Edgar Filing: GOLDEN TELECOM INC

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GOLDEN TELECOM INC. ANNUAL REPORT 2003

LETTER FROM THE CHAIRMAN OF THE BOARD 03
REPORT FROM THE PRESIDENT 05
GOLDEN TELECOM COMINCOM I COMBELLGA SIBCHALLENGE 07
FIBER TO NIZHNY NOVGOROD BACKBONE IN SAINT PETERSBURG 09
BUSINESS AND CORPORATE SERVICES 11
CARRIER AND OPERATOR SERVICES 13
CONSUMER INTERNET SERVICES MOBILE SERVICES 15
FINANCIAL PERFORMANCE 17
CHALLENGES FOR THE FUTURE 19
THANKS 21
FINANCIAL REVIEW 22

[GOLDEN TELECOM(TM) LOGO]

GOLDEN TELECOM INC.

ANNUAL REPORT 2003 01

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02 LETTER FROM THE CHAIRMAN OF THE BOARD

01 LETTER FROM THE CHAIRMAN OF THE BOARD

DEAR FELLOW SHAREHOLDERS

GOLDEN TELECOM expanded steadily in 2003, both through consolidation and through
organic growth. We were pleased to see that the market has recognized our
company's growth potential, and we will continue to undertake measures to ensure
that the company realizes this potential. Your board has always set high
standards of corporate governance for Golden Telecom. Your representatives
closely scrutinize investments and acquisitions to ensure that growth
opportunities are prudently pursued. We are confident that management has the
resources and the incentives to ensure that our company continues to grow. We
respect the importance of Golden Telecom's portfolio investors, and remain
committed to delivering the best possible transparency and corporate governance
to all investors.

Sincerely, PETR. O. AVEN /s/ PETR. O. AVEN
CHAIRMAN, BOARD OF DIRECTORS, GOLDEN TELECOM, INC.

LETTER FROM THE CHAIRMAN OF THE BOARD 03

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04 LETTER TO SHAREHOLDERS

02 REPORT FROM THE PRESIDENT

WHEN I TOOK OVER AS PRESIDENT AND CEO OF GOLDEN TELECOM, INC. IN 2001, I HAD A
VISION OF A COMPANY THAT WOULD BE A TRULY NATIONAL OPERATOR, PROVIDING THE
HIGHEST QUALITY SERVICE TO THE MOST DEMANDING CUSTOMER BASE. WE HAVE NOT LOST
SIGHT OF OUR GOAL OF BEING THE LEADING FACILITIES-BASED, ALTERNATIVE VOICE, DATA
AND INTERNET SERVICES OPERATOR IN RUSSIA AND THE COMMONWEALTH OF INDEPENDENT
STATES. 2003 SAW OUR COMPANY CONTINUE TO BUILD TOWARDS THAT GOAL. IN PURSUIT OF
THIS GOAL, WE HAVE FIVE STRATEGIES:

(1) PURSUE CONSOLIDATION OPPORTUNITIES (2) INCREASE MARKET SHARE BY OFFERING
BUNDLED DATA AND VOICE SERVICES OVER AN INTEGRATED NETWORK (3) EXTEND OUR
LEADING POSITION IN HIGH GROWTH DATA AND INTERNET MARKETS (4) REDUCE OPERATING
COSTS AND SATISFY CAPACITY NEEDS THROUGH NETWORK PLANNING AND OPTIMIZATION (5)
FOCUS OPERATING ACTIVITIES AND CAPITAL INVESTMENTS IN MAJOR METROPOLITAN AREAS.

THE RUSSIAN telecommunications sector is an exciting place to be. The government
announced in March 2004 that it expects 2004 GDP growth to be 6.4%. We do not
see aggressive competition from incumbent operators for our core corporate
market. We see opportunities in the regions, and in the small business sector.
At the same time, we have learned from the examples of other companies in other
markets, and will expand prudently. When we build, we build because we see a
tangible client that will pay to use the new capacity. When we buy, we already
have a plan to add value to the asset. Cash increased from $59.6 million to
$65.2 million, despite an impressive acquisition and capital expenditure
program, which testifies to the strength of our underlying business, and to the
prudence of our expansion strategy. The highlight of the year was the
acquisition of Comincom/Combellga. We made an important regional purchase of
Sibchallenge in Krasnoyarsk, broadening our network's footprint as Russia's
growth spreads beyond the capital. Although we ended the year with revenues 42%
up on 2002, and with a share price 98% higher than at the start of the year,
Golden Telecom is not resting on its laurels. The challenge for 2004 will be to
consolidate our new acquisitions, and to seek out more growth in the regions.

LETTER TO SHAREHOLDERS 05

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06 LETTER TO SHAREHOLDERS

03 COMINCOM I COMBELLGA (1)
SIBCHALLENGE (2)

OUR PURCHASE of Comincom with its 100%-owned subsidiary, Combellga will
have far-reaching effects for the alternative telecoms market. Now Golden
Telecom is the largest player in this market. We are the only operator capable
of offering commercial-grade telecoms services in virtually any point of Russia.
No other operator can claim to have our reach, or our network quality. With
Combellga, we also acquire Telenor as a shareholder, with two seats on our
board. We see it as an important show of faith in the company that Telenor
preferred to exchange Comincom for shares in Golden Telecom, rather than cash.
Our new shareholder brings a wealth of experience from other markets. Telenor
have shown themselves to be committed investors in Russia, so we are delighted
to have them as shareholders.

OUR ACQUISITION of Sibchallenge follows the model of regional expansion
that we started in Nizhny Novgorod with our purchases of KIS and ADS. We look
for operators that have their own facilities, numbering capacity and
interconnect agreements, as well as a local client base. We can add our
commercial experience and backbone capacity to have a positive impact from day
one. With each new transaction we strengthen our corporate platform for
integrating companies, which gives us a head start against the competition, and
will enable us to use these regional companies as a springboard to be as strong
in the regions as we have been in Moscow. We intend to buy similar companies,
when they are available at a good price. For instance, we have announced in
February 2004 our acquisition of 100% of ST-Holding, which owns 50% plus one
share in ZAO Samara-Telecom, an alternative operator in Samara and the Samara
region.

LETTER TO SHAREHOLDERS 07

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08 LETTER TO SHAREHOLDERS

04 FIBER TO NIZHNY NOVGOROD (1)
BACKBONE IN SAINT PETERSBURG (2)

MOSCOW CLIENTS are increasingly asking us to connect their regional offices
or manufacturing plants with their head office. As a result of this extra
traffic, this year we signed an agreement with VimpelCom to build a fiber optic
cable to Nizhny Novgorod. This means that when the project is completed later
this year, we should get all the capacity we need, while paying only about a
half of the cost of construction. This fits with our strategy of client-driven
capital expenditure - we only build when there is a concrete revenue stream, or
a cost to be replaced. Our ADS subsidiary in Nizhny Novgorod will benefit from
having much cheaper connections to Moscow and the outside world, and we will be
less dependent on incumbent operators for a key route. As our nationwide traffic
increases, we expect to extend this network to cover Russia's major traffic
destinations. The end result should be a national, state-of-the-art
telecommunications network that can rival the incumbent.

ANOTHER EXAMPLE of our client-driven capex is our network in
Saint-Petersburg. We have built a backbone network to connect VimpelCom's base
stations. We can use VimpelCom as an "anchor client" in Saint-Petersburg, and
use this newly built network to attract and service other clients. We have
already extended this network to Veliky Novgorod, and expect to do the same in
other cities.

LETTER TO SHAREHOLDERS 09

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10 LETTER TO SHAREHOLDERS

05 BUSINESS AND CORPORATE SERVICES

Fig.1 BUSINESS AND CORPORATE SERVICES REVENUE, $ million

[BAR CHART]

[PLOT POINTS TO COME]

See Footnote No 14 of the financial statements, which describes the basis for
segment information presentation

FOURTH QUARTER revenues from our business and corporate services department were
over 52% higher than the same quarter in the previous year and we increased the
number of contracts in this segment to approximately 97,639 from approximately
34,928 at the end of the first quarter. These are customers that we expect to
generate revenue in the future, and we plan to widen the services that we sell
them. The Business and Corporate services unit was particularly proud to be
chosen to manage most of the lines for the hotline to the President of Russia,
organized on December 18, 2003. From December 14 to 18, any person could call a
special toll-free number and put a question to Mr Putin. Over 70 of Golden
Telecom's call center operators worked on the hot line, which was open round the
clock. This year was a record-breaking one: more than 1.6 million questions were
put to the President over the telephone, via the Internet and live on-air. Over
half of the calls received were processed by the operators of Golden Telecom's
call center. During the live broadcast more than 3000 calls per minute were made
to the toll-free number. Thanks to a unique solution created by Golden Telecom,
no call to the Presidential hotline went unanswered.

THERE IS NO BETTER EXAMPLE OF OUR SLOGAN "YOU ARE CONNECTED" THAN OUR ABILITY TO
CONNECT A PRESIDENT DIRECTLY WITH HIS CITIZENS.

LETTER TO SHAREHOLDERS 11

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12 LETTER TO SHAREHOLDERS

06 CARRIER AND OPERATOR SERVICES

Fig.1 CARRIER AND OPERATOR SERVICES REVENUE, $ million

[BAR CHART]

[PLOT POINTS TO COME]

See Footnote No 14 of the financial statements, which describes the basis for
segment information presentation

ALTHOUGH the Carrier and Operator services sector is highly competitive, our
revenue in this segment in the fourth quarter 2003 was 38% higher than the same
quarter in 2002. This sector is competitive because the products offered are
more commoditized. One way in which we have managed to set ourselves apart from
the competition is to forge close ties to all the wireless operators, which
enables us to share in Russia's mobile boom as we provide network services to
them. We signed a contract with VimpelCom to provide backbone service in
Saint-Petersburg and the North West region of Russia. This is an important
relationship for us, as it creates a platform for our expansion into this
region, and allows us to develop expertise than can be applied in the rest of
Russia.

LETTER TO SHAREHOLDERS 13

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14 LETTER TO SHAREHOLDERS

07 CONSUMER INTERNET SERVICES (1)
MOBILE SERVICES (2)

Fig.1 CONSUMER INTERNET REVENUES, $ million

[BAR CHART]

[PLOT POINTS TO COME]

Fig.2 MOBILE SERVICE REVENUES, $ million

[BAR CHART]

[PLOT POINTS TO COME]

See Footnote No 14 of the financial statements, which describes the basis for
segment information presentation

OUR INTERNET SERVICE PROVIDER, ROL, remains Russia's largest pan-national
provider, and connected its 300,000th customer this year. Average revenues per
user remain flat at around $8, and so revenues from this segment grew by 41%
this year. OUR MOBILE OPERATOR IN UKRAINE increased subscriber numbers to
40,026, up 8.6% from last year. ARPU is steady at $31. MCT Corp., a company in
which we own 23%, sold stakes in 5 cellular operators for $70 million, and
declared a dividend, from which we received $4.7 million.

LETTER TO SHAREHOLDERS 15

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16 LETTER TO SHAREHOLDERS

08 FINANCIAL PERFORMANCE

FOR THE YEARS ENDED DECEMBER 31,
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Tab.1 2000 2001 2002 2003
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FINANCIAL RESULTS

REVENUES 113.1 140.0 198.7 360.5

INCOME (LOSS) FROM OPERATIONS (15.1) (45.3) 31.4 69.7

NET INCOME (LOSS) (10.3) (39.0) 29.8 55.4

NET INCOME (LOSS) PER SHARE - DILUTED (0.4) (1.65) 1.21 1.90

WEIGHTED AVERAGE SHARES - DILUTED 24.1 23.6 24.5 29.1

PURCHASES OF PROPERTY, PLANT
AND EQUIPMENT AND INTANGIBLE ASSETS 37.1 27.9 29.4 63.7

ACQUISITIONS, NET OF CASH ACQUIRED 24.3 33.4 51.2 12.3

AS OF DECEMBER 31,
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Tab.2 2000 2001 2002 2003
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FINANCIAL POSITION

TOTAL ASSETS 348.5 300.4 435.8 729.2

TOTAL DEBT, INCLUDING

CURRENT PORTION 19.0 22.2 40.5 8.0

SHAREHOLDERS' EQUITY 283.2 220.8 307.5 580.2

FINANCIAL RATIOS

OPERATING RATIO -13% -32% 16% 19%

NET MARGIN -9% -28% 15% 15%

DEBT TO TOTAL CAPITALIZATION 5% 7% 9% 1%

OUR REVENUES GREW 81% to $360.5 million, and our net income was $55.4 million,
up 80% to a record level for us. Golden Telecom closed the year in a strong
financial position. Cash rose from $59.6 million to $65.2 million over the year.
Cash flow from operations exceeded capital expenditure by $23.3 million. In
additions, significant cash inflows came from the exercise of employee stock
options ($23.7 million) and a special dividend from our equity investee, MCT
Corp. ($4.7 million). We paid off our $30 million debt to Citibank early, and
now have negligible debt, which is unusual in this sector. We will borrow money
if a large attractive acquisition target presents itself, but for the time
being, our cash flow from operations should be sufficient for our capital needs,
as well as for smaller acquisitions.

LETTER TO SHAREHOLDERS 17

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18 LETTER TO SHAREHOLDERS

09 CHALLENGES FOR THE FUTURE

IN 2004, WE WILL FOCUS ON INTEGRATING COMINCOM AND COMBELLGA IN ORDER TO ENSURE
THAT WE CAN PRESERVE AND DEVELOP THE VALUE THAT HAS BEEN BUILT UP IN THESE TWO
COMPANIES. WE WILL CONTINUE TO PUSH INTO THE REGIONS. IN ADDITION, WE WILL
CONTINUE TO MEET THE FOLLOWING CHALLENGES.

(1) SMALL AND MEDIUM-SIZED ENTERPRISES (SME)/SMALL OFFICE-HOME OFFICE (SOHO)
MARKET. This market delivers higher margins, and shows tremendous growth
potential. The small business sector in Russia has not grown as fast as expected
in recent years, but the Russian government has announced that it plans to
support small business growth. These new businesses will need telephone and data
services if they are going to thrive, and we will work to ensure that our
billing systems and business practices are tuned to this sector. (2)
COMPETITION. The competitiveness of our service is demonstrated by the fact
that, together with Comincom/Combellga, we have nearly 50% of the alternative
corporate telephony market in Moscow. Each year our increased investment creates
a sunk cost that will make it harder for new entrants to offer a service with
our breadth of coverage and services. However, we realize that our competitors
are not sleeping, either, and so we will continue investing and innovating to
stop them catching up. (3) COMPETITION FROM NEW TECHNOLOGIES. We think that the
best way to deal with competition from new technologies like voice over Internet
protocol (VoIP) and wireless in the local loop (WLL) is to embrace these
technologies ourselves. These new technologies lower the cost of entry for new
operators, and allow them to undercut our prices, but they also enable us to
offer faster and cheaper service to our customers. Golden Telecom continues to
monitor innovations in the fast-moving world of telecommunications equipment,
and we see plenty of opportunities to improve client service, and maintain our
market position.

LETTER TO SHAREHOLDERS 19

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20 LETTER TO SHAREHOLDERS

10 THANKS

I WOULD LIKE TO TAKE THIS OPPORTUNITY TO THANK VARIOUS GROUPS WHO HAVE MADE
POSSIBLE THE SUCCESS OF GOLDEN TELECOM.

FIRST OR ALL, I would like to thank the staff of Golden Telecom, who have
continued to maintain their flexibility and focus on quality in a changing
environment. No sooner had we finished the merger of Sovintel and TeleRoss than
we embarked on the acquisition of Comincom and Combellga. The employees of your
company have met these challenges with creativity and hard work, and you have
good reason to be proud of them. SECOND, thanks are due to our shareholders, and
their representatives on the Board, who have supported us in our expansion
plans, and provided useful advice in all aspects of our operations. We welcome
our new directors from Telenor and look forward to sharing their experience in
both developed and emerging telecoms markets. As shareholders, you can be
confident that you are represented by a team of experts from various fields, who
are committed to the highest standards of corporate governance.

Thank you, ALEXANDER Y. VINOGRADOV, /s/ ALEXANDER Y. VINOGRADOV
PRESIDENT AND CHIEF EXECUTIVE OFFICER, GOLDEN TELECOM, INC.

LETTER TO SHAREHOLDERS 21

12 FINANCIAL REVIEW

22 FINANCIAL REVIEW

SELECTED FINANCIAL DATA

The following selected historical consolidated financial data at December 31,
1999, 2000, 2001, 2002 and 2003, and for all of the years presented are derived
from consolidated financial statements of Golden Telecom, Inc. which have been
audited by Ernst & Young (CIS) Limited, independent auditors. The data should be
read in conjunction with the consolidated financial statements, related notes,
and other financial information included in this document.

FOR THE YEARS ENDED DECEMBER 31,
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1999 2000 2001 2002 2003
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)

Revenues .................................................................... $ 97,931 $113,089 $140,038 $198,727 $360,534
Cost of revenues (excluding depreciation and amortization) .................. 40,516 50,954 63,685 91,189 181,085
Gross margin ................................................................ 57,415 62,135 76,353 107,538 179,449
Selling, general and administrative (excluding depreciation and
amortization) ............................................................... 41,011 45,420 48,935 46,147 64,384
Depreciation and amortization ............................................... 28,143 31,851 41,398 29,961 45,334
Abandonment and restructuring charge ........................................ 19,813 -- -- -- --
Impairment charge ........................................................... -- -- 31,291 -- --
Income (loss) from operations ............................................... (31,552) (15,136) (45,271) 31,430 69,731
Equity in earnings (losses) of ventures ..................................... (6,677) (285) 8,155 4,375 4,687
Interest income (expense), net .............................................. 2,814 7,126 777 (667) (872)
Foreign currency loss ....................................................... (2,739) (390) (647) (1,174) (232)
Minority interest ........................................................... (1,477) (431) (117) (527) (480)
Other non-operating expense ................................................. -- (148) -- -- --
Provision for income taxes .................................................. 6,823 990 1,902 4,627 17,399
Net income (loss) before cumulative effect of change in accounting
principle ................................................................... (46,454) (10,254) (39,005) 28,810 55,435
Cumulative effect of change in accounting principle ......................... -- -- -- 974 --
Net income (loss) ........................................................... (46,454) (10,254) (39,005) 29,784 55,435
Net income (loss) per share
before Cumulative effect of change in accounting principle - basic(1) ....... (3.38) (0.43) (1.65) 1.20 1.95
Cumulative effect of change in accounting principle ......................... -- -- -- 0.04 --
Net income (loss) per share - basic(1) ...................................... (3.38) (0.43) (1.65) 1.24 1.95
Weighted average shares - basic(1) .......................................... 13,736 24,096 23,605 24,102 28,468
Net income (loss) per share
before cumulative effect of change in accounting principle - diluted(1)...... (3.38) (0.43) (1.65) 1.17 1.90
Cumulative effect of change in accounting principle ......................... -- -- -- 0.04 --
Net income (loss) per share diluted(1) ...................................... (3.38) (0.43) (1.65) 1.21 1.90
Weighted average shares diluted(1) .......................................... 13,736 24,096 23,605 24,517 29,107

FINANCIAL REVIEW 23

AT DECEMBER 31,
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1999 2000 2001 2002 2003
BALANCE SHEET DATA: (IN THOUSANDS)

Cash and cash equivalents ................................................... $ 162,722 $ 57,889 $ 37,404 $ 59,625 $ 65,180
Investments available for sale .............................................. 54,344 8,976
Property and equipment, net ................................................. 62,176 82,377 98,590 166,121 283,110
Investments in and advances to ventures ..................................... 45,196 49,629 45,981 721 251
Goodwill and intangible assets, net ......................................... 53,467 70,045 57,146 127,669 248,843
Total assets ................................................................ 366,624 348,456 300,384 435,810 729,226
Total debt, including current portion ....................................... 28,029 18,997 22,220 40,495 7,980
Minority interest ........................................................... 2,816 3,337 5,967 2,187 2,722
Shareholders' equity ........................................................ 288,552 283,193 220,844 307,458 580,231

(1) Per share amounts in this table were calculated based upon the assumption
that the 10,600,000 common shares issued in connection with the formation of the
Company are outstanding for all periods prior to September 30, 1999.

Refer to Note 5 to the Consolidated Financial Statements for descriptions of
recent acquisitions that impact the comparability of financial information.
Other business combinations not disclosed in the footnotes were as follows:

In August 1999, the Company increased its beneficial ownership in TCM from 95%
to 100%. Goodwill in the amount of $3.2 million was recorded by the Company.

An affiliate of ING Barings which indirectly owned 12.25% of Golden Telecom
(Ukraine), contributed its indirect interest in Golden Telecom (Ukraine) to a
wholly owned subsidiary of Golden Telecom, Inc., upon the consummation of the
Initial Public Offering ("IPO") on September 30, 1999 in exchange for 420,000
newly issued shares of common stock of the Company. In accordance with the
subscription agreement filed with the United States Securities and Exchange
Commission at the time of the IPO, an additional 30,000 shares of common stock
in the Company were issued in full and final settlement to the affiliate of ING
Barings. Our beneficial interest in Golden Telecom (Ukraine) increased from
56.75% to 69% as the result of this transaction.

In June 1999, the Company acquired the assets of Glasnet, a Moscow based
Internet Services Provider ("ISP"). In July 1999, the Company acquired a 75%
interest in SA Telcom LLP, a telecommunications and data services provider in
Kazakhstan. In December 1999, the company acquired the assets of Nevalink, an
ISP, and full-equity ownership of NevaTelecom. Both Nevalink and NevaTelecom
provide telecom and Internet services to the St. Petersburg market. These
acquisitions were purchased for approximately $2.5 million in cash.

In February 2000, Golden Telecom (Ukraine), acquired 99% of Sovam Teleport
Ukraine, including a 51% interest previously held by third parties. Sovam
Teleport Ukraine is a provider of data and Internet services to Ukraine-based
business. In March 2000, the Company acquired the assets of Referat.ru and
Absolute Games, two leading vertical Internet portals in the education and
computer gaming categories of the Russian Internet. In April 2000, the Company
acquired the assets of Fintek, a prominent Moscow-based Web design studio and
51% of Commercial Information Networks, the largest Internet service provider in
Nizhny Novgorod. In September 2000, SFMT-Rusnet, Inc., a wholly-owned
subsidiary, acquired 25% of SA Telcom LLP, a telecommunications and data
services provider in Kazakhstan, bringing its ownership interest in this company
up to 100%. The combined purchase price was less than $3.0 million in cash.

24 FINANCIAL REVIEW

In October 2000, the Company acquired the assets of IT INFOART STARS, a leading
horizontal Russian and English language Internet portal, for approximately $8.3
million in cash. In December 2000, the Company acquired Agama Limited ("Agama")
that owns the Agama family of web properties for approximately $13.1 million in
cash and the issuance of 399,872 shares of the Company's common stock valued at
$3.8 million.

In December 2000, the Company acquired an approximately 24% ownership interest
in MCT Corp. in exchange for the Company's 100% ownership of Vostok Mobile B.V.,
a Netherlands registered private limited holding company that owned the
Company's Russian mobile operations. Refer to Note 4 to the Consolidated
Financial Statements for a description of the change in method of accounting for
goodwill in 2002.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following discussion and analysis relates to our financial condition and
results of operations of the Company for each of the years ended December 31,
2003, 2002 and 2001. This discussion should be read in conjunction with the
"Selected Historical Consolidated Financial Data" and the Company's Consolidated
Financial Statements and the notes related thereto appearing elsewhere in this
Report.

We are a leading facilities-based provider of integrated telecommunications and
Internet services to businesses and other high-usage customers and
telecommunications operators in 165 combined access points in Moscow, Kiev, St.
Petersburg, Nizhny Novgorod, Krasnoyarsk and other major population centers
throughout Russia and other countries of the Commonwealth of Independent States
("CIS"). We organize our operations into four business groups, as follows:

BUSINESS AND CORPORATE SERVICES. Using our fiber optic and satellite-based
networks in and between major metropolitan areas of Russia, Ukraine and
other countries of the CIS, we provide business and corporate services
including voice and data services to corporate clients across all
geographical markets and all industry segments, other than
telecommunications operators;

CARRIER AND OPERATOR SERVICES. Using our fiber optic and satellite-based
networks in and between major metropolitan areas of Russia, Ukraine and
other countries of the CIS, we provide a range of carrier and operator
services including voice and data services to foreign and Russian
telecommunications and mobile operators;

CONSUMER INTERNET SERVICES. Using our fiber optic and satellite-based networks,
we provide dial-up Internet access to the consumer market and web content
offered through a family of Internet portals throughout Russia, Ukraine and
Kazakhstan; and

MOBILE SERVICES. Using our mobile networks in Kiev and Odessa, Ukraine, we
provide mobile services with value-added features, such as voicemail,
roaming and messaging services on a subscription and prepaid basis.

We intend to offer all of our integrated telecommunication services under the
Golden Telecom brand, although, due to the recent acquisition of OAO Comincom
("Comincom"), some services still carry the Combellga brand. Our dial-up
Internet services are distributed under the ROL brand in Russia and Kazakhstan
and under the Svit-On-Line brand in Ukraine.

Additionally, we hold a minority interest in MCT Corp. ("MCT"), which in turn
has ownership interests in 15 mobile operations located throughout Russia and in
Uzbekistan and Tajikistan. We treat our ownership interest in MCT as an equi-

FINANCIAL REVIEW 25

ty method investment and are not actively involved in the day-to-day management
of the operations. In August 2003, MCT concluded a binding agreement with OJSC
Mobile TeleSystems on the sale of five of its cellular operators. OJSC Mobile
TeleSystems acquired these five cellular operators from MCT for $70.0 million
and assumed certain guarantees as part of the transaction.

Most of our revenue is derived from high-volume business customers and carriers.
Our business customers include large multi-national companies, local
enterprises, financial institutions, hotels and government agencies. We believe
that the carriers, including mobile operators, which contribute a substantial
portion of our revenues, in turn derive a portion of their business from
high-volume business customers. Thus, we believe that the majority of our
ultimate end-users are businesses that require access to highly reliable and
advanced telecommunications facilities to sustain their operations.

We have traditionally competed for customers on the basis of network quality,
customer service and range of services offered. In the past several years, other
telecommunications operators have also introduced high-quality services to the
segments of the business market in which we operate. Competition with these
operators is intense, and frequently results in declining prices for some of our
services, which adversely affect our revenues. In addition, some of our
competitors do not link their prices to the United States ("US") dollar - ruble
exchange rate, so when the ruble devalues, their prices effectively become lower
in relation to our prices. The ruble exchange rate with the US dollar has become
relatively stable since early 2000, has appreciated during 2003 and price
pressures associated with devaluation have eased considerably. We cannot be
certain that the exchange rate will remain stable in the future and therefore we
may experience additional price pressures.

Since early 2000, we have witnessed a recovery in the Russian market, but
downward pricing pressures persists from increased competition and the global
trend toward lower telecommunications tariffs. In 2001, 2002 and during 2003,
our traffic volume increases exceeded the reduction in tariffs on certain types
of voice traffic. This is a contributory factor to the increases in our revenue
in 2001, 2002 and during 2003. We expect that this trend of year over year
increases in traffic volume will continue as long as the Russian economy
continues to develop at its current pace.

In order to handle additional traffic volumes, we have expanded and will
continue to expand our fiber optic capacity along our heavy traffic and high
cost routes to mitigate declines in traffic margins, reduce our unit
transmission costs and ensure sufficient capacity to meet the growing demand for
data and Internet services. We expect to and have continued to add additional
transmission capacity, which due to its fixed cost nature can initially depress
margins, but will over time allow us to improve or maintain our margins.

On January 1, 2004, a new law on telecommunications ("New Law") came into effect
in Russia. The New Law sets the legal basis for the telecommunications business
in Russia and defines the status that state bodies have in the
telecommunications sector. We cannot predict with any certainty how the New Law
will affect us. The New Law may increase the regulation of our operations and
until such time as appropriate implementing regulations consistent with the New
Law are promulgated by the Ministry of Communications, there will be a period of
confusion and ambiguity as regulators interpret the legislation.

In Kiev, Ukraine we have entered into agreements to obtain sufficient numbering
capacity for our business services operations. Our ability to grow our business
services operations in Kiev may become limited if the parties who provide our
numbering capacity and other infrastructure requirements are unable or unwilling
to perform under their contracts with us.

26 FINANCIAL REVIEW

We have entered into an interim arrangement with Ukrtelecom on allocation of
indirect numbering capacity to us, and expect the allocation to be completed in
the beginning of 2004, which will cause us to incur significant additional
costs. This would enable us to participate in sharing profits from
fixed-to-mobile calls termination on a par with other Ukrainian mobile
operators. However, introduction of CPP principle may eventually decrease
average revenue per subscriber in our mobile network in Ukraine.

In 2003 we signed new amendments to the settlement agreement with Ukrtelecom
allowing incoming international traffic termination to Ukrainian public switched
telephone network ("PSTN") via Ukrtelecom's network. Also, we signed a new
agreement with Utel for incoming international traffic termination to Ukrainian
PSTN's. Outgoing international traffic is routed through our international
gateway to international operators using least-cost routing.

A faction within the Parliament introduced a bill which would have prevented
telecommunications operators from charging for incoming calls of any kind.
Although the sponsors of the bill were attempting to expedite the calling party
pays' ("CPP") concept common in other countries, they overlooked the basic
requirements needed to fully support the concept in Ukraine, namely legislation
governing inter-operator settlements and billing functionality enhancements
within the local infrastructure. The bill was defeated in early 2002 after
successful lobbying by the major players in the market, however, in February
2003, the Ukrainian Parliament overrode the President's veto and adopted an
amendment to the Ukrainian Communications law prohibiting all telecommunications
operators from charging their end-user customers for incoming calls, thus
introducing the CPP principle, which entered into effect on September 19, 2003.

State regulated tariffs for calls from the public switched telephone network to
mobile networks were also introduced at this time, thus allowing mobile
operators to receive a share of revenue from calls in to mobile networks.

To effect CPP settlements on our network we entered into an interim agreement
with Ukrtelecom that assigns a national destination code numbering plan to our
mobile customers and reallocates our interconnect numbering capacity in Kiev and
Odessa from our mobile to our fixed network. This agreement became effective in
November 2003 and enabled us to receive a settlement from revenue generated when
a fixed line party calls our mobile customer. This agreement also releases
direct city numbering capacity for future sale to CLEC customers.

In addition to our traditional voice and data service provision, prior to 2002,
we were actively pursuing a strategy of developing non-traditional telecom
service offerings including those related to the Internet, such as web-hosting,
web design, and vertical and horizontal Internet portal development. In line
with experience outside of Russia, we did not see the rapid development of
Internet based services that were expected. Internet based advertising and
e-commerce revenues did not develop to significant levels and we reviewed our
long term strategy for Internet based products. As a result of this review, we
evaluated the future cash flows for this business, and we recorded an impairment
charge of $20.9 million in the fourth quarter of 2001. We expect to see some
growth in Internet based advertising and will continue to offer this service to
support our dial-up Internet service and be in a position to capitalize on any
upturn in demand for this service.

We have seen a significant year-over-year increase in our dial-up Internet
subscriber numbers and we expect the increase to continue, as our base of
regional subscribers expands. As additional dial-up capacity becomes available
in Moscow, we expect to increase our market share in the capital as well. In
June 2001, we completed the purchase of a leading Russian Internet service
provider ("ISP"), Cityline, together with

FINANCIAL REVIEW 27

Uralrelcom, another ISP and an infrastructure company, ZAO First
Telecommunications Company ("PTK"), and together, these entities allowed us to
increase our regional dial-up Internet presence and increase our numbering
capacity and access lines in Moscow. The new Moscow capacity was initially
placed into service in July 2002. The Moscow numbering capacity and some of the
access lines provided by PTK are allocated to support Business and Corporate
Services and Carrier and Operator Services division end-user customers, with the
majority of the access lines being allocated to support planned increases in
dial-up Internet subscribers in our Consumer Internet Services division.

We have continued to integrate our acquisitions and improve operational
efficiency while at the same time controlling costs. We expect to incur further
costs in connection with overall streamlining of our operations during 2004. As
of April 15, 2003, all assets, liabilities, rights and obligations of TeleRoss
were transferred to Sovintel as part of the legal merger of these two
wholly-owned subsidiaries.

RECENT AQUISITION

In August 2003, we completed the acquisition of 100% ownership interest in OOO
Sibchallenge ("Sibchallenge"), a telecommunications service provider in
Krasnoyarsk, Russia for cash consideration of approximately $15.4 million. The
acquisition of Sibchallenge establishes our presence in the Krasnoyarsk region.
In addition, Sibchallenge has numbering capacity and interconnect agreements.

In December 2003, we completed the acquisition of 100% of the shares in Comincom
from Nye Telenor East Invest ("Telenor") for a total purchase price of
approximately $195.3 million, consisting of approximately $193.5 million in
GTI's common stock and direct transaction costs of approximately $1.8 million.
The acquisition of Comincom further strengthens our position in the key Moscow
and St. Petersburg communications markets, and positions us to realize future
operating and capital expenditure synergies. Comincom provides
telecommunications services, principally to major hotels, business offices and
mobile communication companies through its telecommunications network in Russia,
including Moscow, St. Petersburg, Voronezh, Samara and several other major
population centers.

In February 2004, we completed the acquisition of ST-Holdings, a Czech company
that owns slightly over 50% in ZAO Samara-Telecom, a telecommunications service
provider in Samara, Russia from SMARTS and individual owners for approximately
$4.8 million in cash.

CRITICAL ACCOUNTING POLICIES

The fundamental objective of financial reporting is to provide useful
information that allows a reader to comprehend our business activities. To
assist that understanding, management has identified our "critical accounting
policies". These policies have the potential to have a significant impact on our
financial statements, either because of the significance of the financial
statement item to which they relate, or because they require judgment and
estimation due to the uncertainty involved in measuring, at a specific point in
time, events which are continuous in nature.

Revenue recognition policies; we recognize operating revenues as services are
rendered or as products are delivered to customers and installed. Under
multiple-delivery contracts involving a combination of product delivery,
installation and maintenance, connection and service fees, revenues are
recognized based on the relative fair value of the respective amounts.

Elements are grouped if they are inseparable or objective evidence of fair value
does not exist. Certain revenues, such as connection and installation fees, are
deferred. We also defer direct incremental costs related to connection fees, not
exceeding the revenue deferred. Deferred revenues are subse-

28 FINANCIAL REVIEW

quently recognized over the estimated average customer lives, which are
periodically reassessed by us, and such reassessment may impact our future
operating results. In determining the recording of revenue, estimates and
assumptions are required in assessing the expected conversion of the revenue
streams to cash collected.

Allowance for doubtful accounts policies; the allowance estimation process
requires management to make assumptions based on historical results, future
expectations, the economic and competitive environment, changes in the
creditworthiness of our customers, and other relevant factors. Changes in the
underlying assumptions may have a significant impact on the results of our
operations. In particular, we have certain amounts due to and from subsidiaries
of a European telecommunications operator who is currently subject to bankruptcy
proceedings. The ultimate resolution of this matter will be affected by a number
of factors including the determination of legal obligations of each party, the
course of the bankruptcy proceedings, and the enforceability of any
determinations. We have recognized provisions based on our preliminary estimate
of net exposure on the resolution of these receivables and payables. If our
assessment proves to be incorrect we may have to recognize an additional
provision of up to $2.1 million, net of tax, although management believes that
the possibility of such an adverse outcome is remote.

Long-lived asset recovery policies; this policy is in relation to long-lived
assets, consisting primarily of property and equipment and intangibles, which
comprise a significant portion of our total assets. Changesin technology or
changes in our intended use of these assets may cause the estimated period of
use or the value of these assets to change. We perform periodic internal studies
to confirm the appropriateness of estimated economic useful lives for each
category of current property and equipment. Additionally, long-lived assets,
including intangibles, are reviewed for impairment whenever events or changes in
circumstances have indicated that their carrying amounts may not be recoverable.
Estimates and assumptions used in both setting useful lives and testing for
recoverability of our long-lived assets require the exercise of judgment and
estimation based on certain assumptions concerning the expected life of any
asset and expected future cash flows from the use of an asset.

Goodwill and assessment of impairment; Commencing from the adoption of Statement
on Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets", on January 1, 2002, we perform goodwill impairment testing
annually as of October 1 or whenever impairment indicators exist. This test
requires a significant degree of judgment about the future events and it
includes determination of the reporting units, allocation of goodwill to the
reporting units and comparison of the fair value with the carrying amount of
each reporting unit. Based on the discounted cash flow valuations performed in
2003, we concluded that for all reporting units the fair value is in excess of
the respective carrying amounts.

Valuation allowance for deferred tax asset; we record valuation allowances
related to tax effects of deductible temporary differences and loss
carryforwards when, in the opinion of management, it is more likely than not
that the respective tax assets will not be realized. Changes in our assessment
of probability of realization of deferred tax assets may impact our effective
income tax rate.

Business segment information; we changed our reporting for business segments in
the second quarter of 2003. Prior to the completion of the acquisition of the
remaining 50% ownership interest in Sovintel and the subsequent merger of
TeleRoss into Sovintel in April 2003, we managed our business segments based on
telecommunications products that we provided. In the first quarter of 2003, we
re-designed our business segments around customer characteristics.

FINANCIAL REVIEW 29

Currently, we report four segments within the telecommunications industry:
Business and Corporate Services, Carrier and Operator Services, Consumer
Internet Services and Mobile Services. A significant portion of our cost
structure, including our investment in infrastructure, benefits multiple
segments. As a result, we perform allocations of certain costs in order to
report business segment information for management and financial reporting
purposes. Applying different allocation techniques and parameters could impact
the reported results of individual business segments.

Functional currency; effective January 1, 2003, Russia is no longer considered a
hyperinflationary economy, therefore the determination of functional currency
for United States generally accepted accounting principles ("US GAAP") reporting
purposes should be based on the analysis of the underlying business transactions
for each Russian subsidiary. We have determined in accordance with the
functional currency criteria of SFAS No. 52, "Foreign Currency Translation", the
US dollar should be considered the functional currency of all Russian
subsidiaries. There are subjective elements in this determination, including a
weight given to each specific criteria established by SFAS No. 52. Changes in
the underlying business transactions could lead to different functional currency
determination for a particular subsidiary, which would have an impact on its
reported financial position and results of operations.

CRITICAL ACCOUNTING ESTIMATES

Accounting estimates are an integral part of the financial statements prepared
by management and are based upon management's current judgments. Certain
accounting estimates are particularly sensitive because of their significance to
the financial statements and because of the possibility that future events
affecting them may differ markedly from management's current judgment. We
believe the following items represent such particularly sensitive accounting
estimates:

ALLOWANCE FOR DOUBTFUL ACCOUNTS; any changes in the underlying assumptions of
recoverability of accounts receivable by respective aging group or certain
specific accounts that are excluded from the specific and general allowances
could have a material effect on our current and future results of operations. We
believe that the allowance for doubtful accounts is adequate to cover estimated
losses in our accounts receivable balances under current conditions.

TAX PROVISIONS; in the course of preparing financial statements in accordance
with US GAAP, we record potential tax loss provisions under the guidelines of
SFAS No. 5, "Accounting for Contingencies". In general SFAS No. 5 requires loss
contingencies to be recorded when they are both probable and reasonably
estimable. In addition, we record other deferred tax provisions under the
guidelines of SFAS No. 109, "Accounting for Income Taxes". Significant judgment
is required to determine when such provisions should be recorded, and when facts
and circumstances change, when such provisions should be released.

USEFUL LIVES OF PROPERTY AND EQUIPMENT AND CERTAIN INTANGIBLE ASSETS; our
network assets and amortizable intangible assets are depreciated and amortized
over periods generally ranging from five to ten years. Any reduction or increase
in the estimated useful lives for a particular category of fixed assets or
intangible assets could have a material effect on our future results of
operations.

BUSINESS COMBINATIONS; SFAS No. 141, "Business Combinations", requires us to
recognize the share in the assets of businesses acquired and respective
liabilities assumed based on their fair values. Our estimates of the fair value
of the identified intangible assets of businesses acquired is based on our
expectations of future results of operations of such businesses. In particular,
our valuation of Comincom's identified intangible assets might change as
the appropriate regulations consistent with the new Russian law on
telecommunications, that came into effect on January 1, 2004, are
promulgated and its effects on the future results of operations of Comincom
become known.

30 FINANCIAL REVIEW

CRITICAL ACCOUNTING ESTIMATES

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations." This statement provides the
accounting for the cost of legal obligations associated with the retirement of
long-lived assets. SFAS No. 143 requires entities to record the fair value of a
legal liability for an asset retirement obligation in the period it is incurred.
We have reviewed the requirements under SFAS No. 143 and have determined that no
material legal obligations to remove long-lived assets exist.

SFAS No. 143 is effective for years beginning after June 15, 2002. The adoption
of SFAS No. 143 did not have a material impact on the Company's consolidated
financial position or results of operation.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. This statement nullifies Emerging Issues Task Force No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring),"
which required that a liability for an exit cost be recognized upon the entity's
commitment to an exit plan. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of the
provisions of SFAS No. 146 did not have an impact on the Company's results of
operations or financial position.

In November 2002, the FASB Emerging Issues Task Force issued its consensus
concerning Revenue Arrangements with Multiple Deliverables ("EITF 00-21"). EITF
00-21 addresses how to determine whether a revenue arrangement involving
multiple deliverables should be divided into separate units of accounting, and,
if separation is appropriate, how the arrangement consideration should be
measured and allocated to the identified accounting units. The guidance in EITF
00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The adoption of EITF 00-21 did not have a
material impact on our consolidated financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and Accounting Principles Board ("APB") No. 28, "Interim Financial
Reporting", to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements.

While the Statement does not amend SFAS No. 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of SFAS No. 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that compensation
using the fair value method of SFAS No. 123 or the intrinsic value method of APB
No. 25,". SFAS No. 148 disclosure provisions are effective for years ending
after December 15, 2002. We have adopted the amendments to SFAS No. 123
disclosure provisions required under SFAS No. 148 but will continue to use the
intrinsic value method under APB No. 25 to account for stock-based compensation.
As such, the adoption of SFAS No. 148 did not have a significant impact of the
Company's consolidated financial position or results of operations.

The effect of applying SFAS No. 123 on the reported net income (loss), as
disclosed below is not representative of the effects on net income (loss) in
future years due to the vesting period of the stock options and the fair value
of additional stock options in future years.

FINANCIAL REVIEW 31

TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------------
2001 2002 2003
----------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Net income (loss), as reported ....................................................... $ (39,005) $ 29,784 $ 55,435
Deduct: total stock-based employee compensation expense
determined under fair value based method for all awards, net of related tax effects .. 8,278 7,937 3,183
---------- ---------- ----------
Pro forma net income (loss) .......................................................... $ (47,283) $ 21,847 $ 52,252
========== ========== ==========
Net income (loss) per share:
Basic - as reported ................................................................ $ (1.65) $ 1.24 $ 1.95
Basic - pro forma .................................................................. (2.00) 0.91 1.84
Diluted - as reported .............................................................. (1.65) 1.21 1.90
Diluted - pro forma ................................................................ (2.00) 0.89 1.80

In November 2002, the FASB issued FASB Interpretation No. 45,"Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN No. 45"). FIN No. 45 requires that
upon issuance of a guarantee, the guarantor must recognize aliability for the
fair value of the obligation it assumes under that guarantee. The disclosure
provisions of FIN No. 45 are effective for financial statements of annual
periods that end after December 15, 2002. The provisions for initial recognition
and measurement are effective on a prospective basis for guarantees that are
issued or modified after December 31, 2002. The adoption of the FIN No. 45 did
not have an impact on the Company's results of operations or financial position.

FIN No. 46 also requires disclosure about VIEs that are not required to be
consolidated but in which the reporting entity has a significant variable
interest. In December 2003, the FASB revised certain implementation provisions
of FIN No. 46. The revised interpretation ("FIN No. 46R") substantially retained
the requirements of immediate application of FIN No. 46 to VIEs created after
January 31, 2003. There were no such entities created after January 31, 2003.
With respect to older VIEs, the consolidation requirements under FIN No. 46R
apply not later than for the first financial year or interim period ending after
December 15, 2003, if such a VIE is a special-purpose entity ("SPE"), and no
later than for the first financial year or interim period ending after March 15,
2004, if such a VIE is not an SPE. The adoption of FIN No. 46 did not have an
impact on our results of operations or finanical position and we do not expect
the additional transition provisions will have a significant impact on our 2004
financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is generally effective for contracts entered into or
modified after June 30, 2003. The adoption of the provisions of SFAS No. 149 did
not have an impact on the Company's results of operations or financial position.

32 FINANCIAL REVIEW

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
requires certain financial instruments that embody obligations of the issuer and
have characteristics of both liabilities and equity to be classified as
liabilities. The provisions of SFAS No. 150 are effective for finanical
instruments entered into or modified after May 31, 2003 and to all other
instruments that exist as of the beginning of the first interim financial
reporting period beginning after June 15, 2003. The Company does not have any
financial instruments that meet the provisions of SFAS No. 150, therefore,
adopting the provisions of SFAS No. 150 did not have an impact on the Company's
results of operations or financial position.

RESULTS OF OPERATIONS REVENUE

GTI is a leading facilities-based provider of integrated telecommunications and
Internet services to businesses and other high-usage customers and
telecommunications operators in Moscow, Kiev, St. Petersburg, Nizhny Novgorod,
Krasnoyarsk and other major population centers throughout Russia and other
countries of the Commonwealth of Independent States. The results of our four
business groups from the operations of our consolidated entities combined with
the non-consolidated entities where we are actively involved in the day-to-day
management, are shown in footnote 14 "Segment Information - Line of Business
Data" to our consolidated financial statements.

Our functional currency is the US dollar, as the majority of our cash flows are
indexed to, or denominated in US dollars. Through December 31, 2002, Russia has
been considered to be a highly inflationary environment. From January 1, 2003,
Russia ceased to be considered as a highly inflationary economy. As we currently
believe our functional currency is the US dollar, this change did not have a
material impact on our results of operations or financial position.

According to Russian government estimates, inflation in Russia was 19% in 2001,
16% in 2002, and 14% in 2003. The Russian government expects inflation to be
approximately 10% in 2004. Although the rate of inflation has been declining,
any return to heavy and sustained inflation could lead to market instability,
new financial crises, reduction in consumer buying power and erosion of consumer
confidence.

We have continued to integrate our acquisitions and improve operational
efficiency while at the same time controlling costs. We expect to incur further
costs in connection with overall streamlining of our operations in 2004. In the
first quarter of 2004, we expect to incur a reorganization charge in the range
of approximately $2.0 million to approximately $3.0 million for headcount
reductions in association with the operational integration of Comincom. As of
April 15, 2003, all assets, liabilities, rights and obligations of TeleRoss were
transferred to Sovintel as part of the legal merger of these two wholly-owned
subsidiaries. This resulted in the reorganization of our operations along the
lines of customer characteristics as opposed to the types of telecommunications
products we provide. Therefore, in accordance with SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", we have aligned our
operating segments in the manner that the chief operating decision maker manages
the operations for purposes of making operating decisions and allocating
resources.

The discussion of our results of operations is organized as follows:

CONSOLIDATED RESULTS of Operations for the Year Ended December 31, 2003 compared
to the Consolidated Results of Operations for the Year Ended December 31, 2002.

CONSOLIDATED FINANCIAL POSITION at December 31, 2003 compared to Consolidated
Financial Position at December 31, 2002.

CONSOLIDATED RESULTS of Operations for the Year Ended December 31, 2002 compared
to the Consolidated Results of Operations for the Year Ended December 31, 2001.

CONSOLIDATED FINANCIAL POSITION at December 31, 2002 compared to Consolidated
Financial Position at December 31, 2001.

FINANCIAL REVIEW 33

CONSOLIDATED RESULTS

CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2003 COMPARED
TO THE CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002

Our revenue increased by 81% to $360.5 million for the year ended December 31,
2003 from $198.7 million for the year ended December 31, 2002. The overall
increase in revenue was largely due to the consolidation of Sovintel's results
of operations for a full year. The breakdown of revenue by business group was as
follows:

CONSOLIDATED CONSOLIDATED
REVENUE REVENUE
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2002 2003
------------ ------------
(IN MILLIONS)

REVENUE
Business and Corporate Services .............................. $ 91.7 $188.9
Carrier and Operator Services ................................ 73.9 128.5
Consumer Internet Services ................................... 21.8 30.8
Mobile Services .............................................. 13.0 13.9
Eliminations ................................................. (1.7) (1.6)
------ ------
TOTAL REVENUE ................................................ $198.7 $360.5

Business and Corporate Services. Revenue from Business and Corporate Services
increased by 106% to $188.9 million for the year ended December 31, 2003 from
$91.7 million for the year ended December 31, 2002. The primary reason for the
increase is due to the acquisition of the remaining 50% ownership interest in
Sovintel which was completed in the third quarter of 2002. We began
consolidating Sovintel into our results of operations from September 17, 2002.
In addition, we had increases in our domestic traffic revenues due to adding
approximately 1,600 new corporate customers and signing up 74 new multi-tenant
business centers in the year ended December 31, 2003 along with actively
promoting new services among our client base. In addition, in the fourth quarter
of 2003, we had approximately $5.0 million in customer premises equipment sales,
higher than we have experienced in previous quarters.

The acquisition of 100% ownership interest in Comincom was completed in the
fourth quarter of 2003. We began consolidating Comincom into our results of
operations from December 1, 2003. As a result of consolidating Comincom, revenue
from Business and Corporate Services increased by $6.7 million for the year
ended December 31, 2003.

Revenue from the Business and Corporate Services division of Golden Telecom
(Ukraine) ("GTU") increased by 15% to $19.0 million for the year ended December
31, 2003 from $16.5 million for the year ended December 31, 2002. The increase
in revenue was due to an increase in the total intercity minutes of use by
business and corporate clients and an increase in monthly recurring
chargesoffset by lower equipment sales.

Carrier and Operator Services. Revenue from Carrier and Operator Services
increased by 74% to $128.5 million for the year ended December 31, 2003 from
$73.9 million for the year ended December 31, 2002. The primary reason for the
increase is due to the acquisition of the remaining 50% ownership interest in
Sovintel, which was completed in the third quarter of 2002. We began
consolidating Sovintel into our results of operations from September 17, 2002.

In addition, we have added a number of new carriers with increased volumes of
traffic, especially voice over IP, and increased the number of services that we
offer to cellular providers, which has more than offset general tariff declines,
although pricing pressures still exist.

The acquisition of 100% ownership interest in Comincom was completed in the
fourth quarter of 2003. We began consolidating Comincom into our results of
operations from

34 FINANCIAL REVIEW

December 1, 2003. As a result of consolidating Comincom, revenue from Carrier
and Operator Services increased by $2.0 million for the year ended December 31,
2003.

Revenue for the CARRIER AND OPERATOR SERVICES division of GTU increased by 93%
to $11.6 million for the year ended December 31, 2003 from $6.0 million for the
year ended December 31, 2002. The increase in revenue was due to increasing
volumes of incoming international traffic which we are able to terminate in a
number of cities in Ukraine as well as increasing volumes of outgoing
international traffic.

CONSUMER INTERNET SERVICES. Revenue from Consumer Internet Services increased by
41% to $30.8 million for the year ended December 31, 2003 from $21.8 million for
the year ended December 31, 2002. The increase is largely the result of
increases in the number of dial-up Internet subscribers from 242,155 at December
31, 2002 to 363,545 at December 31, 2003 and the average revenue per Internet
subscriber increasing from approximately $7.84 per month to approximately $8.39
per month over the same period.

MOBILE SERVICES. Revenue from Mobile Services increased by 7% to $13.9 million
for the year ended December 31, 2003 from $13.0 million for the year ended
December 31, 2002. Active subscribers increased from 35,386 at December 31, 2002
to 40,026 at December 31, 2003 and the average revenue per active subscriber has
increased by 8% to approximately $30.74 per month due to an increasing number of
subscribers on a tariff plan which allows for unlimited local calls for a fixed
payment of $99 per month. As a result of the adoption of the CPP principle by
the Ukrainian Parliament on September 17, 2003, we were unable to charge our
mobile customers for incoming calls and our revenues were reduced accordingly.

The following table shows our principal expenses for the years ended December
31, 2002 and December 31, 2003:

CONSOLIDATED CONSOLIDATED
EXPENSES EXPENSES
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2002 2003
------------ ------------
(IN MILLIONS)

COST OF REVENUE
Business and Corporate Services .......................... $ 47.9 $ 84.8
Carrier and Operator Services ............................ 27.4 74.9
Consumer Internet Services ............................... 14.6 20.2
Mobile Services .......................................... 3.0 2.8
Eliminations ............................................. (1.7) (1.6)
TOTAL COST OF REVENUE ...................................... 91.2 181.1
Selling, general and administrative ...................... 46.1 64.4
Depreciation and amortization ............................ 30.0 45.3
Equity in earnings of ventures ........................... (4.4) (4.7)
Interest income .......................................... (1.6) (1.1)
Interest expense ......................................... 2.2 2.0
Foreign currency loss .................................... 1.2 0.2
Provision for income taxes ............................... $ 4.6 $ 17.4

COST OF REVENUE

Our cost of revenue increased by 99% to $181.1 million for the year ended
December 31, 2003 from $91.2 million for the year ended December 31, 2002.

BUSINESS AND CORPORATE SERVICES. Cost of revenue from Business and Corporate
Services increased by 77% to $84.8 million, or 45% of revenue, for the year
ended December 31, 2003 from $47.9 million, or 52% of revenue, for the year
ended December 31, 2002. The increase in cost of revenue and the decrease in
cost of revenue as a percentage of revenue are mainly due to the acquisition of
the remaining 50% ownership interest in Sovintel which was completed in the
third quarter of 2002. We began consolidating Sovintel into our results of
operations from September 17, 2002. In addition, in the fourth quarter of 2003,
we had approximately $5.0 million in customer premises equipment sales with
significantly lower margins as part of a strategy to provide a wider range of
communication and Internet technology product to our existing customers.

FINANCIAL REVIEW 35

The acquisition of 100% ownership interest in Comincom was completed in the
fourth quarter of 2003. We began consolidating Comincom into our results of
operations from December 1, 2003. As a result of consolidating Comincom, cost of
revenue from Business and Corporate Services increased by $2.9 million for the
year ended December 31, 2003.

Cost of revenue for the Business and Corporate Services division of GTU
increased by 20% to $9.1 million, or 48% of revenue, for the year ended December
31, 2003 from $7.6 million, or 46% of revenue, for the year ended December 31,
2002.

CARRIER AND OPERATOR SERVICES. Cost of revenue from Carrier and Operator
Services increased by 173% to $74.9 million, or 58% of revenue, for the year
ended December 31, 2003 from $27.4 million, or 37% of revenue, for the year
ended December 31, 2002. The increase in cost of revenue and the increase in
cost of revenue as a percentage of revenue was due to the acquisition of the
remaining 50% ownership interest in Sovintel which was completed in the third
quarter of 2002. Sovintel's cost of revenue as a percentage of revenue is
traditionally lower margin bilateral voice. We began consolidating Sovintel into
our results of operations from September 17, 2002.

Cost of revenue for the Carrier and Operator Services division of GTU increased
by 113% to $8.1 million, or 70% of revenue, for the year ended December 31, 2003
from $3.8 million, or 63% of revenue, for the year ended December 31, 2002. Cost
of revenue increased as a percentage of revenue due to the increased volumes of
lower margin international incoming and outgoing traffic.

The acquisition of 100% ownership interest in Comincom was completed in the
fourth quarter of 2003. We began consolidating Comincom into our results of
operations from December 1, 2003. As a result of consolidating Comincom, cost of
revenue from Carrier and Operator Services increased by $1.4 million for the
year ended December 31, 2003.

CONSUMER INTERNET SERVICES. Cost of revenue from Consumer Internet Services
increased by 38% to $20.2 million, or 66% of revenue, for the year ended
December 31, 2003 from $14.6 million, or 67% of revenue, for the year ended
December 31, 2002. The decrease as a percentage of revenue was mainly due to
additional low cost interconnect capacity becoming available in the third
quarter of 2002.

MOBILE SERVICES. Cost of revenue from Mobile Services decreased by 7% to $2.8
million, or 20% of revenue, for the year ended December 31, 2003 from $3.0
million, or 23% of revenue, for the year ended December 31, 2002. The cost of
revenue as a percentage of revenue decreased due to the increased number of
subscribers using the unlimited local call tariff plan which does not lead to
additional settlement costs with other operators.

SELLING, GENERAL AND ADMINISTRATIVE

Our selling, general and administrative expenses increased by 40% to $64.4
million, or 18% of revenue, for the year ended December 31, 2003 from $46.1
million, or 23% of revenue, for the year ended December 31, 2002. This increase
in selling, general and administrative expenses was mainly due to increases in
employee related costs, advertising, inventory obsolescence, bad debt expense,
consulting costs associated with the operational integration of Comincom, and
other selling, general and administrative expenses arising from the
consolidation of Sovintel from September 17, 2002 and the consolidation of
Comincom from December 1, 2003 into our results of operations.

DEPRECIATION AND AMORTIZATION

Our depreciation and amortization expenses increased by 51% to $45.3 million for
the year ended December 31, 2003 from $30.0 million for the year ended December
31, 2002. The increase was due in part to depreciation on continuing capital
expenditures of

36 FINANCIAL REVIEW

the consolidated entities, but primarily relates to our acquisition of the
remaining 50% of Sovintel and subsequent consolidation of Sovintel as of
September 17, 2002 into our results of operations. In addition, depreciation and
amortization increased by $1.7 million due to the consolidation of Comincom into
our results of operations from December 1, 2003.

EQUITY IN EARNINGS OF VENTURES

The earnings after interest and tax charges from our investments in
non-consolidated ventures increased to $4.7 million for the year ended December
31, 2003 from $4.4 million for the year ended December 31, 2002. We recognized
earnings at Sovintel of $9.6 million for the period from January 1, 2002 to
September 16, 2002, which more than offset our recognized losses in MCT of $5.1
million. The increase in equity in earnings was mainly due to receiving a $4.7
million dividend from MCT in the fourth quarter of 2003, an equity investment in
which we have ceased recognition of losses as they exceeded our investment base,
partly offset by the effects of the acquisition of the remaining 50% of Sovintel
and its subsequent consolidation as of September 17, 2002 into our results of
operations.

INTEREST INCOME

Our interest income was $1.1 million for the year ended December 31, 2003 down
from $1.6 million for the year ended December 31, 2002. The decrease in interest
income mainly reflects lower interest rates earned on deposits in short-term US
money market funds.

INTEREST EXPENSE

Our interest expense was $2.0 million for the year ended December 31, 2003 down
from $2.2 million for the year ended December 31, 2002. Debt, excluding capital
lease obligations, at December 31, 2003 was $1.2 million compared to $33.1
million at December 31, 2002. On June 30, 2003, we settled $30.0 million of
outstanding debt plus accrued interest under a credit facility with ZAO
Citibank. There was no penalty for the early settlement of this debt however an
additional $0.2 million of previously capitalized financing costs was recognized
during the second quarter of 2003 which was previously being recognized over the
life of the facility.

FOREIGN CURRENCY LOSS

Our foreign currency loss was $0.2 million for the year ended December 31, 2003,
compared to a foreign currency loss of $1.2 million for the year ended December
31, 2002. The improvement in foreign currency loss is due to the combination of
movements in exchange rates and changes in the amount of net monetary assets
that we have denominated in foreign currencies.

PROVISION FOR INCOME TAXES

Our charge for income taxes was $17.4 million for the year ended December 31,
2003 compared to $4.6 million for the year ended December 31, 2002. Our
effective tax rate was 24% for the year ended December 31, 2003 compared to 14%
for the year ended December 31, 2002. The increase is primarily due to the
acquisition of the remaining 50% of Sovintel and subsequent consolidation of
Sovintel from September 17, 2002 into our results of operations. In addition,
there were increased levels of taxable profits being incurred in our Russian and
Ukrainian subsidiaries in the year ended December 31, 2003 as compared to the
year ended December 31, 2002. In the fourth quarter of 2002, we recognized the
full benefit of carry-forward tax losses of $2.8 million at our wholly-owned
Russian subsidiary, Teleross, which previously had been recognized on a
quarterly basis and we recognized $0.8 million of current deferred tax assets at
GTU. In the fourth quarter of 2003, we recognized the full benefit of US
carry-forward tax losses resulting in a deferred tax benefit of approximately
$1.9 million.

FINANCIAL REVIEW 37

CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE

We adopted SFAS No. 142 "Accounting for Goodwill," effective from January 1,
2002. As a result, we recorded a cumulative effect of a change in accounting
principle for negative goodwill (deferred credit) arising on our equity method
investments in the amount of $1.0 million for the year ended December 31, 2002.

NET INCOME AND NET INCOME PER SHARE

Our net income for the year ended December 31, 2003 was $55.4 million, compared
to a net income of $29.8 million for the year ended December 31, 2002.

Our net income per share of common stock increased to $1.95 for the year ended
December 31, 2003, compared to a net income per share of $1.24 for the year
ended December 31, 2002. The increase in net income per share of common stock
was due to the increase in net income partly offset by an increase in the number
of weighted average shares to 28,467,677 in the year ended December 31, 2003,
compared to 24,101,943 in the year ended December 31, 2002. The increase in
outstanding shares was a direct result of the Comincom acquisition and employee
stock option exercises.

Our net income per share of common stock on a fully diluted basis increased to
$1.90 for the year ended December 31, 2003, compared to a net income per common
share of $1.21 for the year ended December 31, 2002. The increase in net income
per share of common stock on a fully diluted basis was due to the increase in
net income partly offset by an increase in the number of weighted average shares
assuming dilution to 29,106,540 the year ended December 31, 2003, compared to
24,516,803 for the year ended December 31, 2002.

CONSOLIDATED FINANCIAL POSITION

SIGNIFICANT CHANGES IN CONSOLIDATED FINANCIAL POSITION AT DECEMBER 31, 2003
COMPARED TO CONSOLIDATED FINANCIAL POSITION AT DECEMBER 31, 2002

On December 1, 2003, we completed the acquisition of 100% of the shares of
Comincom previously held by Telenor and began consolidating the results of
operations and financial position of Comincom. Significant fluctuations in
certain balance sheet items as of December 31, 2003 as compared to December 31,
2002, were mainly due to the consolidation of Comincom into our financial
position. The most significant fluctuations of certain balance sheet items
include accounts receivable, property and equipment, goodwill and intangible
assets, accounts payable and accrued expenses, deferred tax liabilities and
shareholders equity. Other significant changes in balance sheet items, excluding
the effect shareholders of consolidating Comincom are discussed below.

ACCOUNTS RECEIVABLE

Accounts receivable increased from December 31, 2002 to December 31, 2003 as a
result of increased revenue during the period ended December 31, 2003 and slower
collections from customers.

INTANGIBLE ASSETS

Our intangible assets increased at December 31, 2003 as compared to December 31,
2002 as a result of our acquisition of Sibchallenge in August 2003.

DEBT OBLIGATIONS

Our debt position decreased at December 31, 2003 as compared to December 31,
2002 as a result of retiring our debt that consisted mainly of the Citibank
Credit Facility of $30.0 million.

38 FINANCIAL REVIEW

SHAREHOLDERS' EQUITY

Shareholders' equity increased from December 31, 2002 to December 31, 2003 as a
result of our net income of $55.4 million and proceeds of approximately $23.7
million received from the exercise of employee stock options.

CONSOLIDATED RESULTS

CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 COMPARED
TO THE CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001

REVENUE

Our revenue increased by 42% to $198.7 million for the year ended December 31,
2002 from $140.0 million for the year ended December 31, 2001. The breakdown of
revenue by business group was as follows:

CONSOLIDATED CONSOLIDATED
REVENUE REVENUE
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN MILLIONS)

REVENUE
Business and Corporate Services ........................... $ 54.1 $ 91.7
Carrier and Operator Services ............................. 58.5 73.9
Consumer Internet Services ................................ 13.8 21.8
Mobile Services ........................................... 14.4 13.0
Eliminations .............................................. (0.8) (1.7)
------ ------
TOTAL REVENUE ............................................... $140.0 $198.7

Business and Corporate Services. Revenue from Business and Corporate Services
increased by 70% to $91.7 million for the year ended December 31, 2002 from
$54.1 million for the year ended December 31, 2001. The primary reason for the
increase was due to the acquisition of the remaining 50% ownership interest in
Sovintel which was completed in the third quarter of 2002. We began
consolidating Sovintel into our results of operations from September 17, 2002.
In addition, we had increases in corporate data and frame relay revenues. In the
twelve months ended December 31, 2002, the business and corporate services
division had increases in local traffic due to adding approximately 600 new
corporate customers and signing up approximately 30 new multi-tenant business
centers.

The Business and Corporate Services division of Golden Telecom BTS revenue
increased by 41% to $16.5 million for the year ended December 31, 2002 from
$11.7 million for the year ended December 31, 2001. The increase in revenue was
due to increases in the total intercity minutes of use by business and corporate
clients and an increase in monthly recurring charges and equipment sales.

For ADS, acquired in September 2001, revenue from Business and Corporate
Services was $3.1 million and $1.1 million for the years ended December 31, 2002
and 2001, respectively.

CARRIER AND OPERATOR SERVICES. Revenue from Carrier and Operator Services
increased by 26% to $73.9 million for the year ended December 31, 2002 from
$58.5 million for the year ended December 31, 2001. The primary reason for the
increase is due to the acquisition of the remaining 50% ownership interest in
Sovintel which was completed in the third quarter of 2002. We began
consolidating Sovintel into our results of operations from September 17, 2002.

In addition, we had increases in voice over Internet protocol revenues due to
our expanded network coverage in many Russian regions and the CIS and higher
local traffic volumes, partly offset by pricing concessions made to our largest
customer. In the twelve months ended December 31, 2002, we also had lower sales
of international capacity due to the bankruptcy of a European telecommunications
operator.

FINANCIAL REVIEW 39

The Carrier and Operator Services division of Golden Telecom BTS revenue
decreased by 50% to $6.0 million for the year ended December 31, 2002 from $11.9
million for the year ended December 31, 2001. The decrease in revenue was due to
the suspension of the termination of certain incoming international traffic from
the beginning of the fourth quarter of 2001 that continued throughout 2002.

CONSUMER INTERNET SERVICES. Revenue from Consumer Internet Services increased by
58% to $21.8 million for the year ended December 31, 2002 from $13.8 million for
the year ended December 31, 2001. The increase is largely the result of
increases in the number of dial-up Internet subscribers from 185,628 at December
31, 2001 to 242,155 at December 31, 2002 offset by a decrease in average revenue
per dial-up Internet subscriber from approximately $8.74 per month to
approximately $7.84 per month over the same period. Internet revenues have also
increased by the acquisition of Cityline and Uralrelcom on June 1, 2001, however
Cityline's subscribers were absorbed into TeleRoss operations during 2002 so we
are not able to identify the incremental impact of this acquisition on the year
ended December 31, 2002. Uralrelcom's revenue was $2.5 million for the year
ended December 31, 2002 as compared to $1.0 million for the year ended December
31, 2001.

MOBILE SERVICES. Revenue from Mobile Services decreased by 10% to $13.0 million
for the year ended December 31, 2002 from $14.4 million for the year ended
December 31, 2001. Active subscribers declined approximately 13% and the average
revenue per subscriber has declined by 8% to approximately $28.54 per month.

SOVINTEL. Sovintel's revenue increased by 29% to $149.2 million for the year
ended December 31, 2002 from $115.7 million for the year ended December 31,
2001. Increases in traffic volumes, particularly incoming international traffic
more than offset reductions in tariffs. Also, increases in recurring fees,
equipment sales and other service offerings contributed to the increase.

EXPENSES

The following table shows our principal expenses for the year ended December 31,
2001 and December 31, 2002:

CONSOLIDATED CONSOLIDATED
EXPENSES EXPENSES
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN MILLIONS)

COST REVENUE
Business and Corporate Services ............................ $32.1 $47.9
Carrier and Operator Services .............................. 16.8 27.4
Consumer Internet Services ................................. 11.9 14.6
Mobile Services ............................................ 3.7 3.0
Eliminations ............................................... (0.8) (1.7)
----- -----
TOTAL COST OF REVENUE ........................................ 63.7 91.2
Selling, general and administrative ........................ 48.9 46.1
Depreciation and amortization .............................. 41.4 30.0
Impairment charge .......................................... 31.3 --
Equity in earnings of ventures ............................. (8.2) (4.4)
Interest income ............................................ (3.1) (1.6)
Interest expense ........................................... 2.4 2.2
Foreign currency loss ...................................... 0.6 1.2
Provision for income taxes ................................. $ 1.9 $ 4.6

COST OF REVENUE

Our cost of revenue increased by 43% to $91.2 million for the year ended
December 31, 2002 from $63.7 million for the year ended December 31, 2001.

BUSINESS AND CORPORATE SERVICES. Cost of revenue from Business and Corporate
Services increased to $47.9 million, or 52% of revenue, for the year ended
December 31, 2002 from $32.1 million, or 59% of revenue, for the year ended
December 31, 2001. The decrease in cost of revenue as a percentage of revenue
was mainly due to the acquisition of the remaining 50% ownership interest in
Sovintel which was completed in the third quarter of 2002. We began
consolidating Sovintel into our results of operations

40 FINANCIAL REVIEW

from September 17, 2002. In addition, cost of revenue decreased as a percentage
of revenue due to operational improvements in terms of efficient use of
available network resources.

The Business and Corporate Services division of GTU cost of revenue increased by
25% to $7.6 million, or 46% of revenue, for the year ended December 31, 2002
from $6.1 million, or 52% of revenue, for the year ended December 31, 2001. Cost
of revenue decreased as a percentage of revenue due to optimization of both
intercity and international transmission costs.

For ADS, acquired in September 2001, cost of revenue from Business and Corporate
Services was $1.7 million and $0.4 million for the year ended December 31, 2002
and 2001, respectively.

CARRIER AND OPERATOR SERVICES. Cost of revenue from Carrier and Operator
Services increased by 63% to $27.4 million, or 37% of revenue, for the year
ended December 31, 2002 from $16.8 million, or 29% of revenue, for the year
ended December 31, 2001. The increase as a percentage of revenue was mainly due
to the acquisition of the remaining 50% ownership interest in Sovintel which was
completed in the third quarter of 2002. We began consolidating Sovintel into our
results of operations from September 17, 2002. Sovintel's cost of revenue as a
percentage of revenue is traditionally lower margin bilateral voice. In
addition, we had increases in lower margin voice over Internet protocol sales
and decreases in high margin international capacity sales due to the bankruptcy
of a European telecommunications operator. We also had operational improvements
in terms of efficient use of available network resources offset by settlements
to other operators not decreasing in line with pricing concessions to customers.

The Carrier and Operator Services division of GTU cost of revenue decreased by
50% to $3.8 million, or 63% of revenue, for the year ended December 31, 2002
from $7.6 million, or 64% of revenue, for the year ended December 31, 2001. Cost
of revenue decreased as a percentage of revenue due to the related costs of the
suspension of the termination of certain incoming international traffic from the
beginning of the fourth quarter of 2001 that continued throughout 2002.

Consumer Internet Services. Cost of revenue from Consumer Internet Services
increased by 23% to $14.6 million, or 67% of revenue, for the year ended
December 31, 2002 from $11.9 million, or 86% of revenue, for the year ended
December 31, 2001. The improvement in cost of revenue as a percentage of revenue
was mainly due to the operational improvements in terms of efficient use of
available network resources.

MOBILE SERVICES. Cost of revenue from Mobile Services decreased by 19% to $3.0
million, or 23% of revenue, for the year ended December 31, 2002 from $3.7
million, or 26% of revenue, for the year ended December 31, 2001. The cost of
revenue decreased as a percentage of revenue, mainly as a result of cost
controls and a change in the revenue mix from handset sales to traffic revenue.

SOVINTEL. Sovintel's cost of revenue increased by 28% to $81.9 million, or 55%
of revenue, for the year ended December 31, 2002 from $63.9 million, or 55% of
revenue, for the year ended December 31, 2001. The increase in cost of revenue
of 28% is primarily a result of increases in operator settlements as a result of
increases in traffic related revenue.

SELLING, GENERAL AND ADMINISTRATIVE

Our selling, general and administrative expenses decreased by 6% to $46.1
million, or 23% of revenue, for the year ended December 31, 2002 from $48.9
million, or 35% of revenue, for the year ended December 31, 2001. This decrease
in selling, general and administrative expenses was mainly due to reductions in
employee related costs, advertising, and other selling, general and
administrative expenses partially offset by increase in revenue related taxes.

FINANCIAL REVIEW 41

The acquisition of the remaining 50% of Sovintel and subsequent consolidation
contributed $5.1 million for the year ended December 31, 2002 to selling,
general and administrative expenses.

Sovintel's selling, general and administrative expenses increased by 31% to
$17.0 million, or 11% of revenue for the year ended December 31, 2002 from $13.0
million, or 11% of revenue for the year ended December 31, 2001. The increase
was largely due to a increases in employee related costs, increases in revenue
related taxes, and increases in sales and marketing expenses.

DEPRECIATION AND AMORTIZATION

Our depreciation and amortization expenses decreased by 28% to $30.0 million for
the year ended December 31, 2002 from $41.4 million for the year ended December
31, 2001. The decrease is in part due to the adoption of SFAS No. 142 which
requires that goodwill no longer be amortized effective from January 1, 2002 and
which reduced our amortization expense by approximately $11.8 million for the
year ended December 31, 2002 and also as a result of the impairment charges
recorded in the fourth quarter of 2001, which in turn reduced the level of
depreciation and amortization recorded for the year ended December 31, 2002 by
$7.2 million. These reductions were, in part, offset by depreciation on
continuing capital expenditures of the consolidated entities. The acquisition of
the remaining 50% of Sovintel and subsequent consolidation of Sovintel as of
September 17, 2002 into our results of operations contributed $3.9 to
depreciation and amortization million for the year ended December 31, 2002.

IMPAIRMENT CHARGE

In the fourth quarter of 2001 we recorded impairment charges totaling $31.3
million covering two aspects of our business. Severely reduced expectations in
demand for Internet advertising in Russia, as throughout western markets, had
impacted the value of our Internet portal assets and as a result we recorded an
impairment charge of $20.9 million. Operating difficulties had impacted our
mobile business in Ukraine and as a result we recorded an impairment charge of
$10.4 million. For further details of these charges, refer to Note 16 of the
Notes to the Consolidated Financial Statements. No impairment charge was
recorded for the year ended December 31, 2002.

EQUITY IN EARNINGS OF VENTURES

The earnings after interest and tax charges from our investments in
non-consolidated ventures were $4.4 million for the year ended December 31, 2002
down from earnings of $8.2 million for the year ended December 31, 2001. We
recognized earnings at Sovintel of $9.6 million for the period from January 1 to
September 16, 2002, which more than offset our recognized losses in MCT of $5.1
million. For the year ended December 31, 2001, our recognized earnings at
Sovintel were $10.7 million, which more than offset our recognized losses in
MCT.

INTEREST INCOME

Our interest income was $1.6 million for the year ended December 31, 2002 down
from $3.1 million for the year ended December 31, 2001. The decrease in interest
income mainly reflects lower interest rates earned on our cash and cash
equivalents.

INTEREST EXPENSE

Our interest expense was $2.2 million for the year ended December 31, 2002 down
from $2.4 million for the year ended December 31, 2001. Interest expense mainly
reflects the effect of higher average balances of debt, including capital leases
offset by lower interest rates. Debt, excluding capital lease obligations, at
December 31, 2002 was $33.1 million, of this $30.0 million was added in December
2002, compared to $13.2 million at December 31, 2001.

42 FINANCIAL REVIEW

FOREIGN CURRENCY LOSS

Our foreign currency loss was $1.2 million for the year ended December 31, 2002,
compared to a $0.6 million loss for the year ended December 31, 2001. The
increase in foreign currency loss is due to a combination of movements in
exchange rates and changes in the amount of net monetary assets that we have
denominated in foreign currencies. The acquisition of the remaining 50% of
Sovintel and subsequent consolidation of Sovintel from September 17, 2002 into
our results of operations contributed $0.3 million for the year ended December
31, 2002 to foreign currency losses.

PROVISION FOR INCOME TAXES

Our charge for income taxes was $4.6 million for the year ended December 31,
2002 compared to $1.9 million for the year ended December 31, 2001. The
acquisition of the remaining 50% of Sovintel and subsequent consolidation of
Sovintel from September 17, 2002 into our results of operations contributed $3.6
million for the year ended December 31, 2002 to income taxes. There were
increased levels of taxable profits being incurred in our Russian and Ukrainian
subsidiaries and a reduction in the income tax rates for the year ended December
31, 2002 as compared to the year ended December 31, 2001. There was a reduction
of deferred tax asset valuation reserves of $2.8 million relating to tax loss
carryforwards at TeleRoss and we recognized $0.8 million of current deferred tax
assets at GTU.

CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE

We adopted SFAS No. 142, "Accounting for Goodwill," effective from January 1,
2002. As a result, we recorded a cumulative effect of a change in accounting
principle for negative goodwill (deferred credit) arising on our equity method
investments in the amount of $1.0 million for the year ended December 31, 2002.

NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE

Our net income for the year ended December 31, 2002 was $29.8 million, compared
to a net loss of $39.0 million for the year ended December 31, 2001. Our net
income per share of common stock increased to $1.24 for the year ended December
31, 2002, compared to a net loss per share of $1.65 for the year ended December
31, 2001. The increase in net income per share of common stock was due to the
increase in net income and offset by an increase in the number of weighted
average shares to 24,101,943 at December 31, 2002, compared to 23,604,914 at
December 31, 2001. The increase in outstanding shares was a direct result of the
Sovintel acquisition and employee stock option exercises.

Our net income per share of common stock on a fully diluted basis increased to
$1.21 for the year ended December 31, 2002, compared to a net loss per common
share of $1.65 in the year ended December 31, 2001. The increase in net income
per share of common stock on a fully diluted basis was due to the increase in
net income and offset by an increase in the number of weighted average shares
assuming dilution to 24,516,803 in the year ended December 31, 2002, compared to
23,604,914 in the year ended December 31, 2001.

CONSOLIDATED FINANCIAL POSITION

SIGNIFICANT CHANGES IN CONSOLIDATED FINANCIAL POSITION AT DECEMBER 31, 2002
COMPARED TO CONSOLIDATED FINANCIAL POSITION AT DECEMBER 31, 2001

On September 17, 2002, we completed the acquisition of the remaining 50% of
Sovintel previously held by Rostelecom and began consolidating the results of
operations and financial position of Sovintel. Significant fluctuations in
certain balance sheet items as of December 31, 2002 as compared to

FINANCIAL REVIEW 43

December 31, 2001, were mainly due to the consolidation of Sovintel into our
financial position. The most significant fluctuations of certain balance sheet
items include accounts receivable, property and equipment, goodwill and
intangible assets, investments in and advances to ventures, accounts payable and
accrued expenses, deferred tax liabilities and shareholders' equity. Other
significant changes in balance sheet items, excluding the effect of
consolidating Sovintel are discussed below.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

In addition to the effect of the consolidation of Sovintel, our allowance for
doubtful accounts increased from December 31, 2001 as compared to December 31,
2002 mainly due to provisions we made with respect to our preliminary estimate
of exposure relating to the bankruptcy of a European telecommunications
operator.

DEBT OBLIGATIONS

Our debt position increased from December 31, 2001 as compared to December 31,
2002 mainly due to the drawing upon the Citibank Credit Facility in the fourth
quarter of 2002 to retire $30.0 million of the $46.0 million non-interest
bearing promissory note issued to Rostelecom in connection with the acquisition
of the remaining 50% ownership interest in Sovintel previously held by
Rostelecom offset by a repayment of the $6.3 million of debt to GTS and partial
repayment of vendor financing to Motorola and Siemens.

MINORITY INTEREST

The decrease in minority interest from December 31, 2001 as compared to December
31, 2002 primarily reflects our acquisition of the remaining 31% minority
interest of GTU in August 2002.

SHAREHOLDERS' EQUITY

In addition to the increase in shareholders' equity resulting from shares issued
to acquire Sovintel, shareholders' equity also increased from December 31, 2001
to 2002 as a result of our net income of $29.8 million and proceeds of
approximately $5.9 million received from the exercise of stock options.

INCOME TAXES

Our effective rate of income tax differs from the US statutory rate due to the
impact of the following factors (1) different income tax rates and regulations
apply in the countries where we operate; (2) amortization of goodwill and
certain acquired intangible assets is not deductible for income tax purposes;
and (3) in the year ended December 31, 2001 we recorded a $31.3 million
impairment charge that was not deductible for income tax purposes. Prior to 2001
we have not recognized a tax benefit in relation to the deferred tax assets of
our Russian and Ukrainian entities due to uncertainty over the application and
future development of the tax regimes in the two countries.

However, in 2001 and 2002, as a result of our Russian and Ukrainian subsidiaries
profitability for Russian and Ukrainian statutory purposes and reasonable
certainty of future profits, we recorded deferred tax assets in the appropriate
Russian and Ukrainian subsidiaries. In 2003, we recorded the full amount of
deferred tax asset for US loss carry-forwards for income tax purposes. In
respect of the impairment charge, this created additional deferred tax assets,
against which we recorded valuation allowances as a result of the uncertainties
concerning.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents was $65.2 million and $59.6 million as of December
31, 2003 and December 31, 2002, respectively. Our total restricted cash was $1.0
million and $1.5 million as of December

44 FINANCIAL REVIEW

31, 2003, and 2002, respectively. The restricted cash is maintained in
connection with certain of our debt obligations as described below.

During the twelve months ended December 31, 2003, we had net cash inflows of
$87.0 million from our operating activities. During the twelve months ended
December 31, 2002, we had net cash inflows of $50.6 million from our operating
activities. This increase in net cash inflows from operating activities at
December 31, 2003 is mainly due to the increase of net income as a result of,
increased revenues, and the consolidation of Sovintel into our results of
operations and financial position from September 17, 2002 and the consolidation
of Comincom into our results of operations and financial position from December
1, 2003, offset by increased payments for trade payables and slower collections
from customers.

During the twelve months ended December 31, 2003, we received approximately
$342.8 million in cash from our customers for services and we paid approximately
$237.7 million to suppliers and employees. During the twelve months ended
December 31, 2002, we received approximately $196.2 million in cash from our
customers for services and we paid approximately $133.5 to suppliers and
employees.

We used cash of $68.0 million and $52.2 million for investing activities for the
twelve months ended December 31, 2003 and 2002, respectively, which were
principally attributable to building our telecommunications networks and
acquisitions. Network investing activities totaled $63.7 million for the twelve
months ended December 31, 2003 and included capital expenditures principally
attributable to building out our telecommunications network. Network investing
activities totaled $29.4 million for the twelve months ended December 31, 2002.
We used cash of $12.3 million for the year ended December 31, 2003 for
acquisitions principally attributable to acquiring Sibchallenge and we used cash
of $51.2 million of the year ended December 31, 2002 for acquisitions
principally attributable to acquiring the remaining 50% of Sovintel. For the
year ended December 31, 2001, we used cash of $33.4 million for acquisitions,
principally attributable to the acquisitions of Cityline, PTK and Uralrelcom.

For the year ended December 31, 2002, we recovered funds from escrow of $3.0
million in association with our acquisition of PTK in June 2001. For the year
ended December 31, 2001, we received net proceeds from investments available for
sale of $45.4 million and for the year ended December 31, 2002, we received net
proceeds from investments available for sale of $9.0 million. In October 2003,
MCT declared a cash dividend of $1.90 per common share to holders of record as
of October 27, 2003. Our portion of this cash dividend was approximately $4.7
million and was received in November 2003.

For the year ended December 31, 2003, we received $23.7 million net proceeds
from the exercise of employee stock options and for the year ended December 31,
2002, we received $5.9 million net proceeds from the exercise of employee stock
options.

We had working capital of $86.3 million as of December 31, 2003 and $56.5
million as of December 31, 2002. At December 31, 2003, we had total debt,
excluding capital lease obligations, of approximately $1.2 million, of which
$1.0 million were current maturities. At December 31, 2002, we had total debt,
excluding capital lease obligations, of approximately $33.1 million, of which
$9.0 million were current maturities. Total debt included amounts that were
fully collateralized by restricted cash.

In the first quarter of 2000, we entered into a lease for the right to use fiber
optic capacity, including facilities and maintenance, from Moscow to Stockholm.
The lease has an initial term of ten years with an option to renew for an
additional five years. The lease required full prepayments as the capacity
increased from an STM-1 to an STM-4 to full capacity of STM-16. Full prepayments
were made to the lessor in April 2000, August 2000 and February 2001. These
prepayments have been offset against the lease obligation in the financial
statements of the Company. We will continue to make payments for maintenance for
the term of the lease.

FINANCIAL REVIEW 45

In September 2001, we entered into a five year lease for the right to use up to
VC-3 fiber optic capacity on major routes within Russia to support the increase
in our interregional traffic and regional expansion strategy. In December 2001,
we issued a $9.1 million loan to the company that provided the capital lease.
The loan has payment terms of 56 months, starting in January 2002, and carries
interest at the rate of 7 percent per annum.

In February 2004, our Board of Directors declared a cash dividend of $0.20 per
common share to shareholders of record as of March 18, 2004. The total amount
payable to shareholders is approximately $7.2 million. We believe that we have
reached a level of operating profitability that allows for expansion and
maintenance capital expenditures to be financed entirely from operational cash
flows, and therefore we expect that a dividend will continue to be paid in the
future.

Some of our operating companies have received debt financing through direct
loans from affiliated companies. In addition, certain operating companies have
borrowed funds under a back-to-back, seven-year credit facility for up to $22.7
million from a Russian subsidiary of Citibank. Under this facility, we provide
full cash collateral, held in London, and recorded on our balance sheet as
restricted cash, for onshore loans made by the bank to our Russian registered
joint ventures. In a second, similar facility, we provide full cash collateral
for a short term back-to-back, revolving, credit facility for up to $10.0
million from the same bank for two of our larger Russian operating companies.
The funding level as of December 31, 2003 for all these facilities totaled $1.0
million, of which $0.2 million was funded to our consolidated subsidiaries and
$0.8 million was funded to our non-consolidated entities.

In order for us to compete successfully, we may require substantial capital to
continue to develop our networks and meet the funding requirements of our
operations and ventures, including possible losses from operations. We may also
require capital for our acquisition and business development initiatives.

The net proceeds from our IPO and our private placement have been applied to
these funding requirements. We also expect to fund these requirements through
our cash flow from operations, proceeds from additional equity and debt
offerings that we may conduct, and debt financing facilities.

In September 2002, ROL Holdings Limited ("ROLH"), a wholly-owned Cypriot
subsidiary, entered into a secured $30.0 million credit facility with ZAO
Citibank. ROLH drew upon the Citibank credit facility in the fourth quarter of
2002 and loaned the funds to TeleRoss to enable TeleRoss to retire $30.0 million
of the $46.0 million non-interest bearing promissory note issued to Rostelecom
in connection with the acquisition of the remaining 50% ownership interest in
Sovintel previously held by Rostelecom. In June 2003, we settled early the $30.0
million of outstanding debt plus accrued interest. There was no penalty for
early settlement of this debt however an additional $0.2 million of previously
capitalized financing costs was recognized as interest expense which was
previously being recognized over the life of the facility.

In the future, we may execute especially large or numerous acquisitions, which
may require us to raise additional funds through a dilutive equity issuance,
through additional borrowings with collateralization and through the divestment
of non-core assets, or combinations of the above. In the case especially large
or numerous acquisitions do not materialize, we expect our current sources of
funding to finance our capital requirements. The actual amount and timing of our
future capital requirements may differ materially from our current estimates
because of changes or fluctuations in our anticipated acquisitions, investments,
revenue, operating costs and network expansion plans and access to alternative
sources of financing on favorable terms. Further, in order for us to compete
successfully, we may require substantial capital to continue to develop our
networks and meet the funding requirements of our operations and ventures,
including losses from operations. We will also require capital for other
acquisition and business development initiatives. We

46 FINANCIAL REVIEW

expect to fund these requirements through our cash on hand, cash flow from
operations, proceeds from additional equity and debt offerings that we may
conduct, and debt financing facilities.

We may not be able to obtain additional financing on favorable terms. As a
result, we may be subject to additional or more restrictive financial covenants,
our interest obligations may increase significantly and our shareholders may be
adversely diluted. Our failure to generate sufficient funds in the future,
whether from operations or by raising additional debt or equity capital, may
require us to delay or abandon some or all of our anticipated expenditures, to
sell assets, or both, which could have a material adverse effect on our
operations.

As part of our drive to increase our network capacity, reduce costs and improve
the quality of our service, we have leased additional fiber optic and
satellite-based network capacity, the terms of these leases are generally five
years or more and can involve significant advance payments. As demand for our
telecommunication services increases we expect to enter into additional capacity
agreements and may make significant financial commitments, in addition to our
existing commitments.

As of December 31, 2003, we had the following contractual obligations, including
short- and long-term debt arrangements commitments for future payments under
non-cancelable lease arrangements and purchase obligations:

PAYMENTS DUE BY PERIOD (IN THOUSANDS)
----------------------------------------------------
LESS THAN 1 - 3 4 - 5
TOTAL 1 YEAR YEARS YEARS

Short- and long-term debt ................... $ 1,150 $ 950 $ 100 $ 100
Capital lease obligations ................... 7,583 3,129 4,454 --
Non-cancelable lease obligations ............ 3,900 1,854 2,032 14
Purchase obligations ........................ 24,621 20,140 4,481 --
------- ------- ------- -------
Total contractual cash obligations .......... $37,254 $26,073 $11,067 $ 114
======= ======= ======= =======

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our treasury function has managed our funding, liquidity and exposure to
interest rate and foreign currency exchange rate risks. Our investment treasury
operations are conducted within guidelines that have been established and
authorized by our audit committee. In accordance with our policy, we do not
enter into any treasury management transactions of a speculative nature.

The ruble and the hryvna are generally non-convertible outside Russia and
Ukraine, respectively, so our ability to hedge against further devaluation by
converting to other currencies is significantly limited. Further, our ability to
convert rubles and hryvna into other currencies in Russia and Ukraine,
respectively, is subject to rules that restrict the purposes for which
conversion and the payment of foreign currencies are allowed.

Given that much of our operating costs are indexed to or denominated in US
dollars, including employee compensation expense, capital expenditure and
interest expense, we have taken specific steps to minimize our exposure to
fluctuations in the appropriate foreign currency. Although local currency
control regulations require us to collect virtually all of our revenue in local
currency, certain ventures generally either price or invoice in US dollars or
index their invoices and collections to the applicable dollar exchange rate.

Customer contracts may include clauses allowing additional invoicing if the
applicable exchange rate changes significantly between the invoice date and the
date of payment, favorable terms for early or pre-payments and heavy penalty
clauses for overdue payments. Maintaining the dollar value of our revenue
subjects us to additional tax on exchange gains.

Although we are attempting to match revenue, costs, borrowing and repayments in
terms of their respective currencies, we may

FINANCIAL REVIEW 47

experience economic loss and a negative impact on earnings as a result of
foreign currency exchange rate fluctuations. Our cash and cash equivalents are
held largely in interest bearing accounts, in US dollars, however we do have
bank accounts denominated in Russian rubles and Ukrainian hryvna. The book value
as of such accounts at December 31, 2003 and 2002 approximates their fair value.
Cash in excess of our immediate operating needs is invested in US money market
instruments. In accordance with our investment policy, we maintain a diversified
portfolio of low risk, fully liquid securities. We are exposed to market risk
from changes in interest rates on our obligations and we also face exposure to
adverse movements in foreign currency exchange rates. We have developed risk
management policies that establish guidelines for managing foreign currency
exchange rate risk and we also periodically evaluate the materiality of foreign
currency exchange exposures and the financial instruments available to mitigate
this exposure. The following table provides information (in thousands) about our
cash equivalents, investments available for sale, convertible loan, and debt
obligations that are sensitive to changes in interest rates.

THERE 2003 2002
2004 2005 2006 2007 2008 AFTER TOTAL TOTAL
------- ------- ------- ------- ---- ----- ------- -------

Cash equivalents ......................... $ 5,18 $ -- $ -- $ -- $ -- $ -- $65,180 $59,625
Note receivable .......................... $ 1,972 $ 2,116 $ 1,494 $ -- $ -- $ -- $ 5,582 $ 7,422
Fixed rate ............................... 7.00% 7.00% 7.00% -- -- -- 7.00% 7.00%
Long-term debt, including current portion
Variable rate .......................... $ 950 $ -- $ 100 $ 100 $ -- $ -- $ 1,150 $33,099
Average interest rate .................. 5.10% -- 2.49% 2.49% -- -- -- --

The following table provides information about our financial instruments by
local currency and where applicable, presents such information in US dollar
equivalents (in thousands). The table summarizes information on instruments that
are sensitive to foreign currency exchange rates, including foreign currency
denominated debt obligations.

THERE 2003 2002
2004 2005 2006 2007 2008 AFTER TOTAL TOTAL
---- ---- ---- ---- ---- ----- ----- -----

ASSETS
Current assets
Russian rubles ......................... $ 49,961 $ -- $ -- $ -- $ -- $ -- $ 49,961 $ 18,366
Average foreign currency exchange rate . 29.45 -- -- -- -- -- -- --
Ukrainian hryvna ....................... $ 4,719 -- -- -- -- -- $ 4,719 $ 3,324
Average foreign currency exchange rate . 5.33 -- -- -- -- -- -- --
Kazakhstan Tenge ....................... $ 824 -- -- -- -- -- $ 824 $ 40
Average foreign currency exchange rate . 144.12 -- -- -- -- -- -- --
LIABILITIES
Current liabilities
Russian rubles ......................... $ 16,283 -- -- -- -- -- $ 16,283 $ 7,927
Average foreign currency exchange rate . 29.45
Ukrainian hryvna ....................... $ 3,053 -- -- -- -- -- $ 3,053 $ 827
Average foreign currency exchange rate . 5.33
Kazakhstan Tenge ....................... $ 356 -- -- -- -- -- $ 356 $ 40
Average foreign currency exchange rate . 144.12 -- -- -- -- -- -- --

Our interest income and expense are most sensitive to changes in the general
level of U.S. interest rates. In this regard, changes in U.S. interest rates
affect the interest earned on our cash equivalents and short-term investments as
well as interest paid on debt.

48 FINANCIAL REVIEW

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other parts of this document,
including, with- out limitation, those concerning

(I) future acquisitions and capital expenditures;

(II) projected traffic volumes and other growth indicators;

(III) anticipated revenues and expenses;

(IV) the Company's competitive environment;

(V) the future performance of consolidated and equity method
investments;

(VI) our intention to offer our services under the Golden Telecom
brand;

(VII) our intentions to expand our fiber optic capacity and add
transmission capacity;

(VIII) our intention to continue to use the assets of recently
acquired companies in the manner such assets were previously
used; and

(IX) the political, regulatory and financial situation in the
markets in which we operate, including the effect of the new
law "On Telecommunications",

are forward-looking and concern the Company's projected operations, economic
performance and financial condition. These forward-looking statements are made
pursuant to the safe harbor provisions of the Securities Litigation Reform Act
of 1995. It is important to note that such statements involve risks and
uncertainties and that actual results may differ materially from those expressed
or implied by such forward-looking statements. Among the key factors that have a
direct bearing on the Company's results of operations, economic performance and
financial condition are the commercial and execution risks associated with
implementing the Company's business plan, our ability to integrate recently
acquired companies into our operations, the political, economic and legal
environment in the markets in which the Company operates, increasing
competitiveness in the telecommunications and Internet-related businesses that
may limit growth opportunities, and increased and intense downward price
pressures on some of the services that we offer. These and other factors are
discussed herein under "Management Discussion" and Analysis of Financial
Condition and Results of Operations and elsewhere in this Report. Additional
information concerning factors that could cause results to differ materially
from those in the forward-looking statements are contained in this Form 10-K.

In addition, any statements that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, through the use of words or phrases such as
"will likely result," "are expected to," "estimated," "intends," "plans,"
"projection" and "outlook") are not historical facts and may be forward-looking
and, accordingly, such statements involve estimates, assumptions and
uncertainties which could cause actual results to differ materially from those
expressed in the forward-looking statements. Accordingly, any such statements
are qualified in their entirety by reference to, and are accompanied by, the
factors discussed throughout this Report and investors, therefore, should not
place undue reliance on any such forward-looking statements.

Further, any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors may emerge from time to time, and it is not
possible for management to predict all of such factors.

Further, management cannot assess the impact of each such factor on the
Company's business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any
forward-looking statements.

FINANCIAL REVIEW 49

REPORT OF MANAGEMENT

Management is responsible for the preparation of Golden Telecom, Inc.'s
information appearing in this Annual Report. The consolidated financial
statements and notes have been prepared in conformity with accounting principles
generally accepted in the United States of America and include certain amounts
that are based estimates based upon currently available information and
management's judgement of current conditions and circumstances.

To provide reasonable assurance that assets are safeguarded against loss from
unauthorized use or disposition and that accounting records are reliable for
preparing financial statements, management maintains a system of accounting and
other controls. Even an effective internal control system, no matter how well
designed, has inherent limitations, including the possibility the possible of
circumvention or overriding of controls, and therefore can provide only
reasonable assurance with respect to financial statement presentation. The
system of accounting and other controls is improved and modified in response to
change in business conditions and operations and recommendations made by the
independent auditors.

The Audit Committee of the Board of Directors, which is comprised of directors
who are not employees, meets periodically with management and independent
auditors to review the manner in which these groups are performing their
responsibilities and to carry out the Audit Committee, oversight role with
respect to auditing, internal controls and financial reporting matters. The
independent auditors periodically meet privately with the Audit Committee and
have access to its individual members.

Golden Telecom , Inc. engaged Ernst & Young (CIS) Limited, independent auditors,
to audit the consolidated financial statements in accordance with auditing
standards generally accepted in the United States of America, which include
consideration of the internal control structure.

/s/ A. VINOGRADOV
-----------------------
A. VINOGRADOV
CHIEF EXECUTIVE OFFICER

/s/ D. STEWART
-----------------------
D. STEWART
CHIEF FINANCIAL OFFICER

50 FINANCIAL REVIEW

REPORT OF INDEPENDENT AUDITORS

We have audited the accompanying consolidated balance sheets of Golden Telecom,
Inc. as of December 31, 2002 and 2003, and the related consolidated statements
of operations, cash flows, and shareholders' equity for each of the three years
in the period ended December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Golden Telecom,
Inc. at December 31, 2002 and 2003, and the consolidated 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 2 to the financial statements, in 2002 the Company changed
its method of accounting for goodwill.

MOSCOW, RUSSIA, MARCH 10, 2004 ERNST & YOUNG (CIS) LIMITED

THE BOARD OF DIRECTORS AND SHAREHOLDERS /S/ ERNST & YOUNG (CIS) LIMITED

GOLDEN TELECOM, INC.

FINANCIAL REVIEW 51

CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF US$, EXCEPT SHARE DATA)

DECEMBER 31,
-------------------
2002 2003
-------- --------

ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................................... $ 59,625 $ 65,180
Accounts receivable, net of allowance for doubtful accounts of
$8,686 and $13,896 at December 31, 2002 and 2003, respectively ............... 42,226 74,016
VAT receivable ............................................................... 3,998 14,819
Prepaid expenses ............................................................. 7,811 12,232
Deferred tax asset ........................................................... 3,681 5,995
Other current assets ......................................................... 10,113 15,909
-------- --------
TOTAL CURRENT ASSETS ........................................................... 127,454 188,151

PROPERTY AND EQUIPMENT:
Telecommunications equipment ................................................. 192,638 311,965
Telecommunications network held under capital leases ......................... 23,500 28,712
Furniture, fixtures and equipment ............................................ 17,477 27,245
Other property ............................................................... 9,977 13,080
Construction in progress ..................................................... 22,070 34,234
-------- --------
265,662 415,236
Accumulated depreciation ..................................................... 99,541 132,126
-------- --------
Net property and equipment ................................................... 166,121 283,110

GOODWILL AND INTANGIBLE ASSETS:
Goodwill ..................................................................... 71,703 144,008
Telecommunications service contracts, net of accumulated amortization of
$6,775 as of December 31, 2002 and $13,619 as of December 31, 2003 ........... 41,247 64,616
Contract-based customer relationships, net of accumulated amortization of
$811 as of December 31, 2002 and $2,859 as of December 31, 2003 .............. 7,511 32,310
Licenses, net of accumulated amortization of $1,249 as of December 31, 2002
and $1,854 as of December 31, 2003 ........................................... 1,918 2,103
Other intangible assets, net of accumulated amortization of $5,583 as of
December 31, 2002 and $5,492 as of December 31, 2003 ......................... 5,289 5,806
-------- --------
Net goodwill and intangible assets ........................................... 127,668 248,843

Restricted cash .............................................................. 1,515 1,005
Other non-current assets ..................................................... 13,052 8,117
-------- --------
TOTAL ASSETS ................................................................... $435,810 $729,226
======== ========

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

52 FINANCIAL REVIEW

CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF US$, EXCEPT SHARE DATA)

DECEMBER 31,
-----------------------
2002 2003
--------- ----------

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses ................................................... $ 43,870 $ 67,827
VAT Payable ............................................................................. 4,398 10,167
Debt maturing within one year ........................................................... 8,988 950
Current capital lease obligation ........................................................ 1,775 3,067
Deferred revenue ........................................................................ 3,970 6,253
Due to affiliates and related parties ................................................... 1,999 3,495
Other current liabilities ............................................................... 5,980 8,188
--------- ---------
TOTAL CURRENT LIABILITIES ................................................................. 70,980 99,947
Long-term debt, less current portion .................................................... 24,111 200
Long-term deferred tax liability ........................................................ 12,406 24,461
Long-term deferred revenue .............................................................. 7,334 13,725
Long-term capital lease obligations ..................................................... 5,621 3,763
Other non-current liabilities ........................................................... 5,713 4,177
--------- ---------
TOTAL LIABILITIES ......................................................................... 126,165 146,273

Minority interest ....................................................................... 2,187 2,722

SHAREHOLDERS' EQUITY

Preferred stock, $0.01 par value (10,000,000 shares authorized;
none issued and outstanding at December 31, 2002 and 2003) .............................. -- --
Common stock, $0.01 par value (100,000,000 shares authorized;
27,021,415 shares issued and outstanding at December 31,
2002 and 35,948,094 shares issued and outstanding at December 31, 2003) ................. 270 359

Additional paid-in capital .............................................................. 446,215 663,464
Accumulated deficit ..................................................................... (139,027) (83,592)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ................................................................ 307,458 580,231
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................................ $ 435,810 $ 729,226
========= =========

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

FINANCIAL REVIEW 53

CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS OF US$, EXCEPT PER SHARE
DATA)

2001 2002 2003
--------- --------- ---------

REVENUE:
Telecommunication services ....................................................... $ 128,407 $ 189,680 $ 358,724
Revenue from affiliates and related parties ...................................... 11,631 9,047 1,810
--------- --------- ---------
TOTAL REVENUE .................................................................... 140,038 198,727 360,534

OPERATING COSTS AND EXPENSES:
Access and network services (excluding depreciation and amortization) .......... 63,685 91,189 181,085
Selling, general and administrative (excluding depreciation and amortization) .. 48,935 46,147 64,384
Depreciation and amortization .................................................. 41,398 29,961 45,334
Impairment charge .............................................................. 31,291 -- --
--------- --------- ---------
TOTAL OPERATING EXPENSES ......................................................... 185,309 167,297 290,803

INCOME (LOSS) FROM OPERATIONS .................................................... (45,271) 31,430 69,731
--------- --------- ---------

OTHER INCOME (EXPENSE):
Equity in earnings of ventures ................................................. 8,155 4,375 4,687
Interest income ................................................................ 3,161 1,569 1,084
Interest expense ............................................................... (2,384) (2,236) (1,956)
Foreign currency losses ........................................................ (647) (1,174) (232)
Minority interest .............................................................. (117) (527) (480)
--------- --------- ---------
TOTAL OTHER INCOME ............................................................... 8,168 2,007 3,103
--------- --------- ---------

Income (loss) before income taxes .............................................. (37,103) 33,437 72,834
Income taxes ................................................................... 1,902 4,627 17,399
Income (loss) before cumulative effect of change in accounting principle ....... (39,005) 28,810 55,435
Cumulative effect of change in accounting principle ............................ -- 974 --
--------- --------- ---------
NET INCOME (LOSS) ................................................................ $ (39,005) $ 29,784 $ 55,435
========= ========= =========

Basic earnings (loss) per share of common stock:
Income (loss) before cumulative effect of a change in accounting principle ..... (1.65) 1.20 1.95
Cumulative effect of a change in accounting principle .......................... -- 0.04 --
Net income (loss) per share - basic ............................................ $ (1.65) $ 1.24 $ 1.95
========= ========= =========
Weighted average common shares outstanding - basic ............................... 23,605 24,102 28,468
========= ========= =========

Diluted earnings (loss) per share of common stock:
Income (loss) before cumulative effect of a change in accounting principle ..... (1.65) 1.17 1.90
Cumulative effect of a change in accounting principle .......................... -- 0.04 --
--------- --------- ---------
Net income (loss) per share - diluted .......................................... $ (1.65) $ 1.21 $ 1.90
Weighted average common shares outstanding - diluted ............................. 23,605 24,517 29,107
========= ========= =========

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

54 FINANCIAL REVIEW

CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF US$)

YEAR ENDED DECEMBER 31,
--------------------------------
2001 2002 2003
-------- -------- --------

OPERATING ACTIVITIES
Net income (loss) .......................................................................... $(39,005) $ 29,784 $ 55,435
Adjustments to Reconcile net income (loss) to Net Cash Provided by Operating Activities:
Depreciation ............................................................................. 18,685 23,560 34,837
Amortization ............................................................................. 22,713 6,401 10,497
Equity in earnings of ventures ........................................................... (8,155) (4,375) (4,687)
Impairment charge ........................................................................ 31,291
Minority interest ........................................................................ 117 527 480
Foreign currency losses .................................................................. 647 1,174 232
Deferred tax benefit ..................................................................... (1,656) (4,213) (3,117)
Other .................................................................................... 1,274 (196) (96)
Changes in assets and liabilities:
Accounts receivable ...................................................................... 905 (3,358) (11,710)
Accounts payable and accrued expenses .................................................... (1,390) (240) (3,928)
Other assets and liabilities ............................................................. (968) 1,582 9,031
-------- -------- --------

NET CASH PROVIDED BY OPERATING ACTIVITIES .................................................. 24,458 50,646 86,974
INVESTING ACTIVITIES
Purchases of property and equipment and intangible assets ................................ (27,859) (29,431) (63,737)
Acquisitions, net of cash acquired ....................................................... (33,448) (51,214) (12,282)
Loan received from equity investee ....................................................... 9,973
Cash received from escrow account ........................................................ 3,000
Restricted cash .......................................................................... (850) 1,884 510
Purchase of investments available for sale ............................................... (8,965) (2,000)
Proceeds from investments available for sale ............................................. 54,344 10,976
Dividend received from affiliated companies .............................................. 1,924 1,955 4,775
Loans made ............................................................................... (9,137)
Other investing .......................................................................... 11,359 2,688 2,704
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES ...................................................... (12,632) (52,169) (68,030)
FINANCING ACTIVITIES
Proceeds from debt ....................................................................... 3,300 30,000
Repayments of debt ....................................................................... (10,003) (10,107) (35,132)
Purchase of treasury stock ............................................................... (25,000)
Net proceeds from exercise of employee stock options ..................................... 382 5,904 23,737
Other financing .......................................................................... (761) (1,618) (1,910)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ........................................ (32,082) 24,179 (13,305)
Effect of exchange rate changes on cash and cash equivalents ............................... (229) (435) (84)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ....................................... (20,485) 22,221 5,555
Cash and cash equivalents at beginning of period ........................................... 57,889 37,404 59,625
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................................. $ 37,404 $ 59,625 $ 65,180
======== ======== ========

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

FINANCIAL REVIEW 55

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31,
2001, 2002, AND 2003
(IN THOUSANDS OF US$)

COMMON STOCK TREASURY STOCK ADDITIONAL TOTAL
----------------- -------------------- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------- ------- --------- ---------- ----------- -------------

Balance at December 31, 2000 ............. 24,480 $ 245 - - $ 412,754 $(129,806) $ 283,193
Compensatory restricted stock grants ..... - - - - 636 - 636
Compensatory common stock option grants .. - - - - 453 - 453
Issuance of common stock in relation
to restricted stock grants ............... 142 2 - - (2) - -
Exercise of stock options ................ 43 - - - 517 - 517
Exercise of common stock warrants ........ 125 1 - - (1) - -
Purchase of treasury shares .............. - - (2,273) (25,000) - - (25,000)
Other equity transactions ................ - - - - 50 - 50
Net loss ................................. - - - - - (39,005) (39,005)
------ ------ ------- --------- --------- --------- ---------
Balance at December 31, 2001 ............. 24,790 $ 248 (2,273) $ (25,000) $ 414,407 $(168,811) $ 220,844
Compensatory common stock grants ......... - - - - 340 - 340
Exercise of stock options ................ 480 5 - - 5,822 - 5,827
Retirement of treasury shares ............ (2,273) (23) 2,273 25,000 (24,977) - -
Acquisition of EDN Sovintel LLC .......... 4,024 40 - - 50,623 - 50,663
Net income ............................... - - - - - 29,784 29,784
------ ------ ------- --------- --------- --------- ---------
Balance at December 31, 2002 ............. 27,021 $ 270 - - $ 446,215 $(139,027) $ 307,458
Exercise of stock options ................ 1,919 19 - - 23,834 - 23,853
Acquisition of OAO Comincom .............. 7,008 70 - - 193,415 - 193,485
Net income ............................... - - - - - 55,435 55,435
------ ------ ------- --------- --------- --------- ---------
Balance at December 31, 2003 ............. 35,948 $ 359 - - $ 663,464 $ (83,592) $ 580,231
====== ====== ======= ========= ========= ========= =========

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: NATURE OF BUSINESS OPERATIONS

Golden Telecom, Inc. ("GTI", "Golden Telecom" or the "Company") is a provider of
a broad range of telecommunication services to businesses, other
telecommunications service providers and consumers. The Company provides these
services through its operation of voice, Internet and data networks,
international gateways, local access and various value-added services in the
Commonwealth of Independent States ("CIS"), primarily in Russia, and through its
fixed line and mobile operation in Ukraine. Golden Telecom was incorporated in
Delaware on June 10, 1999 for the purpose of acting as a holding company for
Global TeleSystems, Inc's ("GTS"). operating entities within the CIS and
supporting non-CIS holding companies (the "CIS Entities"). On September 29,
1999, GTS transferred its ownership rights in the CIS Entities to the Company in
anticipation of the Company's initial public offering which closed on October 5,
1999.

56 FINANCIAL REVIEW

The CIS Entities were subsidiaries of GTS prior to the transfer of ownership
rights of the CIS Entities to the Company, and after the IPO, GTS retained an
approximately 67% interest in the Company. On May 11, 2001, GTS completed the
sale of approximately 12.2 million shares, or approximately 50%, of GTI's common
stock to a group of investors led by Alfa Group, a leading Russia-based
financial and industrial concern ("Alfa"), and two of the Company's previously
existing major shareholders, Capital International Global Emerging Markets
Private Equity Fund L.P. ("Capital") and investment funds managed by Barings
Vostok Capital Partners ("Baring Vostok"). In July 2001, the Company completed a
buy-back of $25.0 million, or approximately 2.3 million shares, of the Company's
common stock from a subsidiary of GTS and in October 2001, GTS sold the
remaining approximately 0.6 million shares of GTI's common stock and ceased
being a shareholder of the Company.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES AND NEW ACCOUNTING
PRONOUNCEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

Wholly owned subsidiaries and majority owned ventures 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
inter-company accounts and transactions are eliminated upon consolidation.

The Company recognizes profits and losses in accordance with its underlying
ownership percentage or allocation percentage as specified in the agreements
with its partners; however, the Company recognizes 100% of the losses in
ventures and majority owned subsidiaries where the Company bears all of the
financial risk. When such ventures and subsidiaries become profitable, the
Company recognizes 100% of the profits until such time as the excess losses
previously recognized have been recovered.

Results of subsidiaries acquired and accounted for by the purchase method have
been included in operations from the relevant date of acquisition.

FOREIGN CURRENCY TRANSLATION

The Company's functional currency in the us dollar because the majority of its
revenues, costs, property and equipment purchased, and debt and trade
liabilities are either priced, incurred, payable or otherwise measured in US
dollars. Each of the legal entities domiciled in the CIS maintains its records
and prepares its financial statements in the local currency, principally either
Russian rubles or Ukrainian hryvna, in accordance with the requirements of
domestic accounting and tax legislation. The accompanying financial statements
differ from the financial statements used for statutory purposes in the CIS and
other non-US jurisdictions in that they reflect certain adjustments, recorded on
the entities' books, which are appropriate to present the financial position,
results of operations and cash flows in accordance with accounting principles
generally accepted in the United States of America ("US 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.

The Company follows a translation policy in accordance with Statement of
Financial Accounting Standard ("SFAS") No. 52, "Foreign Currency Translation,"
as amended by SFAS No. 130, "Reporting Comprehensive Income". The temporal
method is used for translating assets and liabilities of the Company's legal
entities domiciled in the CIS and other non-US jurisdic-

FINANCIAL REVIEW 57

tions. Accordingly, monetary assets and liabilities are translated at current
exchange rates while non-monetary assets and liabilities are translated at their
historical rates. Income and expense accounts are translated at average monthly
rates of exchange. The resultant translation adjustments are included in the
operations of the subsidiaries and ventures. Generally, the ruble is not
convertible outside of Russia. The official exchange rate which is established
by the Central Bank of Russia is a reasonable approximation of market rate. The
official exchange rates which are used for translation in the accompanying
financial statements at the balance sheet date were 31.78 and 29.45 rubles per
US dollar as of December 31, 2002 and 2003, respectively. Through December 31,
2002, Russia has been considered to be a highly inflationary environment. From
January 1, 2003, Russia ceased to be considered as a highly inflationary
economy. This change had no impact on the consolidated financial statements.

The translation of local currency denominated assets and liabilities into US
dollars for the purpose of these financial statements does not indicate that the
Company could realize or settle in US dollars the reported values of the assets
and liabilities. Likewise, it does not indicate that the Company could return or
distribute the reported US dollar value of capital to its shareholders.

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH

The Company classifies cash on hand and deposits in banks, including commercial
paper, money market accounts, and any other investments with an original
maturity of three months or less from the date of purchase, that the Company may
hold from time to time, as cash and cash equivalents. Restricted cash is
primarily related to cash held in escrow at a financial institution for the
collateralization of debt obligations that certain of the Company's consolidated
subsidiaries and equity ventures have borrowed from such financial institution.

ACCOUNTS RECEIVABLE

Accounts receivable are shown at their net realizable value which approximates
their fair value. The allowance for doubtful accounts is estimated by a
combination of applying estimated loss percentages against the aging of accounts
receivable and specific identification.

INVENTORIES

Inventories, which are classified as other current assets, are stated at the
lower of cost or market. Cost is computed on either a specific identification
basis or a weighted average basis.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Depreciation is calculated on a
straight-line basis over the lesser of the estimated lives, ranging from five to
ten years for telecommunications equipment and three to five years for
furniture, fixtures and equipment and other property, or their contractual term.
Construction in process reflects amounts incurred for the configuration and
build-out of telecommunications equipment not yet placed into service.
Maintenance and repairs are charged to expense as incurred. The Company has
included in property and equipment, capitalized leases in the amount of $23.5
million and $28.7 million at December 31, 2002 and 2003, respectively, with
associated accumulated depreciation of $5.9 million and $9.2 million as of
December 31, 2002 and 2003, respectively. Amortization of assets recorded under
capital leases is included with depreciation expense for the years ended
December 31, 2001, 2002, and 2003.

GOODWILL AND INTANGIBLE ASSETS

Goodwill represents the excess of acquisition costs over the consolidated
subsidiaries and equity fair value of the net assets of acquired businesses, and
was

58 FINANCIAL REVIEW

amortized on a straight-line basis over its estimated useful life, five years,
until December 31, 2001. Beginning January 1, 2002, goodwill has been identified
as an indefinite lived asset in accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets", and accordingly amortization of goodwill ceased as of
that date. Intangible assets, which are stated at cost, consist principally of
telecommunications service contracts, contract based customer relationships,
licenses, software and content and are amortized on a straight-line basis over
the lesser of their estimated useful lives, generally five to ten years, or
their contractual term. In accordance with Accounting Principles Board ("APB")
Opinion No. 17, "Intangible Assets" and SFAS No. 142 "Goodwill and Other
Intangible Assets", the Company continues to evaluate the amortization period to
determine whether events or circumstances warrant revised amortization periods.
Additionally, the Company considers whether the carrying value of such assets
should be reduced based on the future benefits.

GOODWILL IMPAIRMENT ASSESSMENT

Goodwill is reviewed annually, as of the beginning of the fourth quarter, for
impairment or whenever it is determined that impairment indicators exits. The
Company determines whether an impairment has occurred by assigning goodwill to
the reporting units identified in accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets", 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.

LONG-LIVED ASSETS

Long-lived assets to be held and used by the Company are reviewed to determine
whether an event or change in circumstances indicates that the carrying amount
of the asset may not be recoverable. For long-lived assets to be held and used,
the Company bases its evaluation on such impairment indicators as the nature of
the assets, the future economic benefit of the assets, any historical or future
profitability measurements, as well as other external market conditions or
factors that may be present. If such impairment indicators are present or other
factors exist that indicate that the carrying amount of the asset may not be
recoverable, the Company determines whether an impairment has occurred through
the use of an undiscounted cash flows analysis of assets at the lowest level for
which identifiable cash flows exist. If impairment has occurred, the Company
recognizes a loss for the difference between the carrying amount and the fair
value of the asset. The fair value of the asset is measured using discounted
cash flow analysis or other valuation techniques.

INCOME TAXES

The Company uses the liability method of accounting for income taxes. Deferred
income taxes result from temporary differences between the tax bases of assets
and liabilities and the bases as reported in the consolidated financial
statements. The Company does not provide for deferred taxes on the undistributed
earnings of its foreign subsidiaries, as such earnings are generally intended to
be reinvested in those operations permanently. In the case of non-consolidated
entities, except MCT, where our partner requests that a dividend be paid, the
amounts are not expected to have a material impact on the Company's income tax
liability. It is not practical to determine the amount of unrecognized deferred
tax liability for such reinvested earnings.

REVENUE RECOGNITION

The Company records as revenue the amount of telecommunications and Internet
services rendered, as measured primarily by the minutes of traffic processed,
after deducting an estimate of the traffic that are partial minutes and test
traffic

FINANCIAL REVIEW 59

which will be neither billed nor collected, and the time spent online using our
Internet services. Revenue from service contracts is accounted for when the
services are provided. Billings received in advance of service being performed
are deferred and recognized as revenue as the service is performed. Revenues are
stated net of any value-added taxes charged to customers. Certain other taxes
that are based on revenues earned were incurred at a rate of 1% during 2001 and
2002, and have been included in operating expenses since these taxes are
incidental to the revenue cycle.

The Company has deferred connection fees and capitalized direct incremental
costs related to connection fees, not exceeding the revenue deferred. The
deferral of revenue and capitalization of cost of revenue will be recognized
over the estimated life of the customer. The total amount of deferred revenue
was $11.3 million and $20.0 million as of December 31, 2002 and 2003,
respectively. The total amount of deferred cost of revenue was $4.4 million and
$5.2 million as of December 31, 2002 and 2003, respectively.

In the fourth quarter of 2002, the Company re-assessed the average life of the
customer and concluded that the average life of the customer increased from
three to five years except for Golden Telecom (Ukraine) ("GTU") which remained
at two years for customers in the Business and Corporate Services Division and
Operator and Carrier Services Division and eighteen months for customers in the
Mobile Services division. The impact of increasing the average life of the
customer from three to five years was approximately $0.7 million reduction in
revenue and $0.4 million decrease in cost of revenue in the fourth quarter of
2002. The impact of this change in customer life was $0.3 million reduction on
net income and $0.01 per common share - basic for the year ended December 31,
2002.

The Company recognizes revenue from equipment sales when title to the equipment
passes to the customer. The Company defers the revenue on installed equipment
until installation and testing are completed and accepted by the customer.

In November 2002, the Financial Accounting Standards Board ("FASB") Emerging
Issues Task Force issued its consensus concerning Revenue Arrangements with
Multiple Deliverables ("EITF 00-21"). EITF 00-21 addresses how to determine
whether a revenue arrangement involving multiple deliverables should be divided
into separate units of accounting, and, if separation is appropriate, how the
arrangement consideration should be measured and allocated to the identified
accounting units. The guidance in EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
adoption of EITF 00-21 did not have a material impact on the Company's
consolidated financial position or results of operations.

ADVERTISING

The Company expenses the cost of advertising as incurred. Advertising expenses
for the year ended December 31, 2001, 2002 and 2003 were $4.6 million, $3.7
million and $5.2 million, respectively.

GOVERNMENT PENSION FUNDS

The Company contributes to the local state pension funds and social funds, on
behalf of all its CIS 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 5% to the annual gross remuneration of each
employee. The company allocates UST to three social funds, including the pension
fund, where the rate of contributions to the pension fund vary from 28% to 5%,
respectively, depending on the annual gross salary of each employee. The
contributions are expensed as incurred.

60 FINANCIAL REVIEW

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts for cash and cash equivalents, accounts receivable,
accounts payable, accrued liabilities, and short-term debt approximate their
fair value. The fair value of notes receivable, including the long-term portion
that are included in other current and non-current assets, respectively was $7.6
million and $5.6 million at December 31, 2002 and 2003, respectively as
determined by discounting future payments by 5.5%. The fair value of debt to
Citibank approximated the carrying value of $30.0 million at December 31, 2002.
In June 2003, the Company settled early the $30.0 million of outstanding debt to
Citibank. At December 31, 2002 and 2003, the Company held no debt at fixed
rates.

COMPREHENSIVE INCOME

Comprehensive income is defined as the change in equity of a business enterprise
during a period from non-owner sources. For the years ended December 31, 2001,
2002 and 2003, comprehensive income for the Company is equal to net income
(loss).

OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of cash, cash equivalents, and accounts and notes
receivable. Of the $65.2 million of cash and cash equivalents held at December
31, 2003, $50.6 million was held in US money market instruments in US financial
institutions. The remaining balance is being maintained in US-owned and, to a
lesser extent, local financial institutions within the CIS. The Company extends
credit to various customers, principally in Russia and Ukraine, and establishes
an allowance for doubtful accounts for specific customers that it determines to
have significant credit risk. The Company generally does not require collateral
to extend credit to its customers. In 2001, the Company granted an unsecured
loan to a party in a lease agreement, as disclosed in Note 8.

STOCK-BASED COMPENSATION

The Company follows the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," for its Equity Participation Plan. SFAS No. 123 establishes a
fair value method of accounting for employee stock options and similar equity
instruments. The fair value method requires compensation cost to be measured at
the grant date based on the value of the award and to be recognized over the
service period. SFAS No. 123 generally allows companies to either account for
stock-based compensation under the fair value method of SFAS No. 123 or under
the intrinsic value method of APB No. 25, "Accounting for Stock Issued to
Employees." The Company has elected to account for its stock-based compensation
in accordance with the provisions of APB No. 25 and present pro forma
disclosures of results of operations as if the fair value method had been
adopted. The Company recognizes compensation expense for stock options granted
to employees of its equity method investees based on the fair value of options,
as determined using the Black-Sholes valuation model, over the respective option
vesting period.

In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure,"
which amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide
alternative methods of transition to SFAS No. 123's fair value method of
accounting for stock-based employee compensation. SFAS No. 148 also amends the
disclosure provisions of SFAS No. 123 and APB No. 28, "Interim Financial
Reporting", to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. While SFAS No. 148 does not amend
SFAS No. 123 to require companies to account for employee stock options using
the fair value method, the disclosure provisions of SFAS No. 148 are applicable
to all companies

FINANCIAL REVIEW 61

with stock-based employee compensation, regardless of whether they account for
that compensation using the fair value method of SFAS No. 123 or the intrinsic
value method of APB No. 25. SFAS No. 148 disclosure provisions are effective for
years ending after December 15, 2002.

The Company has adopted the amendments to SFAS No. 123 disclosure provisions
required under SFAS No. 148 but will continue to use the intrinsic value
method under APB No. 25 to account for stock-based compensation. As such, the
adoption of SFAS No. 148 did not have a significant impact of the Company's
consolidated financial position or results of operations.

TWELVE MONTHS ENDED DECEMBER 31,
-------------------------------------
2001 2002 2003
---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)

Net income (loss), as reported .................. $ (39,005) $ 29,784 $ 55,435
Deduct: total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects....................................... 8,278 7,937 3,183
---------- ---------- ----------
Pro forma net income (loss)...................... $ (47,283) $ 21,847 $ 52,252
========== ========== ==========
Net income (loss) per share: ....................
Basic - as reported .......................... $ (1.65) $ 1.24 $ 1.95
Basic - pro forma ............................ (2.00) 0.91 1.84
Diluted - as reported ........................ (1.65) 1.21 1.90
Diluted - pro forma .......................... (2.00) 0.89 1.80

ASSET RETIREMENT OBLIGATIONS

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement provides the accounting for the cost of legal
obligations associated with the retirement of long-lived assets. SFAS No. 143
requires entities to record the fair value of a legal liability for an asset
retirement obligation in the period it is incurred. The Company reviewed the
requirements under SFAS No. 143 and has determined that no material legal
obligations to remove long-lived assets exist. SFAS No. 143 is effective for
years beginning after June 15, 2002. The adoption of SFAS No. 143 did not have a
material impact on the Company's consolidated financial position or results of
operations.

EXIT OR DISPOSAL ACTIVITIES

FINANCIAL GUARANTEES

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN No. 45"). FIN No. 45 requires that
upon issuance of a guarantee, the guarantor must recognize a liability for the
fair value of the obligation it assumes under that guarantee. The disclosure
provisions of FIN No. 45 are effective for financial statements of annual
periods that end after December 15, 2002. The provisions for initial recognition
and

62 FINANCIAL REVIEW

measurement are effective on a prospective basis for guarantees that are issued
or modified after December 31, 2002. The adoption of the FIN No. 45 did not have
an impact on the Company's results of operations or financial position.

CONSOLIDATION OF VARIABLE INTEREST ENTITIES

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities". FIN No. 46 amended Accounting Research Bulletin No. 51, "Consolidated
Financial Statements", and established standards for determining under what
circumstances a variable interest ("VIE") should be consolidated with its
primary beneficiary. FIN No. 46 also requires disclosure about VIEs that are not
required to be consolidated but in which the reporting entity has a significant
variable interest. In December 2003, the FASB revised certain implementation
provisions of FIN No. 46. The revised interpretation ("FIN No. 46R")
substantially retained the requirements of immediate application of FIN No. 46
to VIEs created after January 31, 2003. There were no such entities created
after January 31, 2003. With respect to older VIEs, the consolidation
requirements under FIN No. 46R apply not later than for the first financial year
or interim period ending after December 15, 2003, if such a VIE is a
special-purpose entity ("SPE"), and no later than for the first financial year
or interim period ending after March 15, 2004, if such a VIE is not a SPE. The
Company did not identify any previously formed SPEs that are VIEs. Therefore the
adoption of FIN No. 46R did not have a significant impact on the financial
position or results of operations.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

FINANCIAL INSTRUMENTS

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
requires certain financial instruments that embody obligations of the issuer and
have characteristics of both liabilities and equity to be classified as
liabilities. The provisions of SFAS No. 150 are effective for financial
instruments entered into or modified after May 31, 2003 and to all other
instruments that exist as of the beginning of the first interim financial
reporting period beginning after June 15, 2003. The Company does not have any
financial instruments that meet the provisions of SFAS No. 150, therefore,
adopting the provisions of SFAS No. 150 did not have an impact on the Company's
results of operations or financial position.

USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS

The preparation of these consolidated financial statements, in conformity with
US generally accepted accounting principles, requires management to make
estimates and assumptions that affect amounts in the financial statements and
accompanying notes and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

COMPARATIVE FIGURES

Certain 2001 and 2002 amounts have been reclassified to conform to the
presentation adopted in the current year. Such reclassifications did not affect
the consolidated statements of operations.

FINANCIAL REVIEW 63

NOTE 3: NET INCOME (LOSS) PER SHARE

The Company's net loss per share calculation (basic and diluted) at December 31,
2001 is based upon the Company's weighted average common shares outstanding.
There are no reconciling items in the numerator or denominator of the Company's
net loss per share calculation at December 31, 2001. Warrants and stock options
have been excluded from the net loss per share calculation at December 31, 2001
because their effect would have been antidilutive.

Basic earnings per share at December 31, 2002 and 2003 is computed on the basis
of the weighted average number of common shares outstanding. Diluted earnings
per share at December 31, 2002 and 2003 is computed on the basis of the weighted
average number of common shares outstanding plus the effect of outstanding
employee stock options using the "treasury stock" method. The number of stock
options excluded from the diluted earnings per share computation, because their
effect was antidilutive for the twelve months ended December 31, 2002 and 2003
was 352,261 and 10,000 stock options, respectively.

The components of basic and diluted earnings per share were as follows:

TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------
2002 2003
------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA

Income before cumulative effect
of a change in accounting principle ....... $28,810 $55,435
======= =======
Weighted average shares outstanding of:
Common stock ........................... 24,102 28,468
Dilutive effect of:
Employee stock options ................. 415 639
------- -------
Common stock and common
stock equivalents ...................... 24,517 29,107
======= =======
Earnings per share before cumulative
effect of a change in accounting principle:
Basic .................................. $ 1.20 $ 1.95
======= =======
Diluted ................................ $ 1.17 $ 1.90
======= =======

NOTE 4: GOODWILL AND INTANGIBLE ASSETS

In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and No.
142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001.

Upon the adoption of SFAS No. 142, the Company recorded a cumulative effect of a
change in accounting principle for negative goodwill (deferred credit) arising
on the Company's equity method investments in the amount of $1.0 million. The
impact of non-amortization of goodwill on the Company's net income for the
twelve months ended December 31, 2002 was approximately $15.0 million increase,
or $0.62 per share of common stock-basic.

Amortization expense for intangible assets for the twelve months ended December
31, 2002 and 2003 was $6.4 million and $10.5 million, respectively. Amortization
expense for the succeeding five years is expected to be as follows: 2004-$17.3
million, 2005-$16.2 million, 2006-$15.2 million, 2007-$14.3 million, and
2008-$12.7 million. The total gross carrying value and accumulated
amortization of the Company's intangible assets by major intangible asset class
is as follows:

AS OF DECEMBER 31, AS OF DECEMBER 31,
2002 2003
---------------------- ------------------------
ACCUMULATED ACCUMULATED
COST AMORTIZATION COST AMORTIZATION
------- ------------ -------- ------------
(IN THOUSANDS)

Amortized intangible assets:
Telecommunications
service contracts........ $48,022 $ (6,775) $ 78,235 $ (13,619)
Contract-based customer
relationships............ 8,322 (811) 35,169 (2,859)
Licenses................. 3,167 (1,249) 3,957 (1,854)
Other intangible assets.. 10,872 (5,583) 11,298 (5,492)
------- ------------ -------- -----------
Total ...................... $70,383 $ (14,418) $128,659 $ (23,824)
======= ============ ======== ===========

Other intangible assets include software, Internet software and related content,
as well as other intangible assets.

64 FINANCIAL REVIEW

The changes on the carrying amount of goodwill for the year ended December 31,
2002 and 2003, respectively, are as follows:

BUSINESS & CARRIER &
CORPORATE OPERATOR
SEGMENT SEGMENT TOTAL
---------- --------- ----------
(IN THOUSANDS)

Balance as of December 31, 2001 ................... $ 3,332 $ 15,391 $ 18,723
Goodwill acquired during the year ................. 26,083 28,216 54,299
Goodwill reclassified to intangible assets ........ (1,319) - (1,319)
Balance as of December 31, 2002 ................... 28,096 43,607 71,703
Goodwill acquired during the year ................. 56,796 15,509 72,305
---------- --------- ----------
Balance as of December 31, 2003 ................... $ 84,892 $ 59,116 $ 144,008
========== ========= ==========

The pro forma impact of the change in accounting method for goodwill on net loss
and net loss per share for the twelve months ended December 31, 2001 compared to
actual results for each of the twelve months ended December 31, 2002 and 2003,
respectively, is as follows:

TWELVE MONTHS ENDED DECEMBER 31,
------------------------------------
2001 2002 2003
------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Net income (loss), as reported ....................... $ (39,005) 29,784 $ 55,435
Goodwill amortization ................................ 13,846 -- --
Negative goodwill amortization on equity investee .... (243) -- --
----------- --------- --------
Adjusted net income (loss). .......................... $ (25,402) $ 21,847 $ 55,435
=========== ========= ========
Basic net income (loss) per share:
Reported net income (loss) ........................ $ (1.65) $ 1.24 $ 1.95
Goodwill amortization ............................. 0.58 -- --
Negative goodwill amortization .................... (0.01) -- --
----------- --------- --------
Adjusted net income (loss) per share .............. $ (1.08) $ 1.24 $ 1.95
=========== ========= ========
Diluted net income (loss) per share:
Reported net income (loss) ........................ $ (1.65) $ 1.21 $ 1.90
Goodwill amortization ............................. 0.58 -- --
Negative goodwill amortization .................... (0.01) -- --
----------- --------- --------
Adjusted net income (loss) per share .............. $ (1.08) $ 1.21 $ 1.90
=========== ========= ========

FINANCIAL REVIEW 65

NOTE 5: BUSINESS COMBINATIONS AND VENTURE TRANSACTIONS

ACQUISITIONS IN 2001

In June 2001, the Company acquired Internet service provider ("ISP") ZAO
Cityline ("Cityline"), 51% of ISP OOO Uralrelcom ("Uralrelcom") and
infrastructure company ZAO First Telecommunications Company ("PTK") for cash
consideration of approximately $29.0 million, including $6.0 million that was
held in escrow. At the time of acquisition, local access capacity to be
delivered by a third party to PTK was not yet operational nor placed in service.
The purchase and sale agreement provided that until such capacity became fully
operational, $6.0 million of purchase consideration would be held in escrow. In
the fourth quarter of 2001, the Company became aware that such original local
access capacity would not become available. As a result, the Company negotiated
a full recovery of the funds held in escrow and the Company received alternative
local access capacity pursuant to the original terms of the PTK third-party
contract. Accordingly, as of December 31, 2001, the recovery of the funds held
in escrow of $6.0 million was recorded as a reduction in the carrying amount of
the acquired intangible assets. In addition, the Company incurred approximately
$0.9 million in consulting fees related to these investment transactions from an
affiliate of Alfa, a shareholder of the Company.

The following unaudited pro forma combined results of operations for the Company
give effect to the Cityline, Uralrelcom and PTK business combinations as if they
had occurred at the beginning of 2001. For the twelve months ended December 31,
2001, pro forma revenue would have been approximately $142.9 million and the pro
forma net loss would have been approximately $40.9 million, or $1.73 per common
share. These pro forma amounts are provided for informational purposes only and
do not purport to present the results of operations of the Company had the
transactions assumed therein occurred on or as of the date indicated, nor is it
necessarily indicative of the results of operations which may be achieved in the
future.

In September 2001, the Company acquired 51% of ADS, a competitive local exchange
carrier, operating primarily in Nizhny Novgorod, for cash consideration of
approximately $2.9 million. The impact of this acquisition was not material.

The results of operations of Cityline, Uralrelcom and PTK have been included in
the Company's consolidated operations since June 1, 2001. The results of
operations of ADS have been included in the Company's consolidated operations
since September 1, 2001.

ACQUISITIONS IN 2002

In August 2002, the Company acquired approximately 31% of Golden Telecom
(Ukraine) ("GTU") for cash consideration of approximately $5.2 million,
including $3.7 million recorded as a liability, net of $0.3 million discount,
determined at the rate of 6.11%. The Company now owns 100% of GTU. The
acquisition was accounted for as a purchase business combination under US GAAP.
The Company has recorded approximately $1.8 million of contract-based customer
relationship intangible assets that will be amortized over a period of
approximately 5 years. There was no goodwill recorded as a result of this
transaction.

In September 2002, subsidiaries of the Company completed the acquisition of 50%
of EDN Sovintel LLC ("Sovintel") that the Company did not own from Open Joint
Stock Company Rostelecom ("Rostelecom"), pursuant to an Ownership Interest
Purchase Agreement, dated March 13, 2002, by and among subsidiaries of the
Company and Rostelecom, bringing the Company's ownership in Sovintel to 100%.
The total purchase price of approximately $113.1 million consisted of
approximately $50.7 million in GTI's common stock, representing 4,024,067
shares, $10.0 million in cash consideration,

66 FINANCIAL REVIEW

$46.0 million in promissory note consideration (see discussion below), and
direct transaction costs of approximately $7.1 million, including an investment
banking fee of approximately $3.3 million paid to an affiliate of Alfa, a
shareholder of the Company. Sovintel provides worldwide communications services,
principally to major hotels, business offices and mobile communication companies
through its telecommunications network in Russia. The Company began
consolidating the results of operations of Sovintel on September 17, 2002.

In September 2002, TeleRoss LLC ("TeleRoss"), a wholly-owned Russian subsidiary
of the Company, issued a three month $46.0 million non-interest bearing note
payable to Rostelecom in partial settlement of the acquisition of the remaining
50% ownership interest in Sovintel previously held by Rostelecom. TeleRoss was
required to and settled the note, in full, in December 2002. This non-interest
bearing note payable was recorded net of $0.7 million discount representing
imputed interest.

The acquisition of the remaining 50% of Sovintel was accounted for as a purchase
business combination in accordance with SFAS No. 141, "Business Combinations".
As the transaction reflected acquisition of the remaining 50% interest in
Sovintel which was not previously owned by the Company, the Company has recorded
the net assets acquired at 50% of estimated fair value and 50% of historical US
GAAP carrying values. The following is a condensed balance sheet of Sovintel as
of September 17, 2002, reflecting purchase price allocation to the net assets
acquired:

SEPTEMBER 17,
2002
-------------
(IN THOUSANDS)

ASSETS:
Current assets ......................................................... $ 43,223
Property and equipment, net ............................................ 64,124
Telecommunications service contracts intangible assets, net ............ 14,742
Contract based customer relationship intangible assets, net ............ 6,350
Licenses, net .......................................................... 562
Other intangible assets, net ........................................... 300
Goodwill ............................................................... 54,262
Other assets ........................................................... 11,114
-------------
Total assets ........................................................... $ 194,677

LIABILITIES:
Current liabilities .................................................... $ 23,774
Non-current liabilities ................................................ 8,514
-------------
Net assets ............................................................. $ 162,389
Less: previous carrying value of the Company's equity method
investment in Sovintel ............................................... (49,283)

-------------
Total purchase consideration and acquisition costs ........................ $ 113,106
=============
Consideration and acquisition costs:
Cash consideration ..................................................... $ 10,000
Promissory note consideration, net of discount ......................... 45,307
GTI shares consideration ............................................... 50,663
Direct transaction costs ............................................... 7,136
-------------
Total purchase consideration and acquisition costs ..................... $ 113,106
=============

FINANCIAL REVIEW 67

The Company's financial statements reflect the allocation of the purchase price
based on a fair value assessment of the assets acquired and liabilities assumed,
and as such, the Company has assigned approximately $14.7 million to
telecommunications service contracts intangible assets which will be amortized
over a weighted average period of approximately 9 years, approximately $6.4
million to contract based customer relationship intangible assets which will be
amortized over a weighted average period of approximately 5 years, approximately
$0.6 million to licenses which will be amortized over a weighted average period
of 5 years, and approximately $0.3 million to other identified intangible assets
which will be amortized over 5 years. Property and equipment was adjusted to
fair value using a net current replacement cost valuation method. The excess
purchase price over the fair value of the net tangible and intangible assets
acquired of approximately $54.3 million has been assigned to goodwill and is not
deductible for tax purposes. Approximately $26.1 million of this goodwill has
been assigned to the Business and Corporate Services reportable segment and
approximately $28.2 million of this goodwill has been assigned to the Carrier
and Operator Services reportable segment. In accordance with SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets", the Company will not amortize the goodwill recorded in connection with
the acquisition of the remaining 50% of Sovintel. The goodwill will be tested
for impairment at least annually.

The following unaudited pro forma combined results of operations for the Company
give effect to the Sovintel business combination as if it had occurred at the
beginning of 2001 and 2002. These pro forma amounts are provided for
informational purposes only and do not purport to present the results of
operations of the Company had the transactions assumed therein occurred on or as
of the date indicated, nor is it necessarily indicative of the results of
operations which may be achieved in the future.

TWELVE MONTHS ENDED DECEMBER 31,
------------------------------------
2001 2002
----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Revenue .................................................................... $ 239,128 $ 286,998
Income (loss) before cumulative effect of a change
in accounting principle .................................................... (30,688) 36,587
Cumulative effect of a change in accounting principle ...................... -- 974
----------- ---------
Net income (loss) .......................................................... $ (30,688) $ 37,561
=========== =========
Basic earnings (loss) per share of common stock:
Income (loss) before cumulative effect of a change
in accounting principle .................................................. $ (1.11) $ 1.36
Cumulative effect of a change in accounting principle .................... -- 0.04
----------- ---------
Net income (loss) per share - basic ...................................... $ (1.11) $ 1.40
=========== =========
Weighted average common shares - basic ................................... 27,629 26,748
=========== =========
Diluted earnings (loss) per share of common stock:
Income (loss) before cumulative effect of a change
in accounting principle .................................................. $ (1.11) $ 1.34
Cumulative effect of a change in accounting principle .................... -- 0.04
----------- ---------
Net income (loss) per share - diluted .................................... $ (1.11) $ 1.38
=========== =========
Weighted average common shares - diluted ................................. 27,629 27,163
=========== =========

68 FINANCIAL REVIEW

ACQUISITIONS IN 2003

In August 2003, the Company completed the acquisition of 100% of OOO
Sibchallenge ("Sibchallenge"), a telecommunications service provider in
Krasnoyarsk, Russia. The total purchase price of approximately $15.4 million
consisted of cash consideration of approximately $15.0 million and approximately
$0.4 million in direct transaction costs, including an investment banking fee of
$0.3 million paid to Belongers Limited, an affiliate of Alfa, a shareholder of
the Company. The acquisition of Sibchallenge establishes GTI's presence in the
Krasnoyarsk region. In addition, Sibchallenge has numbering capacity and
interconnect agreements.

The acquisition of 100% of Sibchallenge was accounted for as a purchase business
combination in accordance with SFAS No. 141, "Business Combinations".

The following is the condensed balance sheet of Sibchallenge as of August 31,
2003 reflecting purchase price allocation to the net assets acquired:

AUGUST 31, 2003
---------------
(IN THOUSANDS)

ASSETS:
Current assets ....................................... $ 1,792
Property and equipment ............................... 7,057
Telecommunications service contracts
intangible assets, net ............................... 11,175
---------------
Total assets $ 20,024
===============
LIABILITIES:
Current liabilities .................................. $ 1,519
Non-current liabilities .............................. 3,121
---------------
Net assets ........................................... $ 15,384
===============
Consideration and acquisition costs:.
Cash consideration ................................... 15,000
Direct transaction costs ............................. 384
---------------
Total purchase consideration and transaction costs ...... $ 15,384
===============

The Company's financial statements reflect the allocation of the purchase price
based on a fair value assessment of the assets acquired and liabilities assumed
and, as such, the Company has assigned approximately $11.2 million to
telecommunications service contracts intangible assets. These identified
intangible assets will be amortized over a period of 10 years. There was no
goodwill recorded as a result of this transaction. The results of operations of
Sibchallenge have been included in the Company's consolidated operations since
August 31, 2003.

In December 2003, the Company completed the acquisition of 100% of the shares in
OAO Comincom ("Comincom") from Nye Telenor East Invest, pursuant to a Share
Exchange Agreement. The total purchase price of approximately $195.3 million
consisted of approximately $193.5 million in GTI's common stock, representing
7,007,794 shares and direct transaction costs of approximately $1.8 million. The
purchase consideration has been determined using the closing date of the
transaction as December 1, 2003. Accordingly, the GTI shares issued in
consideration are valued based on the average closing price of the Company's
common stock for the five consecutive trading days between November 26, 2003 and
December 2, 2003, which was $27.61 per share. Management believes the
acquisition of 100% of Comincom further strengthens the Company's position in
the key Moscow and St. Petersburg communications markets, and positions the
Company to realize future operating and cost synergies. Comincom provides
telecommunications services, principally to major hotels, business offices and
mobile communication companies through its telecommunications network in Russia,
including Moscow, St. Petersburg, Voronezh, Samara and several other major
population centers. The Company began consolidating the results of operations of
Comincom on December 1, 2003.

The acquisition of 100% of the shares in Comincom was accounted for as a
purchase business combination in accordance with SFAS No. 141, "Business
Combinations. The following is the condensed balance sheet of Comincom as of
December 1, 2003 reflecting the preliminary purchase price allocation to the net
assets acquired:

FINANCIAL REVIEW 69

DECEMBER 1, 2003,
-----------------
(IN THOUSANDS)

ASSETS:
Current assets ................................................... $ 38,191
Property and equipment ........................................ 84,749
Telecommunications service contracts intangible assets, net ... 17,344
Contract-based customer relationship intangible assets, net ... 26,847
Licenses, net ................................................. 546
Goodwill ...................................................... 72,305
Other assets .................................................. 1,575
-----------------
Total assets ..................................................... $ 241,557
=================
LIABILITIES:
Current liabilities ........................................... $ 28,678
Non-current liabilities ....................................... 17,535
-----------------
Net assets .................................................... $ 195,344
=================
Consideration and acquisition costs:
GTI shares consideration ...................................... 193,485
Direct transaction costs ...................................... 1,859
-----------------
Total purchase consideration and acquisition costs ............... $ 195,344
=================

The Company's financial statements reflect the preliminary allocation of the
purchase price based on a preliminary fair value assessment of the assets
acquired and liabilities assumed, and as such, the Company has assigned
approximately $17.3 million to telecommunications service contracts intangible
assets which will be amortized over a weighted average period of approximately
10 years, approximately $26.8 million to contract-based customer relationship
intangible assets which will be amortized over a weighted average period of
approximately 5 years, and approximately $0.5 million to licenses which will be
amortized over a weighted average period of 4 years. The purchase price
allocation will be finalized when the application of the new Russian
telecommunications law, as discussed in Note 12, becomes clear. Property and
equipment was adjusted to fair value using a net current replacement cost
valuation method. The excess purchase price over the fair value of the net
tangible and intangible assets acquired of approximately $72.3 million has been
assigned to goodwill and is not deductible for tax purposes. Approximately $15.5
million of this goodwill has been assigned to the Carrier and Operator Services
reportable segment and approximately $56.8 million of this goodwill has been
assigned to the Business and Corporate Services reportable segment. In
accordance with SFAS No. 141, "Business Combinations", and SFAS No. 142
"Goodwill and Other Intangible Assets", the Company will not amortize the
goodwill recorded in connection with the acquisition of 100% of the shares in
Comincom. The goodwill will be tested for impairment at least annually.

The following unaudited pro forma combined results of operations for the Company
give effect to the Sovintel, Sibchallenge and Comincom business combinations as
if they had occurred at the beginning of 2002 and to give effect to the
Sibchallenge and Comincom business combinations as if they had occurred at the
beginning of 2003. These pro forma amounts are provided for informational
purposes only and do not purport to present the results of operations of the
Company had the transactions assumed therein occurred on or as of the date
indicated, nor is it necessarily indicative of the results of operations which
may be achieved in the future.

70 FINANCIAL REVIEW

TWELVE MONTHS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-----------------------------------
2002 2003
------------ ---------

Revenue ...................................................................... $ 371,226 $ 458,276
Income before cumulative effect of a change in accounting principle .......... 43,368 61,802
Cumulative effect of a change in accounting principle ........................ 974 -
------------ ---------
Net income ................................................................... $ 44,342 $ 61,802
============ =========
Basic earnings per share of common stock:
Income before cumulative effect of a change in accounting principle ....... $ 1.30 $ 1.77
Cumulative effect of a change in accounting principle ..................... 0.03 -
------------ ---------
Net income (loss) per share - basic ....................................... $ 1.33 $ 1.77
============ =========
Weighted average common shares - basic .................................... 33,454 34,990
============ =========
Income before cumulative effect of a change in accounting principle ....... $ 1.28 $ 1.74
Cumulative effect of a change in accounting principle ..................... 0.03 -
------------ ---------
Net income (loss) per share - diluted ..................................... $ 1.31 $ 1.74
============ =========
Weighted average common shares - diluted .................................. 33,869 35,539
============ =========

NOTE 6: INVESTMENTS IN AND ADVANCES TO VENTURES

The Company has various investments in ventures that are accounted for by the
equity method. The Company's ownership percentages in its equity method
investments, in the periods shown, range from approximately 22% to 50%. The
Company has financed the operating and investing cash flow requirements of
several of the Company's ventures in the form of cash advances. The Company
aggregates all of the receivable and payable balances with the ventures in the
Company's investments in and cash advances to the ventures.

For all periods presented through December 31, 2003, the significant investments
accounted for under the equity method and the percentage interest owned consist
of the following:

EQUITY METHOD ENTITIES
---------------------------------
PERIOD OWNERSHIP
-------------------- ---------

EDN Sovintel ............... THROUGH Sep 16, 2002 50%
Other Regional Ventures .... All 50%
TeleRoss Nizhny Novgorod ... THROUGH Aug 2001 50%
TeleRoss Ufa ............... THROUGH Mar 2001 50%
TeleRoss Samara ............ THROUGH Jun 2002 50%
MCT Corp ................... FROM Dec 2000 22%-24%

TeleRoss Nizhny Novgorod, TeleRoss Ufa, TeleRoss Samara, and EDN Sovintel are
all accounted for using the consolidation method subsequent to the dates
indicated above.

The following table presents summarized income statement information and balance
sheet from the Company's significant equity investee, Sovintel, for the year
ended December 31, 2001 and the period January 1, 2002 to September 16, 2002.
Effective September 17, 2002, the Company began consolidating the results of
operations of Sovintel as a result of the acquisition of the 50% interest not
controlled previously.

YEAR ENDED PERIOD FROM JANUARY 1
DECEMBER 31, 2001 TO SEPTEMBER 16, 2002
----------------- ---------------------
(IN THOUSANDS) (IN THOUSANDS)

Revenue ........................ $ 115,706 $ 101,261
Gross margin ................... 51,797 45,248
Operating income ............... 29,747 25,875
Net income ..................... 22,211 19,115
Current Assets ................. 45,319 --
Total Assets ................... 108,513 --
Current liabilities ............ 21,893 --
Total liabilities .............. 25,065 --
Net assets ..................... 83,448 --

FINANCIAL REVIEW 71

The Company's equity investee, MCT Corp. ("MCT"), is in default on a loan note
to a third party that originally became due on September 29, 2001. In December
2001, MCT signed a forbearance agreement whereby the holder of the note agreed
to forbear from selling the note or exercising its rights under the original
debt agreements and to extend the terms of repayment until January 31, 2002. MCT
did not make payment on the note prior to January 31, 2002 and during April 2002
the holder of the note foreclosed on the collateral related to the note and
subsequently sold it to a third-party, resulting in a substantial loss to MCT.
The Company recognized the corresponding amount of the Company's equity in MCT's
losses during the second quarter of 2002, not exceeding the carrying value of
the Company's investment in MCT. Total equity in losses recognized by the
Company related to its MCT investment were $3.9 million and $5.1 million for the
year ended December 31, 2001 and 2002, respectively. Management believes that
throughout the remainder of 2002 and 2003, MCT has continued to incur losses.

The Company has no further commitments to provide financial support to MCT and
thus has ceased recording any additional losses. In August 2003, MCT concluded a
binding agreement with OJSC Mobile TeleSystems on the sale of five of its
cellular operators. OJSC Mobile TeleSystems paid MCT approximately $70.0 million
and assumed certain guarantees as part of the transaction. In October 2003, MCT
declared a cash dividend of $1.90 per common share to shareholders of record as
of October 27, 2003. The Company's portion of this cash dividend was
approximately $4.7 million. This cash dividend was received in November 2003 and
is classified as part of equity in earnings in the consolidated statement of
operations. Consideration has been given to the resumption of equity accounting,
however management does not believe that the Company's share of income resulting
from the sale of assets that MCT has made would exceed losses that had
previously not been recognized once the investment in MCT had been reduced to
zero.

NOTE: 7 SUPPLEMENTAL BALANCE SHEET INFORMATION

DECEMBER 31, (IN THOUSANDS)
----------------------------
2002 2003

Other current assets consist of:
Inventory ....................................... $ 3,401 $ 7,932
Notes receivable ................................ 1,840 1,972
Other current assets ............................ 4,872 6,005
----------- --------------
Total other current assets ...................... $ 10,113 $ 15,909
=========== ==============
Other non-current assets consist of:
Notes receivable ................................ $ 5,582 $ 3,610
Investments in and advances to
ventures ........................................ 721 251
Other non-current assets ........................ 6,749 4,256
----------- --------------
Total other non- current assets ................. $ 13,052 $ 8,117
=========== ==============
Accounts payable and accrued expenses consists of:
Accounts payable ................................ $ 27,443 $ 47,437
Interest payable ................................ 58 11
Accrued compensation ............................ 1,643 2,241
Accrued other taxes ............................. 5,474 1,092
Accrued access and network services ............. 3,031 9,471
Other accrued expenses .......................... 6,221 7,575
----------- --------------
Total accounts payable
and accrued expenses ............................ $ 43,870 $ 67,827
=========== ==============
Other current liabilities consists of:
Non-trade liabilities to GTS .................... $ 2,904 $ 2,904
Other current liabilities ....................... 3,076 5,284
----------- --------------
Total other current liabilities ................. $ 5,980 $ 8,188
=========== ==============

NOTE 8: DEBT OBLIGATIONS AND CAPITAL LEASES

Company debt consists of:

DECEMBER 31,
---------------------------
2002 2003
(IN THOUSANDS)

Citibank General Credit Agreement ...... $ 550 $ 200
Citibank Credit Facility ............... 30,000 --
Motorola Equipment Agreement ........... 849 100
Siemens Loan Agreement ................. 1,700 850
----------- -------------
33,099 1,150
Less: debt maturing within one year .... 8,988 950
----------- -------------
Total long-term debt ................... $ 24,111 $ 200
=========== =============

72 FINANCIAL REVIEW

Aggregate maturities of debt, as of December 31, 2003, are as follows: 2004 -
$1.0 million, 2005 - none, 2006 - $0.1 million, 2007 - $0.1 million, 2008 -
none, and thereafter - none.

The Company paid interest of $2.2 million, $4.8 million and $2.0 million in
2001, 2002, and 2003, respectively.

Some of the Company's operating companies have received debt financing through
direct loans from affiliated companies. In addition, certain operating companies
have borrowed funds under a $22.7 million back-to-back, seven-year credit
facility from a Russian subsidiary of Citibank. Under this facility, the Company
provides full cash collateral, held in London and recorded on our balance sheet
as restricted cash, for onshore loans made by the bank to the Company's Russian
registered ventures. In a second, similar facility, the Company provides full
cash collateral for a $10.0 million short term back-to-back, revolving, credit
facility from the same bank for the Company's larger Russian operating
companies. The funding level as of December 31, 2003 for all these facilities
totaled $1.0 million, of which $0.2 million was funded to the Company's
consolidated subsidiaries and $0.8 million was funded to the Company's
affiliates. The loan facilities carry interest at a rate equal to the
three-month London Inter-Bank Offering Rate ("LIBOR") plus 1.0 percent per annum
(equivalent to approximately 2.49%, on average for loans outstanding, at
December 31, 2003) and mature between December 2006 and January 2007.

In June 1996, GTU entered into an agreement with Motorola Corporation (the
"Motorola equipment agreement") whereby GTU could purchase up to $20.0 million
of certain equipment from Motorola. Through December 31, 2003, the Company had
purchased $13.7 million of equipment under this agreement. GTU is required to
make 15 semiannual payments plus accrued interest beginning six months after
completion of installation of such equipment, starting on June 25, 1997. In June
2004, GTU is required to make the final semiannual payment plus accrued
interest. Amounts outstanding under this agreement totaled $0.1 million at
December 31, 2003. The agreement carries interest at a rate equal to the USD
LIBOR rate plus 3.0 percent per annum (equivalent to 4.02% at December 31,
2003).

In October 2000, GTU entered into a four year supplier loan agreement with
Siemens AG (the "Siemens Loan Agreement") whereby Siemens AG provided to GTU a
loan of $3.4 million for the purchase from Siemens AG of network equipment and
services for use in the GSM 1800 network in Odessa, Ukraine, deployed in the
third quarter of 2000. In accordance with the terms of the Siemens Loan
Agreement, GTU is required to make eight semi-annual payments plus accrued
interest beginning May 15, 2001. Principal outstanding under this agreement
totaled $0.9 million at December 31, 2003. The agreement carries interest at a
rate equal to the six month USD LIBOR plus 4.9% (equivalent to 6.17% at December
31, 2003). The Siemens Loan Agreement became effective with the execution of a
payment guarantee by GTI.

In the first quarter of 2000, the Company entered into a lease for fiber
capacity, including facilities and maintenance, from Moscow to Stockholm. The
lease has a term of ten years with an option to renew for an additional five
years. Prepayments were made to the lessor in April 2000, August 2000 and
February 2001. These prepayments have been offset in the balance sheet against
the capital lease obligation.

In September 2001, the Company entered into a five year lease for the right to
use up to VC-3 fiber optic capacity on major routes within Russia to support the
increase in the Company's interregional traffic and regional expansion strategy.
The lease is classified as a capital lease in the balance sheet. In December
2001, GTI issued a $9.1 million loan to the same company that has provided the
lease. The loan has payment terms of 56 months, which started in January 2002,
and carries interest at the rate of 7 percent per annum.

FINANCIAL REVIEW 73

The following table presents minimum lease payments under capital leases:

LEASE PAYMENTS
--------------
(IN THOUSANDS)

2004 ............................. $ 3,129
2005 ............................. 2,862
2006 ............................. 1,592
--------------
7,583
Less: interest ................... 753
--------------
Total principal payments ....... $ 6,830
==============

In September 2002, ROL Holdings Limited ("ROLH"), a wholly-owned Cypriot
subsidiary of the Company, entered into a secured $30.0 million credit facility
with ZAO Citibank ("Citibank Credit Facility"). ROLH drew upon the Citibank
Credit Facility in the fourth quarter of 2002 to fund the repayment of $30.0
million of the $46.0 million non-interest bearing promissory note issued to
Rostelecom by TeleRoss in connection with the acquisition of the remaining 50%
ownership interest in Sovintel previously held by Rostelecom. In June 2003, the
Company settled early the $30.0 million of outstanding debt plus accrued
interest. There was no penalty for the early settlement of this debt however an
additional $0.2 million of previously capitalized financing costs was recognized
as interest expense which was previously being recognized over the life of the
facility.

NOTE 9: SHAREHOLDERS' EQUITY

COMMON STOCK

In May 2001, GTS completed the transaction contemplated by the Share Purchase
Agreement (the "Share Purchase Agreement"), entered into in April 2001 with
Alfa, Capital, and Baring Vostok, (collectively, the "Purchasers") with respect
to the sale to the Purchasers by GTS of approximately 12.2 million shares of
common stock, par value $0.01 per share of GTI. The aggregate purchase price
paid by the Purchasers for the common stock was $125.0 million. In addition, as
specified in the Share Purchase Agreement, at the time of the consummation of
the sale and purchase, the Purchasers entered into separate stock option
agreements with GTS which gave the Purchasers an option to purchase up to
approximately 2.3 million of the remaining approximately 2.9 million shares of
common stock beneficially owned by GTS at the purchase price of $11.00 per share
during the 60-day period after the closing of the transaction.

In July 2001, the Company completed a buy-back of $25.0 million, or
approximately 2.3 million shares, of the Company's common stock at $11.00 per
share, from a subsidiary of GTS. In October 2001, GTS sold the remaining
approximately 0.6 million shares of GTI's common stock. Accordingly, GTS is no
longer an affiliate of the Company. In the fourth quarter of 2002, the Company
retired the approximately 2.3 million of the Company's common stock held in
treasury. In August 2002, the Company issued 4,024,067 shares of common stock to
Rostelecom in partial settlement of the purchase price for the acquisition of
the remaining 50% ownership interest in Sovintel, previously held by Rostelecom.
In December 2003, the Company issued 7,007,794 shares of common stock to Telenor
in settlement of the purchase price for the acquisition of 100% ownership
interest in Comincom, previously held by Telenor.

The Company's outstanding shares of common stock increased by 479,977 shares and
1,918,882 shares in the twelve months ended December 31, 2002 and 2003,
respectively issued in connection with the exercise of employee stock options.
The Company has reserved 1,736,077 shares of common stock for issuance to
certain employees and directors in connection with the 1999 Equity Participation
Plan.

PREFERRED STOCK

On May 17, 2000, the Company's shareholders authorized 10 million shares of
preferred stock, none of which have been issued.

74 FINANCIAL REVIEW

NOTE 10: STOCK OPTION PLANS

Prior to the formation of the Company, certain employees participated in one or
more of the stock option plans of GTS. At the time of the IPO certain employees
that had been granted GTS options that would vest during the year 2000,
surrendered those options and received restricted shares in GTI, which vested on
the second anniversary of the IPO. The maximum number of restricted shares to be
issued under this arrangement was 141,961. The total cost of this restricted
share program to the Company was $1.7 million (grant date fair value) of which
$0.6 million was recorded in the year ended December 31, 2001 and $1.1 million
was recorded prior to 2001.

The Company has established the 1999 Equity Participation Plan of Golden
Telecom, Inc., (the "Option Plan"). The Company has granted and intends to offer
stock options to key employees, members of the Board of Directors of the
Company, and employees of its equity method investees. The Company recognized
$0.3 million and $0.5 million in compensation expense in the years ended
December 31, 2001 and 2002, respectively in connection with options granted to
employees of the Company's equity investees. Under the Option Plan not more than
4,023,551 shares of common stock (subject to anti-dilution and other adjustment
provisions) were authorized for issuance upon exercise of options or upon
vesting of restricted or deferred stock awards. Options granted under the Option
Plan vest over a three-year term from the date of grant with one-third vesting
after one year and one thirty-sixth vesting each month thereafter and expire ten
years from the date of grant.

When the Option Plan was adopted, the number of shares available for issuance
under the Option Plan was calculated as 15% of the issued and outstanding shares
on a fully diluted basis. In March 2001, the Compensation Committee of the Board
of Directors approved an increase in shares available for issuance under the
Equity Plan from 4,023,551 to 4,320,000 in order to preserve the 15% ratio
referenced above.

In March 2001, in connection with the finalization of the MCT transaction, the
Compensation Committee of the Board of Directors adopted a resolution providing
that the Stock Option Award Agreements executed by the Company and certain
terminated employees shall be amended to provide that the term of the options
held by the employees that transferred from GTI to MCT shall be extended from
ninety days after the employees termination date to one year after the
termination date of the employees or until their termination date with MCT,
whichever occurs earlier. The fair value of the options for employees
transferred to MCT was not material at the date of modification. In April 2001,
in accordance with the Equity Plan, the Compensation Committee of the Board of
Directors adopted a resolution whereby the Stock Option Award Agreements issued
by the Company to employees were amended to provide that the term of the options
held by the employees shall be extended from ninety days after the employees'
termination date to eighteen months after the termination date. No expense was
recognized as a result of this modification since the intrinsic value of the
outstanding options was zero on the measurement date.

The fair value of options granted under the GTI Option Plan in 2001 are
estimated between $7.31 and $8.89 per common share, in 2002 are estimated to be
$8.77 per common share and in 2003 are estimated to be between $9.39 and $15.05
per common share, on the date of grant using the Black Scholes option pricing
model with the following assumptions:

TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------
2001 2002 2003
---- ---- -----------

Risk free interest rate ............. 4.84% 4.71% 2.89 - 3.55%
Dividend yield. ..................... 0.0% 0.0% 0.0%
Expected life (years) ............... 3.0 3.0 3.0
Volatility .......................... 125% 123% 104 - 108%

FINANCIAL REVIEW 75

Additional information with respect to stock options activity is summarized as
follows:

YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2002 2003
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- ---------- --------------

Outstanding at beginning of year .................... 3,241,906 $ 12.75 2,657,073 $ 12.75
Options granted ..................................... 125,000 12.00 195,000 14.56
Options exercised ................................... (479,977) 12.14 (1,918,882) 12.43
Options expired ..................................... (12,438) 13.00 (20,054) 27.06
Options forfeited ................................... (217,418) 13.66 (8,865) 15.63
--------- ----------
Outstanding at end of year .......................... 2,657,073 12.75 904,272 13.48
========= ==========
Options exercisable at end of year .................. 2,230,147 $ 12.72 566,324 $ 13.49

The following table summarizes information about stock options outstanding:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE REMAINING AVERAGE AVERAGE
EXERCISEPRICES NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
AT DECEMBER 31, 2003: OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
--------------------- ------------------- ----------------- -------- ----------- --------

$ 12.00 525,559 6.6 $ 12.00 382,611 $ 12.00
14.00 175,000 9.1 14.00 -- --
15.63 173,713 6.2 15.63 173,713 15.63
19.45 20,000 4.4 19.45 -- --
33.25 10,000 6.4 33.25 10,000 33.25

NOTE 11: INCOME TAXES

The Company accounts for income taxes using the liability method required by
FASB Statement No. 109 "Accounting for Income Taxes". The components of income
(loss) before income taxes and minority interest were as follows:

YEAR ENDED DECEMBER 31,
----------------------------------------
2001 2002 2003
----------- ---------- ----------
(IN THOUSANDS)

Pretax income (loss):
Domestic ...................... $ (16,121) $ 5,823 $ 5,754
Foreign ....................... (20,865) 28,141 67,560
----------- ---------- ----------
$ (36,986) $ 33,964 $ 73,314
=========== ========== ==========

76 FINANCIAL REVIEW

The following is the Company's significant components of the provision for
income taxes attributable to continuing operations:

YEAR ENDED DECEMBER 31,
------------------------------
(IN THOUSANDS) 2001 2002 2003

Domestic - current ........................................ $ 193 $ 16 $ --
Domestic - deferred ....................................... -- -- (1,861)
Foreign - current ......................................... 3,365 8,824 20,516
Foreign - deferred ........................................ (1,656) (4,213) (1,256)
-------- -------- --------
$ 1,902 $ 4,627 $ 17,399
======== ======== ========

The Company paid income taxes of $2.7 million, $8.5 million and $17.5 million in
2001, 2002 and 2003, respectively. United States ("US") taxable income or losses
recorded are reported on the Company's consolidated US income tax return. The
Company was allocated its proportionate share, $23.6 million, of GTS' US net
operating loss carry-forwards in 1999. As of December 31, 2003, the Company had
net operating loss carry-forwards for US federal income tax purposes of
approximately $5.3 million expiring in fiscal years 2010 through 2019. In the
fourth quarter of 2003, the Company recognized the full amount of US
carry-forward tax losses resulting in a deferred tax benefit of approximately
$1.9 million.

The reconciliation of the US statutory federal tax rate of 35.0% to the
Company's effective tax rate is as follows:

YEAR ENDED DECEMBER 31,
------------------------------
(IN THOUSANDS) 2001 2002 2003

Tax benefit (expense)
at US statutory rates ..................................... 35.0% (35.0)% (35.0)%
Non-deductible
expenses/non-taxable income:
Amortization ........................................... (11.4) (0.7) (0.4)
Equity in earnings ..................................... 7.7 5.8 -
Foreign exchange differences .............................. (0.6) (1.2) (0.1)
Different foreign tax rates ............................... (15.6) 7.7 9.3
Change in valuation allowance ............................. (2.2) 15.1 3.8
Other permanent differences . ............................. (18.1) (5.3) (1.3)
-------- -------- --------
Tax expense ............................................... (5.2)% (13.6)% (23.7)%
======== ======== ========

Deferred tax assets and liabilities are recorded based on temporary differences
between book bases of assets and liabilities and their bases for income tax
purposes. The following table summarizes major components of the Company's
deferred tax assets and liabilities:

YEAR ENDED DECEMBER 31,
-----------------------
(IN THOUSANDS) 2002 2003

DEFERRED TAX ASSETS:
Net operating loss carry-forwards....................... $ 7,534 $ 1,955
Accrued expenses ....................................... 2,035 2,525
Deferred revenue ....................................... 3,440 4,800
Fixed assets ........................................... 4,386 4,778
Other deferred tax assets .............................. 1,312 1,117
Valuation allowance .................................... (9,380) (6,587)
-------- --------
Total deferred tax asset .................................. $ 9,328 $ 8,588
======== ========
DEFERRED TAX LIABILITIES:
Accrued revenue ........................................ $ 756 $ -
Deferred expenses ...................................... 1,575 1,306
Intangible assets ...................................... 10,846 21,489
Other deferred tax liabilities ......................... 2,916 4,259
-------- --------
Total deferred tax liability .............................. $ 16,093 $ 27,054
======== ========
Net deferred tax liability ................................ $ (6,765) $(18,466)
======== ========

The following table presents the Company's deferred tax assets and liabilities
as of December 31, 2002 and 2003 attributable to different tax paying components
in different tax jurisdictions:

YEAR ENDED DECEMBER 31,
-----------------------
(IN THOUSANDS) 2002 2003

DEFERRED TAX ASSETS:
US tax component ....................................... $ 4,102 $ 1,861
Foreign tax component................................... 14,606 13,314
Valuation allowance .................................... (9,380) (6,587)
-------- --------
Total deferred tax asset .................................. $ 9,328 $ 8,588
======== ========
DEFERRED TAX LIABILITIES:
US tax component ....................................... $ - $ -
Foreign tax component .................................. 16,093 27,504
-------- --------
Total deferred tax liability .............................. $ 16,093 $ 27,05
======== ========
Net deferred tax liability ................................ $ (6,765) $(18,466)
======== ========

FINANCIAL REVIEW 77

NOTE 12: COMMITMENTS AND LEASES

LEASES

The Company has various cancelable and non-cancelable operating lease agreements
for equipment and office space with terms ranging from one to five years. Rental
expense for operating leases aggregated $4.2 million, $4.9 million, and $4.9
million for the years ended December 31, 2001, 2002 and 2003, respectively.

Future minimum lease payments under non-cancelable operating leases with terms
of one year or more, as of December 31, 2003, are as follows: 2004 -- $1.9
million, 2005 -- $1.3 million, 2006 -- $0.6 million, 2007 -- $0.1 million, 2008
-- none, and thereafter -- none.

OTHER COMMITMENTS AND CONTINGENCIES

The Company has future purchase commitments of $8.4 million and $24.6 million as
of December 31, 2002 and 2003, respectively. In the ordinary course of business,
the Company has issued financial guarantees on debt for the benefit of certain
of its non-consolidated ventures, which is all collateralized by cash as
described in Note 8. The Company expects that all the collateralized debt will
be repaid by the ventures. In addition, the Company has issued guarantees for
the benefit of certain of its consolidated subsidiaries. The total amount
guaranteed at December 31, 2003 was approximately $2.4 million.

MAJOR CUSTOMERS

The Company had one major customer in the Carrier and Operator reporting
segment, representing $18.9 million, or 14%, of total revenues in 2001, $23.1
million, or 12%, of total revenues in 2002 and $27.6 million, or 8%, of total
revenue in 2003.

TAX MATTERS

The Company's policy is to accrue for contingencies in the accounting period in
which a liability is deemed probable and the amount is reasonably determinable.
In this regard, because of the uncertainties associated with the Commonwealth of
Independent States Taxes ("CIS Taxes"), the Company's final CIS Taxes may be in
excess of the estimated amount expensed to date and accrued at December 31, 2002
and 2003. It is the opinion of management that the ultimate resolution of the
Company's CIS Tax liability, to the extent not previously provided for, will not
have a material effect on the financial condition of the Company. However,
depending on the amount and timing of an unfavorable resolution of any
contingencies associated with CIS Taxes, it is possible that the Company's
future results of operations or cash flows could be materially affected in a
particular period.

RUSSIAN ENVIRONMENT AND CURRENT ECONOMIC SITUATION

The Russian economy, while deemed to be of market status beginning in 2002,
continues to display certain traits consistent with that of a market in
transition. These characteristics have in the past included higher than normal
historic inflation, lack of liquidity in the capital markets, and the existence
of currency controls which cause the national currency to be illiquid outside of
Russia. The continued success and stability of the Russian economy will be
significantly impacted by the government's continued actions with regard to
supervisory, legal, and economic reforms.

On January 1, 2004, a new law on telecommunications came into effect in Russia.
The law sets the legal basis for the telecommunications business in Russia and
defines the status that state bodies have in the telecommunications sector. The
Company cannot predict with any certainty how the new law will affect the
Company. The new law creates a new interconnect

78 FINANCIAL REVIEW

pricing regime in 2004 that should be more transparent and unified and it
creates a universal service charge calculated as a percentage of revenue which
will be introduced from 2005. The new law may increase the regulation of the
Company's operations and until such time as appropriate regulations consistent
with the new law are promulgated, there will be a period of confusion and
ambiguity as regulators interpret the legislation.

In the ordinary course of business, the Company may be party to various legal
and tax proceedings, and subject to claims, certain of which relate to the
developing markets and evolving fiscal and regulatory environments in which the
Company operates. In the opinion of management, the Company's liability, if any,
in all pending litigation, other legal proceeding or other matters, will not
have a material effect upon the financial condition, results of operations or
liquidity of the Company.

NOTE 13: RELATED PARTY TRANSACTIONS

Transactions with the Company's equity investees, GTS, Alfa affiliates,
Rostelecom, and Telenor were as follows, for the years ended December 31:

2001 2002 2003
-------- -------- --------
(IN THOUSANDS)

Revenue from equity investees ............................. $ 9,029 $ 7,499 $ 98
Revenue from GTS affiliates ............................... 2,475 -- --
Revenue from Rostelecom ................................... -- 446 575
Revenue from Telenor ...................................... -- 3 --
Revenue from Alfa affiliates .............................. 127 1,102 1,134
-------- -------- --------
$ 11,631 $ 9,047 $ 1,810
======== ======== ========
Cost of revenue from equity investees ..................... 10,056 8,527 4,790
Cost of revenue from GTS affiliates ....................... 850 -- --
Cost of revenue from Telenor .............................. -- -- 27
Cost of revenue from Rostelecom ........................... -- 5,154 16,860
-------- -------- --------
$ 10,906 $ 13,681 $ 21,677
======== ======== ========

The revenue and cost of revenue from GTS affiliates included in the income
statement represents revenue and cost of revenue through October 2001. GTS
ceased to be a shareholder of GTI after this date.

The revenue from Alfa affiliates included in the income statement represents
revenue and cost of revenue from May 2001, the date Alfa became a shareholder.

The revenue and cost of revenue from Rostelecom included in the income statement
represents revenue and cost of revenue from September 2002, the date Rostelecom
became a shareholder.

The revenue and cost of revenue from Telenor included in the income statement
represents revenue and cost of revenue from December 2003, the date Telenor
became a shareholder.

Included in other current assets at December 31, 2003 is approximately $0.3
million of accounts receivable from Alfa affiliates, approximately $0.2 million
of accounts receivable from Rostelecom, and approximately $0.1 million of
inter-company accounts receivable from Telenor.

The Company maintains bank accounts with Alfa Bank, which act as a clearing
agent for the payroll of the Russian staff of the Company. The balances at these
bank accounts were minimal at December 31, 2002 and 2003. In addition, certain
of the Company's Russian subsidiaries maintain current accounts with Alfa. The
amounts on deposit were approximately $0.7 million at December 31, 2002 and
minimal at December 31, 2003.

The Company maintains bank accounts with International Moscow Bank. The
Company's Chief Executive Officer's spouse is a member of the Bank Board of
Directors of International Moscow Bank. The amounts on deposit were
approximately $5.1 million at December 31, 2003.

FINANCIAL REVIEW 79

The Company incurred approximately $0.9 million in consulting costs from an
affiliate of Alfa in relation to investment transactions in Cityline,
Uralrelcom, and PTK during 2001, approximately $3.3 million in consulting costs
from an affiliate of Alfa in relation to the acquisition of the remaining 50% of
Sovintel previously held by Rostelecom in 2002 and approximately $0.3 million in
consulting costs from an affiliate of Alfa in relation to the acquisition of
Sibchallenge in 2003. In addition, the Company incurred approximately $0.1
million in consulting costs from an affiliate of Alfa related to a potential
acquisition that was subsequently withdrawn from the market.

The Company has entered into a consulting services agreement with Alfa Bank.
This consulting services agreement became effective on April 1, 2003 and will
terminate on December 31, 2004, unless terminated earlier pursuant to the
agreement. The agreement provides for compensation for the services, the total
amount of which shall not exceed $1.0 million for the provision of services from
April 1, 2003 to December 31, 2003 and an amount which shall not exceed $1.0
million for the provision of services from January 1, 2004 to December 31, 2004.
In 2003, the Company expensed $0.8 million under the consulting services
agreement.

In September 2002, several Russian subsidiaries of the Company entered into a
one year agreement with OOO Alfa Insurance, an affiliate of Alfa, to provide the
Company's Russian employees with medical and dental insurance services. The
amount payable under this agreement is approximately $0.3 million per annum. In
December 2002, the Company entered into a one year agreement with OOO Alfa
Insurance, an affiliate of Alfa, to provide the Company with property and
equipment liability insurance. The amount payable under this agreement is
approximately $0.2 million per annum.

A member of the Company's executive management is a relative of the general
director of two Russian based telecommunications services providers. The Company
received revenue from these two telecommunications services providers in the
amount of approximately $2.9 million for the year ended December 31, 2003 and
incurred costs to these two telecommunications services providers in the amount
of approximately $1.8 million dollars in the year ended December 31, 2003. At
December 31, 2003, the Company had accounts receivable of Approximately $0.5
million and accounts payable of approximately $0.4 million with these two
telecommunications services providers.

The Company provides telecommunications services to a marketing firm where the
Chief Financial Officer's spouse is the Chief Executive Officer. The Company
received revenue of approximately $0.1 million for the year ended December 31,
2003 from the marketing firm.

The Company issues loans to Russian employees principally to finance the
purchase of apartments in Russia. The amount of loans outstanding was
approximately $0.7 million at December 31, 2002 and approximately $0.6 million
at December 31, 2003. These loans typically have a 4% to 10% rate of interest
per annum and are typically payable over 3 years. In November 2002, the Company
issued an approximately $0.1 million loan to the Finance Director of Sovintel, a
wholly-owned subsidiary of the Company.

NOTE 14: SEGMENT INFORMATION

LINE OF BUSINESS DATA

The Company operates in four segments within the telecommunications industry.
The four segments are: (1) Business and Corporate Services; (2) Carrier and
Operator Services; (3) Consumer Internet Services; and (4) Mobile Services. The
following tables present financial information for both consolidated
subsidiaries and equity investee ventures, segmented by

80 FINANCIAL REVIEW

the Company's lines of businesses for the twelve months ended December 31, 2001,
2002 and 2003, respectively. Transfers between lines of businesses are included
in the adjustments to reconcile segment to consolidated results. The Company
evaluates performance based on the operating income (loss) of each strategic
business unit, among other performance measures. Prior to the completion of the
acquisition of the remaining 50% ownership interest in Sovintel and the
subsequent merger of TeleRoss into Sovintel in April 2003, the Company managed
business segments based on telecommunications products the Company provided. In
April 2003, the Company re-designed the business segments around customer
characteristics, and in accordance with SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", the Company has presented
the following four segments consistent with the information used by the chief
operating decision maker to manage the operations for purposes of making
operating decisions and allocating resources. The Company has restated segment
information for prior periods to conform to the presentation adopted in the
current period.

BUSINESS CARRIER CORPORATE
AND AND CONSUMER MOBILE AND
(IN THOUSANDS) CORPORATE OPERATOR INTERNET SERVICE ELIMINATIONS
--------- --------- --------- --------- ------------

TWELVE MONTHS ENDED DECEMBER 31, 2001
Revenue from external customers ........... $ 123,554 $ 89,265 $ 13,842 $ 14,361 $ --
Intersegment revenue ...................... 402 382 -- -- (784)
Impairment charge ......................... -- -- 20,886 9,931 474
Operating income (loss) ................... 27,279 25,867 (33,418) (10,915) (23,177)
Identifiable assets ....................... 139,796 129,159 35,838 10,264 97,585
Capital expenditures ...................... 32,517 16,722 4,354 1,278 133

TWELVE MONTHS ENDED DECEMBER 31, 2002

Revenue from external customers ........... $ 149,170 $ 104,609 $ 21,800 $ 13,001 $ --
Intersegment revenue ...................... 502 717 -- -- (1,219)
Operating income (loss) ................... 36,975 28,620 (4,356) 3,553 (6,511)
Identifiable assets ....................... 161,635 202,134 41,896 9,383 24,315
Capital expenditures ...................... 29,375 15,417 2,908 449 222

TWELVE MONTHS ENDED DECEMBER 31, 2003

Revenue from external customers ........... $ 188,087 $ 128,048 $ 30,775 $ 13,895 $ --
Intersegment revenue ...................... 649 793 -- -- (1,442)
Operating income (loss) ................... 47,603 26,503 (2,457) 5,278 (6,976)
Identifiable assets ....................... 385,087 236,635 52,584 6,566 52,042
Capital expenditures ...................... 40,231 20,317 2,851 569 90

ADJUSTMENTS
TO RECONCILE
BUSINESS SEGMENT
TO CONSOLIDATED
RESULTS
-----------------------
BUSINESS EQUITY
SEGMENT CONSOLIDATED METHOD AFFILIATE
(IN THOUSANDS) TOTAL RESULTS VENTURES ADJUSTMENTS
--------- ------------ --------- -----------

TWELVE MONTHS ENDED DECEMBER 31, 2001
Revenue from external customers ........... $ 241,022 $ 140,038 $(119,958) $ 18,974
Intersegment revenue ...................... -- -- -- --
Impairment charge ......................... 31,291 31,291 -- --
Operating income (loss) ................... (14,364) (45,271) (30,907) --
Identifiable assets ....................... 412,642 300,384 (112,258) --
Capital expenditures ...................... 55,004 37,359 (17,645) --

TWELVE MONTHS ENDED DECEMBER 31, 2002

Revenue from external customers ........... $ 288,580 $ 198,727 $(105,861) $ 16,008
Intersegment revenue ...................... -- -- -- --
Operating income (loss) ................... 58,281 31,430 (26,851) --
Identifiable assets ....................... 439,363 435,810 (3,552) --
Capital expenditures ...................... 48,371 29,430 (18,941) --

TWELVE MONTHS ENDED DECEMBER 31, 2003

Revenue from external customers ........... $ 360,805 $ 360,534 $ (4,861) $ 4,590
Intersegment revenue ...................... -- -- -- --
Operating income (loss) ................... 69,951 69,731 (220) --
Identifiable assets ....................... 732,914 729,226 (3,688) --
Capital expenditures ...................... 64,058 63,737 (321) --

FINANCIAL REVIEW 81

GEOGRAPHIC DATA

Revenues from external customers are based on the location of the operating
company providing the service.

The Company operated within two main geographic regions of the CIS: Russia and
Ukraine. Geographic information as of December 31, 2001, 2002, and 2003 is as
follows:

CORPORATE
OTHER
COUNTRIES CONSOLIDATED
(IN THOUSANDS) RUSSIA UKRAINE ELIMINATIONS RESULTS
-------- -------- ------------ -------------

YEAR ENDED
DECEMBER 31, 2001
Revenue ................................. $104,461 $ 37,954 $ (2,377) $ 140,038
Long-lived assets ....................... 177,757 26,318 783 204,858

YEAR ENDED
DECEMBER 31, 2002

Revenue ................................. $166,319 $ 35,488 $ (3,080) $ 198,727
Long-lived assets ....................... 275,209 24,541 1,512 301,262

YEAR ENDED
DECEMBER 31, 2003

Revenue ................................. $318,426 $ 44,524 $ (2,416) $ 360,534
Long-lived assets ....................... 509,339 24,236 2,886 536,461

NOTE 15: SUPPLEMENTAL CASH FLOW INFORMATION

The following table summarizes significant non-cash investing and financing
activities for the Company.

TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------
2002 2003
(IN THOUSANDS)

Issuance of common stock
in connection with acquisitions ............ $ 50,663 $ 193,485
Amounts payable in connection
with business acquisitions ................. 3,500 -
Capitalized leased assets .................. - 420

NOTE 16: OTHER TRANSACTIONS

IMPAIRMENT

In the fourth quarter of 2001, the Company recorded an impairment charge in the
amount of $10.4 million in association with the Company's mobile operations in
Ukraine. In 2001, the mobile operation in Ukraine became subject to strong
competitive and regulatory pressures, the Company's average revenue per user
("ARPU") declined significantly and the mobile operations business segment
recorded an operating loss for the first time. The undiscounted cash flow
analysis performed by the Company indicated that carrying value of the mobile
long-lived assets was not recoverable. The Company recognized the loss as an
impairment charge, calculated as the difference between the carrying amount and
the fair value of the assets. Fair value was assessed by discounting the future
cash flows associated with the assets. The components of the impairment charge
includes a write-down of net property, plant and equipment by $8.4 million, net
licenses by $1.5 million and net goodwill associated with the mobile operations
of $0.5 million. This impairment charge is classified in the Mobile Services
division.

In addition to the traditional voice and data service provision, GTI has been
actively pursuing a strategy of developing non-traditional telecom service
offerings including those related to the Internet, such as web hosting, web
design, and vertical and horizontal Internet portal development. To this end,
GTI acquired InfoArt Stars and the Agama family of Web properties to add to the
Russia-On-Line Internet portal, which also incorporates some of the other
acquisitions made in the year ended December 31, 2000, referat.ru, Absolute
Games and Fintek. In line with experience outside of Russia, the Company has not
seen the rapid development of Internet based services that was expected. During
2001, Internet based advertising and e-commerce revenues had not developed to
significant levels. The undiscounted cash flow analysis, based

82 FINANCIAL REVIEW

on the 5-year business plan approved in the fourth quarter of 2001, performed by
the Company indicated that carrying value of the long-lived portal assets was
impaired. The Company recognized the loss as an impairment charge, calculated as
the difference between the carrying amount and the fair value of the assets.
Fair value was assessed by discounting the future cash flows associated with the
assets. As a result, GTI recorded an impairment charge of $20.9 million. The
impairment charge represents a write-down of Internet Content and Related
Software, which was classified as Other Intangible Assets in the balance sheet
and was included in the operating results of the Company's Consumer Internet
business segment.

NOTE 17: QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial
data is as follows:

ACTUAL FOR THE THREE MONTHS ENDED
----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2002 2002 2002 2002
----------- ---------- ------------- ------------
(IN THOUSANDS. EXCEPT PER SHARE DATA)

Revenues ............................................. $ 36,350 $ 39,217 $ 46,376 $ 76,784
Cost of Revenues ..................................... 15,370 17,556 21,617 36,646
Gross Margin ......................................... 20,980 21,661 24,759 40,138
Selling, general and administrative .................. 9,687 10,237 10,792 15,431
Net income ........................................... 6,206 2,754 7,879 12,945
Net income per share - basic(1) ...................... $ 0.28 $ 0.12 $ 0.32 $ 0.48

Revenues ............................................. $ 78,376 $ 80,762 $ 90,095 $ 111,301
Cost of Revenues ..................................... 37,299 39,436 44,883 59,467
Gross Margin ......................................... 41,077 41,326 45,212 51,834
Selling, general and administrative .................. 13,438 13,385 15,764 21,797
Net income ........................................... 12,820 11,835 12,506 18,274
Net income per share - basic(1) ...................... $ 0.47 $ 0.43 $ 0.44 $ 0.59

(1) The sum of the earnings per share for the four quarters will generally not
equal earnings per share for the total year due to changes in the average
number of common shares outstanding.

NOTE 18: SUBSEQUENT EVENTS

In February 2004, the Company completed the acquisition of ST-Holdings, a Czech
company that owns approximately 50% plus one share in ZAO Samara-Telecom, a
telecommunications service provider in Samara, Russia from SMARTS and individual
owners for approximately $4.8 million in cash.

In February 2004, the Board of Directors of the Company declared a cash dividend
of $0.20 per common share to shareholders of record as of March 18, 2004. The
total amount payable to shareholders will be approximately $7.2 million.

In the first quarter of 2004, the Company expects to incur a reorganization
charge in the range of approximately $2.0 million to approximately $3.0 million
for headcount reductions in association with the operational integration of
Comincom.

FINANCIAL REVIEW 83

BORD OF DIRECTORS

PETR AVEN (Chairman)
President, Alfa Bank

VLADIMIR ANDROSIK
Deputy General Director, Rostelecom

MICHAEL CALVEY
Managing Partners,
Baring Vostok Capital Partners

ASHLEY DUNSTER
Vice President,
Capital Research International, Inc.

DAVID HERMAN
Vice Chairman Emeritus, General Motors

KJELL MORTEN JOHNSEN
Vice President, Telenor Networks

ANDREI KOSOGOV
First Deputy Chairman, Alfa Bank

MICHAEL NORTH
Managing Director,
Eurokapital Verwaltungs GmbH

JAN EDVARD THYGESEN
Executive Vice President
and CEO of Telenor Nordic Mobile

ALEXANDER VINOGRADOV
President and CEO, Golden Telecom

APPENDIX

INDEPENDENT AUDITORS
Ernst & Young (CIS) Limited

STOCKHOLDER INFORMATION

ANNUAL MEETING
The Annual Meeting
of Golden Telecom, Inc.
will be held on May 20th, 2004
in Fornebu, Norway, in the
Midnattsol Meeting Room,
Telenor Expo, Snaroyvein 30,
1331 Fornebu, Norway. A
formal notice, together
with the proxy form, will
be mailed in advance of the
meeting to all stockholders
of record entitled to vote.

REGISTER AND TRANSFER AGENT
Correspondence concerning
Golden Telecom, Inc. stock
holdings or changes of
address should
be directed to:
Mellon Investor
Services LLC. 85
Challenger Road.
Ridgefield Park,
NJ 07660.

TELEPHONE:
201-329-8127

FACSIMILE:
201-329-8967

INTERNET:
www.mellon-investor.com

GENERAL INFORMATION
General information about
the company may be
obtained by contacting
Investor Relations:

TELEPHONE:
+7(095)797-9300

FACSIMILE:
+7(095)797-9332

E-MAIL:
InvestorRelations@gti.ru

INTERNET:
www.goldentelecom.com

Consolidated
financial statements
for Golden Telecom, Inc.
for the fiscal year ended
December 31, 2003 are
contained in Form 10-K
filed with the United
States Securities and
Exchange Commission
on March 12, 2004.

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