **6.24**    | **%**      | ** **     | **6.22**    | **%**      | ** ** | **6.18**                                                                                      | **%**      |   |   |   |   |
|                                                                                                 |            |                                                                     |            |              |            |             |            |             |            |             |            |             |            |             |            |                |             |            |            |                                                                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We would experience an additional interest expense ofapproximately $18.7 million on an annual basis as a result of a hypotheticalincrease in the LIBOR/EURIBOR by 1% over the current rate as ofDecember 31, 2006. We would have experienced 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 ofDecember 31, 2005. The increase by 13.3% in an additional interest expenseis primarily attributable to the LIBOR/EURIBOR fluctuations and change in ourdebt structure during the year ended December 31, 2006. The fair value ofour publicly traded fixed-rate long-term notes as of December 31, 2006,ranged from 106.2% to 106.7% of the notional amount. As of December 31,2006, the difference between the carrying value and the fair value of otherfixed rate debt, including capital lease obligations, was immaterial. Fordetails of our fixed-rate debt, refer to Note 11 to our auditedconsolidated financial statements. The fair value of variable rate debtapproximates its 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 loan. For details of these contracts, seeNote 11 to our audited consolidated financial statements. The underlying loanwas repaid ahead of schedule in July 2006, which resulted in an earlytermination of the swap agreements. 

In January 2006, we entered into a variable-to-fixedinterest rate swap agreement with HSBC Bank plc to hedge our exposure tovariability of our future cash flows caused by the change in EURIBOR related toour loan with ABN AMRO N.V. See Note 11 to our audited consolidated financialstatements for details.

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We continue to considerother financial instruments available to us to mitigate exposure to interestrate fluctuations.

**Foreign CurrencyRisk**

Thefollowing tables show, for the periods indicated, certain information regardingthe exchange rate between the ruble and the U.S. dollar, based on datapublished by the Central Bank of Russia. These rates may differ from the actualrates used in preparation of our financial statements and other financialinformation provided herein. 
|                                             | ** ** | **Rubles per U.S. dollar** | ** ** |
|---------------------------------------------|------------|-------------------------------------------|------------|
| **Years ended December 31,** | ** ** | ** **                                | ** ** | **High** | ** ** | **Low** | ** ** | **Average**(1) | ** ** | **Period End** | ** ** |
| 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 | ** ** |   |
| 2006                                        |       | 28.78                                     |       | 26.18 |   |   | 27.09 | ** ** |   |   | 26.33 | ** ** |   |
|                                             |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)                 The average of the exchange rates on thelast business day of each full month during the relevant period.
|                    | ** ** | **Rubles per  U.S. dollar** | ** ** |
|--------------------|------------|---------------------------------------|------------|
| ** **         | ** ** | **High**                              | ** ** | **Low** | ** ** |
| December 2006 |       | 26.39                                 |       | 26.18 |   |
| January 2007  |       | 26.58                                 |       | 26.45 |   |
| February 2007 |       | 26.55                                 |       | 26.16 |   |
| March 2007    |       | 26.24                                 |       | 25.97 |   |
| April 2007    |       | 26.01                                 |       | 25.69 |   |
| May 2007      |       | 25.92                                 |       | 25.69 |   |

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Source: Central Bank of Russia.

On June 25, 2007, the exchange rate between the rubleand the U.S. dollar was 25.94 rubles per U.S. dollar.

Thefollowing tables show, for the periods indicated, certain information regardingthe exchange rate between the hryvnia and the U.S. dollar, based on datapublished by the National Bank of Ukraine. These rates may differ from theactual rates used in preparation of our financial statements and otherfinancial information provided herein.
|                                             | ** ** | **Hryvnias per U.S. dollar** | ** ** |
|---------------------------------------------|------------|---------------------------------------------|------------|
| **Years ended December 31,** | ** ** | ** **                                  | ** ** | **High** | ** ** | **Low** | ** ** | **Average**(1) | ** ** | **Period End** | ** ** |
| 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 | ** ** |   |
| 2006                                        |       | 5.05                                        |       | 5.05 |   |   | 5.05 | ** ** |   |   | 5.05 | ** ** |   |
|                                             |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)                 The average of the exchange rates on the last businessday of each full month during the relevant period.

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|                    | ** ** | **Hryvnias per  U.S. dollar** | ** ** |
|--------------------|------------|-----------------------------------------|------------|
| ** **         | ** ** | **High**                                | ** ** | **Low** | ** ** |
| December 2006 |       | 5.05                                    |       | 5.05 |   |
| January 2007  |       | 5.05                                    |       | 5.05 |   |
| February 2007 |       | 5.05                                    |       | 5.05 |   |
| March 2007    |       | 5.05                                    |       | 5.05 |   |
| April 2007    |       | 5.05                                    |       | 5.05 |   |
| May 2007      |       | 5.05                                    |       | 5.05 |   |

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Source: National Bank of Ukraine.

On June 25, 2007, the exchange rate between thehryvnia and the U.S. dollar was 5.05 hryvnias per U.S. dollar.

Our principal exchange rate risk involves changes inthe value of the ruble, hryvnia and euro relative to the U.S. dollar, which isour reporting currency. We have not entered into any significant currencyhedging arrangements, but we continue to consider different financialinstruments available to us in order to mitigate our exposure to exchange ratefluctuations.

A significant part of our capital expenditures,borrowing and certain operating costs are either denominated in U.S. dollars ortightly linked to the U.S. dollar exchange rate. These include roamingexpenses, cost of customer equipment, capital expenditures and borrowings. Inorder to hedge against a risk of exchange rate currency fluctuations, we previouslydenominated a majority of our tariffs in Russia, which are payable in rubles,in units linked to the U.S. dollar and required accounts to be settled atthe official exchange rate of the Central Bank of Russia on the date ofpayment. However, in the middle of 2006, we introduced a fixed exchange ratefor converting U.S. dollar-denominated tariffs and charges into Russian rublesin order to address competitive pressures on the Russian market and startingfrom January 1, 2007, moved to ruble-denominated tariffs and invoicing. Asa result of these changes, we reevaluated the functional currency criteriaunder SFAS No. 52, “Foreign Currency Translation,” and determined that,beginning January 1, 2007, the functional currency of our subsidiariesdomiciled in Russia would be the ruble. For more information, see also Note 25to our audited consolidated financial statements. The change was adoptedprospectively beginning January 1, 2007 in accordance with SFAS No. 52.No restatement of comparative amounts will be made for the change in functionalcurrency. As a result, currency exchange gains and losses in 2007 and futureyears, assuming the ruble remains our functional currency, will be the resultof operations involving currencies other than the ruble. During 2006, the U.S. dollarwas our functional currency and, therefore, currency exchange gains and lossesfor the year ended December 31, 2006 are the result of operations involvingcurrencies other than the U.S. dollar.

If either of the ruble or the hryvnia declines againstthe U.S. dollar and tariffs cannot be maintained for competitive or otherreasons, our revenues and operating margins could be adversely affected and wecould have difficulty repaying or refinancing our U.S. dollar-denominatedindebtedness.

Our US. dollar-denominated debt represents our primaryfuture risk of exchange loss in U.S. dollar terms. On the other hand, if thevalue of the ruble or the hryvnia declines, our net ruble and hryvnia monetaryasset position results in currency remeasurement losses as the amount of thesecurrencies required to repay U.S. dollar-denominated debt increases.

A portion of our capital expenditures, operating andborrowing costs are denominated in euros. These include costs of customerequipment, roaming expenses, capital expenditures and certain borrowings. Wecurrently do not hedge against the risk of decline in the U.S. dollar againstthe euro because settlements denominated in euros are not significant.

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We would experience a currencyexchange loss of $295.3 million on our U.S. dollar-denominated net monetaryliabilities as a result of a hypothetical 10.0% increase in the ruble/hryvniato U.S. dollar exchange rate at December 31, 2006. The large increase in ahypothetical currency remeasurement loss resulted from a change in ourfunctional currency from the U.S. dollar to the ruble in 2007 (*i.e.* in 2007, a currency exchange loss would be generated bydollar-denominated net monetary liabilities while, in 2006, it would have beengenerated by ruble/hryvnia-denominated net monetary assets). We wouldexperience a currency exchange loss of $5.6 million in the fair value ofour euro-denominated monetary liabilities as a result of a hypothetical 10.0%increase in the U.S. dollar to euro exchange rate at December 31, 2006.The increase in a hypothetical loss in the fair value of our euro-denominatedmonetary liabilities was mainly the result of U.S. dollar to euro exchange ratefluctuations during the year ended December 31, 2006. We are unable toestimate future loss of earnings as a result of such changes. 

**Item 12.**                 *Description of Securities Other Than Equity Securities*

Not applicable.

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**PART II**

**Item 13.**                 *Defaults, Dividend Arrearages and Delinquencies*

None.

**Item 14.**                 *Material Modifications to the Rights of Security Holders and Use ofProceeds*

**A.-E.**   NotApplicable.

**Item 15.**                 *Controls and Procedures*

(a)  DisclosureControls and Procedures.

As required by Rules13a-15 and 15d-15 under the Securities Exchange Act of 1934, management hasevaluated, with the participation of our Chief Executive Officer and ChiefFinancial Officer, the effectiveness of our disclosure controls and proceduresas of December 31, 2006.  Disclosurecontrols and procedures refer to controls and other procedures designed toensure that information required to be disclosed in the reports we file orsubmit under the Exchange Act is recorded, processed, summarized and reported,within the time periods specified in the rules and forms of the Securities andExchange Commission. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that informationrequired to be disclosed by us in our reports that we file or submit under theExchange Act is accumulated and communicated to management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate to allow timelydecisions regarding our required disclosure. In designing and evaluating ourdisclosure controls and procedures, management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, and managementwas required to apply its judgment in evaluating and implementing possiblecontrols and procedures. 

In assessing disclosurecontrols and procedures, the Public Company Accounting Oversight Board’sAuditing Standard No. 2 defines a material weakness as a significantdeficiency, or combination of significant deficiencies, that results in morethan a remote likelihood that a material misstatement of the annual or interimfinancial statements will not be prevented or detected.  In accordance with this definition, our ChiefExecutive Officer and Chief Financial Officer have concluded that, as ofDecember 31, 2006, the end of the period covered by this report, ourdisclosure controls and procedures were not effective at a reasonable assurancelevel due to a single event related to our acquisition of Bitel that isdescribed below.

(b)  Management’s annual report on internalcontrol over financial reporting.

Management isresponsible for establishing and maintaining adequate internal control overfinancial reporting 

Internal control over financial reporting refers to a process designedby, or under the supervision of, our Chief Executive Officer and ChiefFinancial Officer and effected by our board of directors, management and otherpersonnel, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles andincludes those policies and procedures that:

·       pertainto the maintenance of records that in reasonable detail accurately and fairlyreflect the transactions and dispositions of our assets;

·       providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that our 

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receipts and expendituresare being made only in accordance with authorizations of our management andmembers of our board of directors; and

·       providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of our assets that could have a materialeffect on our financial statements.

Internal control overfinancial reporting cannot provide absolute assurance of achieving financialreporting objectives because of its inherent limitations.  Internal control over financial reporting isa process that involves human diligence and compliance and is subject to lapsesin judgment and breakdowns resulting from human failures. Internal control overfinancial reporting also can be circumvented by collusion or improper override.Because of such limitations, there is a risk that material misstatements maynot be prevented or detected on a timely basis by internal control overfinancial reporting. However, these inherent limitations are known features ofthe financial reporting process, and it is possible to design into the processsafeguards to reduce, though not eliminate, this risk.

Management evaluated the effectiveness of our internal control over financialreporting as of December 31, 2006 using the framework set forth in the reportof the Treadway Commission’s Committee of Sponsoring Organizations (COSO),“Internal Control—Integrated Framework.” As a result of management’s evaluationof our internal control over financial reporting, management identified amaterial weakness in our internal control over financial reporting that existedas of December 31, 2006 with respect to the interpretation and application ofgenerally accepted accounting principles applicable to a put and call optionagreement, dated as of November 2005, entered into with Nomihold Securitiesproviding a right of the latter to sell the remaining 49% stake in TarinoLimited, the company controlling Bitel, to MTS Finance S.A. in accordance withthe requirements of FASB Statement No.140 “Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities, a replacementof FASB Statement 125.” 

Our agreement to grant the seller of Bitel a putoption was an isolated circumstance that, in management’s opinion, is unlikelyto recur in the future.  In May 2007, weperformed additional analysis relating to the accounting for this put option inthe context of preparing our financial statements.  As a result of our additional analysis, werevised our initial conclusions and accounting treatment and made adjustmentsto the balances that we previously used in preparing our financialstatements.  After determining that theseadjustments were appropriate, management has concludedthat our internal control over financial reporting was not effective as ofDecember 31, 2006. Otherwise, management has not identified any significantdeficiencies relating to internal control over financial reporting.

**Ourindependent registered public accounting firm, ZAO Deloitte & Touche CIS,has issued an audit report on management’s assessment of our internal controlover financial reporting, expressing an unqualified opinion on management’sassessment and an adverse opinion on the effectiveness of our internal controlover financial reporting as of December 31, 2006.**

(c)  Attestation Reportof Independent Registered Public Accounting Firm.

To the Shareholders ofOJSC Mobile TeleSystems:

We have audited management’s assessment, included inthe accompanying management’s annual report on internal control over financialreporting, that Mobile TeleSystems, a Russian Open Joint-Stock Company, andsubsidiaries (“the Group”) did not maintain effective internal control overfinancial reporting as of December 31, 2006, because of the effect of thematerial weakness identified in management’s assessment based on the criteriaestablished in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission. The Group’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express 

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an opinion on management’sassessment and an opinion on the effectiveness of the Group’s internal controlover financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls may becomeinadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.

A material weaknessis a significant deficiency, or combination of significant deficiencies, thatresults in more than a remote likelihood that a material misstatement of theannual or interim financial statements will not be prevented or detected. Thefollowing material weakness has been identified and included in management’sassessment:

·       Asof December 31, 2006, the Group did not maintain effective control with respectto the interpretation and application of generally accepted accountingprinciples applicable to a put option related to the Group’s acquisition ofBitel in accordance with the requirements of FASB Statement No. 140“Accounting for Transfers and Servicing of Financial Assets and Extinguishmentsof Liabilities, a Replacement of FASB Statement No. 125.”

This material weakness was considered in determiningthe nature, timing, and extent of audit tests applied in our audit of theconsolidated financial statements as of and for the year ended December 31,2006, of the Group and this report does not affect our report on such financialstatements.

In our opinion, management’s assessment that the Groupdid not maintain effective internal control over financial reporting as ofDecember 31, 2006, is fairly stated, in all material respects, based on thecriteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Also in ouropinion, because of the effect of the material weakness described above on theachievement of the objectives of the control criteria, the Group has notmaintained effective internal control over financial reporting as of December31, 2006, based on the 

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criteria established inInternal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements as of and for the yearended December 31, 2006, of the Group and our report dated May 31, 2007 (June7, 2007 as to Note 25) expressed an unqualified opinion on those financial statements.

/s/ ZAO Deloitte & Touche CIS

MoscowMay 31, 2007(June 7, 2007 as to Note 25 of the consolidated financial statements)

(d) Changes in internal control overfinancial reporting.

Management has evaluated, with theparticipation of our Chief Executive Officer and Chief Financial Officer,whether any changes in our internal control over financial reporting thatoccurred during the period covered by this annual report have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting. Based on the evaluation we conducted, management hasconcluded that no such changes have occurred. However, management believes the measures that have been implemented toremediate the material weakness have had a material effect on our internalcontrol over financial reporting since December 31, 2006, and anticipates thatthese remediation measures will continue to have a material impact on ourinternal control over financial reporting in future periods.

**Remediation Activities:**

To remediate the materialweakness described above, we have adopted the following changes:

·       In June 2007, the Audit Committee of our Board of Directors directedmanagement to strengthen control and reporting procedures over significantnon-routine transactions where management’s judgment, interpretation andapplication of complex accounting principles is exercised.

·       In the future, all such transactions will require formal approval fromthe Audit Committee.

·       Pursuant to the Audit Committee’sdirective, management has strengthened control and reporting procedures oversignificant non-routine transactions involving the exercise of interpretivejudgment or application of complex accounting principles by adopting andimplementing a policy pursuant to which such transactions require advancereview and approval in accordance with the Audit Committee’s directive.

**Item 16A.**         *Audit Committee Financial Expert*

Our Board of Directors has determined thatHelmut Reuschenbach is an “audit committee financial expert” as defined in Item16A of Form 20-F. Mr. Reuschenbachis“independent” as defined in Rule 10A-3under the Exchange Act and current NYSE listing rules applicable to us. For adescription of Mr. Reuschenbach’s experience, please see “Item 6. Directors,Senior Management and Employees—A. Directors and Senior Management—KeyBiographies.” 

**Item 16B.**        *Code of Ethics*

We have adopted a Code ofEthics that applies to our senior officers. A copy of our Code of Ethics isavailable on our Internet website, www1.mtsgsm.com.

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**Item 16C.****       ***PrincipalAccountant Fees and Services*

ZAODeloitte & Touche CIS has served as our Independent Registered Public AccountingFirm for each of the fiscal years in the three-year period endedDecember 31, 2006, for which audited financial statements appear in thisAnnual Report on Form 20-F. The following table presents theaggregate fees billed for professional services and other services to ZAODeloitte & Touche CIS in 2005 and 2006.
|                     | ** ** | **Year ended  December 31,** | ** **  |
|---------------------|------------|----------------------------------------|-------------|
| ** **          | ** ** | **2005**                               | ** **  | **2006** | ** ** |
| ** **          | ** ** | **(in thousands)**                | ** **  |
| Audit Fees          |       | $                                      | 1,364.8     |   | $ | 1,326.6 |   |
| Audit-Related  Fees |       | 407.2                                  |        | 1,470.9 |   |
| Tax Fees            |       | 102.1                                  |        | 8.6 |   |
| All Other Fees      |       | —                                 |        | 20.0 |   |
| **Total**           | ** ** | **$**                                  | **1,874.1** | ** ** | **$** | **2,826.1** | ** ** |

 

**Audit Fees**

The Audit Fees for theyears 2005 and 2006 were for services associated with the consolidatedU.S. GAAP audits, the quarterly reviews and several statutory audits.

**Audit-RelatedFees**

The Audit-related Feespaid in 2005 and 2006 mainly included fees for the testing of our internalcontrol procedures and a review of projects related to our Sarbanes-OxleySection 404 readiness. In addition, we paid fees for due diligence andaccounting consultations.

**Tax Fees**

The Tax Fees for the years2005 and 2006 were mainly for services associated with tax compliance and othertax consulting services. 

**All Other Fees**

All other fees for theyear 2006 were for reporting on compliance with certain loan covenants. Therewere no such fees incurred in 2005.

**Audit CommitteePre-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 Committeepre-approves the engagement terms and fees of ZAO Deloitte & ToucheCIS for all audit and non-audit services, including tax services. Our AuditCommittee pre-approved the engagement terms and fees of ZAO Deloitte &Touche CIS for all services performed for the fiscal year endedDecember 31, 2006. 

**Item 16D.**       *Exemption from the Listing Standards for Audit Committees*

Not Applicable.

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**Item 16E.**        *Purchases of Equity Securities by the Issuer and Affiliated Purchasers*

On September 5, 2006, our Board of Directorsauthorized a share repurchase program, allowing our wholly-ownedsubsidiary MTS Bermuda to repurchase ADSs representingup to 10% of our total outstanding shares overa period of twelve months ending August 31, 2007. Thepurchases may be made in the open market or through privatelynegotiated transactions under certain requirements set forth in SEC Rules10b-18 and 10b5-1, as well as other applicable legalrequirements and factors. The share repurchase program does not obligate usto acquire a particular number of ADSs, and the program maybe suspended or discontinued at our sole discretion. The repurchasescould be funded through our own cash flows, commercial paper programor potentially through existing credit facilities. The executionof the program will depend on an on-going assessmentof market conditions, and the program may be extended at anytime. In December 2006, we repurchased 11,161,000 of our shares in the form ofADSs at an average price of $49.2 per ADS for a total amount of $109.9 million.

Thefollowing table sets forth, for each month in 2006 and for the year as a whole,the total number of our ADSs repurchased by MTS Bermuda pursuant to the sharerepurchase plan described above, the average price paid per ADS, the number ofADSs that were purchased as part of the publicly announced share repurchaseplans and the maximum number of ADSs that at that date remained eligible forpurchases under such plans.
| Period         | ** ** | ** ** | ** ** | **Total Number of  ADSs Purchased**(1) | ** ** | **Average Price  Paid per ADS** | ** ** | **Total Number of  ADSs Purchased as  Part of Publicly  Announced Plans or  Programs** | ** ** | **Maximum  Number (or  Approximate  Dollar Value) of  ADSs that May  Yet Be Purchased  Under the Plan** | ** ** |
|----------------|------------|------------|------------|-------------------------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| January 1-31   |       |       | —     |                                                  |       |                                           | —     |                                                                                                                           |       |                                                                                                                                                 | —     |   |   |   | — |   |   |
| February 1-29  |       |       | —     |                                                  |       |                                           | —     |                                                                                                                           |       |                                                                                                                                                 | —     |   |   |   | — |   |   |
| March 1-31     |       |       | —     |                                                  |       |                                           | —     |                                                                                                                           |       |                                                                                                                                                 | —     |   |   |   | — |   |   |
| April 1-30     |       |       | —     |                                                  |       |                                           | —     |                                                                                                                           |       |                                                                                                                                                 | —     |   |   |   | — |   |   |
| May 1-31       |       |       | —     |                                                  |       |                                           | —     |                                                                                                                           |       |                                                                                                                                                 | —     |   |   |   | — |   |   |
| June 1-30      |       |       | —     |                                                  |       |                                           | —     |                                                                                                                           |       |                                                                                                                                                 | —     |   |   |   | — |   |   |
| July 1-31      |       |       | —     |                                                  |       |                                           | —     |                                                                                                                           |       |                                                                                                                                                 | —     |   |   |   | — |   |   |
| August 1-31    |       |       | —     |                                                  |       |                                           | —     |                                                                                                                           |       |                                                                                                                                                 | —     |   |   |   | — |   |   |
| September 1-30 |       |       | —     |                                                  |       |                                           | —     |                                                                                                                           |       |                                                                                                                                                 | —     |   |   |   | — |   |   |
| October 1-31   |       |       | —     |                                                  |       |                                           | —     |                                                                                                                           |       |                                                                                                                                                 | —     |   |   |   | — |   |   |
| November 1-30  |       |       | —     |                                                  |       |                                           | —     |                                                                                                                           |       |                                                                                                                                                 | —     |   |   |   | — |   |   |
| December 1-31  |       |       | 2,232,200  |                                                  |       |                                           | $          | 49.2                                                                                                                           |       |                                                                                                                                                 |       | 2,232,200 |   |   |   | 197,740,401 |   |   |
| Total          |       |       | 2,232,200  |                                                  |       |                                           | $          | 49.2                                                                                                                           |       |                                                                                                                                                 |       | 2,232,200 |   |   |   | 197,740,401 |   |   |

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(1)                 All purchases were made pursuant to thepublicly announced share repurchase plan described above in open market andprivately negotiated transactions effected on the New York Stock Exchange.

**PART III**

**Item 17.**                 *Financial Statements*

See instead Item 18.

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**Item 18.**                 *Financial Statements*

Thefollowing 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, 2006 and 2005 and for the years ended  December 31, 2006, 2005 and 2004:                          |   |   |   |
| Consolidated  balance sheets at December 31, 2006 and 2005                                                                                                |   | F-3    |   |
| Consolidated  statements of operations for the years ended December 31, 2006, 2005 and  2004                                                              |   | F-5    |   |
| Consolidated  statements of changes in shareholders’ equity for the years ended  December 31, 2006, 2005 and 2004      |   | F-6    |   |
| Consolidated  statements of cash flows for the years ended December 31, 2006, 2005 and  2004                                                              |   | F-7    |   |
| Notes to consolidated  financial statements                                                                                                                    |   | F-9    |   |

 

**Item 19.**                 *Exhibits*

| No. | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | **Description** |
|-----|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 1.1 |       | Charter of Mobile TeleSystems OJSC, restated version  no. 5, as approved by the Extraordinary General Meeting of Shareholders of  Mobile TeleSystems OJSC held on October 30, 2006 (English Translation).                                                                                                                                                                                                                                                                                                                                                                                                            |
| 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 |       | 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.                                                                                                                                                                                                                                        |
| 4.2 |       | 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.                                                                                                                                                                                                                                        |
| 4.3 |       | 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.                                                                                                                                                                                                                                        |
| 4.4 |       | 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 is incorporated herein by reference  to Exhibit 4.46 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, 2005, on Form 20-F. |

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| 4.5  |   | 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 is incorporated herein by reference to Exhibit 4.48 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, 2005, on  Form 20-F.                                          |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.6  |   | 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 is  incorporated herein by reference to Exhibit 4.48.1 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, 2005, on Form 20-F.                                     |
| 4.7  |   | 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 is  incorporated herein by reference to Exhibit 4.50 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, 2005, on Form 20-F.                                                 |
| 4.8  |   | 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 is incorporated herein by reference to  Exhibit 4.51 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, 2005, on Form 20-F. |
| 4.9  |   | 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, is incorporated herein by reference to  Exhibit 4.53 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, 2005, on Form 20-F.  |
| 4.10 |   | Loan Agreement for OJSC 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 is incorporated herein by reference to  Exhibit 4.54 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, 2005, on Form 20-F.                                                                |
| 4.11 |   | Amendment Agreement  relating to the Loan Agreement for OJSC  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 is incorporated  herein by reference to Exhibit 4.54.1 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, 2005, on Form 20-F.                         |
| 4.12 |   | Facility Agreement OJSC  Mobile TeleSystems as Borrower and European Bank for Reconstruction and  Development as Lender dated December 8, 2004.                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.13 |   | Amendment and  Restatement Agreement between OJSC Mobile TeleSystems as Borrower and  European Bank for Reconstruction and Development as Lender dated May 17,  2006 relating to a Facility Agreement dated December 8, 2004.                                                                                                                                                                                                                                                                                                             |

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| 4.14 |   | 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. |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.15 |   | 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.                                                                                                                                                                                                                                        |
| 4.16 |   | 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. |
| 4.17 |   | 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.                                                                                                                                                                                                                                        |
| 4.18 |   | 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.                                                                                                                                                                                  |
| 4.19 |   | 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.                                                                                                                                                                                                                                        |
| 4.20 |   | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.21 |   | 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, is  incorporated herein by reference to Exhibit 4.28 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, 2005, on Form 20-F.                                                                                                                                                                                                                                                                       |

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| 4.22 |   | 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, is  incorporated herein by reference to Exhibit 4.31 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, 2005, on  Form 20-F. |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.23 |   | MTS License  No. 33927 for provision of mobile radiotelephone communications services  in the 900/1800-MHz band in the territory of the Adygeya Republic, is  incorporated herein by reference to Exhibit 4.35 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, 2005, on Form 20-F.                                                                                                                                                                 |
| 4.24 |   | 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), is incorporated herein  by reference to Exhibit 4.36 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, 2005, on Form 20-F.                                                                                                                                             |
| 4.25 |   | MTS License  No. 29524 for provision of mobile radiotelephone communications services  in the 900-MHz band in the Astrakhan Region (English translation).                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.26 |   | MTS License  No. 29525 for provision of mobile radiotelephone communications services  in the 900/1800-MHz band in the Stavropol Territory (English  translation).                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.27 |   | Addendum No. 2 to  License No. 29525 (English translation).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.28 |   | MTS License  No. 30255 for provision of mobile radiotelephone communication services  in the 900/1800 MHz band in the Evenkia Autonomous District (English  translation).                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.29 |   | Addendum No. 2 to  License No. 30255 (English translation).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.30 |   | MTS License  No. 30256 for provision of mobile radiotelephone communication services  in the 900/1800 MHz band in the Kemerovo Region (English translation).                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.31 |   | Addendum No. 2 to  License No. 30256 (English translation).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.32 |   | MTS License  No. 30259 for provision of mobile radiotelephone communication services  in the 900/1800 MHz band in the Karachaevo-Cherkesia Republic (English translation).                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.33 |   | Addendum No. 2 to  License No. 30259 (English translation).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.34 |   | Addendum No. 3 to  License No. 30259 (English translation).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.35 |   | MTS License  No. 30260 for provision of mobile radiotelephone communication services  in the 900/1800 MHz band in the Dagestan Republic (English translation).                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.36 |   | Addendum No. 2 to  License No. 30260 (English translation).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.37 |   | Addendum No. 3 to  License No. 30260 (English translation).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.38 |   | MTS License  No. 30261 for provision of mobile radiotelephone communication services  in the 900/1800 MHz band in the Ingushetia Republic (English translation).                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.39 |   | Addendum No. 2 to  License No. 30261 (English translation).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.40 |   | Addendum No. 3 to  License No. 30261 (English translation).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.41 |   | MTS License  No. 30263 for provision of mobile radiotelephone communication services  in the 1800 MHz band in the Kalmykia Republic (English translation).                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.42 |   | Addendum No. 2 to  License No. 30263 (English translation).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

161

----

 

| 4.43 |   | MTS License  No. 30264 for provision of mobile radiotelephone communication services  in the 1800 MHz band in the Tyva Republic (English translation).                                     |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.44 |   | Addendum No. 2 to  License No. 30264 (English translation).                                                                                                                           |
| 4.45 |   | MTS License  No. 30265 for provision of mobile radiotelephone communication services  in the 1800 MHz band in the Altai Republic (English translation).                                    |
| 4.46 |   | Addendum No. 2 to  License No. 30265 (English translation).                                                                                                                           |
| 4.47 |   | MTS License  No. 30266 for provision of mobile radiotelephone communication services  in the 1800 MHz band in the Severnaya Osetia-Alania Republic (English  translation).                 |
| 4.48 |   | Addendum No. 2 to  License No. 30266 (English translation).                                                                                                                           |
| 4.49 |   | Addendum No. 3 to  License No. 30266 (English translation).                                                                                                                           |
| 4.50 |   | MTS License No. 30267 for provision of mobile radiotelephone  communication services in the 1800 MHz band in the Kabardino-Balkar Republic  (English translation).                         |
| 4.51 |   | Addendum No. 2 to  License No. 30267 (English translation).                                                                                                                           |
| 4.52 |   | Addendum No. 3 to  License No. 30267 (English translation).                                                                                                                           |
| 4.53 |   | MTS License  No. 50789 for provision of mobile radiotelephone communication services  using IMT-2000/UMTS mobile radiotelephone networks in the Russian  Federation (English translation). |
| 4.54 |   | UMC License  No. 720189 for provision of communication services using the NMT-450,  GSM-900, PSN and DCS-1800 networks (English translation).                                              |
| 4.55 |   | UMC License  No. 120375 for provision of communication services using the CDMA-450  network (English translation).                                                                         |
| 8.1  |   | List of Subsidiaries of  Mobile TeleSystems OJSC.                                                                                                                                               |
| 10.1 |   | Code of Ethics for  Senior Officers of Mobile TeleSystems OJSC, as approved by the Board of  Directors of Mobile TeleSystems OJSC on May 18, 2006 (English  translation).                  |
| 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.                         |

 

 

162

----

**SIGNATURES**

Theregistrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersignedto sign this annual report on its behalf.
|                     | MOBILE TELESYSTEMS OJSC |
|---------------------|-------------------------|
| Date: June 25, 2007 | By:                     | /s/ Leonid Melamed |
|                | Name:                   | Leonid Melamed |
|                | Title:                  | President and Chief Executive Officer |

 

163

----

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

**OJSC Mobile TeleSystems and Subsidiaries**
|                                                                                                                                | ** ** | **Page** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| REPORT OF THE INDEPENDENT  REGISTERED PUBLIC ACCOUNTING FIRM                                                                   |       | F-2      |
| CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,  2006 AND 2005 AND FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004: |       |     |
| Consolidated balance sheets as of  December 31, 2006 and 2005                                                             |       | F-3      |
| Consolidated statements of  operations for the years ended December 31, 2006, 2005 and 2004                               |       | F-5      |
| Consolidated statements of  changes in shareholders’ equity for the years ended December 31, 2006,  2005 and 2004    |       | F-6      |
| Consolidated statements of cash flows for the years  ended December 31, 2006, 2005 and 2004                               |       | F-7      |
| Notes to the consolidated financial statements                                                                                 |       | F-9      |

 

F-1

----

**REPORT OF THE INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

To the Shareholders of OJSC Mobile TeleSystems:

We have audited the accompanying consolidated balancesheets of Mobile TeleSystems, a RussianOpen Joint-Stock Company, and subsidiaries (“the Group”) as ofDecember 31, 2006 and 2005, and the related consolidated statementsof operations, changes in shareholders’ equity and cash flows for each of thethree years in the period ended December 31, 2006. These financial statements are the responsibility of the Group’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

Weconducted our audits in accordance with the standards of the Public CompanyAccounting 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. An audit 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 statementspresent fairly, in all material respects, the financial position of the Groupas of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of thethree years in the period ended December 31, 2006, in conformity withaccounting principles generally accepted in the United States of America.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board (United States), the effectivenessof the Group’s internal control over financial reporting as ofDecember 31, 2006, based on the criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission and our report dated May 31, 2007 (June 7, 2007 as to Note 25),expressed an unqualified opinion on management’s assessment of theeffectiveness of the Group’s internal control over financial reporting and anadverse opinion on the effectiveness of the Group’s internal control overfinancial reporting because of a material weakness.

/s/ ZAO Deloitte &Touche CIS

MoscowMay 31, 2007(June 7, 2007 as to Note 25)

F-2

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**AS OF DECEMBER 31, 2006 AND 2005**

**(Amounts in thousands of U.S.Dollars, except share and per share amounts)**
|                                                                                                                             | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                  | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **CURRENT ASSETS:**                                                                                                         |       |                  |       |   |   |
| Cash and cash equivalents (Note 4)                                                                                          |       | $                     | 219,989    |   | $ | 78,284 |   |
| Short-term investments, including related party  amounts of $55,000 and $23,100 (Note 5)                     |       | 56,047                |       | 28,059 |   |
| Trade receivables, net (Note 6)                                                                                             |       | 298,479               |       | 209,320 |   |
| Accounts receivable, related parties (Note 17)                                                                              |       | 8,434                 |       | 7,661 |   |
| Inventory and spare parts (Note 7)                                                                                          |       | 196,265               |       | 156,660 |   |
| Prepaid expenses                                                                                                            |       | 244,680               |       | 234,345 |   |
| Deferred tax assets (Note 14)                                                                                               |       | 141,114               |       | 83,336 |   |
| VAT receivable                                                                                                              |       | 339,614               |       | 398,021 |   |
| Other current assets, including assets held for sale  of $63,209 and $nil (Note 2)                                     |       | 124,497               |       | 89,337 |   |
| **Total current assets**                                                                                                    |       | 1,629,119             |       | 1,285,023 |   |
| **PROPERTY, PLANT AND EQUIPMENT**,  net of accumulated depreciation of $1,948,368 and $1,350,783 (Note 8)              |       | 5,297,669             |       | 4,482,679 |   |
| **LICENSES**, net of accumulated  amortization of $747,076 and $561,137 (Notes 3 and 22)      |       | 405,498               |       | 603,116 |   |
| **GOODWILL** (Notes 3 and 24)                                                                                               |       | 165,462               |       | 155,221 |   |
| **OTHER INTANGIBLE ASSETS**, net  of accumulated amortization of $680,425 and $505,098 (Notes 3 and 9)                 |       | 835,916               |       | 681,025 |   |
| **DEBT ISSUANCE COSTS**, net of  accumulated amortization of $48,733 and $23,692 (Note 11)                                  |       | 70,173                |       | 74,527 |   |
| **INVESTMENTS IN AND ADVANCES TO ASSOCIATES**  (Note 19)                                                                    |       | 141,473               |       | 107,959 |   |
| **OTHER INVESTMENTS** (Note 20)                                                                                             |       | 3,856                 |       | 150,000 |   |
| **RESTRICTED CASH** (Note 21)                                                                                               |       | 24,779                |       | 6,230 |   |
| **Total  assets**                                                                                                           |       | $                     | 8,573,945  |   | $ | 7,545,780 |   |

 

The accompanying notes to the consolidated financial statements are an integral part of these statements.

F-3

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2006 AND 2005 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts)**
|                                                                                                                                                                                                                                                  | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                       | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **CURRENT  LIABILITIES:**                                                                                                                                                                                                                        |       |                  |       |   |   |
| Trade accounts payable                                                                                                                                                                                                                           |       | $                     | 309,712    |   | $ | 363,723 |   |
| Accounts payable, related  parties (Note 17)                                                                                                                                                                                                     |       | 135,256               |       | 40,829 |   |
| Deferred connection fees,  current portion (Note 10)                                                                                                                                                                                             |       | 47,528                |       | 44,361 |   |
| Subscriber prepayments and  deposits                                                                                                                                                                                                             |       | 421,539               |       | 344,493 |   |
| Debt, current portion (Note  11)                                                                                                                                                                                                                 |       | 147,260               |       | 765,881 |   |
| Capital lease obligation,  current portion (Notes 12 and 17)                                                                                                                                                                                     |       | 3,366                 |       | 2,793 |   |
| Income tax payable                                                                                                                                                                                                                               |       | 29,110                |       | 7,565 |   |
| Accrued liabilities (Note 13)                                                                                                                                                                                                                    |       | 405,728               |       | 276,291 |   |
| Bitel liability (Note 20)                                                                                                                                                                                                                        |       | 170,000               |       | — |   |
| Other payables                                                                                                                                                                                                                                   |       | 50,805                |       | 76,890 |   |
| **Total current liabilities**                                                                                                                                                                                                                    |       | 1,720,304             |       | 1,922,826 |   |
| **LONG-TERM LIABILITIES:**                                                                                                                                                                                                                       |       |                  |       |   |   |
| Notes payable (Note 11)                                                                                                                                                                                                                          |       | 1,199,178             |       | 1,199,052 |   |
| Debt, net of current portion  (Note 11)                                                                                                                                                                                                          |       | 1,725,361             |       | 879,903 |   |
| Capital lease obligation, net  of current portion (Notes 12 and 17)                                                                                                                                                                              |       | 3,287                 |       | 2,928 |   |
| Deferred connection fees, net  of current portion (Note 10)                                                                                                                                                                                      |       | 32,079                |       | 57,824 |   |
| Deferred taxes (Note 14)                                                                                                                                                                                                                         |       | 86,349                |       | 158,414 |   |
| Other long-term liabilities                                                                                                                                                                                                                      |       | 10,800                |       | — |   |
| **Total long-term liabilities**                                                                                                                                                                                                                  |       | 3,057,054             |       | 2,298,121 |   |
| **Total liabilities**                                                                                                                                                                                                                            |       | 4,777,358             |       | 4,220,947 |   |
| **COMMITMENTS AND CONTINGENCIES** (Note 23)                                                                                                                                                                                                      |       |                  |       |   |   |
| **MINORITY INTEREST**                                                                                                                                                                                                                            |       | 44,806                |       | 30,744 |   |
| **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, 2006 and 2005, 776,550,625 and 763,554,870 of which  are in the form of ADS, respectively (Note 1)) |       | 50,558                |       | 50,558 |   |
| Treasury stock (15,922,129 and  5,400,486 common shares at cost as of December 31, 2006 and 2005)                                                                                                                                                |       | (114,778              | )          | (5,534 | ) |
| Additional paid-in capital                                                                                                                                                                                                                       |       | 571,718               |       | 568,104 |   |
| Unearned compensation (Note  16)                                                                                                                                                                                                                 |       | —                |       | (1,210 | ) |
| Shareholder receivable (Note  11)                                                                                                                                                                                                                |       | —                |       | (7,182 | ) |
| Accumulated other comprehensive  income (Note 2)                                                                                                                                                                                                 |       | 89,916                |       | 50,614 |   |
| Retained earnings                                                                                                                                                                                                                                |       | 3,154,367             |       | 2,638,739 |   |
| **Total shareholders’ equity**                                                                                                                                                                                                              |       | 3,751,781             |       | 3,294,089 |   |
| **Total liabilities and shareholders’ equity**                                                                                                                                                                                              |       | $                     | 8,573,945  |   | $ | 7,545,780 |   |

 

The accompanying notes to the consolidated financial statements are an integral part of these statements.

F-4

----

**OJSC MOBILETELESYSTEMS AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

**(Amounts in thousands of U.S. Dollars, except shareand per share amounts)**
|                                                                                                                                                                     | ** ** | **Years ended December 31,** | ** **    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|---------------|
| ** **                                                                                                                                                          | ** ** | **2006**                                    | ** **    | **2005** | ** ** | **2004** | ** ** |
| **NET OPERATING REVENUE**                                                                                                                                           |       |                                        |          |   |   |   |   |
| Services revenue and connection fees                                                                                                                                |       | $                                           | 6,287,100     |   | $ | 4,942,288 |   | $ | 3,800,271 |   |
| Sales of handsets  and accessories                                                                                                                                  |       | 97,154                                      |          | 68,730 |   | 86,723 |   |
|                                                                                                                                                                |       | **6,384,254**                               |          | **5,011,018** |   | **3,886,994** |   |
| Cost of services,  excluding depreciation and amortization shown separately below (including  related party amounts of $113,732, $78,253 and $61,770, respectively) |       | 1,223,715                                   |          | 732,867 |   | 481,097 |   |
| Cost of handsets  and accessories                                                                                                                                   |       | 209,260                                     |          | 254,606 |   | 218,590 |   |
| General and  administrative expenses (including related party amounts of $13,301, $9,486  and $9,509, respectively) (Note 18)                                       |       | 941,047                                     |          | 758,729 |   | 575,296 |   |
| Provision for  doubtful accounts (Note 6)                                                                                                                           |       | 84,858                                      |          | 50,407 |   | 26,459 |   |
| Other operating  expenses                                                                                                                                           |       | 87,822                                      |          | 67,173 |   | 29,777 |   |
| Sales and  marketing expenses (including related party amounts of $171,792, $80,146 and  $59,113, respectively)                                                     |       | 607,835                                     |          | 608,092 |   | 460,983 |   |
| Depreciation and  amortization expenses                                                                                                                             |       | 1,095,981                                   |          | 907,113 |   | 675,729 |   |
| **Net  operating income**                                                                                                                                           |       | **2,133,736**                               |          | **1,632,031** |   | **1,419,063** |   |
| **CURRENCY EXCHANGE AND TRANSACTION GAINS**                                                                                                               |       | (24,051                                     | )             | (10,319 | ) | (6,529 | ) |
| **OTHER  EXPENSES/(INCOME)**                                                                                                                                        |       |                                        |          |   |   |   |   |
| Interest income  (including related party amounts of $4,844, $5,440 and $6,801)                                                                                     |       | (13,055                                     | )             | (24,828 | ) | (21,792 | ) |
| Interest expense,  net of capitalized interest                                                                                                                      |       | 177,145                                     |          | 132,474 |   | 107,956 |   |
| Equity in net  income of associates (Note 19)                                                                                                                       |       | (58,083                                     | )             | (42,361 | ) | (24,146 | ) |
| Bitel investment  and write off (Note 20)                                                                                                                           |       | 320,000                                     |          | — |   | — |   |
| Other  expenses/(income), net (including related party amounts of $2,460, $2,070 and  $5,303)                                                                       |       | 65,913                                      |          | 13,211 |   | (9,310 | ) |
| **Total  other expenses, net**                                                                                                                                      |       | **491,920**                                 |          | **78,496** |   | **52,708** |   |
| **Income  before provision for income taxes and minority interest**                                                                                                 |       | **1,665,867**                               |          | **1,563,854** |   | **1,372,884** |   |
| **PROVISION FOR INCOME TAXES**(Note  14)                                                                                                                            |       | 576,103                                     |          | 410,590 |   | 354,664 |   |
| **MINORITY INTEREST**                                                                                                                                               |       | 14,026                                      |          | 26,859 |   | 30,342 |   |
| **NET INCOME**                                                                                                                                                      |       | **$**                                       | **1,075,738** |   | **$** | **1,126,405** |   | **$** | **987,878** |   |
| Weighted average  number of common shares outstanding                                                                                                |       | 1,987,610,121                               |          | 1,986,819,999 |   | 1,984,497,348 |   |
| Earnings per share,  basic and diluted                                                                                                                              |       | $                                           | 0.54          |   | $ | 0.57 |   | $ | 0.50 |   |

 

The accompanying notes to the consolidated financial statements are an integral part of these statements.

F-5

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CHANGESIN SHAREHOLDERS’ EQUITYFOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

**(Amounts in thousands of U.S. Dollars, except share amounts)**

| ** **                                                                                    | ** ** | ** **            | ** **    | ** **              | ** ** | ** **        | ** ** | ** **  | ** ** | **Accumulated** | ** ** | ** **      | ** ** | ** **       | ** ** | ** **     | ** ** | ** **   | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------|---------------|-------------------------|------------|-------------------|------------|-------------|------------|-----------------|------------|-----------------|------------|------------------|------------|----------------|------------|--------------|------------|------------|------------|
| ** **                                                                                    | ** ** | ** **            | ** **    | ** **              | ** ** | ** **        | ** ** | ** **  | ** ** | **Other**       | ** ** | **Additional**  | ** ** | ** **       | ** ** | ** **     | ** ** | ** **   | ** ** | ** ** | ** ** |
| ** **                                                                                    | ** ** | **Common Stock** | ** **    | **Treasury Stock** | ** ** | **Comprehensive** | ** ** | **Paid-in** | ** ** | **Unearned**    | ** ** | **Shareholder** | ** ** | **Retained**     | ** ** | ** **     | ** ** |
| ** **                                                                                    | ** ** | **Shares**            | ** **    | **Amount**              | ** ** | **Shares**        | ** ** | **Amount**  | ** ** | **Income**      | ** ** | **Capital**     | ** ** | **Compensation** | ** ** | **Receivable** | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
| **BALANCES, January 1, 2004**                                                                 |       | $                     | 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:                                                                      |       |                  |          |                    |       |              |       |        |       |            |       |            |       |             |       |           |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |
| 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 | ) |
| Currency 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:                                                                      |       |                  |          |                    |       |              |       |        |       |            |       |            |       |             |       |           |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |
| 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 | ) |
| Currency translation adjustment                                                               |       | —                |          |                    | —     |              |       | —      |       | —          |       |            | 24,898     |             |       |           | —     |         |       |       | —     |   |   |   | — |   |   | — |   | 24,898 |   |
| Change in fair value of interest rate swaps, net of  tax  (Note 11)                           |       | —                |          |                    | —     |              |       | —      |       | —          |       |            | 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 |   |
| Receivable from Sistema:                                                                      |       |                  |          |                    |       |              |       |        |       |            |       |            |       |             |       |           |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Increases for interest                                                                        |       | —                |          |                    | —     |              |       | —      |       | —          |       |            | —     |             |       |           | —     |         |       |       | —     |   |   |   | — |   |   | — |   | — |   |
| Payments from Sistema                                                                         |       | —                |          |                    | —     |              |       | —      |       | —          |       |            | —     |             |       |           | —     |         |       |       | —     |   |   |   | 7,182 |   |   | — |   | 7,182 |   |
| Stock options exercised (Note 16)                                                             |       | —                |          |                    | —     |              |       | 639,357     |       | 655             |       |            | —     |             |       |           | 3,149      |         |       |       | —     |   |   |   | — |   |   | — |   | 3,804 |   |
| Amortization of deferred compensation (Note 16)                                               |       | —                |          |                    | —     |              |       | —      |       | —          |       |            | —     |             |       |           | 1,675      |         |       |       | —     |   |   |   | — |   |   | — |   | 1,675 |   |
| Effect of adoption of SFAS 123R (Note 2)                                                      |       | —                |          |                    | —     |              |       | —      |       | —          |       |            | —     |             |       |           | (1,210     | )            |       |       | 1,210      |   |   |   | — |   |   | — |   | — |   |
| Dividends declared (Note 1)                                                                   |       | —                |          |                    | —     |              |       | —      |       | —          |       |            | —     |             |       |           | —     |         |       |       | —     |   |   |   | — |   |   | (560,110 | ) | (560,110 | ) |
| Repurchase of common stock (Note 15)                                                          |       | —                |          |                    | —     |              |       | (11,161,000 | )          | (109,899        | )          |            | —     |             |       |           | —     |         |       |       | —     |   |   |   | — |   |   | — |   | (109,899 | ) |
| Currency translation adjustment                                                               |       | —                |          |                    | —     |              |       | —      |       | —          |       |            | 41,315     |             |       |           | —     |         |       |       | —     |   |   |   | — |   |   | — |   | 41,315 |   |
| Early termination and change in fair value of  interest rate swaps, net of tax (Note 11) |       | —                |          |                    | —     |              |       | —      |       | —          |       |            | (2,013     | )                |       |           | —     |         |       |       | —     |   |   |   | — |   |   | — |   | (2,013 | ) |
| Net income                                                                                    |       | —                |          |                    | —     |              |       | —      |       | —          |       |            | —     |             |       |           | —     |         |       |       | —     |   |   |   | — |   |   | 1,075,738 |   | 1,075,738 |   |
| **BALANCES,  December 31, 2006**                                                              |       | $                     | 1,993,326,138 |                    |       | $                 | 50,558     |        |       | (15,922,129     | )          | $               | (114,778   | )                |       | $              | 89,916     |         |       |       | $          | 571,718 |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | 3,154,367 |   | $ | 3,751,781 |   |

 

The accompanying notes to the consolidated financial statements are anintegral part of these statements.

F-6

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

**(Amounts in thousands of U.S. Dollars)**
|                                                                                             | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                  |       |                                        |       |   |   |   |   |
| Net income                                                                                  |       | $                                           | 1,075,738  |   | $ | 1,126,405 |   | $ | 987,878 |   |
| **Adjustments to reconcile net income to net cash provided by operating  activities:** |       |                                        |       |   |   |   |   |
| Minority interest                                                                           |       | 14,026                                      |       | 26,859 |   | 30,342 |   |
| Depreciation and amortization                                                               |       | 1,095,981                                   |       | 907,113 |   | 675,729 |   |
| Debt issuance cost  amortization                                                            |       | 25,041                                      |       | 14,347 |   | 4,759 |   |
| Amortization of deferred  connection fees                                                   |       | (54,486                                     | )          | (44,207 | ) | (46,978 | ) |
| Equity in net income of  associates                                                         |       | (58,083                                     | )          | (42,361 | ) | (24,146 | ) |
| Inventory obsolescence expense                                                              |       | —                                      |       | 9,112 |   | 4,610 |   |
| Provision for doubtful  accounts                                                            |       | 84,858                                      |       | 50,407 |   | 26,459 |   |
| Deferred taxes                                                                              |       | (133,027                                    | )          | (64,959 | ) | (76,023 | ) |
| Bitel liability and investment  write off (Note 20)                                         |       | 320,000                                     |       | — |   | — |   |
| Non-cash expenses associated  with stock bonus and stock options             |       | 1,675                                       |       | 1,477 |   | 900 |   |
| **Changes in operating assets and liabilities:**                                            |       |                                        |       |   |   |   |   |
| Increase in accounts  receivable                                                            |       | (174,790                                    | )          | (86,008 | ) | (101,223 | ) |
| Increase in inventory                                                                       |       | (39,312                                     | )          | (74,557 | ) | (24,179 | ) |
| Decrease/(increase) in prepaid  expenses and other current assets            |       | 24,268                                      |       | (157,400 | ) | (18,571 | ) |
| Decrease/(increase) in VAT  receivable                                                      |       | 58,446                                      |       | (125,186 | ) | (55,044 | ) |
| Increase in trade accounts  payable, accrued liabilities and other current liabilities |       | 149,568                                     |       | 262,568 |   | 327,076 |   |
| **Net cash provided by operating  activities**                                              |       | 2,389,903                                   |       | 1,803,610 |   | 1,711,589 |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                   |       |                                        |       |   |   |   |   |
| Acquisitions of subsidiaries,  net of cash acquired                                         |       | (38,188                                     | )          | (178,917 | ) | (355,744 | ) |
| Purchases of property, plant  and equipment                                                 |       | (1,449,954                                  | )          | (1,757,980 | ) | (1,204,400 | ) |
| Purchases of intangible assets                                                              |       | (272,014                                    | )          | (423,367 | ) | (154,544 | ) |
| Purchases of short-term  investments                                                        |       | (57,147                                     | )          | (37,375 | ) | (114,440 | ) |
| Proceeds from sale of  short-term investments                                               |       | 29,159                                      |       | 82,724 |   | 286,340 |   |
| Purchase of other investments                                                               |       | (3,856                                      | )          | (150,000 | ) | — |   |
| Proceeds from investments in  and advances to associates                                    |       | 20,000                                      |       | 12,798 |   | (413 | ) |
| Increase in restricted cash                                                                 |       | (18,549                                     | )          | (6,230 | ) | — |   |
| **Net cash used in investing activities**                                                   |       | (1,790,549                                  | )          | (2,458,347 | ) | (1,543,201 | ) |
|                                                                                             |            |                                             |            |  |  |  |  |  |  |  |

 

F-7

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)

**(Amounts in thousands of U.S. Dollars)**

 
|                                                                                   | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                        | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                        |       |                                        |       |   |   |   |   |
| Proceeds from stock options  exercise                                             |       | 3,804                                       |       | 4,256 |   | 4,049 |   |
| Proceeds from issuance of  notes                                                  |       | —                                      |       | 398,944 |   | — |   |
| Repurchase of common stock                                                        |       | (109,899                                    | )          | — |   | — |   |
| Repayment of notes                                                                |       | —                                      |       | — |   | (600,000 | ) |
| Debt issuance cost                                                                |       | (20,686                                     | )          | (59,163 | ) | (12,039 | ) |
| Capital lease obligation  principal paid                                          |       | (5,815                                      | )          | (8,129 | ) | (15,274 | ) |
| Dividends paid including taxes                                                    |       | (558,848                                    | )          | (407,210 | ) | (232,662 | ) |
| Proceeds from loans                                                               |       | 1,284,296                                   |       | 1,012,613 |   | 1,177,556 |   |
| Loan principal paid                                                               |       | (1,064,100                                  | )          | (491,481 | ) | (320,511 | ) |
| Payments from Sistema                                                             |       | 7,182                                       |       | 11,698 |   | 9,654 |   |
| **Net cash (used in)/provided by financing  activities**                          |       | (464,066                                    | )          | 461,528 |   | 10,773 |   |
| Effect of exchange rate  changes on cash and cash  equivalents                    |       | 6,417                                       |       | (2,657 | ) | 4,613 |   |
| **NET INCREASE/(DECREASE) IN CASH  AND CASH EQUIVALENTS**     |       | 141,705                                     |       | (195,866 | ) | 183,774 |   |
| **CASH AND CASH EQUIVALENTS, beginning  of the year**                             |       | 78,284                                      |       | 274,150 |   | 90,376 |   |
| **CASH AND CASH EQUIVALENTS, end  of the year**                                   |       | 219,989                                     |       | 78,284 |   | 274,150 |   |
| **SUPPLEMENTAL INFORMATION:**                                                     |       |                                        |       |   |   |   |   |
| Income taxes paid                                                                 |       | $                                           | 673,410    |   | $ | 588,105 |   | $ | 430,109 |   |
| Interest paid                                                                     |       | $                                           | 201,352    |   | $ | 145,081 |   | $ | 142,899 |   |
| **Non-cash investing activities:**                                                |       |                                        |       |   |   |   |   |
| Additions to network equipment  and software under capital lease        |       | $                                           | 7,561      |   | $ | 4,091 |   | $ | 2,861 |   |
| Amounts owed for capital  expenditures                                            |       | $                                           | 214,835    |   | $ | 69,734 |   | $ | 84,258 |   |
| Additions to network equipment  through ING BHF Bank and Commerzbank AG financing |       | $                                           | —     |   | $ | — |   | $ | 8,800 |   |
| Payable related to business acquisition (Note 3)                                  |       | $                                           | —     |   | $ | 23,618 |   | $ | — |   |

 

The accompanying notes to the consolidated financial statements are an integral part of these statements.

F-8

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

**1.**                 DESCRIPTIONOF BUSINESS

***Business of theGroup******—******OJSC*********Mobile TeleSystems and itssubsidiaries (“MTS” or “the Group”) is one of the leading providers of mobiletelecommunications services in the Russian Federation (“RF”, or “Russia”),Ukraine, Uzbekistan and Turkmenistan in terms of the number of subscribers andrevenues.

The Open Joint-Stock Company Mobile TeleSystems (“MTSOJSC”, or “the Company”) was created on March 1, 2000, through the mergerof MTS CJSC and RTC CJSC, a wholly-owned subsidiary. MTS CJSC started itsoperations in the Moscow license area in 1994 and began expanding into nearbyregions in 1997. Since that time, MTS has continued to grow by applying forGlobal System for Mobile Communication (“GSM”) licenses in new regions andacquiring existing GSM license holders and operators.

The Group provides a wide range of voice and datamobile telecommunications services, including text messages (“SMS”), picturemessages (“MMS”) and other data services. Services are provided to bothconsumers and corporate customers, through a variety of both prepaid andcontract tariff arrangements.

The Group’s mobile services are currently offered overa GSM network, on which a General Packet Radio Service (“GPRS”) service is alsoprovided. In July 2006, Ukrainian MobileCommunications (“UMC”), MTS’s subsidiary in Ukraine, acquired a new CDMA(Code Division Multiple Access) license, which is a 3G telecommunicationsstandard, ratified by the International Telecommunication Union. UMC plans torender the following services over the 3G network: wireless virtual datatransmission services, remote access to corporate mail, high speed access tothe Internet, multimedia services (e.g.video on demand). As of December 31, 2006, UMC has not commenced anycommercial services under this new license.

The Group is organized by geography of its operations.MTS’s principal mobile operations are located in Russia, Ukraine and other CIScountries. In 2005, the Group’s business was managed by ten Russian macro-regions and foreign subsidiaries. In 2006,the Group established a new Business unit “MTS Russia”, that isresponsible for the operational management of all Russian macro-regions;Business unit “UMC”; and Business unit “Foreign subsidiaries” that includesUzdunrobita in Uzbekistan, Barash Communications Technologies, Inc. inTurkmenistan, and MTS Belarus, equity accounted affiliate of MTS, in Belarus.

MTS completed its initial public offering in 2000 andlisted its shares of common stock, represented by American Depositary Shares,or ADSs, on the New York Stock Exchange under the symbol “MBT.”

F-9

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

***Ownership******—******As***of December 31, 2006 and 2005, MTS’sshareholders of record and their respective percentage direct interests inoutstanding shares were as follows:
|                                                                              | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Joint-Stock  Financial Corporation “Sistema” (“Sistema”) |       | 32.2                  | %          | 32.0 | % |
| Sistema Holding  Limited (“Sistema Holding”)                       |       | 9.8                   | %          | 9.7 | % |
| Invest-Svyaz,  Closed Joint-Stock Company (“Invest-Svyaz”)         |       | 8.1                   | %          | 8.1 | % |
| VAST, Limited  Liability Company (“VAST”)                          |       | 3.0                   | %          | 3.0 | % |
| ADS Holders                                                                  |       | 39.3                  | %          | 38.4 | % |
| Free float, GDR  Holders and others                                          |       | 7.6                   | %          | 8.8 | % |
|                                                                         |       | 100.0                 | %          | 100.0 | % |

 

MTS’s share capital comprises 1,977,404,009 and1,988,565,009 of outstanding common shares as of December 31, 2006 and2005, respectively. MTS’s wholly-owned subsidiary, Mobile TeleSystemsLLC, owned 4,761,129 and 5,400,486 shares in connection with the Group’smanagement stock option plans. In December 2006, MTS repurchased11,161,000 of its own common shares representing 2,232,200 ADSs for $110.0million. As a result, the total shares in treasury stock of the Group comprised15,922,129 as of December 31, 2006.

Sistema owned 100% of Sistema Holding, Invest-Svyaz,and VAST, which collectively resulted in Sistema’s effective ownership in MTSof 53.1% and 52.8% (or 1,050,165,886 of common shares) as of December 31,2006 and 2005, respectively.

Vladimir P. Evtushenkov has a controlling interest in Sistema, and would beconsidered under U.S. securities laws as the beneficial owner of MTS’s shareseffectively held by Sistema.

Each ADS initially represented 20 shares of commonstock of the Company. Effective January 2005, the ratio was changed from 1ADS per 20 ordinary shares to 1 ADS per 5 ordinary shares. The Companyinitially issued a total of 17,262,204 ADS, representing 345,244,080 commonshares. Subsequently, due to trading of shares on the open market and therepurchase of 2,232,200 ADS by MTS during2006 the number of ADS changed to 155,310,125 and 152,710,974 (representingunderlying ownership of 776,550,625 and 763,554,870 shares) as of December 31, 2006 and 2005,respectively.

Since 2003, common shares of MTS OJSC have been tradedon the Moscow Interbank Currency Exchange (“MICEX”).

Thefollowing table summarizes the Group’s declared cash dividends for the yearsended December 31, 2006, 2005 and 2004:
|                                    | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Dividends declared                 |       | $                     | 561,629    |   | $ | 402,600 |   | $ | 220,000 |   |
| Dividends, U.S.  Dollars per ADS   |       | 1.4                   |       | 1.01 |   | 2.2 |   |
| Dividends,  U.S. Dollars per share |       | 0.282                 |       | 0.202 |   | 0.110 |   |
|                                    |            |                       |            |  |  |  |  |  |  |  |

 

F-10

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

As at December 31, 2006, dividends payable of$1.3 million are outstanding.

On July 1, 2005, the Companycompleted a merger of eight of its wholly-owned subsidiaries in Russia. Thesesubsidiaries were Telecom XXI, Kuban-GSM, Udmurtia Digital Network-900 (“UDN-900”),Dontelecom, MTS-Barnaul, MTS-Nizhniy Novgorod (“MTS-NN”), Telecom-900 andAmur Cellular Communication (“ACC”).

On April 1, 2006, theCompany completed a further merger of nine of its wholly-owned subsidiaries inRussia which were Gorizont-RT, TAIF Telcom, MTS-RTK, Sibchallenge, TomskCellular Communications (“TSS”), BM Telecom, Far East Cellular Systems-900(“FECS-900”), Siberia Cellular Systems-900 (“SCS-900”) andUraltel.

**2.**                 SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS

***Accountingprinciples******—******MTS***maintains its accounting books and records inRussian rubles for its subsidiaries located in the Russian Federation, inUkrainian hryvnias for UMC, Uzbek som for Uzdunrobita , U.S. Dollars for BarashCommunications Technologies, Inc. (“BCTI”) and Turkmenian manat for the branch of BCTI in Turkmenistanbased on respective local accounting and tax legislations. Theaccompanying consolidated financial statements have been prepared in order topresent MTS’s financial position and its results of operations and cash flowsin accordance with accounting principles generally accepted in the UnitedStates (“U.S. GAAP”) and are expressed in terms of U.S. Dollars.

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 withU.S. GAAP. The principal adjustments are related to revenue recognition,foreign currency translation, deferred taxation, consolidation, acquisitionaccounting and depreciation and valuation of property, plant and equipment,intangible assets and investments.

***Basis ofconsolidation******—******Wholly-owned***subsidiariesand majority-owned subsidiaries where the Group has operating and financialcontrol are consolidated. Those ventures where the Group exercises significant influence, but does not haveoperating and financial control are accounted for using the equity method. All intercompanyaccounts and transactions are eliminated upon consolidation. Investments inwhich the Group does not have the ability to exercise significant influenceover operating and financial policies are accounted for under the costmethod and included in other investments in the consolidated balance sheets.The Group’s share in the net income of unconsolidated associates is included inother income in the accompanying consolidated statements of operations anddisclosed in Note 19. Results of operations of subsidiaries acquired areincluded in the consolidated statements of operations from the date of theiracquisition.

F-11

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

As of December 31, 2006 and 2005, the Company hadinvestments in the following significant legal entities:
|                       | ** ** | **Accounting**        | ** ** | **December 31,** | ** ** |
|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **            | ** ** | **Method**            | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ***Russia***          |       |                  |       |                  |       |   |   |
| Primtelefon           |       | Consolidated          |       | 100.0                 | %          | 100.0 | % |
| ReCom                 |       | Consolidated          |       | 100.0                 | %          | 100.0 | % |
| Volgograd Mobile      |       | Consolidated          |       | 100.0                 | %          | 100.0 | % |
| Astrakhan Mobile      |       | Consolidated          |       | 100.0                 | %          | 100.0 | % |
| MTS-Capital           |       | Consolidated          |       | 100.0                 | %          | 100.0 | % |
| Mar Mobile GSM        |       | Consolidated          |       | 100.0                 | %          | 100.0 | % |
| Novitel               |       | Consolidated          |       | 100.0                 | %          | 100.0 | % |
| MTS-Kostroma          |       | Consolidated          |       | 100.0                 | %          | 100.0 | % |
| Sibintertelecom       |       | Consolidated          |       | 100.0                 | %          | 100.0 | % |
| Telesot Alania        |       | Consolidated          |       | 100.0                 | %          | 100.0 | % |
| MSS                   |       | Consolidated          |       | 91.0                  | %          | 91.0 | % |
| Sweet-Com             |       | Consolidated          |       | 74.9                  | %          | 74.9 | % |
| Dagtelecom            |       | Consolidated          |       | 74.99                 | %          | — |   |
| MTS-RTK(1)            |       | Merged / Consolidated |       | —                |       | 100.0 | % |
| SCS-900(1)            |       | Merged / Consolidated |       | —                |       | 100.0 | % |
| FECS-900(1)           |       | Merged / Consolidated |       | —                |       | 100.0 | % |
| Uraltel(1)            |       | Merged / Consolidated |       | —                |       | 100.0 | % |
| BM Telecom(1)         |       | Merged / Consolidated |       | —                |       | 100.0 | % |
| Sibchallenge(1)       |       | Merged / Consolidated |       | —                |       | 100.0 | % |
| TSS(1)                |       | Merged / Consolidated |       | —                |       | 100.0 | % |
| TAIF Telcom(1)        |       | Merged / Consolidated |       | —                |       | 100.0 | % |
| Gorizont-RT(1)        |       | Merged / Consolidated |       | —                |       | 100.0 | % |
| ***Ukraine***         |       |                  |       |                  |       |   |   |
| UMC                   |       | Consolidated          |       | 100.0                 | %          | 100.0 | % |
| ***Other countries*** |       |                  |       |                  |       |   |   |
| MTS Finance(2)        |       | Consolidated          |       | 100.0                 | %          | 100.0 | % |
| Uzdunrobita           |       | Consolidated          |       | 74.0                  | %          | 74.0 | % |
| BCTI                  |       | Consolidated          |       | 100.0                 | %          | 100.0 | % |
| MTS Bermuda Ltd.(3)   |       | Consolidated          |       | 100.0                 | %          | — |   |
| MTS Belarus           |       | Equity                |       | 49.0                  | %          | 49.0 | % |

----

(1)                 Represents wholly-owned entities merged with MTS OJSCon April 1, 2006.

(2)                 Represents beneficial ownership.

(3)                 A wholly-owned subsidiary in Bermuda established torepurchase the Group’s ADSs (Note 1).

F-12

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

***Translation methodology******—******Management***believesthat, based on the currencies of theprimary economic environments in which the entities and macro-regions operate,the appropriate functional currencies for the Group’s entities in 2006, 2005and 2004 are the following:

·       forRussian business—U.S. Dollar, except for the macro-region (“MR”) South (which includes the former subsidiary Kuban-GSMand other regions located in the South of Russia) where the functionalcurrency is the Russian ruble;

·       forUMC—Ukrainian hryvnia;

·       for Turkmen branch of BCTI—Turkmenian manat; and

·       for other entities—U.S. Dollar.

Each of the legal entities domiciled in Russia,Ukraine, Uzbekistan, Turkmenistan and Belarus maintain their records andprepare their financial statements in the local currency, either Russian ruble,Ukrainian hryvnia, Uzbek som, Turkmenian manat or Belarussian ruble, inaccordance with the requirements of local statutory accounting and taxlegislation.

The Group has selected the U.S.Dollar as its reporting currency. Remeasurement of financial statements intofunctional currencies and translation of financial statements into U.S. Dollarshas been performed in accordance with the provisions of Statement of FinancialAccounting Standard (“SFAS”) No. 52 “Foreign Currency Translation”:

·       For entitieswhose records are not maintained in their functional currencies, monetaryassets and liabilities have been remeasured at the period end exchange rates.Non-monetary assets and liabilities have been remeasured at historical rates.Revenues, expenses and cash flows have been remeasured at historical rates.Remeasurement differences resulting from the use of these rates have beenaccounted for as currency exchange and transaction gains and losses in theaccompanying consolidated statements of operations;

·       For MRSouth, UMC, and for the Turkmen branch of BCTI where the functional currency isother than the reporting currency, the Russian ruble, Ukrainian hryvnia andTurkmenian manat, respectively, all year-end balance sheet items have beentranslated into U.S. Dollars at the period-end exchange rate. Revenues andexpenses have been translated at period average exchange rate. In addition, a“new cost basis” for all non-monetary assets of MR South has been establishedas of January 1, 2003, when the Russian economy ceased to be consideredhyperinflationary. Cumulative translation adjustments related to the use oflocal currency as the functional currency of $41,315, $24,898 and $15,361 wererecorded directly in the consolidated statement of shareholders’ equity for theyears ended December 31, 2006, 2005 and 2004, respectively.

***Management estimates******—******The***preparation of consolidated financial statementsin conformity with U.S. GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

F-13

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

Examples of significant estimates include theallowance for doubtful accounts, the recoverability of intangible assets andother long-lived assets, valuation allowances on deferred tax asset accruals,and valuation of financial instruments.

***Cash and cash equivalents—******Cash***represents cash on hand and in MTS’s bankaccounts and short-term investments, including term deposits, having originalmaturities of less than three months.

***Short-term investments******—******Short-term***investments representinvestments in time deposits, which have original maturities in excess of three months but less than twelvemonths. These investments are accounted for at cost.

***Allowance for doubtful accounts******—******MTS*********provides an allowance for doubtful accounts basedon management’s periodic review for recoverability of accounts receivable fromcustomers and other receivables.

***Prepaid expenses—******Prepaid*********expenses are primarily comprised of advancepayments made to vendors for inventory and services.

***Inventory—******Inventory*********mainly consists of handsets andaccessories held for sale, spare parts, to be used for equipment maintenancewithin the next twelve months, advertising materials, and other inventoryitems. Inventory is stated at the lower ofcost or market value.

Prior to January 1,2006, inventory cost was determined using the first-in, first-out, or FIFOmethod. Starting from January 1, 2006, the Group changed its method ofaccounting for inventory cost from FIFO to the weighted average cost (“WAC”)method. The primary purpose for the change was to ensure a better comparability of the Group’s financial statements withthose of other wireless operators as the WAC method is widely usedthroughout the industry. The effect of the change in accounting policy was notsignificant to the Group’s consolidated financial position, results ofoperations and cash flows and is not expected to be in the future.

Handsets and accessoriesheld for sale are expensed when sold. The Group periodically assesses itsinventories for obsolete and slow-moving stock.

***Value-added tax (“VAT”)******—******Value-added***tax related to sales is payable to the taxauthorities on an accrual basis based upon invoices issued to the customer. VATincurred for purchases may be reclaimed from the state, subject to certainrestrictions, against VAT related to sales.

***Assets held for sale******—******In*********2006, management of the Groupdecided to discontinue using certain telecommunicationequipment in Russian regions inaccordance with Group’s network development strategy.This equipment had a net book value of approximately $63.2 millionas of December 31, 2006. TheCompany has negotiated with a third party to sell this equipment during theyear ended December 31, 2007, at net book value. Accordingly, thisequipment has been classified as a current asset in the Group’s financial statementsas of December 31, 2006.

F-14

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

***Property, plant and equipment—******Property,*****plant and equipment, including improvements thatextend useful lives, are stated at cost. Property, plant and equipment with auseful life of more than one year is capitalized at historical cost anddepreciated on a straight-line basis over its expected useful life as follows:
| 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                              |   |

 

Constructionin progress and equipment held for installation is not depreciated until theconstructed or installed asset is ready for its intended use.

Maintenanceand repair costs are expensed as incurred, while upgrades and improvements arecapitalized.

Interestexpense incurred during the construction phase of MTS network under developmentis capitalized as part of property, plant and equipment until the relevantprojects are completed and placed into service.

As aresult of the financial statement restatements by numerous U.S. publiccompanies and publication of a letter by the Chief Accountant of the SECregarding the interpretation of longstanding lease accounting principles in2004, MTS corrected its accounting practices for leasehold improvements in thefourth quarter of 2004. The primary effect of this accounting correction was toaccelerate to earlier periods depreciation expenses with respect to certaincomponents of previously capitalized leasehold improvements.

Thesecorrections resulted in a cumulative charge to net income of $34.9 million, netof income tax, in the fourth quarter of 2004, of which $21.5 million related tothe years 1998 through 2003. The netcumulative charge is comprised of a $44.5 million increase in depreciationexpense related primarily to depreciation of capitalized leasehold improvementexpenses for base stations; a decrease of $1.4 million in the equity net incomefrom MTS Belarus also related to depreciation of capitalized leaseholdimprovement expenses for base station sites; and an increase of $11.0 millionrelated to an additional deferred tax benefit due to the change in accountingbase for property, plant and equipment.

Allcomponents of the net charge were non-cash and did not impact historical orfuture cash flows or the timing of payments under the related leases.

***Asset retirement obligations******—******In***accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations”,the Group calculates an asset retirement obligation and an associated assetretirement cost when the Group has a legal or constructive obligation inconnection with the retirement of tangible long-lived assets. The Group’sobligations under SFAS No. 143 relate primarily to the cost of removing its equipment from sites. As of December 31,2006 and 2005, the estimated asset retirement obligations were not significantto the Group’s consolidated financial position and results of operations.

In March 2005, theFinancial Accounting Standards Board (“FASB”) issued Interpretation No. 47,“Accounting for Conditional Asset Retirement Obligations—an interpretation ofFASB 

F-15

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

Statement No. 143.”This Interpretation clarifies that the term “conditional asset retirementobligation” as used in FASB Statement No. 143,“Accounting for Asset Retirement Obligations”, which refers to a legalobligation to perform an asset retirement activity, in which the timing and(or) method of settlement are conditional on a future event that may or may not be within the control of theentity. The obligation to perform the asset retirement activity isunconditional even though uncertainty exists about the timing and (or) methodof settlement. Uncertainty about the timing and (or) method of settlement of aconditional asset retirement obligation should be factored into the measurementof the liability when sufficient information exists to make a reasonableestimate of the fair value of the obligation. Interpretation No. 47 waseffective for the Group beginning January 1, 2006. The adoption of thisInterpretation did not have a material impact on its consolidated financialposition and results of operations.

***License costs******—******License***costsare capitalized as a result of (a) the purchase price allocated tolicenses acquired in business combinations and (b) licenses purchaseddirectly from government organizations, which require license payments.

The current operatinglicenses of the Group do not provide for automatic renewal upon expiration. Asthe Group and the industry do not have sufficient experience with the renewalof licenses, license costs are being amortized during the initial licenseperiod without consideration of possible future renewals, subject to periodicreview for impairment, on a straight-line basis over three to ten yearsstarting from the date such license becomes commercially operational.

***Other intangible assets and goodwill******—******Intangible***assets represent various purchased softwarecosts, telephone numbering capacity, acquired customer base, rights to useradio frequencies and rights to use premises. A part of the rights to usepremises was contributed by shareholders to the Group’s charter capital.Telephone numbering capacity with a finite contractual life**is being amortized over the contractperiod which varies from five to ten years and the rights to use premises arebeing amortized over five to fifteen years. Amortization of numbering capacitycosts starts immediately upon the purchase of numbering capacity. Telephonenumbering capacity with unlimited contractual life is not amortized, but isreviewed, at least annually, for impairment in accordance with the provisionsof SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”).

Software and other intangibleassets are amortized over three to fifteen years. Customer bases acquired afterJanuary 1, 2005, are amortized over their estimated average subscriber life,being from 32 to 60 months. In 2004 the average subscriber life ranged from 20to 76 months. The effect of the change in this estimate in 2006 and 2005 wasnot material. Rights to use radio frequencies are amortized over the period oftheir contractual life, being from two to fifteen years. All finite-lifeintangible assets are amortized using the straight-line method.

F-16

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**Notes to the consolidated financial statementsfor the years ended December 31, 2006, 2005 and 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

Goodwill represents an excess ofthe cost of business acquired over the fair market value of identifiable netassets at the date of acquisition. Goodwillis reviewed for impairment at least annually or whenever it is determined that one or more impairment indicatorsexist. The Group determines whether impairment has occurred by assigninggoodwill to the reporting unit identified in accordance with SFAS No. 142,and comparing the carrying amount of the reporting unit to the fair value ofthe reporting unit. If an impairment of goodwill has occurred, the Grouprecognizes a loss for the difference between the carrying amount and theimplied fair value of goodwill. To date, no impairment of goodwill hasoccurred.

***Leasingarrangements*****—**The Group accounts for leases based on therequirements of SFAS No. 13, “Accounting for Leases.”**Entities of the Group lease operating facilities, whichinclude switches, base stations and other cellular network equipment. The Groupalso leases premises and other sites to install base stations equipment anttowers. Rentals payable under operating leases are charged to the incomestatement on a straight line basis over the term of the relevant lease. Forcapital leases, the present value of future minimum lease payments at theinception of the lease is reflected as an asset and a liability in the balancesheet. Amounts due within one year are classified as short-term liabilities andthe remaining balance as long-term liabilities. 

***Investmentsimpairment*****—**Management periodically assesses therecoverability of the carrying values of investments and, if necessary, recordsimpairment losses to write the investments down to fair value. Duringthe year ended December 31, 2006, the Group’s investment in Bitel LLC (“Bitel”)of $150 million was written down to $nil (Note 20). For the two years ended December 31, 2005 and 2004, no impairment ofinvestments occurred.

***Impairment oflong-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 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,MTS records impairment losses to write the asset down to fair value, measuredby the estimated discounted net future cash flows expected to be generated fromthe use of the assets. No impairment of long-lived assets occurred during thethree years ended December 31, 2006.

***Subscriberprepayments*****—**MTS requires the majority of its customers to payin advance for telecommunication services. All amounts received in advance ofservices provided are recorded as a subscriber prepayment liability and are notrecorded as revenues until the related services have been provided to thesubscriber.

***Treasury stock*****—**Shares of common stockrepurchased by the Group are recorded at cost as treasury stock and reduced theshareholders’ equity in the Group’s consolidated financial statements.

***Revenue recognition*****—**The Grouprecords its revenues net of VAT. Revenues are recognized only when all of the following conditions have beenmet: (i) there is pervasive evidence of an arrangement; (ii) delivery ofservices and goods has occurred; (iii) the fees are fixed and determinable; and(iv) collectibility of the fees is reasonably assured.

F-17

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**Notes to the consolidated financial statementsfor the years ended December 31, 2006, 2005 and 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

MTS categorizes itsrevenue sources in the statements of operations as follows:

·       Service revenue andconnection fees: (a) usage charges; (b) subscription fees; (c) value addedservice fees; (d) fees for connecting users of other operators’ fixed line andwireless networks to MTS’s network(“interconnect fees”); (e) roaming fees charged to other operators for guestroamers utilizing MTS’s network; (f) connection fees; and

·       Salesof handsets and accessories.

*Usagecharges*—Usage charges consist of fees determined basedon airtime used by a subscriber, the destination of the call and the serviceutilized, and access charges. MTS recognizes revenues related to usage chargesand access charges in the period when services are rendered.

*Subscriptionfees*—MTS recognizes revenues related to the monthlynetwork subscription fees in the month when the service is provided to thesubscriber.

*Valueadded service fees*—Value added service fees aredetermined based on the usage of airtime or the volume of data transmitted forvalue added services, such as short message services (“SMS”), including content services via SMS, internet usageand data services. The Group evaluates the criteria outlined in EmergingIssues Task Force (“EITF”) Issue No. 99-19 “Reporting Revenue Gross as a Principal Versus Net as an Agent” in determiningwhether it is appropriate to record the gross amount of servicesprovided and related costs or the net amount earned as commissions. Revenue isrecorded gross when MTS is primarilyobligated in a transaction, has latitude in establishing prices and selectingsuppliers of services, or has several but not all of these indicators.

*Roamingfees*—MTS charges roaming per-minute fees to otherwireless operators for non-MTS subscribers utilizing MTS’s network. MTSrecognizes such revenues when the services are provided.

*Interconnectfees*—MTS recognizes interconnect fees for incomingcalls to customers from fixed line or wireless networks owed by other operatorsin the month when services to the customer are actually provided.

Effective July 1, 2006, an amendment to the RF FederalLaw on Communications implemented the “calling party pays”, or CPP, principleprohibiting mobile operators from charging their subscribers for incoming calls. Previously, MTS chargedsubscribers in Russia for incoming calls. Under the new system, MTScharges the telecommunication operators of the calling party for incomingcalls, and, in its turn, MTS pays other operators for the outgoing calls of itssubscribers.

*Connectionfees*—MTS defers the initial connection fees on itsprepaid and postpaid tariff plans from the moment of initial signing of thecontract with subscribers and activation of value added services over the estimated average subscriber life. Following management analysis of thesubscriber base in the regions where the Group operates, effective January 1, 2004, averagesubscriber lives were changed. From January 1, 2004, the Group calculates anaverage expected term of the subscriber relationship for each region and amortizesregional connection fees accordingly. The average expected subscriber life ranged from 20 to76 months in 2004, and from 12 to 60 months in 2005 and 2006. The effectof the change in this estimate was approximately $8.5 million, net ofincome tax or $0.004 per share, in 2004, and not material in 2005 and 2006.

F-18

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**Notes to the consolidated financial statementsfor the years ended December 31, 2006, 2005 and 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

*Salesof handsets and accessories*—MTS sells wirelesshandsets and accessories to customers who are entering into contracts forservice and also as separate distinct transactions. The Group recognizes revenues from the sale of wirelesshandsets and accessories when the products are delivered to and acceptedby the customer, as it is considered to be a separate earnings process from thesale of wireless services in accordance with “EITF” Issue No. 00-21, “RevenueArrangements with Multiple Deliverables”. The costs of wireless handsets andaccessories, whether sold to subscribers through the distribution channel or aspart of the service contract, are expensed when the associated revenue isrecognized.

*Customerincentives*—Incentives provided to customers areusually offered on signing a new contract or as part of a promotional offering.Incentives, representing the reduction of the selling price of the service(free minutes and discounts) are recorded in the period to which they relate,when the respective revenue is recognized, as a reduction to both accountsreceivable and revenue. However, if the sales incentive is a free product orservice delivered at the time of sale, the fair value of the free product orservice is classified as an expense. In particular, in Ukraine, MTS sellshandsets at prices below cost to contractsubscribers. Such subsidies are recognized in the cost of equipment when thesale is recorded.

***Prepaid phone cards*****—**MTS sells prepaid phonecards to subscribers, separately from the handset. These cards allowsubscribers to make a predetermined allotment of wireless phone calls and/ortake advantage of other services offered by the Group, such as short messagesand value-added services. The Group recognizes revenue from the services in themonth when the services were actually rendered. Revenue from the sale ofprepaid cards is deferred until the service is rendered to the customer usesthe airtime or the card expires.

***Cost of services*****—**Expenses incurred byMTS in connection with the provision of wireless communication services mainlyrelate to interconnect and line rental costs, roaming expenses and costs ofhandsets and accessories sold.

Calls made by MTS subscribersfrom areas outside of the territories covered by the Group’s licenses aresubject to roaming fees charged by the wireless provider in thoseterritories. These fees are recorded asroaming expenses, as MTS acts as the principal in the transaction with thesubscriber, being a primary obligor in providing the services, bearingthe credit risk and having latitude in establishing roaming prices. MTS charges its subscribers for roamingfees paid to other networks based on the Group’s existing tariffs and recordssuch roaming fees as service revenues at the time the services are performed.

***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 than not that these assets will not be realized.

***Sales and marketingexpenses*****—**Sales andmarketing expenses consist primarily of dealers’ commissions and advertisingcosts. Dealers’ commissions are linked torevenues received during the six-monthperiod from the date a new subscriber is activated by a dealer. MTS expensesthese costs as incurred. Advertising costs for the years ended December 31,2006, 2005 and 2004, were $321,451, $248,610 and $159,035.

F-19

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**Notes to the CONSOLIDATED financial STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

***Borrowing costs*****—**Borrowing costsinclude interest incurred on existing indebtedness and debt issuance costs.Interest costs for assets that require a period of time to get them ready fortheir intended use are capitalized and amortized over the related assets’estimated useful lives. The capitalized interest costs for the years endedDecember 31, 2006, 2005 and 2004 were $70,274, $54,229 and $33,209,respectively. Debt issuance costs are capitalized and amortized over the termof the respective borrowings using the effective interest method. Interestexpenses net of amounts capitalized and amortization of debt issuance costs,for the years ended December 31, 2006, 2005 and 2004, were $138,977, $110,422and $97,092, respectively.

***Government PensionFund*****—**The Groupcontributes to the local state pension and social funds, on behalf of all itsemployees.

In Russia, starting from 2001, all socialcontributions, including contributions to the pension fund, were substitutedwith a unified social tax (“UST”) calculated by the application of a regressiverate from 35.6% to 2% of the annual gross remuneration of each employee, thatwas changed, starting January 1, 2005, to a rate from 26% to 2%. The UST isallocated to three social funds, including the pension fund, where the rate ofcontributions to the pension fund vary from 28% to 2% (from 20% to 2% startingJanuary 1, 2005), depending on the annual gross salary of each employee. Thesecontributions are expensed as incurred. The amount of UST paid by the Group inRussia amounted to $35.8 million, $35.3 million and $33.7 million in 2006,2005 and 2004, respectively.

In Ukraine, Uzbekistan andTurkmenistan the subsidiaries of the Group are required to contribute aspecified percentage of each employee payroll up to a fixed limit to the localpension fund, unemployment and social security funds. Payments to the pensionfund in the Ukraine amounted to $9.1 million, $6.6 million and $2.9million in 2006, 2005 and 2004 years, respectively. Amounts contributed to the pension funds in Uzbekistan and Turkmenistanwere not significant.

The Group does not participate in any pension fundsother then described above.

***Earnings per share*****—**Basic earnings pershares (“EPS”) have been determined using the weighted average number of sharesoutstanding during the year. Diluted EPS reflect the potential dilutive effectof stock options granted to employees. There are 1,435,001, 3,187,240 and 3,530,970 stock options outstandingas at December 31, 2006, 2005 and 2004, respectively.

The following is the reconciliation of the sharecomponent for basic and diluted EPS with respect to the Group’s net income:
|                                                                            | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                 | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Weighted average  number of common shares outstanding                      |       | 1,987,610,121         |       | 1,986,819,999 |   | 1,984,497,348 |   |
| Dilutive effect  of stock options, as if exercised                         |       | 35,894                |       | 290,040 |   | 1,168,573 |   |
| Weighted average number  of common shares and potential shares outstanding |       | 1,987,646,015         |       | 1,987,110,039 |   | 1,985,665,921 |   |

 

***Financialinstruments and hedging activities*****—**From time to time in its acquisitions, the Group usesfinancial instruments, consisting of put and call options on all or part of theminority stakes of acquired companies, to defer payment of the purchase priceand provide optimal acquisition structuring. Theseput 

F-20

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**Notes to the CONSOLIDATED financial STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

andcall options qualify as freestanding financial instruments and are accounted inaccordance with the provisions of SFAS No. 150 “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities andEquity” and EITF 00-6 “Accounting for Freestanding Derivative FinancialInstruments Indexed to, and Potentially Settled in, the Stock of a ConsolidatedSubsidiary”. Put and call options for the acquisitions of Dagtelecom andUzdunrobita minority interests are measured initially and subsequently at fair value. See also Note 3 “Businesses acquired”and Note 20 “Other investments”. 

From time to time the Group enters intovariable-to-fixed interest rate swap agreement to manage its exposure tovariability in expected future cash flows of its variable-rate long term debt,which is caused by interest rate fluctuations. 

The Group accounts for theseswaps in accordance with the provisions of SFAS No. 133 “Accounting for DerivativeInstruments and Hedging Activities” and SFAS No. 149 “Amendment ofStatement 133 on Derivative Instruments and Hedging Activities.” All derivativesare recorded as either assets or liabilities in the consolidated balancesheets and measured at their respective fair values.

The effective portion of changes in the fair value ofderivatives that are designated and qualify as cash flow hedges are recognizedin equity. The gain or loss relating to the ineffective portion is recognizedimmediately in the income statement.

The Group’s interest rate swap agreements aredesignated as cash flow hedges and the hedging relationship qualifies for hedgeaccounting. Accordingly, the effective portion of the change in the fair valueof interest rate swap agreements is recordedin other comprehensive income and reclassified to interest expense inthe same period that the related cash flows of the hedged transaction affectthe interest expense.

At the inception of the hedge, and on a quarterlybasis, the Group performs an analysis to assess whether changes in the cash flowsof its interest rate swap agreements are deemed highly effective in offsettingchanges in the cash flows of the hedged debt. If at any time the correlationassessment indicates that the interest rate swap agreements are no longereffective as a hedge, the Group discontinues hedge accounting and allsubsequent changes in fair value are recorded in net income.

The Group does not use financial instruments fortrading purposes.

***Fair value offinancial instruments*****—**The fair market value of financial instruments,consisting of cash and cash equivalents, short-term investments, derivativefinancial instruments, accounts receivable and accounts payable, which areincluded in current assets and liabilities, approximates the carrying value ofthese items due to the short term nature of these amounts. As of December 31,2006, the $400 million Notes due in 2008 had a fair value of 106.2% or $425million, the $400 million Notes due in 2010 had a fair value of 106.7% or $427million and the $400 million Notes due in 2012 had a fair value of 106.7% or $427 million.As of December 31, 2006, the fair value of other fixed rate debt includingcapital lease obligations approximated its carrying value. The fair value ofvariable rate debt approximates its carrying value.

F-21

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**Notes to the CONSOLIDATED financial STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

***Comprehensive income*****—**Comprehensive income isdefined as net income plus all other changes in net assets from non-ownersources. The following is the reconciliation of total comprehensive income, netof tax for the years ended December 31, 2006, 2005 and 2004:
|                                                                                                               | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income                                                                                                    |       | $                                          | 1,075,738  |   | $ | 1,126,405 |   | $ | 987,878 |   |
| Translation  adjustment                                                                                       |       | 41,315                                     |       | 24,898 |   | 15,361 |   |
| Early termination  and change in fair value of interest rate swaps, net of tax of $794,  $1,033 and $123 |       | (2,013                                     | )          | 3,272 |   | (512 | ) |
| Total comprehensive  income                                                                                   |       | $                                          | 1,115,040  |   | $ | 1,154,575 |   | $ | 1,002,727 |   |

 

***Stock-basedcompensation*****—**Prior toDecember 31, 2005, MTS accounted for stockoptions issued to employees under the recognition and measurementprovisions of APB Opinion No. 25 “Accounting for Stock Issued to Employees,Compensation” (“APB No.25”), as permitted by FASB Statement No. 123 “Accountingfor Stock-Based Compensation” (“SFAS No.123”) and SFAS No. 148 “Accounting forStock Based Compensation—Transition and Disclosure, an Amendment to FASBStatement No. 123”. Under the requirements of these statements, theGroup elected to use the intrinsic value of options on the measurement date asa method of accounting for compensation to employees. According to theterms of the option plan, the exercise price of the options equaled the averagemarket share price during the hundred day period preceding the grant date. Thedifference in the exercise price of the option and market price at the date ofgrant was shown as unearned compensation in the consolidated statements ofchanges in shareholders’ equity and was amortized to expense over the vestingperiod of two years.

Effective from January 1, 2006, MTS adopted the provisions of FASBStatement No. 123R “Share based payments” (SFAS No. 123R), using themodified-prospective-application transition method. Under this transitionmethod, the compensation cost of $1.7 million recognized in 2006 includes thecompensation cost for all share-based awards granted prior to, but not yetvested as of December 31, 2006, determined based on the grant date fair valueestimated in accordance with the original requirementsof SFAS No. 123, using the same assumptions and taken into account theestimated forfeitures. The Group’sconsolidated financial statements for the periods prior to 2006 have not been restated, in accordance with SFASNo. 123R. Total compensation costs of $1.5 million and $0.9 million wererecognized during the years ended December 31, 2005 and 2004, respectively. The effect from forfeitures comprised $0.3million and $1.1 million the years ended December 31, 2005 and2004, respectively. The effect of the estimated forfeitures upon adoption ofSFAS No. 123Ris not significant. 

As aresult of adopting SFAS No. 123R, the Group’s net income for the year endedDecember 31, 2006, is $1.5 millionlower than if it had continued to account for share-based compensation underAPB No. 25.

The reported basic and dilutedearnings per share of $0.63 for the year ended December 31, 2006, would nothave changed significantly if the Group had not adopted SFAS No. 123R.

As of December 31, 2006, thereis $0.7 million of total unrecognized compensation cost related to non-vestedshare-based compensation arrangements. This amount is expected to be recognizedover a weighted-average period of 0.54 years.

F-22

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**Notes to the CONSOLIDATED financial STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

If theGroup had recognized compensation costs following the provisions of the SFASNo. 123 in the years ended December 31, 2004 and 2005, net income and earningper share amounts would have been as follows:
|                                                                                                                                        | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                             | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Net income as reported                                                                                                                 |       | $                     | 1,126,405  |   | $ | 987,878 |   |
| Add: Stock-based compensation included in reported net income, net of  related tax effects               |       | 1,175                 |       | 900 |   |
| Less: Pro forma stock-based compensation under SFAS No.123, net of  related tax effects        |       | (2,891                | )          | (1,978 | ) |
| Pro-forma net income                                                                                                                   |       | $                     | 1,124,689  |   | $ | 986,800 |   |
| Earnings  per share—basic and diluted                                                                                             |       |                  |       |   |   |
| As reported                                                                                                                            |       | $                     | 0.57       |   | $ | 0.50 |   |
| Pro-forma                                                                                                                              |       | $                     | 0.57       |   | $ | 0.50 |   |

 

***Comparativeinformation*****—**Certain prior year amounts have been reclassifiedto conform to the current period presentation.

***New and recentlyadopted accounting pronouncements******—******In*** February 2006,the FASB issued FASB Statement No. 155, “Accounting for Certain HybridFinancial Instruments, an amendment to FASB Statement No. 133 and 140”(“SFAS No 155”). SFAS No 155 addresses the application of SFAS No. 133 tobeneficial interests in securitized financial assetsand permits the remeasurement to fair value for any hybrid financial instrumentthat contains an embedded derivative that otherwise would requirebifurcation, requires the evaluation of interests in securitized assets to identify interests that are freestandingderivatives or that are hybrid financial instruments that contain anembedded derivative requiring bifurcation, amends SFAS No. 140 toeliminate the prohibition on a qualifying special purpose entity from holding aderivative financial instrument that pertains to a beneficial interest otherthan another derivative financial instrument, and clarifies certain otherderivatives classification issues. This statement is effective for allfinancial instruments acquired, issued or subject to a remeasurement (newbasis) event after the beginning of an entity’s fiscal year that starts afterSeptember 15, 2006, and is not expected to have a material impact on theGroup’s financial position, results of operations and cash flows.

In June 2006, the FASB issued InterpretationNo. 48 “Accounting for Uncertainty in Income Taxes—an interpretation ofSFAS No. 109” (“FIN No. 48”) which is effective for fiscal yearsbeginning after December 15, 2006. FIN No. 48 clarifies theaccounting for uncertainty in income taxes recognized in the financialstatements by prescribing a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. The Interpretation also requiresenterprises to make explicit disclosures at the end of each reporting periodabout uncertainties in their income tax positions, including the detailedroll-forward of tax benefits taken that do not qualify for financial statementrecognition. The Group adopted FIN No. 48as of January 1, 2007. The adoption of FIN No. 48 did not have amaterial impact on the Group’s financial position, results of operations andcash flows. 

F-23

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

In September 2006, the FASB issued FASB StatementNo. 157, “Fair value measurements” (“SFAS No. 157”). SFASNo. 157 defines fair value, establishes a framework for measuring fairvalue, and expands disclosure requirements of fair value measurement. SFASNo. 157 is applicable to other accounting pronouncements that require orpermit fair value measurement, and accordingly, does not require any fair valuemeasurement. SFAS No. 157 is effective for financial statements issued forfiscal years beginning after November 15, 2007, and interim periods withinthose fiscal years. The Group does not expect the adoption of SFAS No. 157to have a material impact on the Group’s financial position, results ofoperations and cash flows.

In September 2006, the SEC staff issued StaffAccounting Bulletin No. 108, “Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 eliminates the diversity of practicesurrounding how public companies quantify financial statement misstatements. Itestablishes an approach that requires quantification of financial statementmisstatements based on the effects of the misstatements on each of thecompany’s financial statements and the related financial statement disclosures.SAB 108 must be applied to annual financial statements for the first fiscalyear ending after November 15, 2006. The adoption of SAB 108 did not havea material impact on the Group’s financial position, results ofoperations and cash flows.

In February 2007, theFASB issued FASB Statement No. 159, “The Fair Value Option for FinancialAssets and Financial Liabilities”—including an amendment of FASB StatementNo. 115”(“SFAS No.159”), which permitsan entity to measure certain financial assets and financial liabilitiesat fair value. SFAS No. 159 offers an irrevocable option to carry the vastmajority of financial assets and liabilitiesat fair value, with changes in fair value recorded in earnings (the fairvalue option, or FVO). The Statement’s objective is to improve financialreporting by allowing entities to mitigate volatility in reported earningscaused by the measurement of related assets and liabilities using differentattributes, without having to apply complex hedge accounting provisions. SFASNo.159 is effective as of the beginning of an entity’s first fiscal yearbeginning after November 15, 2007. Early adoption is permitted as of thebeginning of the previous fiscal year provided that the entity (1) makesthat choice in the first 120 days of that fiscal year, (2) has not yetissued financial statements, and (3) elects to apply the provisions ofSFAS No.157. The Group is currently evaluating the provisions of SFASNo. 159 to determine the potential impact, if any, its adoption will haveon the Group’s financial statements.

**3.**                 BUSINESSESACQUIRED

***Dagtelecomacquisition******—******In***July 2006,MTS acquired a 74.99% controlling stake in Dagtelecom for a cash considerationof $14.7 million. In conjunction with this acquisition, the Group entered intoa put and call option agreement to buy the remaining stake at fair market valuewithin an exercise period commencing from September 1, 2009 and ending inJuly 2021, for the put option, and from 2009 to 2010 for the call option.The fair values of the option was $nil at December 31, 2006. Dagtelecom isa GSM-900 mobile services provider in the Republic of Dagestan, a region in theSouth of Russia with a population of 2.6million. Dagtelecom’s customer base at the date of acquisition wasapproximately 170,000 subscribers (unaudited).

F-24

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

Thisacquisition was accounted for using the purchase method of accounting. Thepurchase price allocation for the acquisition was as follows:
| Current assets           |   | $      | 605    |   |
|--------------------------|--------|--------|--------|--------|
| Non-current  assets      |   | 12,747 |   |
| Customer base  cost      |   | 1,785  |   |
| Goodwill                 |   | 12,574 |   |
| Current  liabilities     |   | (7,610 | )      |
| Non-current  liabilities |   | (5,086 | )      |
| Deferred taxes           |   | (392   | )      |
| Minority interest        |   | 77     |   |
| Purchase price           |   | $      | 14,700 |   |

 

Goodwill is mainly attributableto the economic potential of the macro-region South, where Dagtelecom islocated. Goodwill is not deductible for income tax purposes. 

The customer base is amortized over the estimatedaverage subscriber’s life of approximately 60 months.

***ReCom acquisition******—******In***December 2005,MTS purchased the remaining 46.1% stake in ReCom for $110.0 million. PreviouslyMTS owned 53.9% of ReCom. As a result of the transaction, MTS’ ownership in thesubsidiary increased to 100%. The acquisition was accounted for using thepurchase method of accounting. The allocation of the purchase price increasedthe recorded license costs by $43.9 million, the customer base costs by $15.0million and resulted in recognition of goodwill of $16.2 million.

Goodwill is mainly attributableto the economic potential of the market given the low regional penetrationlevel as of the date of acquisition. Goodwill is not deductible for income taxpurposes. License costs are amortized over the remaining contractualterms of the licenses of approximately 3 to 8 years and the customer base is amortizedover the average subscriber’s life of approximately 60 months.

***BCTI acquisition******—******In*** June 2005, MTS entered into an agreement toacquire 100% of the outstanding stock of BCTI, which is a leadingcellular operator in Turkmenistan with a customer base of approximately 59,100subscribers (unaudited). BCTI holds a license to provide GSM-900/1800 servicesfor the whole territory of Turkmenistan and a license for the provision of AMPSservices. The agreement provided for the acquisition of a 51% stake andincluded a forward commitment to complete the acquisition of the remaining 49%stake within eight months from the date of the original agreement subject tocertain conditions.

MTS acquired the 51% stake in BCTI for a cashconsideration of $28.2 million, including a finder’s fee of $2.5 million. TheGroup accounted for the purchase of the remaining 49% stake in BCTI as afinancing of the minority interest and, consequently, consolidated 100% of thesubsidiary starting from June 30, 2005.In November 2005, MTS completed the acquisition of the remaining 49% stakein BCTI for a cash consideration of $18.5 million.

F-25

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

Thisacquisition was accounted for using the purchase method of accounting. Totalpurchase price amounted to $46.7 million. The purchase price allocation for theacquisition 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 |   |

 

License costs are amortized over the remainingcontractual terms of the licenses of approximately 4 years. In accordancewith certain provisions of the license agreement with the Government ofTurkmenistan, the Group shares the net profit derived from the operations ofthe BCTI branch located in Turkmenistan. The amount of shared net profit iscalculated based on the financial statements prepared in accordance with localgenerally accepted accounting principles subject to certain adjustments. TheGroup shared 49% of the net profit since the date of acquisition up toDecember 21, 2005, and 20% of the net profit commencing December 21,2005. 

***Gorizont-RTacquisition******—******In***December 2004,MTS acquired a 76.0% stake in Gorizont-RT, a mobile phone operator in theRepublic of Sakha (Yakutia) in the Far East of Russia, for a cash considerationof $53.2 million. Gorizont-RT holds licenses to provide GSM-900/1800 servicesin the Republic of Sakha (Yakutia). The Gorizont-RT’s customer base as at thedate of acquisition was approximately 100,000 subscribers (unaudited). MTShas consolidated the financial results of Gorizont-RT since the date ofacquisition.

Theacquisition was accounted for using the purchase method. The purchase priceallocation was as follows:
| Current assets          |   | $      | 3,820  |   |
|-------------------------|--------|--------|--------|--------|
| Non-current assets      |   | 17,501 |   |
| License costs           |   | 26,362 |   |
| Customer base cost      |   | 1,050  |   |
| Trademark               |   | 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 mainly attributableto the economic potential of the market given the low regional penetrationlevel as of the date of acquisition. Goodwill is not deductible for income taxpurposes. License costs are amortized over the remaining contractualterms of the licenses of approximately 10 years and the customer base isamortized over the average subscriber’s life of approximately 60 months.

F-26

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

In June 2005, MTS acquired the remaining 24.0%stake in Gorizont-RT, increasing its ownership to 100%. The purchase price paidwas $13.5 million. The allocation of purchase price increased the recordedlicense costs by $7.5 million.

***Telesot Alaniaacquisition******—******In***December 2004,MTS purchased a 52.5% stake in Telesot Alania, a GSM mobile phone operator in the Republic of North Ossetia located inthe South of Russia, for a cash consideration of $6.2 million. TelesotAlania holds a license to provide GSM-900/1800services in the Republic of North Ossetia. MTS has consolidated the financial results of Telesot Alania since the dateof acquisition, Telesot Alania’s customerbase as at the date of acquisition was approximately 54,000 subscribers(unaudited). In December 2005, MTS acquired the remaining 47.5% stake inTelesot Alania, increasing its ownership in the company to 100%. In accordancewith the purchase agreement the purchase price amounted to $32.6million, from which $9.0 million was paid in 2005, and the remaining $23.6million was paid during 2006.

Theacquisition was accounted for using the purchase method of accounting. Thefinal purchase price allocation was as follows:
| Current assets      |   | $      | 2,229  |   |
|---------------------|--------|--------|--------|--------|
| Non-current assets  |   | 5,508  |   |
| License costs       |   | 8,706  |   |
| Customer base cost  |   | 90     |   |
| Goodwill            |   | 23,967 |   |
| Current liabilities |   | (767   | )      |
| Deferred taxes      |   | (887   | )      |
| Purchase  price     |   | $      | 38,846 |   |

 

The purchase price allocation wascompleted in 2006. The adjustment to the preliminary purchase price allocationmade as of the date of the acquisition in 2005 resulted in a reduction ofgoodwill and increase of license cost of $2.3 million.

License costs are amortized over the remainingcontractual terms of the license of approximately 2 years and the customerbase is amortized over the average subscriber’s life of approximately 60months.

Goodwill is mainly attributableto the economic potential of the market in the macro-region “South” where thecompany is located. Goodwill is notdeductible for income tax purposes.

***Sibintertelecomacquisition******—******In***November 2004,MTS acquired a 93.53% stake in Sibintertelecom, a mobile phone operator inChita region and Aginsk-Buryatsk District in the Far East of Russia, for a cashconsideration of $37.4 million. Sibintertelecom holds licenses to provideGSM-900 services  in the Chita region and the Aginsk-Buryatsk District inthe Far East of Russia. MTS has consolidated the financial results ofSibintertelecom since the date of acquisition.The company’s customer base as at the date of acquisition was approximately100,000 subscribers (unaudited).

F-27

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED financial STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

Theacquisition was accounted for using the purchase method of accounting. Thepurchase price allocation was as follows:
| Current assets      |   | $      | 5,939  |   |
|---------------------|--------|--------|--------|--------|
| Non-current assets  |   | 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 mainly attributableto the economic potential of the market given the low regional penetrationlevel as of the date of acquisition. Goodwill is not deductible for income taxpurposes. License costs are amortized over the remaining contractualterms of the licenses of approximately 5 years for the Chita region and 7 yearsfor the Aginsk-Buryatsk District and the customer base is amortized over theaverage subscriber’s life of approximately 44 months.

In December 2005, MTS acquired the remaining6.47% stake in Sibintertelecom, which resulted in an increase of MTS ownershipin Sibintertelecom to 100.0%. The amount paid for the stake amounted to $2.8million. The allocation of purchase price increased recorded the license costsby $1.4 million.

***TAIF Telcomacquisition—******In***September 2004,MTS exercised its option to acquire the 47.3% of common shares and 50.0% ofpreferred shares in TAIF Telcom for a cash consideration of $63.0 million,increasing its ownership to 100%. The Group received title to the acquiredshares in October 2004.

The purchase price allocationincreased the license costs by $35.8 million, the acquired customer base by$4.2 million, with goodwill of $21.2 million being recorded. Goodwill is mainly attributable to the economicpotential of the market. Goodwill is not deductible for income tax purposes. OnApril 1, 2006, TAIF Telcom was merged with MTS OJSC.

***Uzdunrobitaacquisition—******In*** July 2004,MTS entered into an agreement to acquire 74% of the Uzbekistan mobile operatorJV Uzdunrobita (“Uzdunrobita”) for a cash consideration of $126.4 million,including transaction costs of $5.4 million. The acquisition was completed onAugust 1, 2004, and, starting from this date, Uzdunrobita’s financialresults have been consolidated by the Group. Uzdunrobita holds licenses toprovide GSM-1800 mobile communication services on the whole territory of Uzbekistan, which has a population ofapproximately 25.2 million. Uzdunrobita’s customer base as of the date ofacquisition was approximately 230,000 subscribers (unaudited).

F-28

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**Notes to the CONSOLIDATED financial STATEMENTS  FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

Theacquisition was accounted for using the purchase method. The purchase priceallocation 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 mainly attributableto the economic potential of the market given the low penetration level as ofthe date of acquisition. Goodwill is not deductible for income tax purposes.License costs are amortized over the remaining contractual terms of thelicenses of approximately 12 years and the customer base is amortized over theaverage remaining subscriber’s life of approximately 39 months.

MTS also entered into call and put option agreementswith the existing shareholders of Uzdunrobita to acquire the remaining 26%common shares of the company. The exercise period for the call and put optionwas 48 months from the acquisition date. The fair value of the option was $5.9million at December 31, 2005, and was included in other current assets inthe accompanying consolidated balance sheet.

In August 2006, MTS signed an amendment to thecall and put option agreement, which eliminates the call option and extends theexercise period to July 2008. The purchase price under the put option willbe determined by an international investment bank to be selected jointly byboth parties within 10 days of the date ofservice of a put notice. These changes were made in accordance with the wishesof all parties to maintain and develop a mutually beneficial partnership asdemonstrated by the strong results of Uzdunrobita.

The amendment of the agreement has resulted in thedecrease of the fair value of the option to $nil as at December 31, 2006,and recognition of an interest expense of $5.9 million for the year endedDecember 31, 2006.

***Primtelefonacquisition—******In*** June 2004,MTS purchased 50% of a Far-Eastern operator, CJSC Primtelefon (“Primtelefon”), for a cash consideration of $31million, increasing its effective ownership to 100%, as 50.0% of Primtelefon’sshares were controlled through Vostok Mobile, a wholly-owned subsidiary of MTS.MTS has consolidated the financial results of Primtelefon since the date of acquisition of the second stake.Primtelefon holds licenses to provide GSM 900/1800 mobile cellular communications in the Far East region of Russia.The company’s subscriber base as of the date of acquisition of the controllingstake was approximately 216,000 subscribers (unaudited).

F-29

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**Notes to the CONSOLIDATED financial STATEMENTS  FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

Theacquisition was accounted for using the purchase method. The purchase priceallocation 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 costs acquired areamortized over the remaining contractual terms of the licenses of approximately7 years and the customer base is amortized over the average remainingsubscriber’s life of approximately 41 months.

***Acquisitions ofvarious regional companies—******In***December 2005,MTS acquired an additional 74% stake in MTS-Tver for $1.4 million. As a resultof the transaction, MTS’s ownership in the company increased to 100%. Theacquisition was accounted for using the purchase method.

In February 2005, MTS completed the acquisitionof 74.9% stake in Sweet-Com LLC for a cash consideration of $2.0 million.Sweet-Com LLC is the holder of 3.5GHz radio frequency allocation for the Moscow region. The company is providingwide-band radio access services for the “last mile” based onRadio-Ethernet technology. The acquisition was accounted for using the purchasemethod. As the result of the purchase price allocation, license costs increasedby $2.4 million.

In February 2005, MTS acquired a 74.0% stake inMTS-Komi Republic, increasing its ownership to 100.0%. The consideration paid under the transactionamounted to $1.2 million. The acquisition was accounted for using thepurchase method.

In August 2004, MTS acquiredthe remaining 50% stakes in Astrakhan Mobile and Volgograd Mobile, increasingits ownership to 100.0%. The acquisition price was paid in cash and amounted to $1.1million and $2.9 million, respectively. The results of both companies have beenconsolidated by the Group since the date ofacquisition. Astrakhan Mobile holds 800/1800 MHz license covering the Astrakhanregion (population of approximately 1 million) and Volgograd Mobile holds 800/1800MHz license covering the Volgograd region (population of approximately2.7 million). As of July 31, 2004, the two companies provided AMPS/DAMPSservices to approximately 10,000 subscribers (unaudited). The acquisition wasaccounted for using the purchase method. The allocation of purchase price forthe first and second stakes in both companies resulted in an increase inlicense costs by $16.5 million.

In August 2004, MTS acquired from OJSCVolgatelecom the remaining 49% stake in UDN-900 for $6.4 million in cash.This acquisition increased MTS’s ownership in UDN to 100%. The allocation ofthe purchase price increased recorded license costs by $0.3 million. OnJuly 1, 2005, UDN was merged with MTS OJSC. UDN-900 provides GSM 900services under the MTS brand in the Udmurtia Republic. UDN’s subscriber base asof July 31, 2004, was 219,760 (unaudited).

F-30

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**Notes to the CONSOLIDATED financial STATEMENTS  FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

In April 2004, MTS acquired from OJSCSibirtelecom an additional 7.5% stake in MSS, a company which operates in theOmsk region, for $2.2 million in cash. This acquisition increased MTS’sownership in MSS to 91.0%. The acquisition was accounted for using the purchasemethod. The allocation of purchase price increased recorded license costs by$1.1 million.

In April and May of 2004, MTS acquired theremaining stakes in the following subsidiaries:

35.0%of MTS-NN (a service provider in Nizhny Novgorod) for $0.5 million, and

49.0% of Novitel (handsets dealer in Moscow) for $1.3million.

Both acquisitions increased MTS’ share in therespective companies to 100%. The acquisitions were accounted for using thepurchase method. The allocation of purchase price increased recorded goodwillby $1.8 million. Goodwill is not deductiblefor income tax purposes.

If the additions ofDagtelecom had occurred of January 1, 2005, the effect on the Group’srevenue, net income and earnings per share would not be significant.

**4.**                 CASHAND CASH EQUIVALENTS

Cashand cash equivalents as of December 31, 2006 and 2005, comprised thefollowing:
|                                       | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Ruble current  accounts               |       | $                     | 92,626     |   | $ | 46,119 |   |
| Ruble deposit  accounts               |       | 13,292                |       | 6,775 |   |
| U.S. Dollar  current accounts         |       | 8,445                 |       | 4,599 |   |
| U.S. Dollar  deposit accounts         |       | 37,601                |       | 751 |   |
| Hryvnia current  accounts             |       | 14,931                |       | 4,540 |   |
| Hryvnia deposit  accounts             |       | 5,941                 |       | — |   |
| Uzbek som current  accounts           |       | 1,816                 |       | 920 |   |
| Uzbek som deposit  accounts           |       | 35,513                |       | 3,812 |   |
| Turkmenian manat  current accounts    |       | 7,441                 |       | 10,651 |   |
| Current accounts  in other currencies |       | 2,383                 |       | 117 |   |
| Total cash and cash  equivalents      |       | $                     | 219,989    |   | $ | 78,284 |   |

 

F-31

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**Notes to the CONSOLIDATED financial STATEMENTS  FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

**5.**                 SHORT-TERMINVESTMENTS

Short-terminvestments, consisting of deposits denominated in U.S. Dollars, as ofDecember 31, 2006, comprised the following:
|                                                                      | ** ** | **Annual interest  rate** | ** ** | **Maturity  Date** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------|------------|--------------------|------------|---------------------------------|------------|
| OJSC Moscow Bank  of Reconstruction and Development   |       |                           | 7.5        | %                  |       | March,  2007                    |       |   | $ | 42,700 |   |   |
| OJSC Moscow Bank  of Reconstruction and Development   |       |                           | 7.5        | %                  |       | February,  2007                 |       |   | 12,300 |   |   |
| Other                                                                |       |                           |       |               |       |                            |       |   | 1,047 |   |   |
| Total short-term  investments                                        |       |                           |       |               |       |                            |       |   | $ | 56,047 |   |   |

 

OJSC Moscow Bank of Reconstruction and Development isa related party, whose controlling shareholder is Sistema (see also Note 17).

Short-terminvestments, consisting of deposits denominated in U.S. Dollars, as ofDecember 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 |   |   |
|                               |            |                                |            |                    |            |                             |            |  |  |  |  |  |

 

East-West United BankS.A., is a related party, whose controlling shareholder is Sistema.

**6.**                 TRADERECEIVABLES, NET

Tradereceivables as of December 31, 2006 and 2005, comprised the following:
|                                    | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Accounts  receivable, subscribers  |       | $                     | 183,038    |   | $ | 147,138 |   |
| Accounts  receivable, interconnect |       | 89,977                |       | 21,373 |   |
| Accounts  receivable, roaming      |       | 26,104                |       | 30,863 |   |
| Accounts  receivable, other        |       | 46,795                |       | 49,865 |   |
| Allowance for  doubtful accounts   |       | (47,435               | )          | (39,919 | ) |
| Trade receivables, net             |       | $                     | 298,479    |   | $ | 209,320 |   |

 

F-32

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**Notes to the CONSOLIDATED financial STATEMENTS  FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

Thefollowing table summarizes the changes in the allowance for doubtful accountsfor the years ended December 31, 2006, 2005 and 2004:
|                                  | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Balance,  beginning of the year  |       | $                     | 39,919     |   | $ | 16,659 |   | $ | 13,698 |   |
| Provision for  doubtful accounts |       | 84,858                |       | 50,407 |   | 26,459 |   |
| Accounts  receivable written off |       | (77,342               | )          | (27,147 | ) | (23,498 | ) |
| Balance, end of the year         |       | $                     | 47,435     |   | $ | 39,919 |   | $ | 16,659 |   |

 

**7.**                 INVENTORYAND SPARE PARTS

Inventoryand spare parts as of December 31, 2006 and 2005, comprised the following:
|                                    | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Spare parts for  base stations     |       | $                     | 78,120     |   | $ | 48,998 |   |
| SIM cards and  prepaid phone cards |       | 34,611                |       | 26,902 |   |
| Handsets and  accessories          |       | 25,458                |       | 39,147 |   |
| Advertising  materials             |       | 9,021                 |       | 5,513 |   |
| Other materials                    |       | 49,055                |       | 36,100 |   |
| Total inventory and  spare parts   |       | $                     | 196,265    |   | $ | 156,660 |   |

 

Othermaterials mainly consist of stationery, fuel and auxiliary materials.Obsolescence expense for the years ended December 31, 2006, 2005 and2004, amounted to $nil, $9,112 and $4,610, respectively, and was included ingeneral and administrative expenses in the accompanying consolidated statementsof operations. Spare parts for base stations included in inventory areexpected to be utilized within the next twelve months after the balance sheetdate.

F-33

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**Notes to the CONSOLIDATED financial STATEMENTS  FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

**8.**                 Property, PLANT And EQUIPMENT

Thenet book value of property, plant and equipment as of December 31, 2006 and2005, was as follows:
|                                                                                                                                                                          | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                               | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Network, base station  equipment (including leased network and base station equipment of $7,676  and $17,474, respectively) and related leasehold improvements |       | $                     | 4,517,536  |   | $ | 3,534,574 |   |
| Office equipment,  computers and other (including leased office equipment and computers of $nil  and $402, respectively)                                                 |       | 447,640               |       | 339,788 |   |
| Buildings and related  leasehold improvements                                                                                                                            |       | 242,175               |       | 225,726 |   |
| Vehicles (including  leased vehicles of $7,561 and $nil,  respectively)                                                                                                  |       | 31,949                |       | 21,830 |   |
| Property, plant and equipment,  at cost                                                                                                                                  |       | 5,239,300             |       | 4,121,918 |   |
| Accumulated depreciation  (including accumulated depreciation on leased equipment of $4,321 and  $4,536)                                                            |       | (1,948,368            | )          | (1,350,783 | ) |
| Equipment for  installation                                                                                                                                              |       | 582,827               |       | 621,346 |   |
| Construction in progress                                                                                                                                                 |       | 1,423,910             |       | 1,090,198 |   |
| Property, plant and equipment, net                                                                                                                                       |       | $                     | 5,297,669  |   | $ | 4,482,679 |   |

 

Depreciation expensesduring the years ended December 31, 2006, 2005 and 2004, amounted to $689.7 million, $510.5 million and $385.7million, respectively, including depreciation expenses for leasedproperty, plant and equipment in the amount of $2.3 million, $4.0 million and$5.4 million, respectively.

F-34

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**Notes to the CONSOLIDATED financial STATEMENTS  FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

**9.**                 OTHERINTANGIBLE ASSETS

Intangibleassets at December 31, 2006 and 2005, comprised the following:
|                                                      | ** ** | ** **        | ** ** | **December 31, 2006** | ** **    | **December 31, 2005** | ** ** |
|------------------------------------------------------|------------|-------------------|------------|---------------------------------|---------------|---------------------------------|------------|
| ** **                                           | ** ** | **Useful  lives** | ** ** | **Gross  carrying  value**      | ** **    | **Accumulated  amortization**   | ** ** | **Net  carrying  value** | ** ** | **Gross  carrying  value** | ** ** | **Accumulated  amortization** | ** ** | **Net  carrying  value** | ** ** |
| **Amortized intangible  assets**                     | ** ** | ** **        | ** ** | ** **                      | ** **    |                            | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |
| Acquired customer base                               |       | 30 to  60 months  |       | $                               | 114,850       |                            |       | $ | (95,751 | ) |   | $ | 19,099 |   | $ | 110,360 |   |   | $ | (78,219 | ) |   | $ | 32,141 | ** ** |
| Rights to use premises                               |       | 1 to  15 years    |       | 4,177                           |          |                            | (2,520     | ) |   | 1,657 |   | 8,749 |   |   | (2,573 | ) |   | 6,176 | ** ** |
| Rights to use radio frequencies                      |       | 2 to  15 years    |       | 163,963                         |          |                            | (52,882    | ) |   | 111,081 |   | 130,839 |   |   | (31,227 | ) |   | 99,612 | ** ** |
| Numbering capacity with finite contractual life      |       | 5 to  10 years    |       | 90,138                          |          |                            | (64,522    | ) |   | 25,616 |   | 65,763 |   |   | (50,325 | ) |   | 15,438 | ** ** |
| Billing and telecommunication software               |       | 13 to  180 months |       | 919,400                         |          |                            | (383,358   | ) |   | 536,042 |   | 704,594 |   |   | (299,578 | ) |   | 405,016 | ** ** |
| Accounting software                                  |       | 13 to  48 months  |       | 125,277                         |          |                            | (38,595    | ) |   | 86,682 |   | 102,753 |   |   | (24,305 | ) |   | 78,448 | ** ** |
| Office software                                      |       | 13 to  48 months  |       | 63,605                          |          |                            | (34,113    | ) |   | 29,492 |   | 33,854 |   |   | (14,553 | ) |   | 19,301 | ** ** |
| Other software                                       |       | 3 to  15 years    |       | 14,754                          |          |                            | (8,684     | ) |   | 6,070 |   | 8,867 |   |   | (4,318 | ) |   | 4,549 | ** ** |
|                                                 |       |              |       | 1,496,164                       |          |                            | (680,425   | ) |   | 815,739 |   | 1,165,779 |   |   | (505,098 | ) |   | 660,681 | ** ** |
| **Unamortized intangible assets**                    |       |              |       |                            |          |                            |       |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |
| Numbering capacity with indefinite contractual  life |       |              |       | 20,177                          |          |                            | —     |   |   | 20,177 |   | 20,344 |   |   | — |   |   | 20,344 | ** ** |
| **Total  other intangible  assets**                  | ** ** | ** **        | ** ** | **$**                           | **1,516,341** | ** **                      |       | **$** | **(680,425** | **)** |   | **$** | **835,916** | ** ** | **$** | **1,186,123** | ** ** |   | **$** | **(505,098** | **)** |   | **$** | **681,025** | ** ** |

 

As a result of the limited availability of localtelephone numbering capacity in Moscow and the Moscow region, MTS has been requiredto enter into agreements for the use of telephone numbering capacity withseveral telecommunication operators in Moscow. The costs of acquiring numberingcapacity with a finite contractual life areamortized over a period of five to ten years in accordance with the terms ofthe contract to acquire such capacity. Numbering capacity with an indefinitecontractual life is not amortized.

A significant component of MTS’s rights to usepremises was obtained in the form of contributions to its charter capital in1993. These premises included MTS’ administrative offices and facilitiesutilized for mobile switching centers. By December 31, 2006, these rights werefully amortized and written-off due totheir expiration. In addition, simultaneously with the acquisition of UMC in2003, MTS obtained additional property rights of $8.7 million. AtDecember 31, 2006, UMC’s rights to use premises amounted to $1.7 million,net of accumulated amortization.

Amortization expense for the years ended December 31,2006, 2005 and 2004, amounted to $195.0 million, $202.3 million and $138.1million, respectively. Based on the amortizable intangible assets existing atDecember 31, 2006, the estimated amortization expense is $213.8 million for2007, $206.1 million for 2008, $181.9 millionfor 2009, $127.8 million for 2010, $24.7 million for 2011 and $61.4million thereafter. The actual amortization expense reported in future periodscould differ from these estimates as a result of new intangible assetacquisitions, changes in useful lives and other relevant factors.

F-35

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**Notes to the CONSOLIDATED financial STATEMENTS  FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

**10.**          DEFERREDCONNECTION FEES

Deferredconnection fees for the years ended December 31, 2006 and 2005, were asfollows:
|                                                              | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                   | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Balance at beginning of  the year                            |       | $                     | 102,185    |   | $ | 92,748 |   |
| Payments received and  deferred during the year              |       | 31,908                |       | 53,644 |   |
| Amounts amortized and  recognized as revenue during the year |       | (54,486               | )          | (44,207 | ) |
| Balance at end of the  year                                  |       | 79,607                |       | 102,185 |   |
| Less: current portion                                        |       | (47,528               | )          | (44,361 | ) |
| Non-current portion                                          |       | $                     | 32,079     |   | $ | 57,824 |   |

 

MTS defers initialconnection fees paid by subscribers for the first time activation of networkservice as well as one time activation fees received for connection to variousvalue added services. These fees are recognized as revenue over the estimatedaverage subscriber life (Note 2)*.*

**11.**          BORROWINGS

As atDecember 31, 2006 and 2005, the Group’s borrowings comprised the following: 
|                            | ** ** | **December 31,** | ** ** |
|----------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **Notes:**                 |       |                  |       |   |   |   |   |
| 9.75% Notes due 2008       |       |                  | $          | 400,000 |   |   | $ | 400,000 |   |
| 8.38% Notes due 2010       |       |                  | 400,000    |   |   | 400,000 |   |
| 8.00% Notes due 2012       |       |                  | 399,178    |   |   | 399,052 |   |
| **Total notes, long-term** |       |                  | **$**      | **1,199,178** | ** ** | ** ** | **$** | **1,199,052** | ** ** |
| Bank loans                 | ** ** | ** **            | $          | 1,872,621 |   |   | $ | 1,645,784 |   |
| Less: current portion      | ** ** | ** **            | 147,260    |   |   | 765,881 |   |
| **Total debt, long-term**  | ** ** | ** **            | **$**      | **1,725,361** | ** ** | ** ** | **$** | **879,903** | ** ** |

 

***Notes—***OnJanuary 30, 2003, MTS Finance S.A. (“MTS Finance”), a 100% beneficially ownedsubsidiary of MTS, registered under the laws of Luxembourg, issued $400.0million 9.75% notes at par. These notes arefully 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 30 and July 30, commencing on July 30,2003. The notes are listed on the Luxembourg Stock Exchange. Proceeds receivedfrom the notes issue were $400.0 million and related issuance costs of $3.9million were capitalized.

On October 14, 2003, MTS Finance issued $400.0 millionnotes bearing interest at 8.375% at par. The cash proceeds from the notes were$395.4 million and related issuance costs of approximately $4.6 million were capitalized. These notes arefully 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-annuallyin arrears on April 14 and October 14 of each year, commencing on April 14,2004. The notes are listed on the Luxembourg Stock Exchange.

F-36

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED financial STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

On January 27, 2005, MTS Finance issued $400.0million 8.0% unsecured notes at 99.736%. Thesenotes are fully and unconditionally guaranteed by MTS OJSC and mature onJanuary 28, 2012. MTS Finance is required to make interest paymentson the notes semi-annually in arrears on January 28 and July 28,commencing on July 28, 2005. The notes are listed on the Luxembourg StockExchange. Proceeds received from the notes were $398.9 million and related debtissuance costs of $2.5 million were capitalized.

Subject to certainexceptions and qualifications, the indentures governing the notes containcovenants limiting the Group’s ability to:

·       incurdebt;

·       createliens;

·       leaseproperties sold or transferred by the Group;

·       enterinto loan transactions with affiliates;

·       mergeor consolidate with another person or convey its properties and assets toanother person; and

·       sellor transfer any of its GSM licenses for the Moscow, St. Petersburg, Krasnodarand Ukraine license areas.

In addition, if the Groupexperiences certain types of mergers, consolidations or other changes incontrol, noteholders will have the right to require the Group to redeemthe notes at 101% of their principal amount, plus accrued interest. The Groupis 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, the shareholder of the Group.

If the Group fails to meet these covenants, aftercertain notice and cure periods, the noteholders can accelerate the debt to beimmediately due and payable.

Management believes that the Group is in compliancewith all restrictive notes covenants provisions during the three year periodended December 31, 2006.

***Bank ***loans—*********As***atDecember 31, 2006 and 2005, the Group’s loans from banking institutionswere as follows:
|                                     | ** ** | ** **   | ** ** | **Annual interest rate**             | ** ** | ** **            | ** **    | ** ** | ** ** |
|-------------------------------------|------------|--------------|------------|--------------------------------------|------------|-----------------------|---------------|------------|------------|
| ** **                          | ** ** | ** **   | ** ** | **(actual rate at**        | ** ** | **December 31,** | ** **    |
| ** **                          | ** ** | **Maturity** | ** ** | **December 31, 2006)**     | ** ** | **2006**              | ** **    | **2005**   | ** ** |
| U.S.  Dollar-denominated bank loans |       | 2007-2014    |       | LIBOR+0.13%-4.15%  (5.50%-9.51%)     |       | $                     | 1,802,340     |       | $          | 1,565,047 |   |
| Euro-denominated  bank loans        |       | 2007-2014    |       | EURIBOR +0.35%- 0.65%  (4.20%-4.50%) |       | 66,281                |          | 80,050     |       |
| Other loans                         |       | various      |       | various                              |       | 4,000                 |          | 687        |       |
| **Total debt**                      | ** ** | ** **   | ** ** | ** **                           | ** ** | **$**                 | **1,872,621** | ** ** | **$**      | **1,645,784** | ** ** |

 

The Group’s loans represent amounts borrowed undercredit facility agreements existing as of December 31, 2005, and under thesyndicated loan facility agreement with a number of international financial institutions (The Bank ofTokyo-Mitsubishi UFJ, Ltd., Bayerische Landesbank, HSBC Bank plc, 

F-37

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**Notes to the CONSOLIDATED financial STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

INGBank N.V., Raiffeisen Zentralbank Oesterreich AG, Sumitomo Mitsui BankingCorporation Europe Limited), entered into in 2006. This facility allows theGroup to borrow up to $1,330.0 million which was available in twotranches of $630.0 million and $700.0 million.******Theproceeds were used by OJSC MTS for general corporate purposes, includingacquisitions and refinancing of existing indebtedness. The first tranche bearsinterest of LIBOR+0.80% per annum and matures in 2009. The second tranche bears interest of LIBOR+1.00% per annum within thefirst three years and LIBOR + 1.15%per annum thereafter, matures in April 2011 and is repayable in 13 equalquarterly installments, commencing in April, 2008. An arrangement fee of0.10% of the original facility amount and agency fee of $0.05 million per annumshould be paid in accordance with the agreement. The commitment fee is 0.40%per annum on the undrawn facility in respect of second tranche. The debtissuance costs in respect of this loan of $13.4 million were capitalized. As of December 31, 2006 the balancesoutstanding under the loan totaled $860.0 million.

During 2006, MTS’s loan agreements existing as ofDecember 31, 2005, were amended to increase the amounts of availablecredit facilities by $53.9 million. The Group’s total available creditfacilities as of December 31, 2006, amounted to $625.3 million, includingthe $470.0 million under the syndicated loan agreement described above.

The loans are subject to certain restrictivecovenants, including, but not limited to, certain financial ratios, limitationson dispositions of assets and limitations on transactions with associates.Management believes that as of December 31, 2006, the Group is incompliance with all existing covenants.

Thefollowing table presents the aggregated scheduled maturities of the notes anddebt principal outstanding as of December 31, 2006:
|                                                   | ** ** | **Notes** | ** **    | **Debt**   | ** ** |
|---------------------------------------------------|------------|-----------|---------------|------------|------------|
| Payments due in the year  ended December 31, |       |      |          |       |       |
| 2007                                              |       | $         | —        |       | $          | 147,260 |   |
| 2008                                              |       | 400,000   |          | 200,502    |       |
| 2009                                              |       | —    |          | 839,856    |       |
| 2010                                              |       | 400,000   |          | 202,567    |       |
| 2011                                              |       | —    |          | 163,674    |       |
| Thereafter                                        |       | 399,178   |          | 318,762    |       |
| **Total**                                         | ** ** | **$**     | **1,199,178** | ** ** | **$**      | **1,872,621** | ** ** |

 

***Hedges******—******In***December 2004,the Group entered into two variable-to-fixed interest rate swap agreements withABN AMRO Bank N.V and HSBC Bank plc to hedge MTS’s exposure to variability offuture cash flows caused by the change in LIBOR related to the borrowed loan.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 fromOctober 7, 2004 up to July 27, 2007. MTS agreed with HSBC Bank plc topay a fixed rate of 3.25% and receive a variable interest of LIBOR on $150.0million for the period from October 7, 2004 up to July 27, 2007. Asof December 31, 2005, the Group recorded an asset of $3.6 million inrelation to these contracts in the accompanying consolidated balance sheet andincome of $2.8 million, net of tax of $0.8 million, as other comprehensiveincome in the accompanying consolidated statement of changes in shareholdersequity in relation to the change in fair value of these agreements. Theunderlying loan was repaid ahead of schedule in July 2006, which resultedin early termination of the swap agreements.

F-38

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**Notes to the CONSOLIDATED financial STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

In January 2006, the Group entered into avariable-to-fixed interest rate swap agreement with HSBC Bank plc to hedgeMTS’s exposure to variability of future cash flows caused by the change inEURIBOR related to the borrowed loan. MTS agreed with HSBC Bank plc to pay afixed rate of 3.29% and receive a variable interest of EURIBOR on EUR 26.0million for the period from April 28, 2006, up to October 29, 2013.As of December 31, 2006, the Group recorded an asset of $1.0 million inrelation to the hedge contract in the accompanying consolidated balance sheetand income of $0.8 million, net of tax of$0.2 million, as other comprehensive income in the accompanyingconsolidated statement of changes in shareholders equity in relation tothe change in fair value of this agreement.

These instrumentsqualified as a cash flow hedges under the requirements of SFAS No. 133 asamended by SFAS No. 149. As of December 31, 2006, the outstandinghedge is highly effective. Approximately $0.8 million is expected to bereclassified in net income during the next twelve months.

**12.**          CAPITALLEASE OBLIGATIONS

Thefollowing table presents future minimum lease payments under capital leasestogether with the present value of the net minimum lease payments as ofDecember 31, 2006:
| Payments due in the year  ended December 31, |   |   |   |
|---------------------------------------------------|--------|--------|--------|
| 2007                                              |   | $      | 4,215  |   |
| 2008                                              |   | 2,934  |   |
| 2009                                              |   | 643    |   |
| Thereafter                                        |   | 8      |   |
| Total minimum  lease payments (undiscounted)      |   | 7,800  |   |
| Less: amount  representing interest               |   | (1,147 | )      |
| Present value of  net minimum lease payments      |   | 6,653  |   |
| Less: current  portion of lease payable           |   | (3,366 | )      |
| Non-current portion of  lease payable             |   | $      | 3,287  |   |

 

The schedule includes apayable to Invest-Svyaz-Holding, a related party, in the amount of $0.6 million(See Note 17).

**13.**          ACCRUEDLIABILITIES

Accruedliabilities at December 31, 2006 and 2005, comprised the following:
|                               | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Accruals for  services        |       | $                     | 207,749    |   | $ | 66,444 |   |
| Accrued payroll  and vacation |       | 70,047                |       | 60,732 |   |
| Accruals for  taxes           |       | 68,098                |       | 97,712 |   |
| Interest payable  on debt     |       | 59,834                |       | 51,403 |   |
| Total accrued  liabilities    |       | $                     | 405,728    |   | $ | 276,291 |   |

 

F-39

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

**14.**          INCOMETAX

MTS’provision for income taxes was as follows for the years ended December 31,2006, 2005 and 2004:
|                                     | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current provision  for income taxes |       | $                     | 709,130    |   | $ | 475,549 |   | $ | 430,687 |   |
| Deferred income  tax benefit        |       | (133,027              | )          | (64,959 | ) | (76,023 | ) |
| Total provision for  income taxes   |       | $                     | 576,103    |   | $ | 410,590 |   | $ | 354,664 |   |

 

The statutory income tax rates in 2004-2006 inRussia and Ukraine were 24% and 25%, respectively. The statutory income taxrates in 2004-2006 in Uzbekistan and Turkmenistan were 12% and 20%,respectively.

Thestatutory income tax rate reconciled to MTS’s effective income tax rate is asfollows for the years ended December 31, 2006, 2005 and 2004:
|                                                                            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory income  tax rate for year                                        |       | 24.0     | %          | 24.0     | %          | 24.0     | %          |
| Adjustments:                                                               |       |     |       |     |       |     |       |
| Expenses not deductible for tax purposes                                   |       | 2.9      |       | 3.0      |       | 1.0      |       |
| Currency exchange and transaction losses/(gain)                            |       | 2.8      |       | (0.8     | )          | 1.2      |       |
| Bitel investment and liability write off, not  deductible for tax purposes |       | 4.6      |       | —   |       | —   |       |
| Effect of higher tax rate of foreign subsidiaries                          |       | 0.3      |       | 0.3      |       | 0.2      |       |
| Other                                                                      |       | —   |       | (0.2     | )          | (0.6     | )          |
| Effective income tax  rate                                                 |       | 34.6     | %          | 26.3     | %          | 25.8     | %          |

 

F-40

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

Temporarydifferences between the tax and accounting bases of assets and liabilities giverise to the following deferred tax assets and liabilities at December 31, 2006 and2005:
|                                                      | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Assets/(liabilities)  arising from tax effect of:    |       |                  |       |   |   |
| **Deferred  tax assets**                             |       |                  |       |   |   |
| Depreciation of property, plant and equipment        |       | $                     | 93,865     |   | $ | 64,113 |   |
| Deferred connection fees                             |       | 19,214                |       | 24,784 |   |
| Subscriber prepayments                               |       | 25,755                |       | 23,153 |   |
| Accrued expenses                                     |       | 72,864                |       | 33,803 |   |
| Allowance for doubtful accounts                      |       | 18,837                |       | 9,321 |   |
| Inventory obsolescence                               |       | 2,246                 |       | 7,122 |   |
| Other                                                |       | 9,994                 |       | 8,013 |   |
| Total deferred tax assets                            |       | 242,775               |       | 170,309 |   |
| Valuation allowance                                  |       | (3,086                | )          | (2,294 | ) |
| Total deferred tax assets net of valuation allowance |       | 239,689               |       | 168,015 |   |
| **Deferred  tax liabilities**                        |       |                  |       |   |   |
| Licenses acquired                                    |       | $                     | (83,462    | ) | $ | (140,167 | ) |
| Depreciation of property, plant and equipment        |       | (48,574               | )          | (42,394 | ) |
| Customer base                                        |       | (4,055                | )          | (7,584 | ) |
| Other intangible assets                              |       | (19,479               | )          | (20,428 | ) |
| Debt issuance cost                                   |       | (16,841               | )          | (17,836 | ) |
| Other                                                |       | (12,513               | )          | (14,684 | ) |
| Total deferred tax liabilities                       |       | (184,924              | )          | (243,093 | ) |
| Net deferred tax  (asset/liability)                  |       | 54,765                |       | (75,078 | ) |
| Net deferred tax asset, current                      |       | $                     | 141,114    |   | $ | 83,336 |   |
| Net deferred tax  liability, long-term               |       | $                     | (86,349    | ) | $ | (158,414 | ) |

 

The Group does not recorda deferred tax liability related to the undistributed earnings of UMC,Uzdunrobita and BCTI, as it intends to permanently reinvest these earnings. Theundistributed earnings of UMC amounted to $1,373.6 million and $994.0 millionfor the years ended December 31, 2006 and 2005, respectively.

**15.**          SHAREHOLDERS’EQUITY

In accordance with Russian laws, earnings availablefor dividends are limited to profits determined in accordance with Russianstatutory accounting regulations, denominated in rubles, after certain deductions. The net income of MTS OJSC for theyears ended December 31, 2006, 2005 and 2004 that is distributable underRussian legislation totaled 32,094 million rubles ($1,181.0 million), 12,544million rubles ($444.4 million) and 15,209 million rubles ($527.9 million),respectively.

See also Note 1 for adescription of the repurchase of the Company’s own shares inDecember 2006.

F-41

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

**16.**          STOCKBONUS AND STOCK OPTION PLANS

In 2000, MTS established a stock bonus plan and stockoption plan (“the Option Plan”) for selected officers, key employees and keyadvisors. During its initial public offering in 2000 (see Note 1) MTS allotted9,966,631 shares of its common stock to fund the Option Plan.

Since2002, MTS has made several grants pursuant to its stock option plan toemployees and directors of the Group. These options generally vest over a twoyear period from the date of the grant, contingent on continued employment ofthe grantee with the Company. A summary of the status of the Group’s OptionPlan is presented below:
|                                        | ** ** | **Number of  shares** | ** ** | **Weighted  average  exercise price  (per share),  U.S. Dollar** | ** ** | **Weighted  average fair  value of options  (per share),  U.S. Dollar** | ** ** | **Aggregate  intrinsic value,  thousands of   U.S. Dollar** | ** ** |
|----------------------------------------|------------|----------------------------|------------|---------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| Outstanding at  December 31, 2003 |       | 4,797,410                  |       |                                                                            | 1.87       |                                                                                             |       |                                                                            | 0.71       |   |   |   | $ | 1,237 |   |   |
| Granted                                |       | 1,665,256                  |       |                                                                            | 5.95       |                                                                                             |       |                                                                            | 2.36       |   |   |   | 1,811 |   |   |
| Exercised                              |       | (2,726,966                 | )          |                                                                            | 1.49       |                                                                                             |       |                                                                            | 0.50       |   |   |   | (225 | ) |   |
| Forfeited                              |       | (204,730                   | )          |                                                                            | 1.92       |                                                                                             |       |                                                                            | 0.73       |   |   |   | (55 | ) |   |
| Outstanding at  December 31, 2004 |       | 3,530,970                  |       |                                                                            | 4.09       |                                                                                             |       |                                                                            | 1.65       |   |   |   | $ | 2,777 |   |   |
| Granted                                |       | 1,778,694                  |       |                                                                            | 6.89       |                                                                                             |       |                                                                            | 1.74       |   |   |   | 907 |   |   |
| Exercised                              |       | (1,801,622                 | )          |                                                                            | 2.43       |                                                                                             |       |                                                                            | 1.02       |   |   |   | (924 | ) |   |
| Forfeited                              |       | (320,802                   | )          |                                                                            | 5.25       |                                                                                             |       |                                                                            | 2.06       |   |   |   | (305 | ) |   |
| Outstanding at  December 31, 2005 |       | 3,187,240                  |       |                                                                            | 6.47       |                                                                                             |       |                                                                            | 2.02       |   |   |   | $ | 2,455 |   |   |
| Granted                                |       | —                     |       |                                                                            | —     |                                                                                             |       |                                                                            | —     |   |   |   | — |   |   |
| Exercised                              |       | (639,357                   | )          |                                                                            | 5.95       |                                                                                             |       |                                                                            | 2.36       |   |   |   | (695 | ) |   |
| Forfeited                              |       | (1,112,882                 | )          |                                                                            | 6.23       |                                                                                             |       |                                                                            | 2.17       |   |   |   | (1,017 | ) |   |
| Outstanding at  December 31, 2006 |       | 1,435,001                  |       |                                                                            | 6.89       |                                                                                             |       |                                                                            | 1.74       |   |   |   | $ | 743 |   |   |

 

As ofDecember 31, 2006 the Group had the following stock options outstanding:
| Exercise prices,  U.S. Dollar | ** ** | ** ** | ** ** | **Number of shares** | ** ** | **Remaining  weighted average  life (years)** | ** ** |
|-----------------------------------------|------------|------------|------------|--------------------------------|------------|---------------------------------------------------------|------------|
| 6.89                                    |       |       | 1,435,001  |                           |       |                                                    | 0.54       |   |   |
|                                         |            |            |            |                                |            |                                                         |            |  |  |  |  |

 

All options outstanding as of December 31, 2006are non-vested and will vest in 2007.

F-42

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

Thefair value of options granted during the years ended December 31, 2005 and2004, were estimated using the binomial option pricing model using thefollowing assumptions:
|                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Risk free rate                     |       | 4.7      | %          | 4.5      | %          |
| Expected dividend  yield           |       | 3        | %          | 3        | %          |
| Expected  volatility               |       | 40.0     | %          | 48.8     | %          |
| Expected life  (years)             |       | 2        |       | 2        |       |
| Fair value of options  (per share) |       | $        | 1.74       |     | $          | 2.36 |   |
|                                    |            |          |            |          |            |  |  |

 

In accordance with theRussian legislation, MTS Board members and key employees may be consideredinsiders with respect to the Group and thus may be restricted from sellingtheir shares.

**17.**          RELATEDPARTIES

Relatedparties balances as of December 31, 2006 and 2005, comprised thefollowing:
|                                                  | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Accounts receivable:                             |       |                  |       |   |   |
| MTT for interconnection                          |       | $                     | 5,164      |   | $ | 862 |   |
| Mediaplanning for advertising                    |       | 2,041                 |       | 1,400 | ** ** |
| Rosno for insurance                              |       | 640                   |       | 3,663 |   |
| Maxima for advertising                           |       | 152                   |       | 1,689 |   |
| Other                                            |       | 437                   |       | 47 |   |
| Total accounts receivable, related parties       |       | $                     | 8,434      |   | $ | 7,661 |   |
| Accounts payable:                                |       |                  |       |   |   |
| Sitronics for software                           |       | $                     | 106,176    |   | $ | 25,898 |   |
| Kvazar-Micro.ru for systems integration services |       | 8,172                 |       | 6,564 |   |
| SmartCards for SIM cards                         |       | 6,304                 |       | — |   |
| MTT for interconnect                             |       | 4,834                 |       | 4,262 |   |
| Maxima for advertising                           |       | 4,167                 |       | 1,082 |   |
| Comstar UTS for interconnect                     |       | 1,598                 |       | 2,430 |   |
| Mediaplanning for advertising                    |       | 1,244                 |       | — |   |
| MGTS for interconnect                            |       | 766                   |       | 588 |   |
| Other                                            |       | 1,995                 |       | 5 |   |
| Total accounts  payable, related parties         |       | $                     | 135,256    |   | $ | 40,829 |   |

 

Transactions with major related parties are describedbelow.

***Moscow Bank ofReconstruction and Development (“MBRD”)******—MTS***maintainscertain bank and deposit accounts with MBRD, whose major shareholder isSistema. As of December 31, 2006 and 2005,MTS’s cash position at MBRD amounted to $86.5 million and $18.0 million incurrent accounts, respectively. Deposit accounts at MBRD amounted to$55.0 million as of December 31, 2006, and $nil as of December 31, 2005 (Note 5). The related interest accruedand collected on the deposits for the years ended December 31,2006, 

F-43

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

2005 and 2004, amounted to$4.8 million, $5.4 million and $6.8 million, respectively, and was included asa component of interest income in the accompanying consolidated statements ofoperations.

***Rosno OJSC(“Rosno”)******—******MTS***arranged medical insurance for its employees and property insurance with Rosno (a subsidiary of Sistema untilFebruary, 2007). Insurance premiums paid to Rosno for the yearsended December 31, 2006, 2005 and2004, amounted to $11.3 million, $12.6 million and $7.6 million, respectively.

Staring from February, 2007, Rosno is no longer arelated party of the Group, as Sistema sold its controlling stake in Rosno toAllianz.

***Maxima AdvertisingAgency (“Maxima”)******—******In***2006, 2005 and 2004, the MTS Group had agreements foradvertising services with Maxima, a subsidiary of Sistema. Advertising costsrelated to Maxima for the years ended December 31, 2006, 2005 and 2004amounted to $117.8 million, $58.6 million and $48.9 million, respectively.

***Kvazar-Micro.ru(“Kvazar”)******—******In***2004, MTSsigned agreements for software implementation services with Kvazar, a subsidiary of Sistema. Pursuant to these agreements,Kvazar provided systems integration services to MTS in 2006, 2005 and 2004 ofapproximately $52.1 million, $62.0 million and $9.7 million, respectively.

***Comstar UTS (“Comstar”)—******In***2006,2005 and 2004, MTS had interconnection and line rental agreements with Comstar,a subsidiary of Sistema. The cost of interconnection and line rental servicesrendered by Comstar for 2006, 2005 and 2004 amounted to $5.3 million, $4.7 million and $3.1 million, respectively.

During 2007 Telmos and MTU-Inform merged with Comstar.In 2006, 2005 and 2004,MTS had interconnect and line rental agreements with, and received domestic andinternational long-distance services from these entities. Interconnect and line rental expenses withthese entities for 2006, 2005 and 2004 comprised $25.9 million, $25.2 million and $27.3 million,respectively.

***Moscow CityTelephone Network (“MGTS”)******—******In***2006,2005 and 2004, MTS had line rental agreements withMGTS and rented a cable plant from MGTS for the installation of optic-fibercable. MTS also rented buildings for administrative offices as well as premisesfor switchboard and base station equipment. Rental expenses for the years 2006, 2005 and 2004 amounted to $13.1million, $8.3 million and $5.9 million, respectively. Sistema is themajority shareholder of MGTS.

***Invest-Svyaz-Holding******—******In***2006,2005 and 2004, MTS entered into agreements with Invest-Svyaz-Holding, a wholly-owned subsidiary of Sistema, forleasing of network equipment and billing system. These leases wererecorded as capital leases in compliance with the requirements of SFASNo. 13 “Accounting for Leases.” Thepresent values of future lease payments due within one year are classified ascurrent liabilities and the remaining balance as long-term liabilities. Theinterest rate implicit in these leases varies from 26% to 30%.

F-44

----

**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

The present value of the future lease payments undercapital leases to Invest-Svyaz-Holding comprise $0.6 million and these paymentsare expected to be made in 2007.

For the year ended December 31, 2006, principal andinterest paid to Invest-Svyaz-Holding were $2.7 million and $0.5 million, respectively.For the year ended December 31, 2005, principal and interest paid to Invest-Svyaz-Holding were $6.1 million and $2.0 million,respectively. Principal and interest paid to Invest-Svyaz-Holding forthe year ended December 31, 2004, were $6.4 million and $4.1 million,respectively.

***Sitronics*****—**Sitronics Telecom Solutions Czech Republic andRussia, formerly Strom Telecom and Mediatel, are subsidiaries ofSistema. During 2006, 2005 and 2004, the Group acquired from these companiestelecommunications equipment, billing systems and related services forapproximately $231.2 million, $179.2 million and $9.1 million,respectively. Advances paid under theseagreements and outstanding as of December 31, 2006 and 2005, amounted to $niland $45.7 million, respectively.

***Mediaplanning*—****During********2006, 2005 and 2004,MTS entered into a number of agreements to purchase advertising services withMediaplanning, a subsidiary of Sistema. Related advertising costs recorded forthe years ended December 31, 2006, 2005 and 2004, amounted to $45.1 million,$21.5 million and $11.3 million, respectively.

***MTT*****—**In 2006, 2005 and 2004, MTS had interconnect and linerental agreements with MTT, a subsidiary of Sistema. Interconnect expenses for 2006, 2005 and 2004 amounted to $69.3 million,$41.1 million and $16.1 million, respectively. Interconnect revenue forthe year ended December 31, 2006, amounted to $7.0 million.

***SmartCards*****—**During 2006, the Group entered into a number of agreementswith SmartCards, a subsidiary of Sistema, to purchase SIM cards. Pursuant tothese contracts, the Group purchased SIM cards for approximately $37.0 million.

***Sistema Telecom*****—**In May 2006, Sistema introduced a universal brand featuringa new egg-shaped logo for each of the telecommunication companies operatingwithin the Sistema group, including MTS. Thebrand is owned by Sistema Telecom, a subsidiary of Sistema. The expensesrelated to the use of the brand name incurred by MTS and paid for in the yearended December 31, 2006, amounted to $9.7 million. 

F-45

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

**18.**          GENERALAND ADMINISTRATIVE EXPENSES

Generaland administrative expenses for the years ended December 31, 2006, 2005 and2004, comprised the following:
|                                      | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Salaries and  social contributions   |       | $                     | 430,443    |   | $ | 336,203 |   | $ | 256,989 |   |
| Rent                                 |       | 123,378               |       | 79,869 |   | 54,054 |   |
| General and  administrative          |       | 118,980               |       | 100,257 |   | 72,586 |   |
| Repair and  maintenance              |       | 94,242                |       | 90,609 |   | 81,538 |   |
| Taxes other than  income             |       | 88,089                |       | 62,102 |   | 50,033 |   |
| Billing and data  processing         |       | 44,886                |       | 37,287 |   | 28,238 |   |
| Consulting  expenses                 |       | 30,306                |       | 26,486 |   | 19,694 |   |
| Insurance                            |       | 10,723                |       | 16,804 |   | 7,554 |   |
| Inventory  obsolescence expense      |       | —                |       | 9,112 |   | 4,610 |   |
| General and  administrative expenses |       | $                     | 941,047    |   | $ | 758,729 |   | $ | 575,296 |   |

 

**19.**          INVESTMENTSIN AND ADVANCES TO ASSOCIATES

At December 31,2006 and 2005, the Group’s investments in and advances to associates comprisedthe following:
|                                                  | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2006**              | ** ** | **2005** | ** ** |
| MTS Belarus—equity  investment              |       | $                     | 119,802    |   | $ | 66,288 |   |
| MTS Belarus—loans  receivable               |       | 21,341                |       | 41,341 |   |
| Receivables from  other investee companies       |       | 330                   |       | 330 |   |
| Total investments in and  advances to associates |       | $                     | 141,473    |   | $ | 107,959 |   |

***MTS Belarus*****—**As of December 31, 2006 and 2005, the Group provided MTSBelarus with a total of $21.3 million and $41.3 million in loans, respectively.These loans bear interest of 3.00% to 11.00% per annum. In addition, the Groupguarantees debt of MTS Belarus in the amount of $3.0****million to Citibank International plc (see Note 23).

The Group’s share in netincome of associates is included in other income in the accompanyingconsolidated statements of operations. For the years ended December 31, 2006,2005 and 2004, this share amounted to $58.1 million, $42.4 million and $24.1million, respectively.

**20.****          Other Investments**

In December 2005, MTS Financeacquired a 51.0% stake in Tarino Limited (“Tarino”) for $150.0 million incash from Nomihold SecuritiesInc. (“Nomihold”). Tarino was at that time the indirect owner, through itswholly-owned subsidiaries, of Bitel LLC (“Bitel”), a Kyrgyz company holding aGSM 900/1800 license for the entire territory of Kyrgyzstan.

Concurrently with thepurchase of a 51.0% stake, the Group entered into a put and call option agreementwith Nomihold to acquire the remaining 49.0% interest in Tarino. The calloption was 

F-46

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

exercisableby the Group from November 22, 2005 toNovember 17, 2006, and the put option was exercisable by the seller fromNovember 18, 2006 to December 8, 2006. The call and put option price was $170.0million. The put and call option was recorded at fair value, whichapproximated $nil at December 31, 2005. At December 31, 2006, a liability of$170.0 million was recorded.

After the decision of theKyrgyz Supreme Court on December 15, 2005, Bitel’s corporate offices wereseized by a third party. The Group could not re-gain operating control overBitel’s operations in 2005 and therefore accounted for its 51.0% investment inBitel at cost as at December 31, 2005.

During 2006, the Grouptook steps to vindicate its ownership rights on Bitel although these efforts sofar have not proven to be successful. The matter was brought to the KyrgyzProsecutor General for investigation. On January 15, 2007, the ProsecutorGeneral informed the Group that it sees no grounds to become involved in theownership dispute over Bitel and additionally stated that the Group had nobasis to appeal the decision of the Kyrgyz courts in connection with ownershipof Bitel. 

In addition, an appeal tooverturn certain adverse Kyrgyz courts rulings connected with ownership rightsto Bitel was also filed with the Kyrgyz Supreme Court on December 15, 2006, butthe time period in which the appeal should have been heard has expired withoutany action by the court.

Consequently the decisionwas made by the Group to write off the costs associated with the purchase of51% stake in Bitel. As of December 31, 2006, the investment was fullyimpaired.  Furthermore, as noted above, with the impairment of the underlyingasset, a liability of $170.0 million was recorded with an associated charge tonon-operating expenses.

In January 2007, Nomiholdcommenced an arbitration proceeding against MTS Finance in the London Court ofInternational Arbitration in order to compel MTS Finance to purchase theremaining shares. Nomihold seeks specific performance of the put option,unspecified monetary damages, interest, and costs. The matter is currentlypending.

Also, there is on-goingarbitration in the United Kingdom related to Tarino’s ownership in Bitel.Kyrgyzstan Mobitel Investment Company Limited (“KMIC”) has initiated a separatearbitration proceeding against the three Isle of Man companies affiliated withthe Group (“the KFG Companies”) claiming that the KFG Companies breached a May31, 2003 Transfer Agreement concerning the shares of Bitel.  The Transfer Agreement was made between theKFG Companies and IPOC International Growth Fund Limited (“IPOC”) although IPOCsubsequently assigned its interest KMIC, and KMIC was the claimant in thearbitration.  This claim occurred priorto MTS Finance’s acquisition of the KFG Companies. It is possible there may beadditional or related disputes concerning agreements with respect to TarinoLimited. It is not possible at this time to predict the outcome or finalresolution of any such disputes or litigation.

In addition, the KFGCompanies have been named defendants in lawsuits filed by Bitel in the Isle ofMan seeking the return of dividends received by these three companies in thefirst quarter of 2005 from Bitel in the amount of approximately $25.2 millionplus compensatory damages, and to recover approximately $3.7 million in lossesand accrued interest. In the event that the defendants do not prevail in theselawsuits, MTS may be liable to Bitel for such claims. The KFG Companies havealso asserted counterclaims against Bitel, and claims against other defendantsincluding Altimo and Altimo Holding, for the wrongful appropriation and controlof Bitel. It is not possible at this time to predict the outcome or resolutionof these claims.

F-47

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

**21.**          Restricted cash

Restricted cash of $24.8million and $6.2 million, as of December 31, 2006 and 2005, respectively,consists of cash deposited by Uzdunrobita in a special bank account. The cashwill be further converted from Uzbek som into U.S. Dollars and used forsettlements with suppliers of equipment and software.

**22.**          Operating Licenses

Inconnection with providing telecommunication services, the Group has been issuedvarious operating GSM licenses by the Russian Ministry of InformationTechnologies and Communications. In additionto the licenses received directly from the Russian Ministry of InformationTechnologies and Communications, the Group has been granted access to varioustelecommunication licenses through acquisitions. In foreign subsidiaries, thelicenses are granted by the local Communication authorities. At December 31,2006 and 2005, the recorded values of the Group’s telecommunication licenseswere as follows:
|                                         | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Moscow license  area                    |       | $                     | 233,970    |   | $ | 258,226 |   |
| Asian Russian  regions                  |       | 179,473               |       | 193,109 |   |
| Krasnodar,  Adygeya and Northern Osetia |       | 149,986               |       | 124,396 |   |
| European Russia  Regions                |       | 111,198               |       | 111,198 |   |
| Tatarstan  Republic                     |       | 104,159               |       | 104,159 |   |
| North—West region                  |       | 74,639                |       | 74,639 |   |
| Ukraine                                 |       | 63,535                |       | 61,717 |   |
| Turkmenistan                            |       | 50,503                |       | 50,503 |   |
| Far East                                |       | 48,107                |       | 48,107 |   |
| Uzbekistan                              |       | 40,861                |       | 40,861 |   |
| Other                                   |       | 96,143                |       | 97,338 |   |
| Licenses, at cost                       |       | 1,152,574             |       | 1,164,253 |   |
| Accumulated  amortization               |       | (747,076              | )          | (561,137 | ) |
| Licenses, net                           |       | $                     | 405,498    |   | $ | 603,116 |   |

 

Amortization expense forthe years ended December 31, 2006, 2005 and 2004, amounted to $211.3 million,$194.3 million and $151.9 million, respectively.

Based on the cost ofamortizable operating licenses existing at December 31, 2006, the estimatedfuture amortization expenses are $163.8 million during 2007, $100.2 millionduring 2008, $47.8 million during 2009, $43.4 million during 2010, $23.0million during 2011 and $27.3 million thereafter. The actual amortizationexpense reported in future periods could differ from these estimates as aresult of new intangible assets acquisitions, changes in useful lives and otherrelevant factors.

Each of the Group’slicenses, except the licenses covering the Moscow license area and Uzbekistan, contain a requirement for service to be commencedand for subscriber number and territorial coverage targets to beachieved by a specified date. The Group has met these targets or receivedextensions to these dates in those regional license areas in which the Grouphas not commenced operations. Management believes that the Group is incompliance with all material terms of its licenses.

F-48

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

The Group’s operatinglicenses do not provide for automatic renewal. However, licenses that expiredduring the year ended December 31, 2006, were renewed. The Group has limitedexperience with the renewal of its existinglicenses. Management believes that licenses required for the Group’s operationswill be renewed upon expiration.

**23.**          **COMMITMENTS ANDCONTINGENCIES**

***Capital ***commitments****—**Asof December 31, 2006, the Group had executed non-binding purchase agreements ofapproximately $299.6 million to acquire property, plant and equipment andcapital services.

***Operating ***leases****—**TheGroup has entered into non-cancelable agreements to lease the space fortelecommunication equipment and offices, which expire in various years up to2055. Rental expenses under these operating leases of $123.4 million, $73.2million and $54.0 million for the years ended December 31, 2006, 2005 and 2004,respectively, are included in operating expenses in the accompanyingconsolidated statements of operations. Future minimum lease payments due underthese leases at December 31, 2006 are as follows:
| Payments due in the years  ended December 31, |   |   |    |
|-----------------------------------------------|--------|--------|---------|
| 2007                                          |   | $      | 69,932  |   |
| 2008                                          |   | 32,868 |    |
| 2009                                          |   | 25,359 |    |
| 2010                                          |   | 16,644 |    |
| 2011                                          |   | 11,095 |    |
| Thereafter                                    |   | 42,559 |    |
| Total                                         |   | $      | 198,457 |   |

 

***Issued ***guarantees****—**As of December 31, 2006, theGroup had issued guarantees to third party banks on behalf of MTS Belarus, anequity investee, for $3.0 million. The guarantees expired in April 2007. Thefair value of issued guarantees is recorded as a liability in the accompanyingconsolidated balance sheet. At December 31, 2006, the fair value of theseguarantees was $0.1 million and was calculated as the difference between theinterest expense on the carrying value of the debt per the loan agreement andthe interest expense calculated based on an average market rate.

As of December 31, 2006, no event of default hasoccurred under any of the guarantees issued by the Group.

***Operating ***environment****—**TheRussian and Ukrainian economies, while deemed to be of market status, continueto display certain traits consistent with that of an emerging market. Thesecharacteristics have in the past included higher than normal inflation,insufficient liquidity of the capital markets, and the existence of currencycontrols. The continued success and stability of the Russian and Ukrainianeconomies will be subject to their government’s continued actions with regardto supervisory, legal and economic reforms.

The new Federal Law on Communications sets the legalbasis for the telecommunications business in Russia and defines the status thatstate bodies have in the telecommunications sector. In addition, the lawcreated a universal service fund (“USF”) charge, which became effective May 3,2005, calculated as 1.2% 

F-49

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

of revenue from servicesprovided to customers, excluding interconnection and other operators’ traffic routing revenue. For the year ended December31, 2006, and for the period from May to December 31, 2005, the Group incurredapproximately $54.2 million and $30.3 million in USF charges, respectively,which are recorded in other operating expenses in the accompanying consolidatedstatements of operations. 

The Group’s operations inTurkmenistan are subject to certain restrictions in accordance with the localregulatory environment including, but not limited to, the sale of hard currencyon the local market and hard currency repatriation. The effect of thoserestrictions on the financial statements is represented by a loss from currencytranslation transactions in Turkmenistan of $24.3 million recognized as othernon-operating expense in the Group statement of operations for the year endedDecember 31, 2006. The amount of loss from currency translation transactionsfor the year ended December 31, 2005, was insignificant.

***Legal ***proceedings****—**Russia and Ukraine currently have a number oflaws related to various taxes imposed by both federal and regional governmentalauthorities. Applicable taxes include VAT, corporate income tax (profits tax),a number of turnover-based taxes, and payroll (social) taxes, together withothers. Laws related to these taxes have not been in force for significantperiods, in contrast to more developed market economies; therefore, thegovernment’s implementation of these regulations is often inconsistent ornonexistent. Accordingly, few precedents with regard to tax rulings have beenestablished. Tax declarations, together with other legal compliance areas(for example, 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 are more significant than typically found in countrieswith more developed tax systems.

In September 2006, the Russiantax authorities audited MTS OJSC’s compliance with tax legislation forthe years ended December 31, 2003 and 2004. Based on the results of this audit,the Russian tax authorities assessed that 1,283,660 thousand rubles(approximately $48.8 million as of December31, 2006) of additional taxes, penalties and fines were payable by the Group.The Group has prepared and filed a petition with the Arbitration Courtof Moscow to recognize the tax authorities’ resolution to be partially invalid.The amount of disputed taxes and fines equals 1,220,096 thousand rubles(approximately $46.3 million). In 2007, a final court hearing considered thismatter which resulted in a judgment infavour of the Group. Generally, taxdeclarations remain open and subject to inspection for a period of three yearsfollowing the tax year. As of December 31, 2006, tax declarations of the Groupfor the preceding two fiscal years were open for further review.

There are regulatory uncertainties in Ukraine related to the treatmentfor VAT purposes of contributions payable to the Ukrainian State PensionFund (“Pension Fund”) in respect of the cash paid for the consumption oftelecommunication services by customers. Also it could have influence on incometax and other taxes paid by the Group.

As a result of the a tax audit of the period fromOctober 1, 2002 to June 30, 2004, additional VAT charges (including penalties) calculated on the Pension Fundcontributions could be up to $13.5 million. In 2005, UMC initiated alitigation case in respect of this issue against the tax authorities, and hasreceived favorable rulings from the courts on three occasions (the most recentfrom the Highest Administrative Court of Ukraine). Management believes that VATwas not applicable to the Pension Fundcontributions during the period under the tax authorities’ review. Further,management believes that UMC is in line with 

F-50

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

industrypractice and has already defended its position in the courts. AtDecember 31, 2006, no VAT charges in relation to the above litigation had beenaccrued in the Group’s financial statements or paid to the tax authorities.

In January 2007, the U.S. theInternal Revenue Services (“the IRS”) started auditing BCTI’s compliance withU.S. Federal tax legislation for the year ended December 31, 2004. As of thedate of these statements, the audit has not been finalized and no officialassessment has been issued by the IRS. Based on the preliminary findings of theaudit the Group’s consultants have assessed that the potential income taxexposure for the years 2003-2006 could be within a range up to $28.3 million.The Group’s management has assessed its maximum potential liability equals upto $3.3 million and that amount was recognized in the Group’s statements ofoperations for the year ended December 31, 2006.

As discussed in Note 20, in January 2007, Nomiholdcommenced an arbitration proceeding against MTS Finance in the London Court ofInternational Arbitration in order to compel MTS Finance to purchase theremaining 49% stake in Tarino Limited for $170.0 million. Nomihold seeksspecific performance of the put option, unspecified monetary damages, interest,and costs. The matter is currently pending. 

As also discussed in Note 20, there is on-goingarbitration in the United Kingdom related to Tarino’s ownership in Bitel.Kyrgyzstan Mobitel Investment Company Limited (“KMIC”) has initiated a separatearbitration proceeding against the three Isle of Man companies affiliated withthe Group (“the KFG Companies”) claiming that the KFG Companies breached a May31, 2003 Transfer Agreement concerning the shares of Bitel. It is possiblethere may be additional or related disputes concerning agreements with respectto Tarino Limited. It is not possible at this time to predict the outcome orfinal resolution of any such disputes or litigation.

As further discussed in Note 20, the KFG Companieshave been named defendants in lawsuits filed by Bitel in the Isle of Manseeking the return of dividends received by these three companies in the firstquarter of 2005 from Bitel and the KFG Companies have also assertedcounterclaims against Bitel, and claims against other defendants includingAltimo and Altimo Holding, for the wrongful appropriation and control of Bitel.It is not possible at this time to predict the outcome or resolution of theseclaims.

In addition, in the ordinary course of business, MTSmay be party to various legal, tax and customs proceedings, and subject toclaims, certain of which relate to the developing markets and evolving fiscaland regulatory environments in which MTS operates. In the opinion ofmanagement, the Group’s liability, if any, in all such pending litigation,other legal proceeding or other matters will not have a material effect uponits financial condition, results of operations or liquidity of MTS.

Managementbelieves that it has adequately provided for tax, customs and other legalliabilities in the accompanying consolidated financial statements; however, therisk remains that the relevant authorities could take differing positions withregard to interpretive issues and the effect could be significant. 

**24.**          SEGMENTINFORMATION

SFAS No. 131, “Disclosures about Segments of anEnterprise and Related Information”, established standards for reportinginformation about operating segments in financial statements. Operatingsegments are defined as components of an enterprise engaging in businessactivities about which separate financial 

F-51

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

information is availablethat is evaluated regularly by the chief operating decision maker or group indeciding how to allocate resources and in assessing performance. 

The Group’s business is organized by ten Russianmacro-regions and foreign subsidiaries. During 2005, the Russian business wasmanaged on a macro-regional basis. In 2005, the Group had several operatingsegments, of which six were reportable segments—five Russian macro-regions andUkraine. 

In 2006, the Group established new business units:business unit “MTS Russia”, which is responsible for the centralizedoperational management of business in all Russian macro-regions, all of whichoperate in the same economic environment and possess similar economiccharacteristics; business unit “UMC”, MTS’ subsidiary in Ukraine; and businessunit “Foreign subsidiaries” that include Uzdunrobita in Uzbekistan, BarashCommunications Technologies, Inc. in Turkmenistan, and MTS Belarus, an equityaccounted affiliate of MTS in Belarus.

Countries of operations are managed separately due totheir different economic and regulatory environment that requires separatemarketing and investment strategies. The chief operating decision makerevaluates performance based on the operating income of each business unit. 

Following the introduction of business unit “MTSRussia”, the Group’s management has defined two operating reportable segments:Russia and Ukraine. Accordingly, MTS has retroactively restated its segmentinformation for all periods presented. 

F-52

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

Intercompanyeliminations presented below consist primarily of sales transactions betweensegments conducted under the normal course of operations.
|                                                                   | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Revenue:                                                          |       |       |       |       |       |       |       |
| Russia                                                            |       | $          | 4,665,530  |       | $          | 3,700,601  |       | $ | 3,043,893 |   |
| Ukraine                                                           |       | 1,490,278  |       | 1,201,827  |       | 832,313    |       |
| Other                                                             |       | 242,455    |       | 119,932    |       | 26,783     |       |
| Intercompany  eliminations                                        |       | (14,009    | )          | (11,342    | )          | (15,995    | )          |
| Total revenue                                                     |       | $          | 6,384,254  |       | $          | 5,011,018  |       | $ | 3,886,994 |   |
| Depreciation and  amortization:                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Russia                                                            |       | $          | 819,316    |       | $          | 722,977    |       | $ | 539,767 |   |
| Ukraine                                                           |       | 233,744    |       | 153,795    |       | 124,935    |       |
| Other                                                             |       | 42,921     |       | 30,341     |       | 11,027     |       |
| Total depreciation  and amortization                              |       | $          | 1,095,981  |       | $          | 907,113    |       | $ | 675,729 |   |
| Operating income:                                                 |       |       |       |       |       |       |       |
| Russia                                                            |       | $          | 1,510,875  |       | $          | 1,153,542  |       | $ | 1,096,787 |   |
| Ukraine                                                           |       | 530,522    |       | 431,292    |       | 317,860    |       |
| Other                                                             |       | 92,339     |       | 47,197     |       | 4,416      |       |
| Total operating  income                                           |       | $          | 2,133,736  |       | $          | 1,632,031  |       | $ | 1,419,063 |   |
| Total operating income                                            |       | $          | 2,133,736  |       | $          | 1,632,031  |       | $ | 1,419,063 |   |
| Currency exchange  and transaction gains                          |       | (24,051    | )          | (10,319    | )          | (6,529     | )          |
| Interest income                                                   |       | (13,055    | )          | (24,828    | )          | (21,792    | )          |
| Interest expense                                                  |       | 177,145    |       | 132,474    |       | 107,956    |       |
| Equity in net  income of associates                               |       | (58,083    | )          | (42,361    | )          | (24,146    | )          |
| Bitel investment  and write off                                   |       | 320,000    |       | —     |       | —     |       |
| Other expenses  /(income)                                         |       | 65,913     |       | 13,211     |       | (9,310     | )          |
| Income before provision  for income taxes and minority   interest |       | $          | 1,665,867  |       | $          | 1,563,854  |       | $ | 1,372,884 |   |

 

F-53

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**Notes to the CONSOLIDATED financial STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

| ** **                            | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|
| Additions to long-lived  assets:      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Russia                                |       | $          | 1,135,637  |       | $          | 1,486,158 |   |
| Ukraine                               |       | 644,524    |       | 719,279    |       |
| Other                                 |       | 69,609     |       | 132,799    |       |
| Total additions  to long-lived assets |       | $          | 1,849,770  |       | $          | 2,338,236 |   |
| Additions to  goodwill:               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Russia                                |       | $          | 12,574     |       | $          | 46,382 |   |
| Ukraine                               |       | —     |       | —     |       |
| Other                                 |       | —     |       | —     |       |
| Total additions  to goodwill          |       | $          | 12,574     |       | $          | 46,382 |   |
| Goodwill:                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Russia                                |       | $          | 110,992    |       | $          | 100,751 |   |
| Ukraine                               |       | 8,000      |       | 8,000      |       |
| Other                                 |       | 46,470     |       | 46,470     |       |
| Total goodwill                        |       | $          | 165,462    |       | $          | 155,221 |   |
| Long-lived  assets:                   |       |       |       |       |       |
| Russia                                |       | $          | 4,638,096  |       | $          | 4,285,157 |   |
| Ukraine                               |       | 1,794,828  |       | 1,390,966  |       |
| Other                                 |       | 271,621    |       | 245,918    |       |
| Total long-lived  assets              |       | $          | 6,704,545  |       | $          | 5,922,041 |   |
| Total assets:                         |       |       |       |       |       |
| Russia                                |       | $          | 6,257,781  |       | $          | 5,530,911 |   |
| Ukraine                               |       | 1,955,188  |       | 1,560,762  |       |
| Other                                 |       | 360,976    |       | 454,107    |       |
| Total assets                          |       | $          | 8,573,945  |       | $          | 7,545,780 |   |

 

**25.**          SUBSEQUENTEVENTS

***Functionalcurrency—******Prior***toJanuary 1, 2007, the functional currency for all of the Group’ssubsidiaries, excluding UMC, MR South andBCTI where the functional currency is the local currency, was the U.S.Dollar. Starting from January 1, 2007, the Group’s subsidiaries in theRussian Federation introduced Russian ruble tariffs for settlements with themajority of its customers.

As a result of these changes, the Group reevaluated thefunctional currency criteria under SFAS No. 52, “Foreign CurrencyTranslation”, and determined that, commencing January 1, 2007, thefunctional currency of the Group’s subsidiaries domiciled in Russia is theRussian ruble. The change is adoptedprospectively commencing January 1, 2007, in accordance with SFASNo. 52.

***Bitel—******In January 2007, Nomiholdcommenced an arbitration proceeding against MTS Finance in the London Court ofInternational Arbitration in order to compel MTS Finance to purchase theremaining 49% stake in Tarino Limited for $170.0 million (see Note 20).***

F-54

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**OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES**

**Notes to the CONSOLIDATED financial STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004 (Continued)**

**(Amounts in thousands of U.S. Dollars, except share and per share amounts or if otherwise stated)**

A group of individual shareholders of Sistema, themajority shareholder of MTS OJSC, has agreed to compensate MTS Finance for anypotential loss up to $170 million should the arbitration decision regardingexercise of the aforementioned put option prove unfavorable to MTS Finance.

In a separate arbitration proceeding initiated againstthe KFG Companies by Kyrgyzstan Mobitel Investment Company Limited (KMIC) underthe rules of the LCIA, the arbitration tribunal in a partial final award datedMay 25, 2007 and received by the Group on June 7, 2007, found that the KFGCompanies breached a May 31, 2003 Transfer Agreement concerning the shares ofBitel (see Note 20).  The tribunal ruledthat the KFG Companies breached the Transfer Agreement when they failed toestablish a date on which the equity interest in Bitel was to be transferred toKMIC and by failing to take other steps to transfer the Bitel interests.  The arbitration tribunal ruled that KMIC isentitled only to damages in an amount to be determined in futureproceedings.  The Group is not able topredict the outcome of these proceedings or the amount of damages to be paid ifany.

***Merger—******On***April 1,2007, the Russian registration authority approved the merger of ReCom and Telesot Alania, the Company’s wholly-owned subsidiaries located in theRussian Federation, into MTS OJSC.

***3G licenses—******In***April,2007, MTS OJSC received a federal license to provide 3G services in Russia,that allow subscribers to use high-tech and innovative services coupled withhigh service quality and level of customer service. MTS is planning to startcommercial use of a 3G network within the next two years.

Along with MTS OJSC, Uzdunrobita in Uzbekistanacquired a new 3G license. Uzdunrobita is planning to launch its 3G network in2008.

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