Edgar Filing: DEUTSCHE TELEKOM AG

Title of each class

Name of each exchange on which registered

American Depositary Shares, each representing one Ordinary Share

New York Stock Exchange

Ordinary Shares, no par value

New York Stock Exchange*

As filed with the Securities and Exchange Commission on June 29, 2004

SECURITIES AND EXCHANGE COMMISSION

Form 20-F/A


	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934


	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the fiscal year ended December 31, 2003


	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-14540

Deutsche Telekom AG

(Exact Name of Registrant as Specified in its Charter)

Germany

(Jurisdiction of Incorporation or Organization)

Friedrich-Ebert-Allee 140, 53113 Bonn, Germany

(Address of Registrant's Principal Executive Offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Securities registered or to be registered pursuant to Section 12(g) of the Act.

NONE

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

NONE

(Title of Class)

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report:

Ordinary Shares, no par value: 4,195,081,597 (as of December 31, 2003)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No

Indicate by check mark which financial statement item the registrant has elected.

Item 17 Item 18


	* Not for trading, but only in connection with the registration of American Depositary Shares.

This Amended Annual Report on Form 20-F/A dated June 29, 2004 is being filed to:


(1)	add financial information concerning certain affiliates and subsidiaries of Deutsche Telekom AG (found herein on pages A-1 to A-270) pursuant to the requirements of Item 3-09 of Regulation S-X;


(2)	amend "Item 3. Key Information — Exchange Rates" on page 8 of the Form 20-F filed on March 30, 2004 to change the reference in the table of the average noon buying rate for 2003 from "1.4111" to "1.1411", and to change the year reference in the first sentence below the table from "2003" to "2004";


(3)	amend "Item 5. Operating and Financial Review and Prospects — Consolidated Results of Operations — Segment Analysis — T-Com — Personnel Costs" on page 110 of the Form 20-F filed on March 30, 2004 to delete the words "during the year." in the second paragraph thereunder; and


(4)	amend "Item 5. Operating and Financial Review and Prospects — Consolidated Results of Operations — Segment Analysis — T-Systems — Total Revenue" on page 111 of Form 20-F filed on March 30, 2004 to insert the word "million" after "EUR 10,614" in the third paragraph thereunder.

Other than the foregoing items and conforming changes related thereto, and the correction of certain typographical errors, no part of the Annual Report on Form 20-F filed on March 30, 2004 is being amended, and the filing of this Amended Annual Report on Form 20-F/A should not be understood to mean that any other statements contained therein are true or complete as of any date subsequent to March 30, 2004. This Amended Annual Report on Form 20-F/A is incorporated by reference into the registration statements of Deutsche Telekom AG on Form F-3, File No. 333-13550, and on Form S-8, File No. 333-106591, and into each respective prospectus that forms a part of those registration statements.

PART III

ITEM 17. Financial Statements

Not applicable.

ITEM 18. Financial Statements

See pages F-1 through F-104.

Separate financial statements required by Rule 3-09 of Regulation S-X are included on pages A-1 through A-270 in this Annual Report.

ITEM 19. Exhibits

Documents filed as exhibits to this Annual Report.


1.1	Articles of Incorporation (Satzung) of Deutsche Telekom AG as amended to date (English translation included).


2.1	Indenture dated as of July 6, 2000, relating to debt securities of Deutsche Telekom International Finance B.V. (incorporated by reference to Deutsche Telekom's Registration Statement on Form F-3, File No. 333-12096).*

2.2

Except as noted above, the total amount of long-term debt securities of Deutsche Telekom AG authorized under any instrument does not exceed 10% of the total assets of the group on a consolidated basis. Deutsche Telekom AG hereby agrees to furnish to the Commission, upon its request, a copy of any instrument defining the rights of holders of long-term debt of Deutsche Telekom AG or of its subsidiaries for which consolidated or unconsolidated financial statements are required to be filed.


8.1	Significant subsidiaries as of the end of the year covered by this Annual Report.*


11.1	Deutsche Telekom AG's Code of Ethics.*


12.1	Certification of the Principal Executive Officer pursuant to Section 302 of of the Sarbanes-Oxley Act of 2002.


12.2	Certification of the Principal Financial Officer pursuant to Section 302 of of the Sarbanes-Oxley Act of 2002.


13.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


14.1	Combined consent of Ernst & Young Deutsche Allgemeine Treuhand AG Wirtschaftspruefungsgesellschaft AG and PwC Deutsche Revision Aktiengesellschaft Wirtschaftspruefungsgesellschaft.*


14.2	Consent of PricewaterhouseCoopers Accountants N.V.


14.3	Consent of ZAO Deloitte & Touche CIS.


14.4	Statement Regarding Consent of Arthur Andersen and Arthur Andersen Sp. z o.o.


*	Previously filed.

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.

DEUTSCHE TELEKOM AG

Date: June 25, 2004


				By:				/s/ Kai-Uwe Ricke
				Name:				Kai-Uwe Ricke
				Title:				Chairman of the Management Board
				By:				/s/ Dr. Karl-Gerhard Eick
				Name:				Dr. Karl-Gerhard Eick
				Title:				Deputy Chairman of the Management Board
								Finance and Controlling

DEUTSCHE TELEKOM AG

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	Page
Consolidated Financial Statements of Ben Nederland Holding B.V. as of and for the year ended December 31, 2001		A-1
Consolidated Financial Statements of OJSC Mobile TeleSystems as of and for the years ended December 31, 2003, 2002 and 2001		A-15
Consolidated Financial Statements of Polska Telefonia Cyfrowa Sp. z o.o. as of and for the years ended December 31, 2003, 2002 (unaudited) and 2001 (audited)		A-70
Consolidated Financial Statements of Virgin Mobile Telecoms Limited as of and for the years ended December 31, 2003 and 2002 (unaudited, U.K. GAAP)		A-126
Consolidated Financial Statements of Virgin Mobile Telecoms Limited as of and for the years ended December 31, 2001 and 2002, (unaudited U.K. GAAP)		A-152
Consolidated Financial Statements of Virgin Mobile Telecoms Limited for the years ended December 31, 2001 and 2000 and for the period from incorporation (29 January 1999) to 31 December 1999 (US GAAP)		A-180
Consolidated Financial Statements of comdirect bank Aktiengesellschaft as of and for the years ended December 31, 2003 and 2002 (unaudited)		A-198
Consolidated Financial Statements of comdirect bank Aktiengesellschaft as of and for the years ended December 31, 2002 and 2001 (unaudited)		A-244

F-1

BEN NEDERLAND HOLDING B.V.

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001

A-1

BEN NEDERLAND HOLDING B.V.

CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001

CONTENTS	Page


REPORT OF INDEPENDENT ACCOUNTANTS	A-3

CONSOLIDATED BALANCE SHEETS	A-4

CONSOLIDATED PROFIT AND LOSS ACCOUNTS	A-5

CONSOLIDATED CASH FLOW STATEMENTS	A-6

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS	A-7


DIRECTORS

R.G.W. Holekamp (appointed July 4, 2001)

S.M. Fries (appointed July 4, 2001)

J.J.A. van Leeuwen (appointed July 4, 2001)

W.A.L. Schrijver (appointed July 4, 2001; resigned October 16, 2001)

P.E. de Weerd († June 18, 2001)

R.D. Whiteside (resigned December 7, 2001)

A-2

TO THE SHAREHOLDERS OF
BEN NEDERLAND HOLDING B.V.

REPORT OF INDEPENDENT ACCOUNTANTS

We have examined the accompanying consolidated balance sheets of Ben Nederland Holding B.V., Amsterdam, and its subsidiaries as of December 31, 2001 and 2000 and the related consolidated profit and loss accounts and statements of cash flows, for each of the three years in the period ended December 31, 2001, all expressed in Euros. Our examinations of these statements were made in accordance with auditing standards generally accepted in the United States and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the consolidated financial statements referred to above present fairly the financial position of Ben Nederland Holding B.V., Amsterdam, and its subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the Netherlands.

As discussed in Note 2 to the financial statements, the Company changed its method of capitalizing asset construction costs in 2001 and ceased the capitalization of interest costs related to assets under construction in 2000.

Accounting principles generally accepted in the Netherlands vary in certain respects from accounting principles generally accepted in the United States. The application of the latter would have affected the determination of consolidated net loss expressed in Euros for each of the three years in the period ended December 31, 2001 and the determination of consolidated stockholders’ equity and consolidated financial position also expressed in Euros at December 31, 2001 and 2000 to the extent summarized in Note 16 to the consolidated financial statements.

PricewaterhouseCoopers N.V.

Amsterdam, The Netherlands
April 24, 2002

A-3

BEN NEDERLAND HOLDING B.V.

CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 2001 AND 2000
(After proposed appropriation of the result for the years)
(Amounts expressed in thousands of Euros)

	2001	2000

	€’000	€’000
ASSETS
FIXED ASSETS
Intangible fixed assets	548,075	549,369
Tangible fixed assets	460,752	335,538
Financial fixed assets	—	23

Total fixed assets	1,008,827	884,930

CURRENT ASSETS
Short term loans	2,680	6,421
Receivables	83,715	86,142
Inventory	13,064	14,228
Cash and bank balances	26,251	13,166

Total current assets	125,710	119,957

TOTAL ASSETS	1,134,537	1,004,887


SHAREHOLDERS’ EQUITY & LIABILITIES
TOTAL SHAREHOLDERS’ EQUITY	608,549	807,415
CURRENT LIABILITIES	525,988	197,472

TOTAL SHAREHOLDERS’ EQUITY & LIABILITIES	1,134,537	1,004,887

The accompanying notes form an integral part of these financial statements.

A-4

BEN NEDERLAND HOLDING B.V.

CONSOLIDATED PROFIT AND LOSS ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2001
(Amounts expressed in thousands of Euros)

	2001		2000		1999

	€’000		€’000		€’000
Net sales	447,527		244,842		66,655
Cost of sales⁽¹⁾	(226,546	)	(156,633	)	(69,757	)

Gross profit	220,981		88,209		(3,102	)
Operating expenses	(410,039	)	(316,390	)	(172,585	)
Other operating income	482		1,229		470

Operating loss	(188,576	)	(226,952	)	(175,217	)
Net financial expense	(10,290	)	(12,427	)	(3,716	)

Extraordinary income	—		—		16,504

Net loss	(198,866	)	(239,379	)	(162,429	)

______________

(1)

Cost of sales excludes depreciation and amortization, which is included in operating expenses.

The accompanying notes form an integral part of these financial statements.

A-5

BEN NEDERLAND HOLDING B.V.

CONSOLIDATED CASH FLOW STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2001
(Amounts expressed in thousands of Euros)

	2001		2000		1999

	€’000		€’000		€’000
CASH FLOW FROM OPERATING ACTIVITIES
Result after taxation for the period	(198,866	)	(239,379	)	(162,429	)
Adjustments:
Depreciation of tangible and intangible fixed assets	75,032		54,785		29,166
Loss on disposal of financial fixed assets	23		—		—
Changes in working capital:
Decrease/(increase) inventory	1,164		(6,742	)	(6,012	)
Decrease/(increase) receivables	2,427		(52,982	)	(27,495	)
Decrease/(increase) short term loans	3,741		557		(3,802	)
Decrease/(increase) current liabilities exclusive of shareholder loans	11,947		(46,309	)	146,309

	19,279		(105,476	)	109,000
Net cash used in operating activities	(104,532	)	(290,070	)	(24,263	)


CASH FLOWS FROM INVESTING ACTIVITIES
Investment in tangible fixed assets	(163,433	)	(128,965	)	(192,197	)
Disposal of tangible fixed assets	1,382		1,445		1,135
Investment in intangible fixed assets	(36,901	)	(432,018	)	(21,464	)
Investment in financial fixed assets	—		(23	)	—

Net cash used in investing activities	(198,952	)	(559,561	)	(212,526	)


CASH FLOWS FROM FINANCING ACTIVITIES
Paid in capital	—		1,070,714		—
Loans from shareholders	316,569		(214,222	)	236,857

Net cash provided by financing activities	316,569		856,492		236,857

NET INCREASE IN CASH	13,085		6,861		68
Cash and cash equivalents beginning of year	13,166		6,305		6,237
Cash and cash equivalents end of year	26,251		13,166		6,305

The accompanying notes form an integral part of these financial statements.

A-6

BEN NEDERLAND HOLDING B.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2001

ACTIVITIES

In accordance with Article 2 of its Articles of Association the principal activities of the company are to participate in, to finance, to collaborate with, to conduct the management of companies and enterprises active in the area of telecommunications and to provide advice and all other services.

Furthermore, the company’s objective is to exploit, to apply for and to hold all licenses required for establishing a full-scale mobile telecommunications business in the Netherlands and to maintain and operate a mobile telecommunications infrastructure in the Netherlands.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying consolidated financial statements have been prepared in accordance with principles of accounting generally accepted in the Netherlands.

Changes in accounting policies

In 2001, the Company upgraded its accounting system to identify direct costs of Engineering & Operations employees working on assets under construction. These costs were not separately identifiable in prior years. As a result of the accounting system change, the Company began capitalizing these costs beginning January 1, 2001. Total costs capitalized for the year ended December 31, 2001 were EUR 4,595,000. No such costs were capitalized related to prior years.

Up to January 1, 2000 the Company capitalised interest on construction in progress. As of January 1, 2000 all interest is expensed. The balance of € 1,795,000 at December 31, 1999 was charged to income in the year 2000.

Principles of consolidation

Group companies included in the consolidated accounts are those in which the company exercises significant influence. All intercompany balances and transactions are eliminated on consolidation.

Group companies included in the consolidated accounts are as follows:

		Proportion of voting rights held

	Domicile	2001		2000


BEN Nederland B.V	The Hague	100	%	100	%
BEN Klantenservice B.V	The Hague	100	%	100	%
3 G-Blue B.V	The Hague	—		100	%

3 G-Blue B.V. merged into Ben Nederland B.V. in 2001.

Cash flow statement

The cash flow statements are prepared using the indirect method, in accordance with IAS 7.

Foreign currencies

In the profit and loss accounts, all transactions denominated in a currency other than the Euro are translated into Euros at the exchange rate prevailing at the time of the transaction. Assets and liabilities denominated in foreign currencies are translated into Euros at the exchange rates prevailing on the balance sheet dates with differences recorded through the profit and loss account.

A-7

BEN NEDERLAND HOLDING B.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE THREE YEARS ENDED DECEMBER 31, 2001

Impairment of fixed assets

The carrying amounts of fixed assets are reviewed annually and written down where necessary for impairment.

Intangible fixed assets

Intangible fixed assets are stated at cost less amortisation calculated using the straight-line method over their estimated useful lives.

The DCS-1800 license, acquired in 1998, is carried at cost less amortisation on a straight-line basis from the launch of services to the end of the license period. (15 years).

The UMTS license is carried at cost. This license will be amortised on a straight-line basis, as from the launch of services to the end of the license period. The UMTS license runs through December 31, 2016.

Software licenses and capitalised software development costs are carried at cost less amortisation calculated using the straight-line method evenly over their useful lives of 3 years.

Tangible fixed assets

Tangible fixed assets are stated at cost less accumulated depreciation calculated over their estimated useful lives using the straight-line method.

The estimated useful life for certain network equipment was revised during 2000, and this change was applied prospectively. This had the impact of reducing the annual depreciation charge by approximately € 9 million.

The annual depreciation rates are:

Installation, machinery and equipment	13%-33	%
Furniture and fixtures	20	%
Leasehold improvements	10	%

Financial fixed assets

Participations of less than 20% equity interest are carried at cost. If necessary, provisions are recorded when there are permanent impairments in value. As of 2001, there have been no impairments to date. Income derived from these participations is recognised only when dividends are declared.

Accounts receivable

Subscriber and other debtors are stated at nominal value less a provision for doubtful debts.

Inventory

Inventory, consisting of packaging, handsets, sim-cards and reload vouchers, is carried at cost. Appropriate allowance is made for obsolete and slow-moving goods.

Revenue recognition

Revenues are recorded at the time the service is rendered. Revenues from services rendered are recorded net of discounts and VAT.

Deferred income tax

Deferred income tax is provided, using the liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Currently enacted tax rates are used to determine deferred income tax.

A-8

BEN NEDERLAND HOLDING B.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE THREE YEARS ENDED DECEMBER 31, 2001

Deferred tax assets relating to the carry forwards of unutilised tax losses are recognised to the extent that it is probable that future taxable income will be available against which the unused tax losses can be utilised.

At December 31, 2001, losses available for carry forward (all indefinite) of € 620,988,000 were not recognised in determining the deferred tax asset.

Interest

It is the policy of the Company to expense interest as incurred.

FINANCIAL FIXED ASSETS

	2001			2000

	€’000			€’000
Balance at January 1		23			—
Additions/(Disposals)		(23	)		23

Balance at December 31		—			23

Ben Nederland B.V. acquired 50 shares (13%) with a nominal value of € 454 in B-Genius, the E-Academy, N.V. on June 5, 2000. The participation has been disposed for NLG 1 in 2001.

INTANGIBLE FIXED ASSETS

	€’000

COST
Balance at January 1, 2001	592,079
Additions	36,901
Disposals	—

Balance at December 31, 2001	628,980

ACCUMULATED AMORTISATION
Balance at January 1, 2001	(42,710	)
Amortisation for the year	(38,195	)

Balance at December 31, 2001	(80,905	)

Net book value at December 31, 2001	548,075

TANGIBLE FIXED ASSETS

	Installations, machinery and equipment			Furniture and fixtures			Leasehold improvements			Assets under construction			Total

	€’000			€’000			€’000			€’000			€’000
AT COST
Balance at January 1, 2001		169,436			4,729			92,143			110,791			377,099
Additions		57,693			1,823			24,602			85,951			170,069
Disposals		(1,227	)		—			(132	)		(266	)		(1,625	)
Transfers from assets under construction		24,757			—			10,545			(41,938	)		(6,636	)

Balance at December 31, 2001		250,659			6,552			127,158			154,538			538,907

ACCUMULATED DEPRECIATION
Balance at January 1, 2001		(30,554	)		(1,266	)		(9,741	)		—			(41,561	)
Charge for the year		(24,560	)		(1,216	)		(11,061	)		—			(36,837	)
Disposals		235			—			8			—			243

Balance at December 31, 2001		(54,879	)		(2,482	)		(20,794	)		—			(78,155	)

Net book value at December 31, 2001		195,780			4,070			106,364			154,538			460,752

A-9

BEN NEDERLAND HOLDING B.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE THREE YEARS ENDED DECEMBER 31, 2001

Assets under construction mainly represent costs incurred in the design and construction of the company’s network.

RECEIVABLES

	2001	2000

	€’000	€’000

Third party receivables	80,758	79,514
Prepaid expenses	1,034	564
Taxation	1,923	6,064

	83,715	86,142

ISSUED SHARE CAPITAL

The total authorised share capital consists of 500,000,000 shares each having a nominal value of € 0,45 (NLG 1), of which 199,999,998 have been issued and fully paid at December 31, 2001 (2000: € 90,756,042).

SHARE PREMIUM ACCOUNT

	2001	2000

	€’000	€’000

Balance at January 1	1,138,781	113,445
Share premium paid on shares issued	—	1,025,336

Balance at December 31, 2001	1,138,781	1,138,781

ACCUMULATED DEFICIT

	2001		2000

	€’000		€’000

Balance at January 1	(422,122	)	(182,743	)
Current year net result/(loss)	(198,866	)	(239,379	)

Balance at December 31	(620,988	)	(422,122	)

10.

CURRENT LIABILITIES

	2001	2000

	€’000	€’000

Loans from shareholders	379,845	63,276
Trade creditors	112,787	119,120
Accruals and other creditors	23,904	12,000
Tax and social security	9,452	3,076

	525,988	197,472

11.

OPERATING EXPENSES

	2001	2000

	€’000	€’000

Selling and marketing expenses	150,390	128,310
General and administrative expenses	184,617	133,295
Depreciation and amortisation	75,032	54,785

	410,039	316,390

A-10

BEN NEDERLAND HOLDING B.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE THREE YEARS ENDED DECEMBER 31, 2001

12.

REMUNERATION OF DIRECTORS

The company’s directors received remuneration of € 874,105 during the year 2001.

13.

EMPLOYEES

Total employee expenses amounted to € 40,940,035 (2000: € 30,166,093) including social security of € 3,711,361 (2000: € 2,645,145) and pension costs of € 3,083,489 (2000: € 1,883,913). Employee expenses are included in General and administrative expenses.

The group had an average of 1,142 employees during 2001 (2000: 691).

14.

NET FINANCIAL INCOME/(EXPENSE)

	2001		2000

	€’000		€’000

Interest and similar income	985		890
Interest and similar expense	(11,900	)	(12,850	)
Foreign exchange gain/(loss)	(158	)	(493	)
Other financial income/(expenses)	783		26

	(10,290	)	(12,427	)

Interest expense primarily relates to that payable on shareholder financing.

15.

COMMITMENTS

At December 31, 2001, the group had entered into various agreements, principally relating to the network, resulting in commitments of € 393 million.

The company has issued guarantees under article 403 of the Dutch Civil Code to the group companies Ben Nederland B.V. en Ben Klantenservice B.V.

16.

RECONCILIATION TO U.S. GAAP

The consolidated financial statements of Ben Nederland Holding B.V. have been prepared in accordance with Dutch GAAP, which differs in certain respects from generally accepted accounting principles in the United States (U.S. GAAP). Application of U.S. GAAP would have affected the balance sheet as of December 31, 2001 and 2000 and the net loss for each of the years in the three-year period ended December 31, 2001 to the extent described below.

(1)

Capitalisation of interest on assets under construction and mobile communication licences

Under Dutch GAAP capitalisation of interest accumulated from borrowings during the asset construction period is voluntary. Prior to January 1, 2000, the Company capitalised interest accumulated during the construction period and amortized these costs over the assets useful life. As of January 1, 2000 the company elected to cease capitalization of interest costs related to assets under construction. As part of this change in accounting policy the unamortised balance of € 1,795,000 capitalized as of December 31, 1999 was reversed and charged to income in the year 2000.

Under U.S. GAAP, interest accumulated on borrowings during the asset construction period are capitalised and are amortized once the respective assets are placed in operation resulting in an increase in the net loss of € 692,000 in 2001 and a decrease in the net loss in 2000 of €4,375,000.

Under Dutch GAAP, interest costs related to the financing of the mobile communications licences are expensed as incurred. Under US GAAP, the license is considered an inextricable part of the network used to provide the actual services and accordingly interest costs related to the financing of the licenses during the network construction period are capitalized as part

A-11

BEN NEDERLAND HOLDING B.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FOR THE THREE YEARS ENDED DECEMBER 31, 2001

of network cost. This results in a decrease in net loss of € 11,653,000, € 7,754,000 and €379,000 in 2001, 2000 and 1999, respectively.

(2)

Technical equipment lease

During 1999, the Company entered into a sales lease back transaction relating to certain technical equipment in use by the Company. Under Dutch GAAP, the net cash received was recognized as other operating revenues. Under US GAAP, the gross cash received of € 65.6 million and payment liabilities of € 61.7 million are recognized on the balance sheet and the net cash gain on the transaction is recognized as other income over the lease term of 16 years.

(3)

Vendor penalties

During 1998 and 1999 the Company received penalties from a vendor as the vendor failed to meet certain contractual requirements with respect to the roll out of the network. These payments relate to refunds on amounts paid for network assets purchased. Under Dutch GAAP these amounts were recorded as income. Under U.S. GAAP these payments are recorded as a deduction from the cost of the network assets resulting in a reduction of net income and the carrying value of network assets by € 13.2 million in 1998 and € 4.6 million in 1999. Additionally, depreciation expense related to these assets is reduced by € 2.5 million, € 2.5 million and € 1.2 million for the years ended December 31, 2001, 2000 and 1999, respectively.

The effect of these items is set out in the following tables.

Reconciliation of net loss from Dutch GAAP to U.S. GAAP:
(Amounts in € ’000)

	2001		2000		1999

Net loss as reported in the consolidated financial statements under Dutch GAAP	(198,866	)	(239,379	)	(162,429	)
Interest capitalisation⁽¹⁾	10,961		12,129		379
Technical equipment lease⁽²⁾	250		250		(3,875	)
Vendor penalties⁽³⁾	2,540		2,540		(3,358	)

Net loss in accordance with U.S. GAAP	(185,115	)	(224,460	)	(169,283	)

Reconciliation of shareholders’ equity from Dutch GAAP to U.S. GAAP

(Amounts in € ’000)

	Dec 31, 2001			Dec 31, 2000

Shareholders’ equity in accordance with Dutch GAAP		608,549			807,415
Interest capitalisation⁽¹⁾		26,181			15,220
Technical equipment lease⁽²⁾		(3,375	)		(3,625	)
Vendor penalties⁽³⁾		(9,555	)		(12,095	)

Shareholders’ equity in accordance with U.S. GAAP		621,800			806,915

A-12

THIS PAGE INTENTIONALLY LEFT BLANK

A-13

OJSC MOBILE TELESYSTEMS
AND SUBSIDIARIES

Consolidated Financial Statements
December 31, 2003, 2002 and 2001
Unaudited

A-14

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
OJSC Mobile TeleSystems and Subsidiaries

Independent Auditors’ Report		A-16

Consolidated Financial Statements at December 31, 2003 and 2002:

	Consolidated balance sheets at December 31, 2003 and 2002	A-17

	Consolidated statements of operations for the years ended December 31, 2003, 2002 and 2001	A-19

	Consolidated statements of changes in shareholders’ equity for the years ended December 31, 2003, 2002 and 2001	A-20

	Consolidated statements of cash flows for the years ended December 31, 2003, 2002 and 2001	A-21

	Notes to consolidated financial statements	A-22

A-15

Report of Independent Registered Public Accounting Firm

To the Shareholders of OJSC Mobile TeleSystems:

We have audited the accompanying consolidated balance sheets of Mobile TeleSystems, a Russian Open Joint-Stock Company, and subsidiaries (the "Group") as of December 31, 2003 and 2002, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Group's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 3 to the consolidated financial statements, the Group changed its method of accounting for subscriber acquisition costs in 2001.

/s/ ZAO Deloitte & Touche CIS

March 26, 2004, except for Note 24,
as to which the date is June 15, 2004

Moscow, Russia

A-16

OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AT DECEMBER 31, 2003 and 2002
(Amounts in thousands of U.S. dollars, except share amounts)

	December 31,

	2003		2002

CURRENT ASSETS:
Cash and cash equivalents (Note 5)	$	90,376	$	34,661
Short-term investments (Note 6)		245,000		30,000
Trade receivables, net (Note 7)		99,951		40,501
Accounts receivable, related parties (Note 18)		3,356		3,569
Inventory (Note 8)		67,291		41,386
Prepaid expenses		46,679		26,537
Deferred tax asset, current portion (Note 15)		44,423		12,223
VAT receivable		209,629		154,061
Other current assets		33,774		15,392

Total current assets		840,479		358,330

PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $532,268 and $299,216, respectively (Note 9)		2,256,076		1,344,633
LICENSES, net of accumulated amortization of $257,024 and $143,402, respectively (Notes 4 and 21)		703,103		386,919
OTHER INTANGIBLE ASSETS AND GOODWILL, net of accumulated amortization of $148,052 and $78,889, respectively (Note 10)		312,677		138,090
DEBT ISSUANCE COSTS, net of accumulated amortization of $4,586 and $2,898, respectively (Note 12)		9,431		2,957
INVESTMENTS IN AND ADVANCES TO ASSOCIATES (Note 20)		103,585		34,034

Total assets	$	4,225,351	$	2,264,963

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

A-17

OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AT DECEMBER 31, 2003 and 2002
(Amounts in thousands of U.S. dollars, except share amounts)

	December 31,

	2003			2002

CURRENT LIABILITIES:
Accounts payable, related parties (Note 18)	$	31,904		$	4,968
Trade accounts payable		168,039			117,623
Deferred connection fees, current portion (Note 11)		21,467			22,210
Subscriber prepayments and deposits		191,768			110,950
Debt, current portion (Note 12)		103,312			67,098
Notes payable, current portion (Note 12)		597,836			—
Capital lease obligation, current portion (Notes 13 and 18)		9,122			21,232
Income tax payable		11,128			3,987
Accrued liabilities (Note 14)		143,789			73,919
Other payables		19,604			2,225

Total current liabilities		1,297,969			424,212

LONG-TERM LIABILITIES:
Notes payable, net of current portion (Note 12)		800,000			298,943
Debt, net of current portion (Note 12)		142,418			59,971
Capital lease obligation, net of current portion (Notes 13 and 18)		7,646			7,241
Deferred connection fees, net of current portion (Note 11)		25,177			19,694
Deferred taxes (Note 15)		180,628			87,485

Total long-term liabilities		1,155,869			473,334

Total liabilities		2,453,838			897,546

COMMITMENTS AND CONTINGENCIES (Note 22)
MINORITY INTEREST		47,603			65,373
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, 2003 and 2002, 345,244,080 of which are in the form of ADS (Note 1)		50,558			50,558
Treasury stock (9,929,074 as of December 31, 2003 and 9,966,631 as of December 31, 2002 common shares at cost) (Note 17)		(10,197	)		(10,206	)
Additional paid-in capital		559,911			558,102
Unearned compensation (Note 17)		(869	)		(212	)
Shareholder receivable (Note 12)		(27,610	)		(34,412	)
Accumulated other comprehensive income (Note 2)		7,595			—
Retained earnings		1,144,522			738,214

Total shareholders’ equity		1,723,910			1,302,044

Total liabilities and shareholders’ equity	$	4,225,351		$	2,264,963

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

A-18

OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 and 2001
(Amounts in thousands of U.S. dollars, except share and per share amounts)

	2003			2002			2001

NET REVENUES:
Service revenues	$	2,435,717		$	1,274,287		$	830,308
Connection fees		29,372			24,854			21,066
Equipment sales		81,109			62,615			41,873

		2,546,198			1,361,756			893,247

COST OF SERVICES AND PRODUCTS, exclusive of depreciation and amortization shown separately below (including related party amounts of $37,680, $31,607 and $30,537, respectively):
Interconnection and line rental		187,270			113,052			75,278
Roaming expenses		113,838			83,393			68,387
Cost of equipment		173,071			90,227			39,828

		474,179			286,672			183,493

OPERATING EXPENSES (including related party amounts of $11,002, $9,602 and $8,882, respectively) (Note 19):		406,722			229,056			134,598
SALES AND MARKETING EXPENSES (including related party amounts of $23,668, $12,140 and $8,707, respectively):		326,783			171,977			107,729
DEPRECIATION AND AMORTIZATION		415,916			209,680			133,318
IMPAIRMENT OF INVESTMENT (Note 20)		—			—			10,000

Net operating income		922,598			464,371			324,109
CURRENCY EXCHANGE AND TRANSLATION (GAINS) LOSSES		(693	)		3,474			2,264
OTHER EXPENSES/(INCOME) (including related party amounts of $6,161, $5,141 and $2,978, respectively):
Interest income (Note 6)		(18,076	)		(8,289	)		(11,829	)
Interest expense		106,551			44,389			6,944
Other expenses (income), net		3,420			(2,454	)		(2,672	)

Total other expenses (income), net		91,895			33,646			(7,557	)
Income before provision for income taxes and minority interest		831,396			427,251			329,402
PROVISION FOR INCOME TAXES (Note 15)		242,480			110,417			98,128
MINORITY INTEREST		71,677			39,711			7,536

NET INCOME before cumulative effect of a change in accounting principle		517,239			277,123			223,738
Cumulative effect of a change in accounting principle, net of income taxes of $9,644 (Note 3)		—			—			(17,909	)

NET INCOME	$	517,239		$	277,123		$	205,829

Weighted average number of common shares outstanding		1,983,374,949			1,983,359,507			1,983,359,507
Earnings per share, basic and diluted:
Net income before cumulative effect of a change in accounting principle	$	0.261		$	0.140		$	0.113
Net income	$	0.261		$	0.140		$	0.104

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

A-19

OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 and 2001
(Amounts in thousands of U.S. dollars, except share amounts)

	Common Stock			Treasury Stock					Accumulated Other Comprehensive Income		Additional Paid-in Capital		Unearned Compen- sation			Share- holder Receivable			Retained Earnings			Total

	Shares	Amount		Shares		Amount

BALANCES,
December 31, 2000	1,993,326,138		50,558	(9,966,631	)		(10,206	)		—		552,030		—			(49,519	)		258,221			801,084

Receivable from Sistema (Note 12):														—
Increases for interest	—		—	—			—			—		3,764		—			(3,764	)		—			—
Payments from Sistema	—		—	—			—			—		—		—			14,325			—			14,325
Net income	—		—	—			—			—		—		—			—			205,829			205,829
Dividends declared	—		—	—			—			—		—		—			—			(2,959	)		(2,959	)

BALANCES,
December 31, 2001	1,993,326,138		50,558	(9,966,631	)		(10,206	)		—		555,794		—			(38,958	)		461,091			1,018,279

Receivable from Sistema (Note 12):
Increases for interest	—		—	—			—			—		2,073		—			(2,073	)		—			—
Payments from Sistema	—		—	—			—			—		—		—			6,619			—			6,619
Issuance of stock options (Note 17)	—		—	—			—			—		235		(235	)		—			—			—
Amortization of deferred compensation (Note 17)	—		—	—			—			—		—		23			—			—			23
Net income	—		—	—			—			—		—		—			—			277,123			277,123

BALANCES,
December 31, 2002	1,993,326,138	$	50,558	(9,966,631	)	$	(10,206	)		—	$	558,102	$	(212	)	$	(34,412	)	$	738,214		$	1,302,044

Receivable from Sistema (Note 12):
Increases for interest	—		—	—			—			—		807		—			(807	)		—			—
Payments from Sistema	—		—	—			—			—		—		—			7,609			—			7,609
Issuance of stock options (Note 17)	—		—	—			—			—		1,002		(1,002	)		—			—			—
Stock options exercised (Note 17)	—		—	37,557			9			—		—		—			—			—			9
Amortization of deferred compensation (Note 17)	—		—	—			—			—		—		345			—			—			345
Dividends declared (Note 1)	—		—	—			—			—		—		—			—			(110,931	)		(110,931	)
Cumulative translation adjustment net of income taxes	—		—	—			—			7,595		—		—			—			—			7,595
Net income	—		—	—			—			—		—		—			—			517,239			517,239

BALANCES,
December 31, 2003	1,993,326,138	$	50,558	(9,929,074	)	$	(10,197	)	$	7,595	$	559,911	$	(869	)	$	(27,610	)	$	1,144,522		$	1,723,910

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

A-20

OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 and 2001
(Amounts in thousands of U.S. dollars)

	2003			2002			2001

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	517,239		$	277,123		$	205,829
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest		71,677			39,475			7,536
Depreciation and amortization		415,916			209,680			133,318
Amortization of deferred connection fees		(29,372	)		(24,854	)		(20,027	)
Equity in net loss of associates		(2,670	)		—			—
Cumulative effect of a change in accounting principle		—			—			17,909
Gain on debt extinguishment		—			—			(2,780	)
Inventory obsolescence expense		3,307			5,614			2,543
Provision for doubtful accounts		32,633			7,047			3,219
Deferred taxes		(43,001	)		(18,989	)		(39,964	)
Non-cash expenses associated with stock bonus and stock option plans		213			23			—
Impairment of investment		—			—			10,000
Changes in operating assets and liabilities:
Increase in trade receivables		(64,597	)		(18,945	)		(7,181	)
Decrease/(Increase) in accounts receivable, related parties		213			(1,360	)		(3,091	)
Increase in inventory		(14,737	)		(18,186	)		(4,129	)
Increase in prepaid expenses		(11,029	)		(2,634	)		(8,552	)
Increase in VAT receivable		(50,230	)		(64,154	)		(59,618	)
(Increase)/Decrease in other current assets		(8,122	)		(7,422	)		1,613
(Decrease)/Increase in accounts payable, related parties		(1,417	)		81			1,049
Increase/(Decrease) in trade accounts payable		2,673			(16,058	)		20,470
Increase in subscriber prepayments and deposits		76,861			46,064			49,980
Increase/(Decrease) in income tax payable		7,141			(19,778	)		10,753
Increase in accrued liabilities and other payables		63,286			20,045			19,324

Net cash provided by operating activities		965,984			412,772			338,201

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of subsidiaries, net of cash acquired		(667,206	)		(143,396	)		(75,858	)
Purchases of property, plant and equipment		(839,165	)		(502,054	)		(396,667	)
Purchases of intangible assets		(119,606	)		(72,218	)		(44,533	)
Purchases of short term investments		(215,000	)		—			(110,000	)
Proceeds from sale of short term investments		—			55,304			195,602
Investments in and advances to associates		(69,110	)		(35,557	)		(10,067	)

Net cash used in investing activities		(1,910,087	)		(697,921	)		(441,523	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes		1,097,000			50,808			248,135
Notes issuance cost		(9,556	)		(649	)		(3,856	)
Capital lease obligation principal paid		(22,646	)		(1,804	)		(7,947	)
Dividends paid		(110,864	)		—			(2,959	)
Proceeds from loans		712,716			52,851			13,577
Loan principal paid		(677,374	)		(7,008	)		(13,683	)
Payments from Sistema		8,269			6,619			14,325

Net cash provided by financing activities		997,545			100,817			247,592

Effect of exchange rate changes on cash and cash equivalents		2,273			(636	)		(469	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:		55,715			(184,968	)		143,801

CASH AND CASH EQUIVALENTS, beginning of year		34,661			219,629			75,828

CASH AND CASH EQUIVALENTS, end of year	$	90,376		$	34,661		$	219,629

SUPPLEMENTAL INFORMATION:
Income taxes paid	$	286,016		$	147,346		$	129,418
Interest paid	$	79,824		$	43,438		$	4,096
Non-cash investing activities:
Additions to network equipment and software under capital lease	$	10,928		$	18,917		$	34,072
Payable related to business acquisition (Note 4)	$	27,500		$	—		$	—

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

A-21

OJSC MOBILE TELESYSTEMS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars,
except share and per share amounts or if otherwise stated)

1. DESCRIPTION OF BUSINESS

Business of the Group

OJSC Mobile TeleSystems and its subsidiaries (“MTS” or the “Group”) is the leading provider of wireless telecommunication services in the Russian Federation (“RF”) and Ukraine in terms of the number of subscribers and revenues. The Group has operated primarily in the GSM standard since 1994.

Open Joint-Stock Company Mobile TeleSystems (“MTS OJSC” or the “Company”) was created on March 1, 2000, through the merger of Closed Joint-Stock Company Mobile TeleSystems (“MTS CJSC”) and RTC CJSC, its wholly-owned subsidiary. MTS CJSC was formed in 1993 to design, construct and operate a cellular telecommunications network in Moscow and the Moscow region. The development of the network was achieved through green-field build-out in the regions for which the Company was granted 900 or 1800 MHz (“GSM-900” and “GSM-1800”) cellular licenses or through the acquisition of majority stakes in local GSM operators (see Note 21 Operating Licenses and Note 4 Businesses Acquired).

The Company’s shares are traded in the form of American Depositary Shares (“ADS”). Each ADS represents 20 shares of common stock of the Company. In July 2000, the Company issued a total of 17,262,204 ADS, representing 345,244,080 common shares.

Ownership

As of December 31, 2003 and 2002, MTS’ shareholders of record and their respective percentage direct interests were as follows:

	2003		2002

Joint-Stock Financial Corporation “Sistema” (“Sistema”)	41.0	%	35.0	%
T-Mobile Worldwide Holding GmbH (“T-Mobile”)	25.4	%	36.4	%
VAST, Limited Liability Company (“VAST”)	3.1	%	3.1	%
Invest-Svyaz-Holding, Closed Joint-Stock Company	8.0	%	8.0	%
ADS Holders	17.4	%	17.4	%
GDR Holders	5.0	%	—
All executive officers and directors	0.1	%	0.1	%

	100.0	%	100.0	%

Sistema owns 51.0% equity interest in VAST, a limited liability company incorporated under the laws of the Russian Federation; the remaining 49.0% interest is held by ASVT, a Russian open joint-stock company. Sistema’s effective ownership in MTS was 50.6% and 44.6% at December 31, 2003 and 2002, respectively.

In March 2003, Sistema and T-Mobile (together, “the Shareholders”) entered into a call option agreement, pursuant to which T-Mobile granted Sistema the option to acquire from it 199,332,614 shares of MTS, representing 10.0% of outstanding common stock of MTS. On April 26, 2003, Sistema exercised its option with T-Mobile to purchase an additional 6.0% of the outstanding common stock of MTS and purchased T-Mobile’s 49.0% interest in Invest-Svyaz-Holding, bringing its interest in Invest-Svyaz-Holding to 100.0%. Concurrently with this transaction, T-Mobile sold its holding of 5.0% in MTS

A-22

on the open market in the form of Global Depositary Receipts (“GDRs”) listed on the London Stock Exchange.

In April 2003, Sistema issued $350.0 million 10.25% notes, due in 2008. These notes are collateralized by 193,473,900 shares of common stock of MTS OJSC.

On June 30, 2003, the Group approved cash dividends of $1.12 per ADS ($0.056 per share) for a total of $111.0 million. As of the date of these statements, dividends in the amount of $96.7 million, net of tax in the amount of $10.5 million, were paid.

On November 28, 2003, common shares of MTS OJSC were included by the Board of Moscow Interbank Currency Exchange (“MICEX”) into the MICEX “B” Quotation List.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS

Accounting principles

MTS maintains its accounting books and records in Russian rubles for its subsidiaries located in the Russian Federation and Ukrainian hryvnas for Ukrainian Mobile Communications (“UMC”) based on local accounting and tax legislation. The accompanying consolidated financial statements have been prepared in order to present MTS’ financial position and its results of operations and cash flows in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and expressed in terms of U.S. dollars.

The accompanying consolidated financial statements differ from the financial statements used for statutory purposes in that they reflect various adjustments, not recorded on the entities’ books, which are appropriate to present the financial position, results of operations and cash flows in accordance with U.S. GAAP. The principal adjustments are related to revenue recognition, foreign currency translation, deferred taxation, consolidation, and depreciation and valuation of property and equipment and intangible assets.

Basis of consolidation

Wholly owned subsidiaries and majority owned subsidiaries where the Company has operating and financial control are consolidated. Those ventures where the Company exercises significant influence, but does not exercise operating and financial control are accounted for by the equity method. All significant intercompany accounts and transactions are eliminated upon consolidation. The Company’s share in net income of unconsolidated affiliates was insignificant for each of the three years in the period ended December 31, 2003, and is included in other income in the accompanying consolidated statements of operations. Results of operations of subsidiaries acquired are included in the consolidated statements of operations from the date of their acquisition.

A-23

As of December 31, 2003 and 2002, MTS has investments in the following significant operating and holding entities:

	Accounting Method	December 31,

		2003		2002

Rosico⁽¹⁾	Consolidated	—		100.0	%
ACC	Consolidated	100.0	%	100.0	%
Telecom XXI	Consolidated	100.0	%	100.0	%
Telecom-900	Consolidated	100.0	%	100.0	%
SCS-900	Consolidated	88.5	%	51.0	%
FECS-900	Consolidated	60.0	%	60.0	%
Uraltel	Consolidated	99.8	%	53.2	%
MTS Finance⁽²⁾	Consolidated	100.0	%	100.0	%
BM Telecom	Consolidated	100.0	%	100.0	%
Kuban-GSM	Consolidated	100.0	%	52.7	%
Dontelecom	Consolidated	100.0	%	100.0	%
MTS-Barnaul	Consolidated	100.0	%	100.0	%
BIT	Consolidated	100.0	%	100.0	%
MTS-Capital	Consolidated	100.0	%	—
UMC	Consolidated	100.0	%	—
Sibchallenge	Consolidated	100.0	%	—
TSS	Consolidated	100.0	%	—
Volgograd Mobile	Equity	50.0	%	—
Astrakhan Mobile	Equity	50.0	%	—
Mar Mobile GSM	Consolidated	100.0	%	—
Primtelefon	Equity	50.0	%	—
MSS	Consolidated	83.5	%	83.5	%
ReCom	Consolidated	53.9	%	53.9	%
TAIF Telcom	Consolidated	52.7	%	—
UDN-900	Consolidated	51.0	%	51.0	%
Novitel	Consolidated	51.0	%	51.0	%
MTS Belarus	Equity	49.0	%	49.0	%

______________

⁽¹⁾

On June 9, 2003, the Group’s wholly owned subsidiary, Rosico, merged into MTS OJSC pursuant to a shareholders’ resolution approving the transaction.

⁽²⁾

Represents beneficial ownership.

Translation methodology

Effective January 1, 2003, the Russian economy ceased to be considered hyperinflationary. Management believes that the U.S. dollar is the appropriate functional currency because the majority of its revenues, costs, property and equipment purchased, and debt are either priced, incurred, payable or otherwise measured in U.S. dollars. Each of the legal entities domiciled in Russia, Ukraine and Belarus maintains its records and prepares its financial statements in the local currency, principally either Russian ruble, Ukrainian hryvna or Belarusian ruble, in accordance with the requirements of local statutory accounting and tax legislation.

A-24

Translation (re-measurement) of financial statements denominated in local currencies into U.S. dollars has been performed in accordance with the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 52 “Foreign currency translation.”

For subsidiaries of the Group where functional currency is the U.S. dollar, monetary assets and liabilities have been translated at the period end exchange rates. Non-monetary assets and liabilities have been translated at historical rates. Revenues, expenses and cash flows have been translated at historical rates. Translation differences resulting from the use of these rates have been accounted for as currency translation gains and losses in the accompanying consolidated statements of operations.

For UMC and Kuban-GSM where functional currency is the local currency, Ukrainian hryvna and Russian ruble, respectively, a “new cost basis” for all non-monetary assets has been established as of January 1, 2003. All year end balance sheet items have been translated into U.S. dollars at the period end exchange rate. Revenues and expenses have been translated at period average exchange rate. Cumulative translation adjustments in the amount of $7,595, net of income taxes were recorded directly in the consolidated statement of shareholders’ equity.

Management estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Examples of significant estimates include the allowance for doubtful accounts, the recoverability of intangible assets and other long-lived assets, and valuation allowances on deferred tax assets.

Cash and cash equivalents

Cash represents cash on hand and in MTS’ bank accounts and short-term investments having original maturities of less than three months.

Short-term investments

Short-term investments represent investments in time deposits, which have original maturities in excess of three months but less than twelve months. These investments are being accounted for at cost.

Allowance for doubtful accounts

MTS provides an allowance for doubtful accounts based on management’s periodic review of accounts receivable from customers and other receivables.

Prepaid expenses

Prepaid expenses are primarily comprised of advance payments made for inventory and services to vendors.

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Inventory

Inventory, accounted for at lower of cost, determined by the first-in, first-out, or FIFO method, or market, consists of telephones and accessories, held for sale and spare parts, to be used for equipment maintenance within next twelve months and other inventory items.

Telephones and accessories, held for sale, are written down to their market values based on specific monthly reviews of significant inventoried items and are expensed as cost of equipment.

Value-added taxes (“VAT”)

Value-added taxes related to sales are payable to the tax authorities on an accrual basis based upon invoices issued to the customer. VAT incurred for purchases may be reclaimed, subject to certain restrictions, against VAT related to sales.

Property, plant and equipment

Property, plant and equipment with a useful life of more than one year are capitalized at historical cost and depreciated on a straight-line basis over their expected useful lives as follows:

Network and base station equipment		5–12 years
Leasehold improvements		shorter of 10 years or lease term
Office equipment and computers		5 years
Buildings		50 years
Vehicles		4 years

Construction in progress and equipment held for installation are not depreciated until the constructed or installed asset is ready for its intended use.

Maintenance and repair costs are expensed as incurred, while upgrades and improvements that extend useful lives are capitalized.

License costs

License costs are capitalized as a result of (a) purchase price allocated to licenses acquired in business combinations (see Note 4 Businesses Acquired) and (b) licenses purchased directly from government organizations, which require license payments.

Our current operating licenses do not provide for automatic renewal upon expiration, and as the Group and the industry do not have sufficient experience with the renewal of licenses, license costs are being amortized, subject to periodic review for impairment, on a straight-line basis over three to ten years starting from the date such license area becomes commercially operational.

Upon adoption of SFAS No. 142, “Goodwill and Other Intangible Assets” on January 1, 2002, the Group reclassified $22.0 million relating to the 1998 acquisition of Rosico from goodwill to licenses.

Other intangible assets and Goodwill

Intangible assets represent various purchased software costs, telephone numbering capacity, acquired customer base and rights to use premises. A significant portion of the rights to use premises was contributed by shareholders to the Group’s charter capital. Telephone numbering capacity costs

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with finite contractual life are being amortized over five to ten years and the rights to use premises are being amortized over ten years.

Software costs are amortized over four years. Acquired customer base is amortized over the estimated average subscriber life from 30 to 70 months. Other intangible assets are being amortized over three to four years. All finite-life intangible assets are being amortized using the straight-line method.

Telephone numbering capacity with unlimited contractual life is not amortized, but is reviewed, at least annually, for impairment in accordance with the provisions of SFAS No. 142. Amortization of deferred numbering capacity costs starts immediately upon the purchase of numbering capacity.

Goodwill represents the excess of the cost of business acquired over the fair market value of identifiable net assets at the date of acquisition, namely fair value of workforce-in-place acquired in the purchase of UMC (see Note 4 Business Acquired).

Goodwill is reviewed annually, as of the beginning of the fourth quarter, for impairment or whenever it is determined that impairment indicators exist. The Company determines whether an impairment has occurred by assigning goodwill to the reporting unit identified in accordance with SFAS No. 142, and comparing the carrying amount of the reporting unit to the fair value of the reporting unit. If a goodwill impairment has occurred, the Company recognizes a loss for the difference between the carrying amount and the implied fair value of goodwill. To date, no impairment of goodwill has occurred.

Leasing arrangements

The Group accounts for leases based on the requirements of SFAS No. 13, “Accounting for Leases.” Majority of the Group’s operating leases are for the premises. Certain subsidiaries of the Group lease switches, base stations and other cellular network equipment as well as billing systems. For capital leases, the present value of future minimum lease payments at the inception of the lease is reflected as an asset and a liability in the balance sheet. Amounts due within one year are classified as short-term liabilities and the remaining balance as long-term liabilities.

Subscriber acquisition costs

Subscriber acquisition costs represent the direct costs paid for each new subscriber enrolled through MTS’ independent dealers. MTS expenses these costs as incurred. Prior to 2001, these costs were capitalized to the extent of any revenues that had been deferred from the acquisition of a subscriber, such as connection fees charged to a subscriber to initiate call service, and amortized as a component of sales and marketing expense on a straight-line basis over the estimated average subscriber life (see also Note 3 Change in Accounting Principle).

Investments impairment

Management periodically assesses the realizability of the carrying values of the investments and if necessary records impairment losses to write the investment down to fair value.

For the three years in the period ended December 31, 2003, no such impairments have occurred, except as discussed in Note 20 Investments In and Advances to Associates.

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Debt issuance costs

Debt issuance costs are amortized using the effective interest method over the terms of the related debt.

Impairment of long-lived assets

MTS periodically evaluates the recoverability of the carrying amount of its long-lived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Whenever events or changes in circumstances indicate that the carrying amounts of those assets may not be recoverable, MTS compares undiscounted net cash flows estimated to be generated by those assets to the carrying amount of those assets. When these undiscounted cash flows are less than the carrying amounts of the assets, MTS records impairment losses to write the asset down to fair value, measured by the estimated discounted net future cash flows expected to be generated from the use of the assets. For the three years in the period ended December 31, 2003, no such impairments have occurred.

Subscriber prepayments

The Group requires the majority of its customers to pay in advance for telecommunication services. All amounts received in advance of service provided are recorded as a subscriber prepayment liability and are not recorded as revenues until the related services have been provided to the subscriber.

Revenue recognition

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

MTS categorizes the revenue sources in the statements of operations as follows:

•

Service revenues: (a) subscription fees, (b) usage charge, (c) value-added service fees, (d) roaming fees charged to other operators for guest roamers utilizing MTS’ network and (e) prepaid phone cards;

•

Connection fees;

•

Equipment sales: (a) sales of handsets, and (b) sales of accessories.

Subscription fees

MTS recognizes revenues related to the monthly network fees in the month that the wireless service is provided to the subscriber.

Usage charges and Value-added services fees

Usage charges consist of fees based on airtime used by subscriber, the destination of the call and the service utilized.

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Value-added service fees are based on usage of airtime or volume of data transmitted for value added services, such as short message services, internet usage and data services. MTS recognizes revenues related to usage charges and value-added services in the period when services were rendered.

Roaming fees

MTS charges roaming per-minutes fees to other wireless operators for non-MTS subscribers utilizing MTS’ network. Guest roaming fees were $153,271, $83,393 and $52,639 for the years ended December 31, 2003, 2002 and 2001, respectively.

Prepaid phone cards

MTS sells to subscribers prepaid phone cards, separately from the handset. These cards allow subscribers to make a predetermined allotment of wireless phone calls and/or take advantage of other services offered by the Group, such as short messages and sending or receiving faxes.

At the time that the prepaid phone card is purchased, MTS records the receipt of cash as a subscriber prepayment. The Group recognizes revenues from the phone cards in the period when subscriber uses time under the phone card. Unused time on sold phone cards is not recognized as revenues until the related services have been provided to the subscriber or the prepaid phone card has expired.

In 2002, MTS introduced a new line of prepaid service tariff plans, whereby a customer may purchase a package that allows a connection to the MTS network and a predetermined allotment of wireless phone calls and/or other services offered by the Group. Revenues under these plans are allocated between connection fees and service fees based on their relative fair values.

Connection fees

MTS defers initial connection fees from the moment of initial signing of the contract with subscribers over the estimated average subscriber life. The Group estimates that the average expected term of the subscriber relationship is 39 months in Russia and 47 months in Ukraine (see also Note 11 Deferred Connection Fees).

Equipment sales

MTS sells handsets and accessories to customers who are entering into contracts for service and as separate distinct transactions. The Group recognizes revenues from the handsets and accessories when title passes to the customer. MTS records estimated returns as a direct reduction of sales at the time the related sales are recorded.

In Ukraine, MTS also from time to time sells handsets at prices below cost. MTS recognizes these subsidies in cost of equipment when sale is recorded.

Expense recognition

Expenses incurred by MTS in relation to the provision of wireless communication services mainly relate to interconnection and line rental costs, roaming expenses, costs of handsets and other accessories sold, depreciation and amortization, and maintenance of the network.

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Calls made by subscribers from areas outside of territories covered by the Group licenses are subject to roaming fees charged by the wireless provider in those territories. These fees are recorded as roaming expenses, as MTS acts as the principal in the transaction with the subscriber and bears the risk of non-collection from the subscriber. Roaming fees are charged to MTS subscribers based on Group’s existing tariffs and recorded as service revenues.

The costs of handsets and accessories, whether sold to subscribers through the distribution channel or as part of the service contract, are expensed when title passes to the customer. Any fees paid to dealers as commissions are recorded as a component of sales and marketing expenses.

Taxation

Deferred tax assets and liabilities are recognized for the expected future tax consequences of existing differences between financial reporting and tax reporting bases of assets and liabilities, and loss or tax credit carryforwards using enacted tax rates expected to be in effect at the time these differences are realized. Valuation allowances are recorded for deferred tax assets for which it is more likely that these assets will not be realized.

Advertising costs

Advertising costs are expensed as incurred. Advertising costs for the years ended December 31, 2003, 2002 and 2001 were $102,018, $48,624 and $42,715, respectively, and are reflected as a component of sales and marketing expenses in the accompanying consolidated statements of operations.

Government pension fund

Subsidiaries of the Group contribute to the local state pension fund and social fund, on behalf of all its employees.

In Russia, starting from January 1, 2001 all social contributions, including contributions to the pension fund, were substituted with a unified social tax (“UST”) calculated by the application of a regressive rate from 35.6% to 2% of the annual gross remuneration of each employee. UST is allocated to three social funds, including the pension fund, where the rate of contributions to the pension fund vary from 28% to 2%, respectively, depending on the annual gross salary of each employee. The contributions are expensed as incurred.

In Ukraine the subsidiary of the Group is required to contribute a specified percentage of each employee payroll up to a fixed limit to Pension Fund, Unemployment Fund and Social Security Fund.

Earnings per share

Basic earnings per share (“EPS”) have been determined using the weighted average number of shares outstanding during the year. Diluted EPS reflect the potential dilution of stock options, granted to employees. There are 4,797,410 stock options outstanding as of December 31, 2003.

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The following is the reconciliation of the share component for basic and diluted EPS:

	December 31,

	2003	2002	2001

Weighted average number of common share outstanding	1,983,374,949	1,983,359,507	1,983,359,507
Dilutive effect of stock options	1,727,131	405,946	30,133

Weighted average number of common shares and potential shares outstanding	1,985,102,080	1,983,765,453	1,983,389,640

Fair value of financial instruments

The fair market value of financial instruments, consisting of cash and cash equivalents, accounts receivable and accounts payable, which are included in current assets and liabilities, approximates the carrying value of these items due to the short term nature of these amounts. The fair value of our publicly traded long-term notes as of December 31, 2003 ranged from 103.6% to 110.2% of the principal amount. As of December 31, 2003, fair value of other fixed rate debt including capital lease obligation approximated its carrying value. The fair value of variable rate debt is equivalent to carrying value.

Comprehensive income

Comprehensive income is defined as net income plus all other changes in net assets from non-owner sources. The following is a reconciliation of comprehensive income, net of income taxes:

	December 31,

	2003		2002		2001

Net income	$	517,239	$	277,123	$	205,829
Cumulative translation adjustment		7,595		—		—

Total comprehensive income	$	524,834	$	277,123	$	205,829

Comparative information

Certain prior years amounts have been reclassified to conform to the current year presentation.

Stock-based compensation

MTS accounts for stock options issued to employees, non-employee directors and consultants following the requirements of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148 “Accounting for Stock Based Compensation—Transition and Disclosure, an amendment to FASB Statement No. 123.” Under the requirements of these statements compensation to employees and non-employee directors is measured based on the intrinsic value of options on the measurement date, calculated as a difference between the fair market value of stock and exercise price at that date. Compensation to consultants is measured based on the fair value of options on the measurement date as determined using a Black-Scholes option-pricing model.

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If the Group had elected to recognize compensation costs based on the fair values of options at the date of the grant, net income and earning per share amounts would have been as follows:

	December 31,

	2003			2002			2001

Net income as reported	$	517,239		$	277,123		$	205,829
Pro-forma effect of the application of fair value method of accounting for stock options		(727	)		(460	)		(129	)

Pro-forma net income	$	516,512		$	276,663		$	205,700

Earnings per share—basic and diluted
As reported	$	0.261		$	0.140		$	0.104
Pro-forma	$	0.260		$	0.140		$	0.104

Recently adopted accounting pronouncements

In June 2001, Financial Accounting Standard Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation is recorded in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over the asset’s useful life. Changes in the liability resulting from the passage of time will be recognized as operating expense. The Group adopted SFAS No. 143 effective January 1, 2003. The adoption of SFAS No. 143 did not have a material impact on the Group’s financial position or results of operations.

In April 2002, FASB issued SFAS No. 145, “Rescission of FASB Statements Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS No. 4, “Reporting Gains and Losses from Extinguishments of Debt,” addressed statement of operations classification of gains and losses from extinguishment of debt. SFAS No. 64 amended SFAS No. 4 and is no longer necessary due to the rescission of SFAS No. 4. SFAS No. 145 also amended SFAS No. 13 “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Following the adoption of the requirements of SFAS No. 145 effective January 1, 2003, MTS reclassified a gain on the extinguishment of a credit facility with OJSC AB Inkombank of $2.8 million and the related income tax expense of $0.7 million from extraordinary gain on debt repayment to other income and income tax expense, respectively, in the consolidated statement of operations for the year ended December 31, 2001.

In June 2002, FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which requires the recognition of a liability when incurred for costs associated with an exit or disposal activity. The fundamental conclusion reached by the FASB in this Statement is that an entity’s commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The Group adopted the provisions of SFAS No. 146 effective January 1, 2003. The adoption of SFAS No. 146 did not have a material impact on the Group’s financial position or results of operations.

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In November 2002, FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires that the guarantor recognizes, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantee. FIN 45 also requires additional disclosures about the guarantor’s obligations under certain guarantees that it has issued. The Group adopted the initial recognition and measurement provisions of this interpretation on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on the Group’s financial position or results of operations.

In November 2002, the Emerging Issues Task Force (“EITF”) issued a final consensus on EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on when and how an arrangement involving multiple deliverables should be divided in separate units of accounting. The Group adopted the requirements of EITF Issue No. 00-21 prospectively for arrangements entered into after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have a material impact on the Group’s financial position or results of operations.

In April 2003, FASB issued SFAS No. 149, “Amendments of FASB Statements No. 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 clarifies under what circumstances a contract with an initial investment meets the characteristic of a derivative, clarifies when a derivative contains a financing component, amends the definition of an underlying and certain other existing pronouncements. The Group adopted the requirements of SFAS No. 149 for contracts entered into or modified and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on the Group’s financial position or results of operations.

In May 2003, FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. SFAS No. 150 requires issuers to classify as liabilities (or assets in some circumstances) certain classes of freestanding financial instruments that embody obligations for the issuer, including mandatory redeemable financial instruments, obligations to repurchase the issuer’s equity shares by transferring assets and certain obligations to issue a variable number of shares. The Group adopted the requirements of SFAS No. 150 effective July 1, 2003. The adoption of SFAS No. 150 did not have a material impact on the Group’s financial position or results of operations.

New accounting pronouncements

In December 2003, FASB issued a revision to Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46R” or the “Interpretation”). FIN 46R clarifies the application of ARB No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. FIN 46R requires the consolidation of these entities, known as variable interest entities (“VIEs”), by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both.

Among other changes, the revisions of FIN 46R (a) clarified some requirements of the original FIN 46, which had been issued in January 2003, (b) eased some implementation problems, and (c) added new scope exceptions. FIN 46R deferred the effective date of the Interpretation for public

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companies, to the end of the first reporting period ending after March 15, 2004, except that all public companies must at a minimum apply the provisions of the Interpretation to entities that were previously considered “special-purpose entities” under the FASB literature prior to the issuance of FIN 46R by the end of the first reporting period ending after December 15, 2003.

The Group is evaluating whether the adoption of FIN 46 will have a material impact on its financial position, cash flows and results of operations. The Group did not enter into any transactions under the scope of FIN 46R after February 1, 2003.

In December 2003, the Securities Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB 104 updates portions of the interpretive guidance included in Topic 13 of the codification of Staff Accounting Bulletins in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The Group believes it is following the guidance of SAB 104.

3. CHANGE IN ACCOUNTING PRINCIPLE

Effective January 1, 2001, the Group changed its accounting principle regarding recognition of subscriber acquisition costs. Subscriber acquisition costs represent the direct costs paid for each new subscriber enrolled through MTS’ independent dealers. Prior to the 2001, these costs were capitalized to the extent of any revenues that had been deferred from the acquisition of a subscriber, such as connection fees charged to a subscriber to initiate call service, and amortized as a component of sales and marketing expense on a straight-line basis over the estimated average subscriber life. MTS now expenses subscriber acquisition costs as incurred. This change of accounting principle was made to facilitate the comparison of MTS’ results with other telecommunication companies.

As a cumulative effect of this change, the remaining balance of capitalized subscriber acquisition cost as of January 1, 2001 in the amount of $17,909 ($0.009 per basic and diluted share), net of $9,644 in taxes was expensed and included in income during the year ended December 31, 2001.

4. BUSINESSES ACQUIRED

Telecom XXI acquisition

In May 2001, MTS acquired 100% of the outstanding common stock of Telecom XXI, a Russian closed joint-stock company, for cash consideration of $49.7 million. Telecom XXI has GSM-900 and GSM-1800 licenses, covering northwest of Russia, including St. Petersburg and Leningrad region as well as Kaliningrad. Telecom XXI did not have any subscribers at the date of the acquisition. The Telecom XXI acquisition was accounted for using the purchase method of accounting. The purchase price was allocated as follows:

Current assets	$	849
Non-current asset		1,322
License costs		74,639
Current liabilities		(944	)
Deferred taxes		(26,124	)

Purchase price	$	49,742

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License costs are amortized over the remaining term of the license of approximately 7 years at the date of the acquisition.

Telecom-900 acquisition

In August 2001, MTS acquired 81% of the outstanding common stock of Telecom-900, a Russian closed joint-stock company, for a cash consideration of $26.8 million from Sistema. Telecom-900 is the holding company for three regional mobile phone operators, Siberia Cellular System 900 CJSC (“SCS-900”), Uraltel CJSC (“Uraltel”), and Far East Cellular Systems 900 CJSC (“FECS-900”). At the date of acquisition, these companies had approximately 96,000 subscribers and licenses to provide GSM-900/1800 mobile services in the Novosibirsk region, Altai Republic, Sverdlovsk region and Khabarovsk region.

Telecom-900 acquisition was accounted for using the purchase method of accounting. The purchase price was allocated as follows:

Current assets	$	12,136
Non-current assets		29,297
License costs		31,542
Current liabilities		(21,883	)
Non-current liabilities		(10,626	)
Deferred taxes		(7,754	)
Minority interest		(5,900	)

Purchase price	$	26,812

In November 2002, MTS acquired the remaining 19% of Telecom-900 from Invest-Svyaz-Holding, a shareholder of the Group and a wholly owned subsidiary of Sistema, for a cash consideration of $6.9 million. The acquisition was accounted for using the purchase method of accounting. The allocation of the purchase price increased recorded license costs by $2.7 million.

On August 13, 2003, Telecom-900 completed the purchase of the 43.7% and 2.95% stakes in Uraltel for a cash consideration of $35.7 million. The transaction increased Telecom-900’s ownership in Uraltel to 99.85%. The acquisition was accounted using purchase method of accounting. The allocation of purchase price increased recorded license cost by $24.5 million.

In November 2003, the Group completed the purchase of the 30% stake in SCS-900 from Sibirtelecom for cash consideration of $28.6 million. The Group’s acquisition of this stake increased its ownership in SCS-900 to 81.0%. On December 29, 2003, the Group acquired for cash consideration of $9.3 million a 100% stake in ILIT LLC, a company which owns a 7.5% stake in SCS-900, increasing its ownership in SCS-900 to 88.5%. The acquisition was accounted using purchase method of accounting. The allocation of purchase price increased recorded license cost by $25.7 million.

License costs are amortized over the remaining contractual terms of the respective license, ranging from 6 to 10 years at the date of the first acquisition.

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Kuban-GSM acquisition

In March 2002, MTS acquired 51% of Kuban-GSM, a Russian closed joint-stock company, for cash consideration of $71.4 million. At the date of acquisition, Kuban-GSM had approximately 500,000 subscribers. It operates in thirteen major cities throughout the south of the European part of the Russian Federation, including Sochi, Krasnodar and Novorossiisk. The Kuban-GSM acquisition was accounted for using the purchase method of accounting. The purchase price was allocated as follows:

Current assets	$	11,751
Non-current assets		80,848
License costs		62,549
Acquired customer base		3,561
Current liabilities		(31,289	)
Non-current liabilities		(19,827	)
Deferred taxes		(15,866	)
Minority interest		(20,327	)

Purchase price	$	71,400

In October 2002, MTS exercised its option to buy additional 353 shares for $5.0 million payable in cash, increasing its ownership in Kuban-GSM to 52.7%. The acquisition of the additional interest was accounted for using the purchase method of accounting. The allocation of the purchase price increased recorded license costs by $4.4 million, increased acquired customer base by $0.2 million, and decreased minority interest by $0.5 million.

In September 2003, the Group acquired 100.0% of Kubtelesot for cash consideration of $107.0 million. Kubtelesot owned 47.3% of Kuban-GSM, and the Group’s purchase of this stake increased its ownership in Kuban-GSM to 100.0%. The acquisition was accounted for using the purchase method of accounting. The allocation of purchase price increased recorded license cost by $57.5 million, increased acquired customer base by $8.4 million, and decreased minority interest by $59.0 million.

License costs are amortized over the remaining contractual term of the license of approximately 5 years at the date of the first acquisition. Acquired customer base is amortized over the average remaining subscribers life of approximately 70 months.

BM Telecom acquisition

In May 2002, MTS completed its acquisition of 100% of the outstanding common stock of Ufa-based BM Telecom, a closed joint-stock company, for $41.0 million in cash. At the date of acquisition BM Telecom had approximately 100,000 subscribers and it holds a GSM-900/1800 license to

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operate in Bashkortostan Republic of Russia. This acquisition was accounted for by the purchase method. The purchase price was allocated as follows:

Current assets	$	3,312
Non-current assets		14,736
License costs		48,932
Current liabilities		(3,603	)
Non-current liabilities		(10,227	)
Deferred taxes		(12,150	)

Purchase price	$	41,000

License costs associated with the acquisition of BM Telecom are amortized over the remaining term of the license of approximately 5 years.

Dontelecom acquisition

On September 26, 2002, MTS completed its acquisition of 66.66% of the outstanding common stock of Dontelecom, a closed joint-stock company, for cash consideration of $15.0 million (including 33.33% acquired from Sistema for $7.5 million). At the date of acquisition Dontelecom had approximately 39,000 subscribers. Dontelecom holds a GSM-900/1800 license to operate in the Rostov region. This acquisition was accounted for using the purchase method. The purchase price was allocated as follows:

Current assets	$	3,422
Non-current assets		8,401
License costs		14,739
Current liabilities		(5,849	)
Non-current liabilities		(357	)
Deferred taxes		(3,675	)
Minority interest		(1,681	)

Purchase price	$	15,000

In October 2002, the Group completed the acquisition of the remaining 33.33% of the outstanding common stock of Dontelecom for $7.5 million. The acquisition was accounted for using the purchase method of accounting. The purchase increased the recorded license costs by $7.3 million.

License costs are amortized over the remaining contractual term of the license of approximately 3 years at the date of the acquisition.

UMC acquisition

On March 4, 2003, MTS acquired 57.7% of the outstanding voting interest of UMC, a provider of mobile services in Ukraine, for cash consideration of $199.0 million, including the acquisition of 16.3% of the outstanding voting interest from Deutsche Telekom AG, a related party, for $55.0 million. Acquisition costs relating to the transaction of $1.4 million were capitalized. In connection with the acquisition, MTS also assumed debt of UMC with face value of approximately $65.0 million, with the

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fair value of approximately $62.0 million. At the date of acquisition, UMC had approximately 1.8 million subscribers.

The acquisition was accounted for using the purchase method. For convenience, MTS consolidated UMC from March 1, 2003. Purchase price allocation is as follows:

Current assets	$	82,293
Non-current assets		272,721
License costs		82,200
Acquired customer base		30,927
Current liabilities		(63,551	)
Non-current liabilities		(78,580	)
Deferred taxes		(27,425	)
Minority interest		(99,581	)

Purchase price	$	199,004

MTS paid $171.5 million of the purchase price in cash and agreed to pay the balance of the purchase price of $27.5 million to Cetel B.V., a wholly owned subsidiary of Deutsche Telekom AG, within one year. The amount payable accrues interest of 9% per annum.

MTS also had an option agreement with Ukrtelecom to purchase its remaining 26.0% stake in UMC, exercisable from February 5, 2003 to November 5, 2005, with an exercise price of $87.6 million. On June 4, 2003, MTS exercised its call option. As a result of the transaction, MTS’ ownership in UMC increased from 57.7% to 83.7%. The acquisition was accounted for using purchase method of accounting. The allocation of purchase price increased recorded license cost by $10.2 million, increased acquired customer base by $13.9 million, and decreased minority interest by $66.4 million.

In addition, MTS entered into a put and call option agreement with TDC Mobile International A/S (“TDC”) for the purchase of its 16.3% stake in UMC. The exercise period of the call option was from May 5, 2003 to November 5, 2004, and the put option was exercisable from August 5, 2003 to November 5, 2004. The call option price was $85.0 million plus interest accrued from November 5, 2002 to the date of the exercise at 11% per annum; the price of the put option was calculated based on reported earnings of UMC prior to the exercise and was subject to a minimum amount of $55.0 million. On June 25, 2003, MTS notified TDC of its intent to exercise its rights under the put and call option agreement. The purchase was completed during July 2003. MTS paid cash consideration of approximately $91.7 million to purchase the remaining 16.3% stake in UMC. The acquisition was accounted for using purchase method of accounting. The allocation of purchase price increased recorded license cost by $52.7 million, increased acquired customer base by $8.7 million, and decreased minority interest by $43.8 million.

The UMC license costs are amortized over the remaining contractual terms of the licenses of approximately 9 to 13 years at the date of the acquisition, acquired customer base is amortized over the average remaining subscribers life of approximately 47 months. Other acquired intangible assets, represented mostly by software, are amortized over their respective useful lives of 3 to 10 years.

In accordance with SFAS No. 141 “Business Combinations,” the Group recognized $8.0 million of goodwill relating to workforce-in-place.

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UMC is one of the two leading mobile operators in Ukraine, operating under nationwide GSM 900/1800 and NMT 450 licenses. As at the date of purchase of the controlling stake, it was providing services to approximately 1.8 million subscribers.

TAIF Telcom acquisition

In April 2003, MTS acquired 51.0% of the common shares of TAIF Telcom, a Russian open joint-stock company, for cash consideration of $51.0 million and 50.0% of the preferred shares of TAIF Telcom for cash consideration of $10.0 million. In May 2003, MTS acquired an additional 1.7% of the common shares of TAIF Telcom for cash consideration of $2.3 million. In connection with the acquisitions, MTS also assumed indebtedness of approximately $16.6 million that is collateralized by telecom equipment.

MTS also entered into call and put option agreements with the existing shareholders of TAIF Telcom to acquire the remaining 49.0% of common shares and 50.0% of preferred shares of TAIF Telcom. The exercise period for the call option on common shares is 48 months from the acquisition date and for the put option on common shares is 36 months following an 18 month period after the acquisition date. The call and put option agreements for the common shares stipulate a minimum purchase price of $49.0 million plus 8% per annum commencing from the acquisition date. The exercise period for the call option on preferred shares is 48 months following a 24 month period after the acquisition date and for the put option on preferred shares it is a 24 month period after the acquisition date. The call and put option agreements for the preferred shares stipulate a minimum purchase price of $10.0 million plus 8% per annum commencing from the acquisition date.

If all of the options are exercised, MTS’ share in TAIF Telcom will increase to 100.0%.

The purchase price allocation was as follows:

Current assets	$	3,870
Non-current assets		48,391
License costs		68,407
Current liabilities		(26,099	)
Non-current liabilities		(5,550	)
Deferred taxes		(16,814	)
Minority interest		(8,965	)

Purchase price	$	63,240

License costs acquired are amortized over the remaining contractual terms of the licenses of approximately 4 years.

TAIF Telcom provides mobile services in the GSM-900/1800 standard in the Republic of Tatarstan and in the Volga region of Russia. At the date of acquisition, TAIF Telcom had approximately 240,000 subscribers.

Sibachallenge acquisition

On August 22, 2003, MTS completed the purchase of 100.0% of Sibachallenge, a cellular operator in the Krasnoyarsk region, for cash consideration of $45.5 million, paid a finder’s fee of $2.0 million

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and assumed net debt of approximately $6.6 million. Sibachallenge holds licenses to provide GSM-900/1800 and DAMPS mobile services in the Krasnoyarsk region of Siberia, the Republic of Khakasiya, and in the Taimyr Autonomous region, all of which are located in the Siberian part of Russia. At the date of acquisition, Sibachallenge had approximately 132,000 subscribers.

The purchase price allocation was as follows:

Current assets	$	4,078
Non-current assets		16,678
License costs		52,625
Current liabilities		(6,405	)
Non-current liabilities		(6,628	)
Deferred taxes		(12,894	)

Purchase price	$	47,454

License costs acquired are amortized over the remaining contractual terms of the licenses of approximately 8 years.

Tomsk Cellular Communications acquisition

In September 2003, MTS purchased 100.0% of Siberian operator Tomsk Cellular Communications (“TSS”) for cash consideration of $47.0 million. TSS holds licenses to provide GSM-900/1800 mobile cellular communications in the Tomsk region. At the date of acquisition, TSS had approximately 183,000 subscribers.

The acquisition was accounted for using the purchase method. The purchase price allocation was as follows:

Current assets	$	3,299
Non-current assets		11,412
License costs		49,282
Current liabilities		(4,543	)
Non-current liabilities		(105	)
Deferred taxes		(12,345	)

Purchase price	$	47,000

License costs acquired are amortized over the remaining contractual terms of the licenses of approximately 8 years.

Acquisitions of various regional companies

In August 2003, the Group reached an agreement to acquire, in a series of related transactions, equity interests in five Russian regional mobile phone operators from MCT Corporation for a total of $71.0 million. The Group agreed to purchase a 43.7% stake in Uraltel (described above) and 100.0% of Vostok Mobile BV, which holds a 50.0% stake in Primtelefon.

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The Group also agreed to purchase Vostok Mobile South, which holds 50.0% stakes in Astrakhan Mobile and Volgograd Mobile, as well as an 80.0% stake in Mar Mobile GSM. The Group also entered into agreements to acquire the remaining 20.0% of Mar Mobile GSM and another 2.95% stake in Uraltel from existing shareholders unrelated to MCT Corporation for approximately $1.0 million.

On August 26, 2003, the Group completed the acquisition of Vostok Mobile BV and recorded a 50.0% stake investment in Primtelefon using equity method of accounting.

On October 14, 2003, the Group completed the purchase of Vostok Mobile South and thus acquired a 50.0% stake in Volgograd Mobile and Astrakhan Mobile and an 80.0% stake in Mar Mobile GSM. Also, in a separate transaction the Group completed the acquisition of the remaining 20.0% stake in Mar Mobile GSM from existing shareholders unrelated to MCT corporation, thus consolidating a 100.0% ownership in the company.

Pro-forma results of operations (unaudited)

The following unaudited pro forma financial data for the years ended December 31, 2003 and 2002, give effect to the acquisitions of UMC, TAIF Telcom, Sibchallenge, TSS, Kuban-GSM and other various regional companies as if they had occurred at the beginning of the respective years.

	December 31,

	2003		2002

Pro-forma:
Net revenues	$	2,640,856	$	1,714,532
Net operating income		925,149		544,917
Net income		583,222		342,595

Earnings per share, basic and diluted	$	0.294	$	0.173

The pro-forma information is based on various assumptions and estimates. The pro-forma information is not necessarily indicative of the operating results that would have occurred if the Group acquisitions had been consummated as of January 1, 2003 and 2002, nor is it necessarily indicative of future operating results. The pro-forma information does not give effect to any potential revenue enhancements or cost synergies or other operating efficiencies that could result from the acquisitions. The actual results of operations of these companies are included in the consolidated financial statements of the Group only from the respective dates of acquisition.

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5. CASH AND CASH EQUIVALENTS

Cash and cash equivalents as of December 31, 2003 and 2002 comprised of the following:

	December 31,

	2003		2002

Ruble current accounts	$	40,597	$	19,860
Ruble deposits		20,201		—
U.S. dollar deposits		886		7,999
U.S. dollar current accounts		20,130		6,404
Other		8,562		398

Total cash and cash equivalents	$	90,376	$	34,661

6. SHORT-TERM INVESTMENTS

Short-term investments, denominated in U.S. dollars, as of December 31, 2003 comprised of the following:

	Annual interest rate		Maturity date	December 31, 2003

OJSC Moscow Bank of Reconstruction and Development	4.8	%	February 2, 2004	$	200,000
OJSC Moscow Bank of Reconstruction and Development	8.0	%	October 4, 2004		10,000
OJSC Moscow Bank of Reconstruction and Development	8.4	%	October 21, 2004		19,100
OJSC Moscow Bank of Reconstruction and Development	8.4	%	November 23, 2004		5,000
OJSC Moscow Bank of Reconstruction and Development	8.4	%	December 5, 2004		5,900
OJSC Moscow Bank of Reconstruction and Development	8.4	%	December 20, 2004		5,000

Total short-term investments				$	245,000

Short-term investments, denominated in U.S. dollars, as of December 31, 2002 comprised of the following

	Annual interest rate		Maturity date	December 31, 2002

OJSC Moscow Bank of Reconstruction and Development	9.0	%	October 22, 2003	$	19,100
OJSC Moscow Bank of Reconstruction and Development	9.0	%	November 21, 2003		5,000
OJSC Moscow Bank of Reconstruction and Development	9.0	%	December 5, 2003		5,900

Total short-term investments				$	30,000

OJSC Moscow Bank of Reconstruction and Development is a related party (see also Note 18 Related Party).

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7. TRADE RECEIVABLES

Trade receivables as of December 31, 2003 and 2002 were as follows:

	December 31,

	2003			2002

Accounts receivable, subscribers	$	87,149		$	29,505
Accounts receivable, roaming		26,500			17,266
Allowance for doubtful accounts		(13,698	)		(6,270	)

Trade receivables, net	$	99,951		$	40,501

The following table summarizes the changes in the allowance for doubtful accounts for the years ended December 31, 2003, 2002 and 2001:

	December 31,

	2003			2002			2001

Balance, beginning of year	$	6,270		$	5,178		$	1,959
Provision for doubtful accounts		32,633			7,047			3,219
Accounts receivable written off		(25,205	)		(5,955	)		—

Balance, end of year	$	13,698		$	6,270		$	5,178

8. INVENTORY

Inventory as of December 31, 2003 and 2002 comprised of the following:

	December 31,

	2003		2002

Spare parts for base stations	$	26,635	$	15,519
Handsets and accessories		23,499		18,056
Other inventory		17,157		7,811

Inventory	$	67,291	$	41,386

Obsolescence expense for the years ended December 31, 2003, 2002 and 2001 amounted to $3,307, $5,614 and $2,543, respectively, and was included in operating expenses in the accompanying consolidated statements of operations.

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9. PROPERTY, PLANT AND EQUIPMENT

The net book value of property, plant and equipment as of December 31, 2003 and 2002 was as follows:

	December 31,

	2003			2002

Network and base station equipment (including leased network and base station equipment of $66,311 and $55,383 respectively)	$	1,775,180		$	959,465
Leasehold improvements		6,582			4,299
Office equipment, computers, software and other (including leased office equipment, computers and software of $1,923 and $1,739, respectively)		147,395			68,271
Buildings		144,680			96,420
Vehicles		11,611			7,607

Property, plant and equipment, at cost		2,085,448			1,136,062
Accumulated depreciation (including accumulated depreciation on leased equipment of $23,343 and $13,420, respectively)		(532,268	)		(299,216	)
Equipment for installation		334,264			313,222
Construction in-progress		368,632			194,565

Property, plant and equipment, net	$	2,256,076		$	1,344,633

Depreciation expenses during the years ended December 31, 2003, 2002 and 2001 amounted to $233.1 million, $116.0 million and $73.7 million, respectively, including depreciation expenses for leased property, plant and equipment in the amount of $7.6 million, $3.4 million and $1.6 million, respectively.

10. OTHER INTANGIBLE ASSETS

Intangible assets at December 31, 2003 and 2002 comprised of the following:

December 31, 2003

December 31, 2002

Useful
lives

Gross
carrying
value

Accumulated
amortization

Net
carrying
value

Gross
carrying
value

Accumulated
amortization

Net
carrying
value