UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Golden Telecom, Inc.

(Exact name of registrant as specified in its charter)

DELAWARE (State or other jurisdiction of incorporation or organization)		51-0391303 (I.R.S. Employer Identification No.)

Representative Office Golden TeleServices, Inc. 1 Kozhevnichesky Proezd Moscow, Russia (Address of principal executive office)		115114 (Zip Code)

(011-7-495) 797-9300
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer þ		Accelerated Filer o		Non-accelerated Filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     At August 9, 2007, there were 40,308,222 outstanding shares of common stock of the registrant.

 

 

TABLE OF CONTENTS

				Page
PART I.		FINANCIAL INFORMATION
Item 1		Financial Statements (Unaudited)			3
		Condensed Consolidated Balance Sheets as of December 31, 2006 and June 30, 2007 (Unaudited)			3
		Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2006 and 2007 (Unaudited)			5
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2007 (Unaudited)			6
		Notes to Unaudited Condensed Consolidated Financial Statements			7
Item 2		Management's Discussion and Analysis of Financial Condition and Results of Operations *			23
Item 3		Quantitative and Qualitative Disclosures About Market Risk			46
Item 4		Controls and Procedures			46
PART II.		OTHER INFORMATION
Item 1		Legal Proceedings			47
Item 1A		Risk Factors			47
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds			47
Item 3		Defaults Upon Senior Securities			47
Item 4		Submission of Matters to a Vote of Security Holders			48
Item 5		Other information			48
Item 6		Exhibits			48
Signatures					49

*

Please refer to the special note regarding forward-looking statements in this section.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

GOLDEN TELECOM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)

		December 31,				June 30,
		2006				2007
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	18,413			$	96,124
Cash held in escrow			—				10,000
Accounts receivable, net of allowance for doubtful accounts of $25,224 and $30,054 at December 31, 2006 and June 30, 2007, respectively			147,719				198,829
VAT receivable			21,486				34,220
Prepaid expenses			11,371				12,528
Taxes receivable, excluding VAT			6,466				9,000
Notes receivable			379				1,715
Deferred tax asset			11,098				14,467
Inventory			7,682				10,262
Due from affiliates and related parties			1,227				2,806
Restricted cash			—				235
Other current assets			5,564				7,714
TOTAL CURRENT ASSETS			231,405				397,900
Property and equipment, net of accumulated depreciation of $352,765 and $409,661 at December 31, 2006 and June 30, 2007, respectively			552,341				799,530
Goodwill and intangible assets:
Goodwill			180,539				290,219
Intangible assets, net of accumulated amortization of $90,314 and $103,702 at December 31, 2006 and June 30, 2007, respectively			116,545				236,993
Net goodwill and intangible assets			297,084				527,212
Investments in and advances to ventures			11,886				12,152
Notes receivable			2,500				20,973
Restricted cash			233				—
Other non-current assets			11,741				15,779
TOTAL ASSETS		$	1,107,190			$	1,773,546

See notes to unaudited condensed consolidated financial statements.

GOLDEN TELECOM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)

		December 31,				June 30,
		2006				2007
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses		$	146,058			$	257,530
VAT payable			2,725				13,412
Debt maturing within one year			12,305				11,728
Current capital lease obligation			753				5,072
Deferred revenue			21,634				25,104
Due to affiliates and related parties			4,505				5,533
Liability for acquisition			378				8,205
Other current liabilities			233				193
TOTAL CURRENT LIABILITIES			188,591				326,777
Long-term debt, less current portion			29				225,149
Long-term deferred tax liability			29,268				72,339
Long-term deferred revenue			36,951				44,847
Long-term capital lease obligations			1,591				9,496
Other non-current liabilities			2,321				2,510
TOTAL LIABILITIES			258,751				681,118
Minority interest			31,263				72,208
SHAREHOLDERS’ EQUITY
Preferred stock, $0.01 par value (10,000,000 shares authorized; none issued and outstanding at December 31, 2006 and June 30, 2007)			—				—
Common stock, $0.01 par value (100,000,000 shares authorized; 36,673,015 and 39,915,234 shares issued and outstanding at December 31, 2006 and June 30, 2007, respectively)			367				399
Additional paid-in capital			674,993				822,124
Retained earnings			66,744				107,238
Accumulated other comprehensive income			75,072				90,459
TOTAL SHAREHOLDERS’ EQUITY			817,176				1,020,220
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,107,190			$	1,773,546

See notes to unaudited condensed consolidated financial statements.

GOLDEN TELECOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2007				2006				2007
REVENUE:
Telecommunication services		$	195,242			$	295,263			$	371,889			$	548,460
Revenue from affiliates and related parties			1,726				2,406				3,219				4,948
TOTAL REVENUE			196,968				297,669				375,108				553,408
OPERATING COSTS AND EXPENSES:
Access and network services (excluding depreciation and amortization)			105,608				171,633				199,001				321,728
Selling, general and administrative (excluding depreciation and amortization)			33,569				44,797				67,450				93,783
Depreciation and amortization			23,923				32,413				46,572				60,970
TOTAL OPERATING COSTS AND EXPENSES			163,100				248,843				313,023				476,481
INCOME FROM OPERATIONS			33,868				48,826				62,085				76,927
OTHER INCOME (EXPENSE):
Equity in earnings (losses) of ventures			347				107				671				(268	)
Interest income			156				1,160				803				1,428
Interest expense			(74	)			(3,065	)			(150	)			(3,065	)
Foreign currency gains (losses)			669				1,326				1,575				1,593
TOTAL OTHER INCOME (EXPENSE)			1,098				(472	)			2,899				(312)
Income before income taxes and minority interest			34,966				48,354				64,984				76,615
Income taxes			11,356				14,706				20,770				24,836
Minority interest			965				1,385				2,103				2,797
Income before cumulative effect of a change in accounting principle			22,645				32,263				42,111				48,982
Cumulative effect of a change in accounting principle, net of tax of $52			—				—				681				—
NET INCOME		$	22,645			$	32,263			$	41,430			$	48,982
Basic earnings per share of common stock:
Income before cumulative effect of a change in accounting principle			0.62				0.85				1.15				1.31
Cumulative effect of a change in accounting principle			—				—				0.02				—
Net income per share — basic		$	0.62			$	0.85			$	1.13			$	1.31
Weighted average common shares — basic			36,600				37,872				36,537				37,277
Diluted earnings per share of common stock:
Income before cumulative effect of a change in accounting principle		$	0.62			$	0.85				1.15				1.31
Cumulative effect of a change in accounting principle			—				—				0.02				—
Net income per share — diluted		$	0.62			$	0.85			$	1.13			$	1.31
Weighted average common shares — diluted			36,716				37,983				36,687				37,400
Cash dividends per common share		$	0.20			$	—			$	0.40			$	—

See notes to unaudited condensed consolidated financial statements.

GOLDEN TELECOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)

		Six Months Ended
		June 30,
		2006				2007
OPERATING ACTIVITIES:
Net income		$	41,430			$	48,982
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Depreciation			36,545				49,395
Amortization			10,027				11,575
Equity in (earnings) losses of ventures			(671	)			268
Foreign currency gain			(1,575	)			(1,593	)
Bad debt expense			4,555				3,394
Stock based compensation expense			2,273				11,223
Cumulative effect of a change in accounting principle, net of tax of $52			681				—
Other			452				534
Changes in assets and liabilities:
Accounts receivable			(27,855	)			(36,659	)
Accounts payable and accrued expenses			22,916				19,505
VAT, net			(6,552	)			(925	)
Other changes in assets and liabilities			(1,055	)			3,978
NET CASH PROVIDED BY OPERATING ACTIVITIES			81,171				109,677
INVESTING ACTIVITIES:
Purchases of property and equipment and intangible assets			(81,206	)			(110,162	)
Acquisitions, net of cash acquired			(16,486	)			(106,066	)
Restricted cash			337				(2	)
Cash held in escrow			—				(10,000	)
Loans made			(3,000	)			(19,815	)
Other investing			1,206				596
NET CASH USED IN INVESTING ACTIVITIES			(99,149	)			(245,449	)
FINANCING ACTIVITIES:
Net proceeds from exercise of employee stock options			2,306				756
Cash dividends paid			(14,622	)			—
Proceeds from debt			—				281,706
Repayment of debt			—				(69,203	)
Other financing			(1,062	)			(697	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES			(13,378	)			212,562
Effect of exchange rate changes on cash and cash equivalents			591				921
Net increase (decrease) in cash and cash equivalents			(30,765	)			77,711
Cash and cash equivalents at beginning of period			67,176				18,413
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	36,411			$	96,124

See notes to unaudited condensed consolidated financial statements.

GOLDEN TELECOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1: Basis of Presentation

     Golden Telecom, Inc. (the “Company” or “GTI”) is a provider of a broad range of telecommunications 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 operations in Ukraine.

     The financial statements included herein are unaudited and have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) for interim financial reporting and United States Securities and Exchange Commission (“SEC”) regulations. Certain information and footnote disclosures normally included in complete financial statements prepared in accordance with US GAAP and SEC rules and regulations have been condensed or omitted pursuant to such US GAAP and SEC rules and regulations. In the opinion of management, the financial statements reflect all adjustments of a normal and recurring nature necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods. These financial statements should be read in conjunction with the Company’s 2006 audited consolidated financial statements and the notes related thereto. The results of operations for the three and six months ended June 30, 2007 may not be indicative of the operating results for the full year.

Note 2: Summary of Significant Accounting Policies and Recent Accounting Pronouncements

Summary of Significant Accounting Policies

     The accompanying unaudited condensed consolidated financial statements for the three and six months ended June 30, 2007 should be read in conjunction with the consolidated financial statements contained in the Company’s annual report on Form 10-K filed with the SEC on March 16, 2007. The Company’s significant accounting policies have not changed since December 31, 2006, except as outlined below.

Accounting from Uncertainty in Income Taxes

     On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (‘‘FASB’’) Interpretation No. 48 (‘‘FIN No. 48’’), “Accounting for Uncertainty in Income Taxes — an interpretation of SFAS No. 109”. FIN No. 48 creates a single model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN No. 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of FIN No. 48 resulted in the cumulative effect adjustment to the opening balance of retained earnings as of January 1, 2007, of approximately $8.5 million. As of June 30, 2007, the Company included accruals for unrecognized income tax benefits totaling approximately $20.1 million as a component of accrued liabilities.

     A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:

		(in thousands)
Balance at January 1, 2007		$	8,555
Additions based on tax positions related to the current year (including additions related to the acquisition of ZAO Cortec in May 2007 of $10,221)			10,457
Additions of tax positions of prior years			1,044
Reductions of tax positions of prior years			—
Settlements			—
Balance at June 30, 2007		$	20,056

     Approximately $9.9 million of unrecognized tax benefits, if recognized, would affect the effective tax rate. The Company considers it reasonably possible that approximately $5.3 million of the unrecognized income tax benefit will be reversed within the next twelve months, due to expiration of the statute of limitations. It is also reasonably possible that the total amounts of unrecognized tax benefits will decrease by approximately $6.5 million due to the potential deconsolidation of a variable interest entity in the period ending September 30, 2007.

GOLDEN TELECOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

     Although the Company believes it is more likely than not that all recognized income tax benefits would be sustained upon examination, the Company has recognized some income tax benefits that have a reasonable possibility of successfully being challenged by the tax authorities. These income tax positions could result in total unrecognized tax benefits increasing by up to approximately $13.2 million if the Company’s position was successfully challenged. However, the Company believes that it is reasonably possible that such an increase in total unrecognized tax benefits will be recognized as certain tax position due to a favorable outcome of the litigation with tax authorities in the amount of approximately $8.0 million before the end of 2007.

     The Company recognizes accrued interest related to unrecognized tax benefits and penalties in income tax expenses. During the three and six months ended June 30, 2007, the Company recognized approximately $0.4 million and $0.6 million, respectively, in interest and penalties. At January 1, 2007 and June 30, 2007, the Company had accrued for approximately $3.2 million and $7.0 million, respectively, for the payment of interest and penalties.

     As of the adoption of FIN No. 48, the tax years ended December 31, 2003, 2004, 2005 and 2006 remained subject to examination by United States tax authorities. As of the adoption date of FIN No.48, the tax years ended December 31, 2004, 2005 and 2006 remained subject to examination by Russian and Ukrainian tax authorities.

Income Taxes

     The Company accounts for income taxes using the liability method required by Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” For interim reporting purposes, the Company also follows the provisions of Accounting Principles Board No. 28, “Interim Financial Reporting,” which requires the Company to account for income taxes based on the Company’s best estimate of the effective tax rate expected to be applicable for the full fiscal year on a current year-to-date basis. The rate so determined is based on the tax rates currently applicable to the Company in the United States and to the Company’s subsidiaries in Russia and other CIS countries and includes the Company’s best estimate of the annual tax effect of non-deductible expenses, primarily related to amortization of intangible assets, foreign exchange and other permanent differences as well as estimates as to the realization of certain deferred tax assets. Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and the basis 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, where the Company’s 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.

Comparative Figures

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

Recent Accounting Pronouncements

Income Statement Presentation of Taxes Collected from Customers and Remitted to Government Authorities

     In June 2006, the Emerging Issues Task Force reached (“EITF”) a consensus on EITF Issue No. 06-03 (“EITF No. 06-03”), “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)”. EITF No. 06-03 provides that the presentation of taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. The provisions of EITF No. 06-03 became effective for fiscal years beginning after December 15, 2006. The Company continues to present such taxes on a net basis in the consolidated statement of operations, and therefore, the adoption of EITF No. 06-03 had no effect on the Company’s consolidated financial position or results of operations.

GOLDEN TELECOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Fair Value Measurements

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 creates a fair value hierarchy, which prioritizes the inputs that should be used in determining fair value. Under this pronouncement, companies must provide disclosures containing relevant information in the financial statements, allowing users to assess inputs used to measure fair value, as well as the effect of those measurements on earnings for the periods presented, including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the provisions of SFAS No. 157 to determine the potential impact, if any, the adoption will have on the Company’s financial statements.

Fair Value Option

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financials Liabilities — Including an Amendment of FASB Statement No. 115”. This standard permits measurement of certain financial assets and financial liabilities at fair value. If the fair value option is elected, the unrealized gains and losses are reported in earnings at each reporting date. Generally, the fair value option may be elected on an instrument-by-instrument basis, as long as it is applied to the instrument in its entirety. The fair value option election is irrevocable, unless a new election date occurs. SFAS No. 159 requires prospective application and also establishes certain additional presentation and disclosure requirements. The standard is effective as of the beginning of the fiscal year that begins after November 15, 2007. The Company is currently evaluating the provisions of SFAS No. 159 to determine the potential impact, if any, the adoption will have on the Company’s financial statements.

Note 3: Comprehensive Income

     SFAS No. 130, “Reporting Comprehensive Income”, requires the reporting of comprehensive income in addition to net income. Accumulated other comprehensive income includes foreign currency translation adjustments. For the three and six months ended June 30, 2007, total comprehensive income included, in addition to net income, the effect of translating foreign currency denominated financial statements of the Company’s foreign subsidiaries domiciled in Russia and Ukraine into the Company’s reporting currency, in accordance with SFAS No. 52, “Foreign Currency Translation”.

     Comprehensive income comprises the following:

		Three Months Ended June 30,								Six Months Ended June 30,
		2006				2007				2006				2007
		(in thousands)
Net income		$	22,645			$	32,263			$	41,430			$	48,982
Foreign currency translation adjustment			—				7,493				—				15,387
Comprehensive income		$	22,645			$	39,756			$	41,430			$	64,369

Note 4: Intangible Assets

     The total gross carrying value and accumulated amortization of the Company’s intangible assets by major asset class is as follows:

						As of December 31, 2006								As of June 30, 2007
						(in thousands)
		Weighted Average								Accumulated								Accumulated
		Amortization Lives				Cost				Amortization				Cost				Amortization
Intangible assets:
Telecommunications service contracts		10 years				$	119,433			$	(49,450	)		$	132,215			$	(54,163	)
Contract-based customer relationships		5 years					42,104				(28,578	)			51,263				(33,878	)
Licenses		10 years					26,948				(4,295	)			102,083				(4,469	)
Brand name		10 years					—				—				32,800				(2,269	)
Other intangible assets		6 years					18,374				(7,991	)			22,334				(8,923	)
Total						$	206,859			$	(90,314	)		$	340,695			$	(103,702	)

     Approximately $85.5 million of licenses are not being amortized because they are not ready for their intended use.

GOLDEN TELECOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note 5: Net Income Per Share

     Basic earnings per share at June 30, 2006 and 2007 are computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per share at June 30, 2006 and 2007 are 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 three and six months ended June 30, 2006 and 2007 was 10,000 and 1,456,020 stock options, respectively.

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2006				2007				2006				2007
		(in thousands, except per share data)
Income before cumulative effect of a change in accounting principle		$	22,645			$	32,263			$	42,111			$	48,982
Weighted average outstanding of:
Common stock shares			36,600				37,872				36,537				37,277
Dilutive effect of:
Employee stock options			116				111				150				123
Common stock and common stock equivalents			36,716				37,983				36,687				37,400
Net income per share before cumulative effect of a change in accounting principle:
Basic		$	0.62			$	0.85			$	1.15			$	1.31
Diluted		$	0.62			$	0.85			$	1.15			$	1.31

Note 6: Business Combinations and Investment Transactions

     In February 2007, the Company completed the acquisition of 65% ownership interest in Fortland Limited (“Fortland”) from an entity, the principal shareholder of which is also a shareholder in three of the Company’s other subsidiaries. Fortland owns Kolangon-Optim LLC (“Kolangon”), an early-stage digital video broadcast enterprise in Russia. The Company acquired Fortland for approximately $49.7 million consisting of cash consideration of approximately $38.6 million paid in April 2007, and a deferred payment of $11.1 million due in October 2007, approximately $0.2 million of direct transaction costs plus the assumption of approximately $1.8 million debt. The acquisition of Fortland was accounted for as an asset purchase of television license through a variable interest entity. The Company has consolidated the financial position and results of operations of Fortland from February 1, 2007. On acquisition, the Company allocated approximately $72.1 million to licenses, approximately $17.2 million to deferred tax liability, and approximately $15.0 million to noncontrolling interest. In conjunction with this transaction, the Company also entered into an agreement whereby the Company agreed to provide a secured loan of approximately $12.1 million to the seller. The loan, issued in April 2007, is secured by a pledge of a 15% interest in Fortland owned by the seller and matures in April 2011. In conjunction with this transaction, the Company also entered into a put option agreement that, if exercised, would require the Company to purchase the seller’s remaining 35% interest in Fortland at fair market value. In conjunction with this transaction, the Company also entered into a call option agreement that, if exercised, would require the seller to sell the seller’s remaining 35% interest in Fortland at fair market value. The put and call options are exercisable on and after September 30, 2010.

     In April 2007, the Company completed the acquisition of 100% ownership interest in ZAO Telecommunications Agency (“Atel”), a fixed line alternative telecommunications operator in Perm, for approximately $4.5 million in cash consideration. The Company has consolidated the financial position and results of operations of Atel from April 1, 2007.

GOLDEN TELECOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

     The Company’s consolidated 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 $2.7 million to fixed assets which will be depreciated over a weighted average period of approximately 7 years. The excess of the purchase price over the fair value of the net assets acquired of approximately $1.8 million has been assigned to goodwill and is not deductible for tax purposes. The purchase price allocation will be finalized upon completion of the valuation of the acquired fixed and intangible assets. The goodwill has been assigned to 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 above acquisitions. The goodwill will be tested for impairment at least annually.

     In May 2007, the Company completed the acquisition of 100% ownership interest in OOO ICA Center of Commercial Real Estate (“CKN”), which owns 6,181 square meters of a building in Moscow. The Company acquired CKN for approximately $9.8 million of cash consideration. The acquisition of CKN was accounted for as an asset purchase of a building through a variable interest entity. On acquisition, the Company allocated $12.0 million to fixed assets and approximately $2.3 million to deferred tax liability. The Company has consolidated the financial position and the results of operations of CKN from May 1, 2007.

     In May 2007, the Company completed the acquisition of a 51% ownership interest in ZAO Cortec and its subsidiaries (together “Corbina”) from Inure Enterprises Ltd. and Rambert Management Limited, pursuant to a Stock Purchase Agreement. The total purchase price of approximately $196.8 million consisted of approximately $142.1 million of GTI’s common stock, representing 3,193,219 shares, cash consideration of approximately $8.2 million, and direct transaction costs of approximately $1.4 million. At June 30, 2007, the Company had $10.0 million held in escrow out of which the $8.2 million of cash consideration was paid in August 2007. In addition, as part of the purchase price, the Company refinanced $45.0 million of debt that the seller owed to OAO Vneshtorgbank. The refinancing was effected through a loan to Corbina from the Company. The purchase consideration of GTI’s common stock, which was issued on May 25, 2007, was determined based on the closing price of the Company’s common stock on December 20, 2006, when the Company announced that it had entered into a binding Memorandum of Understanding with Dawn Key Limited to acquire a 51% ownership interest in Corbina. 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 December 18, 2006 and December 22, 2006, which was $44.51 per share. Management believes the acquisition of 51% of Corbina further strengthens the Company’s position in the Company’s broadband strategy and positions the Company to realize future operating and cost synergies. Corbina is an integrated telecommunications provider of telecommunications and Internet services in Russia. The Company has consolidated the financial position of Corbina from May 31, 2007 and the results of operations of Corbina from June 1, 2007. Corbina holds a variable interest and is the primary beneficiary of Mircom Trading, Inc. (“Mircom”), a British Virgin Islands registered wholesale telecommunications operator providing a range of carrier and operator services to foreign telecommunications operators. Mircom is owned by a member of the Board of Directors of Corbina. As of June 30, 2007, Mircom had net liabilities of approximately $14.8 million. For the month ended June 30, 2007, Mircom had revenues of approximately $0.7 million and net loss of approximately $0.3 million. The creditors of Mircom have no recourse to the Company’s general credit.

     The acquisition of 51% ownership interest in Corbina was accounted for as a purchase business combination in accordance with SFAS No. 141, “Business Combinations”. The following is the condensed balance sheet of Corbina as of May 31, 2007 reflecting the preliminary purchase price allocation to the net assets acquired:

GOLDEN TELECOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

		May 31, 2007
		(in thousands)
ASSETS:
Current assets		$	31,743
Property and equipment			150,327
Intangible assets			51,591
Goodwill			103,698
Other assets			23
Total assets		$	337,382
LIABILITES:
Current liabilities		$	94,100
Non-current liabilities			25,307
Net assets		$	217,975
Less: Minority interest in net assets acquired			(21,194	)
Total purchase consideration and transaction costs		$	196,781
Consideration and transaction costs:
GTI shares consideration			142,130
Cash consideration			8,205
Loan refinancing			45,000
Direct transaction costs			1,446
Total purchase consideration and transaction costs		$	196,781

     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 $32.8 million to brand which will be amortized over a period of 10 years, approximately $10.5 million to telecommunications service contracts intangible assets which will be amortized over a weighted average period of approximately 6 years, approximately $7.6 million to contract-based customer relationship intangible assets which will be amortized over a weighted average period of approximately 9 years, approximately $0.1 million to licenses which will be amortized over a weighted average period of 5 years, and approximately $0.6 million to other intangible assets which will be amortized over a weighted average period of 5 years. The Company has recorded approximately $10.3 million of tax contingencies related to the acquisition of Corbina. The purchase price allocation will be finalized upon the completion of the valuation of the acquired fixed and intangible assets and resolving tax contingencies. The excess purchase price over the fair value of the net tangible and intangible assets acquired of approximately $103.7 million has been assigned to goodwill and is not deductible for tax purposes. Approximately $23.0 million of this goodwill has been assigned to the Business and Corporate Services reportable segment, approximately $5.0 million of this goodwill has been assigned to the Carrier and Operator Services reportable segment, approximately $66.8 million of this goodwill has been assigned to the Consumer Internet Services reportable segment, and approximately $8.9 million of this goodwill has been assigned to the Mobile 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 51% ownership interest in Corbina. The goodwill will be tested for impairment at least annually.

     The following unaudited pro forma consolidated results of operations for the Company give effect to the Corbina business combination as if it had occurred at the beginning of 2006 and to give effect to the Corbina business combination as if it had occurred at the beginning of 2007. These unaudited 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.

GOLDEN TELECOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

		Three Months Ended June 30,								Six Months Ended June 30,
		2006				2007				2006				2007
		(unaudited)
		(in thousands, except per share data)
Revenue		$	217,059			$	320,363			$	414,166			$	604,968
Income before cumulative effect of a change in accounting principle			22,395				33,654				41,840				50,320
Cumulative effect of a change in accounting principle			—				—				(681	)			—
Net income		$	22,395			$	33,654			$	41,159			$	50,320
Basic earnings per share of common stock:
Income before cumulative effect of a change in accounting principle		$	0.56			$	0.82			$	1.05			$	1.24
Cumulative effect of a change in accounting principle			—				—				0.02				—
Net income per share — basic
Weighted average common shares — basic		$	0.56			$	0.82			$	1.03			$	1.24
Diluted earnings per share of common stock:
Income before cumulative effect of a change in accounting principle		$	0.56			$	0.82			$	1.05			$	1.24
Cumulative effect of a change in accounting principle			—				—				0.02				—
Net income per share — diluted		$	0.56			$	0.82			$	1.03			$	1.24

     In June 2007, the Company completed the acquisition of 100% ownership interest in ZAO Direct Net Telecommunications (“DirectNet”) and ZAO Satcom Tel (“Satcomtel”), fixed line alternative telecommunications operators in Moscow and the assets of NDNT, Inc. and NDNT (UK) Limited, for approximately $1.4 million in cash consideration, including the assignment of approximately $0.7 of intercompany debt from the seller to the Company. The Company has consolidated the financial position and the results of operations of DirectNet and Satcomtel from June 1, 2007.

     The Company’s consolidated 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 $0.1 million to telecommunications services contracts intangible assets which will be amortized over a weighted average period of approximately 10 years and approximately $0.1 million to other intangible assets which will be amortized over a weighted average period of approximately 10 years. The excess of the purchase price over the fair value of the net assets acquired of approximately $1.9 million has been assigned to goodwill and is not deductible for tax purposes. The purchase price allocation will be finalized upon completion of the valuation of the acquired fixed and intangible assets. The goodwill has been assigned to 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 above acquisitions. The goodwill will be tested for impairment at least annually.

     In June 2007, the Company completed the acquisition of 75% ownership interest in OOO Alcar (“Alcar”), an early-stage WiFi enterprise in Russia from an entity, the principal shareholder of which is also a shareholder in three of the Company’s other subsidiaries. The Company acquired Alcar for approximately $1.9 million of cash consideration. The acquisition of Alcar was accounted for as an asset purchase of WiFi frequencies through a variable interest entity. On acquisition, the Company allocated approximately $3.1 million to licenses, approximately $0.7 million to deferred tax liability, and approximately $0.8 million to noncontrolling interest. The Company has consolidated the financial position and the results of operations of Alcar from June 1, 2007.

Note 7: Shareholders’ Equity

Common Stock

     The Company’s outstanding shares of common stock increased by 167,358 shares and 49,000 shares in the six months ended June 30, 2006 and 2007, respectively, which shares were issued in connection with the exercise of employee stock options.

GOLDEN TELECOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

     In May 2007, the Company issued 3,193,219 shares of the Company’s common stock in connection with the acquisition of 51% ownership interest in Corbina.

     At June 30, 2007, there were 5,597 unvested restricted shares of the Company’s common stock outstanding with a value of $0.3 million. Unvested restricted shares of 497 relate to restricted shares issued to senior management of the Company in August 2005 and vest gradually over approximately two years. The remaining 5,100 unvested restricted shares relate to restricted shares issued to certain members of the Board of Directors of the Company in May 2007 and vest after one year.

Note 8: Stock Option and Stock Appreciation Rights Plans

     During the six months ended June 30, 2006 and 2007, the Company recorded pretax stock-based compensation expense of approximately $2.2 million and $11.2 million, respectively, related to the expensing of the Company’s Stock Appreciation Rights (“SARs”), non-qualified stock options and restricted shares.

     The Company has established the 1999 Equity Participation Plan of Golden Telecom, Inc. (the “Equity Plan”) and granted stock options to key employees and members of the Board of Directors of the Company. In April 2007, the Compensation Committee of the Board of Directors recommended and the Board of Directors approved an amendment to the Equity Plan to increase the number of shares available under the Equity Plan by 1,000,000. The decision of the Board of Directors was ratified by the Company’s shareholders on May 17, 2007. Under the Equity Plan not more than 5,320,000 shares of common stock (subject to anti-dilution and other adjustment provisions) are authorized for issuance upon exercise of options or upon vesting of restricted or deferred stock awards. There are 1,959,019 securities remaining available for future issuance under the Company’s Equity Plan.

     The Company has established the Golden Telecom, Inc. 2005 Stock Appreciation Rights Plan (“SARs Plan”) and the EDN Sovintel 2005 Stock Appreciation Rights Bonus Plan (“Sovintel SARs Bonus Plan”). On June 27, 2007, the terms of the outstanding SARs issued under the SARs plan and the Sovintel SARs Bonus Plan were modified to cap the maximum of payout to the employee at the closing sales price per share of the Company’s common stock on the NASDAQ Global Select Market on June 27, 2007, or $53.80. On June 27, 2007, the participants of the SARs Plan, the Sovintel SARs Bonus Plan, and the SARs granted to the Chief Executive Officer (“CEO”) outside of these plans, were granted 849,150 stock options (one stock option for every capped SAR) with essentially the same terms as the capped SARs with the exercise price of $53.80.

     On June 28, 2007, the Company’s Board of Directors approved and the Company granted 606,870 options to senior management and key employees. Under the terms of the Company’s Equity Plan the options were granted at a share price which was the closing sales price per share of the Company’s common stock on the NASDAQ Global Select Market on the date immediately preceding the date of grant, which was $53.80 (“Option Granting Share Price”). Seventy-five percent of the options grant shall be subject to time vesting, one-third of which shall be and become vested and nonforfeitable on each of the first three anniversary dates from the grant date, provided that the employee remains continuously employed by the Company until each such relevant date. The Option Granting Share Price shall increase by five percent on each anniversary date after the grant date in association with the options that shall be and become vested and nonforfeitable on each such anniversary date. Twenty-five percent of the options granted are subject to market condition vesting upon the Company’s common stock achieving an average closing trading price of at least $82.15 per share for thirty consecutive days as determined in the sole discretion of the Company. If the Company’s stock does not achieve an average closing trading price of at least $82.15 per share for thirty consecutive days within three years of the date of grant, such portion of the options shall expire by its own terms and shall not be exercisable. The options have a contractual term of 5 years and are settled in stock only .

GOLDEN TELECOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

     A summary of activity under the SARs Plan, the Sovintel SARs Bonus Plan, and the SARs granted to the CEO outside of these plans, as of June 30, 2006 and 2007, and changes during the six months then ended are presented below:

						Weighted
						Average
						Exercise				Aggregate
		SARs				Price				Intrinsic Value
										(in thousands)
Outstanding at January 1, 2006			1,251,800			$	29.19
SARs granted			60,000				31.46
SARs exercised			—				—
SARs expired			—				—
SARs forfeited			(42,400	)			28.95
Outstanding at June 30, 2006			1,269,400				29.30			$	—
Exercisable at June 30, 2006			—			$	—			$	—

						Weighted
						Average
						Exercise				Aggregate
		SARs				Price				Intrinsic Value
										(in thousands)
Outstanding at January 1, 2007			1,293,800			$	29.05
SARs granted			—				—
SARs exercised			(648,117	)			28.43
SARs expired			—				—
SARs forfeited			(33,900	)			29.88
Outstanding at June 30, 2007			611,783				29.67			$	15,500
Exercisable at June 30, 2007			21,100			$	26.19			$	608

     The weighted-average fair value of SARs outstanding as of June 30, 2007 was $19.19 per SAR. As of June 30, 2007, there was approximately $3.3 million of total unrecognized compensation cost related to non-vested SARs awards. That cost is expected to be recognized over a weighted-average requisite service period of 0.9 years.

     A summary of activity under the Equity Plan as of June 30, 2006 and 2007, and changes during the six months then ended is presented below:

						Weighted
						Average
						Exercise				Aggregate
		Stock options				Price				Intrinsic Value
										(in thousands)
Outstanding at January 1, 2006			373,012			$	14.31
Stock options granted			—				—
Stock options exercised			(167,358	)			13.81
Stock options expired			—				—
Stock options forfeited			—				—
Outstanding at June 30, 2006			205,654				14.71			$	2,272
Exercisable at June 30, 2006			205,654			$	14.71			$	2,272

GOLDEN TELECOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

						Weighted
						Average
						Exercise				Aggregate
		Stock options				Price				Intrinsic Value
										(in thousands)
Outstanding at January 1, 2007			157,915			$	13.82
Stock options granted			1,456,020				55.58
Stock options exercised			(49,000	)			15.07
Stock options expired			—				—
Stock options forfeited			—				—
Outstanding at June 30, 2007			1,564,935				55.34			$	5,574
Exercisable at June 30, 2007			367,382			$	41.78			$	4,860

     The weighted-average fair value of stock options outstanding as of June 30, 2007 was $18.80 per stock option. As of June 30, 2007, there was approximately $23.3 million of total unrecognized compensation cost related to non-vested stock option awards. That cost is expected to be recognized over a weighted-average requisite service period of 1.5 years.

GOLDEN TELECOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note 9: Commitments and Contingencies

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 taxes in 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, 2006 and June 30, 2007. 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.

     The Company’s wholly-owned Russian subsidiary, EDN Sovintel LLC (“Sovintel”) is engaged in litigation with the Russian tax inspectorate in regard to claims issued by the tax inspectorate on September 25, 2006. The Russian tax inspectorate claimed that Sovintel owes taxes, fines and penalties in the amount of approximately $21.9 million for the years ended December 31, 2004 and 2005. On October 4, 2006, Sovintel filed a lawsuit against the tax inspectorate disputing the claims. Court hearings were held between November 8, 2006 and March 19, 2007. The first instance court ruled in favor of Sovintel by dismissing the tax inspectorate’s claim on April 3, 2007. On April 28, 2007 the tax inspectorate appealed this decision. The second instance court ruled in favor of Sovintel by dismissing the tax inspectorate’s claim on July 16, 2007. The Company expects that the tax inspectorate will appeal this decision in the third instance court. The term for appeal will expire on September 26, 2007. Currently, the Company does not consider an unfavorable outcome probable for this claim. In October 2006, ZAO International Moscow Bank, a related party, provided a bank guarantee for up to 518,000,000 Russian Rubles, equivalent to approximately $20.1 million, for Sovintel’s obligation in connection with this claim.

     Starting in 2006, the Russian tax inspectorate, in the course of tax audits of Russian long-distance telecom operators, started to challenge the offset of Value Added Taxes (“VAT”) relating to the cost of international telecommunication services. Therefore, there is a risk that the Company may be assessed additional VAT, fines and penalties on similar issues. The amount of such risk relating to the years ended December 31, 2004 and 2005 is included in the approximately $21.9 million tax claim currently disputed, as disclosed above. The amount of similar risk relating to the year ended December 31, 2006 is assessed as being up to approximately $13.0 million. The amount of risk relating the six months ended June 30, 2007 is assessed as being up to approximately $7.3 million. Should the Russian tax inspectorate assert such claim, the Company believes it has meritorious defenses to successfully dispute such claim and defend its position in court. However, due to the fact that court cases on such matters are appearing for the first time, the expected outcome of such cases is currently unclear.

Taxes Other Than Income Tax

     The Company has also identified contingencies related to taxes other than income tax. Such possible tax contingencies could materialize and require the Company to pay additional amounts of tax. As of June 30, 2007 management estimates such contingencies related to taxes on other than income tax to be up to approximately $3.0 million. The Company believes the estimated loss related to these contingencies is not probable and, as such, it is not accrued at June 30, 2007.

Russian Environment and Current Economic Situation

     While there have been improvements in the Russian economic situation, such as an increase in gross domestic product and a reduced rate of inflation, Russia continues economic reform and development of its legal, tax and regulatory frameworks as required by a market economy. The future stability of the Russian economy is largely dependent on these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the Russian government.

     In a letter dated December 20, 2006, several deputies of the State Duma wrote to the Russian General Prosecutor alleging that Sovintel was illegally providing domestic and international services prior to receipt of access codes. The letter states that because Sovintel had not yet received access codes to offer such services in the first, second and third quarter of 2006, then Sovintel was operating illegally in this respect. Further, the letter requests that the Prosecutor General’s office conduct an investigation of Sovintel’s activities and, if appropriate, charge those Sovintel officials responsible for the activities. Sovintel received the access codes in December 2006 and prior to construction of its Federal Transit Network was operating under its previous licenses. The Company believes that it was acting in accordance with Russian regulations and legislation and our licenses.

GOLDEN TELECOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Net Assets Position in Accordance with Statutory Requirements

     In accordance with Russian legislation, joint stock companies must maintain a level of equity (net assets) that is greater than the charter capital. In the event that a company’s net assets, as determined under Russian accounting legislation, fall below certain minimum levels, specifically below zero, the company can be forced to liquidate.

     Kolangon and some of the Company’s other regional entities have had, and continue to have, negative equity as reported in each of their Russian statutory financial statements. Management believes that the risk of the initiation of statutory liquidation procedures or other material adverse actions is remote. However, if such actions were taken, it could have a material adverse effect on the Company’s results of operations, financial position and operating plans. The Company is currently in the process of remediating this situation.

Other Commitments and Contingencies

     The Company has future purchase commitments of approximately $95.2 million as of June 30, 2007, which primarily includes equipment, interconnection and satellite transponder capacity.

     In January 2007, the Company entered into a five-year term Facility Agreement (the “Facility Agreement”) with banks, financial institutions and other institutional lenders, Citibank, N.A. London Branch and ING Bank N.V. as mandated lead arrangers, and Citibank International plc as agent. The Facility Agreement established an unsecured credit facility under which, the Company, GTS Finance, Inc., a wholly-owned subsidiary of the Company, and Sovintel may borrow up to an aggregate of $275.0 million. The credit facility carries interest at a rate equal to London Interbank Offered Rate (“LIBOR”) plus 1.5% per annum for the first twenty-four months and LIBOR plus 2% per annum thereafter. Funds borrowed may be used for general corporate purposes, including acquisitions, the payment of dividends and capital expenditures. The Facility Agreement places various restrictions on the Company related to incurrence of debt, asset disposals, mergers and acquisitions, and negative pledges. The Facility Agreement also requires the Company to meet various financial and non-financial covenants, including several restrictions related to financial condition. As of June 30, 2007, the Company’s has $225.0 million outstanding under the Facility Agreement. The Company paid approximately $3.9 million of arrangement fees to the lead arrangers which are recorded in other non-current assets.

     In January 2007, the Company entered into a five year lease agreement with ZAO Rascom, the Company’s equity method investee, for the right to use eight STM-64 fiber optic cable systems between Moscow and Stockholm. The Company had the right to take possession of two STM-64 fiber optic cable systems as of January 1, 2007 and the option to increase to six STM-64 fiber optic cable systems in the future. In connection with this lease, the Company has recorded a capitalized leased asset and a related capital lease obligation, which were approximately $1.6 million and $1.4 million, respectively as of June 30, 2007.

     In February 2007, the Company entered into a five year lease agreement for the right to use STM-1 fiber optic capacity on major routes within Russia. The Company had the right to take possession of this STM-1 fiber optic capacity beginning April 1, 2007. In March 2007, the Company issued a $2.0 million loan to the same company that has provided the lease and in May 2007 the Company issued an additional approximately $5.9 million loan to the same company that has provided the lease. The loan has payment terms of 59 months, which start in May 2007, and carries interest at the rate of 9 percent per annum. In connection with this lease, the Company has recorded a capitalized leased asset and a related capital lease obligation, which were approximately $9.8 million and $9.8 million, respectively as of June 30, 2007.

Other Matters

     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.

GOLDEN TELECOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

     Sovintel is currently engaged in litigation with a minority shareholder of Kubtelecom LLC (“Kubtelecom”), a 74% owned subsidiary of the Company, in regard to the shareholder’s claim that the shareholder’s pre-emptive right to acquire 74% ownership in Kubtelecom was breached. The first instance court ruled in favor of the minority shareholders on December 4, 2006. The second instance court ruled in favor of Sovintel by dismissing the minority shareholder’s claim on March 14, 2007. The minority shareholder appealed this ruling and on April 18, 2007, the third instance court ruled in favor of Sovintel. The shareholder appealed to the Supreme Arbitration Court of the Russian Federation and on July 11, 2007, the court turned down the claim. The shareholder may file a new claim based on other grounds. The Company does not consider an unfavorable outcome probable for this claim. However, in case of an unfavorable outcome of this litigation, the Company may be forced to unwind the Kubtelecom acquisition.

     On March 6, 2007, Rossvyaznadzor, a governmental body that reports to the Ministry of Information Technologies and Communications of the Russian Federation, warned Sovintel that it should remedy certain alleged violations in traffic routing. The allegation followed an inspection by Rossvyaznadzor of an independent operator, OAO Arctel (“Arctel”). Rossvyaznadzor believes that Sovintel inappropriately converted telephone traffic of Arctel into IP-telephone traffic and then incorrectly routed this traffic abroad. Sovintel carried out a full analysis of the routing of these calls. Following Sovintel’s review, the Company notified Rossvyaznadzor that the Company believes that Sovintel has not violated its licenses. Sovintel filed a lawsuit against Rossvyaznadzor and on May 17, 2007, the court turned down Sovintel’s lawsuit for procedural reasons that the license in question had been annulled and that there were no grounds for dispute. On May 29, 2007, Sovintel appealed this court decision and on June 26, 2007, Sovintel withdrew its lawsuit. On June 29, 2007, the court accepted Sovintel’s withdrawal of the lawsuit and revoked the decision of the first instance court.

     The Company is currently engaged in a regulatory dispute with the National Commission of Communication’s Regulation of Ukraine (“NCCR”) over re-registration of the license, recorded at approximately $13.3 million, for wireless broadband radio frequencies issued to S-Line LLC (“S-Line”), a 75% owned Ukrainian subsidiary of the Company. The first instance court ruled in favor of S-Line on April 18, 2007 obliging the NCCR to re-register the license. NCCR appealed this decision and on August 3, 2007 the second instance court ruled in favor of NCCR. On August 8, 2007, S-Line filed an appeal of this decision to the Supreme Administrative Court of Ukraine. The Company considers the re-registration of this license probable. While the Company awaits formal re-registration, the license continues to be valid.

     During the six months ended June 30, 2007, the Company purchased services of approximately $1.6 million from a minority shareholder in four of the Company’s subsidiaries.

Note 10: 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 range from approximately 50% to 54%.

     The components of the Company’s investments in and advances to ventures are as follows:

		As of December 31, 2006				As of June 30, 2007
		(in thousands)
Equity in net assets acquired		$	13,448			$	13,022
Goodwill as part of investment			1,313				1,313
Difference between fair value and historical value of assets acquired			(1,355	)			(1,485	)
Cash advances and other			(1,520	)			(698	)
Total investments in and advances to ventures		$	11,886			$	12,152

     The Company has financed the operating and investing cash flow requirements of several of the Company’s ventures in the form of cash advances and loans. 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.

GOLDEN TELECOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note 11: 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 the Company’s lines of businesses for the three and six months ended June 30, 2006 and 2007, 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. 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.

																														Adjustments to Reconcile
																														Business Segment to
																														Consolidated Results
		Business				Carrier																Business								Equity
		and				and				Consumer				Mobile				Corporate &				Segment				Consolidated				Method				Affiliate
		Corporate				Operator				Internet				Services				Eliminations				Total				Results				Ventures				Adjustments
		(in thousands)
Three Months Ended June 30, 2006
Revenue from external customers		$	113,073			$	71,398			$	12,243			$	2,621			$	—			$	199,335			$	196,968			$	(4,210	)		$	1,843
Intersegment revenue			—				9				—				—				(9	)			—				—				—				—
Operating income (loss)			30,787				7,399				667				501				(4,468	)			34,886				33,868				(1,018	)			—
Identifiable assets			520,706				364,875				73,136				9,145				(2.968	)			964,894				935,924				(28,970	)			—
Capital expenditures			22,318				9,365				5,067				5,614				24				42,388				41,873				(515	)			—

																														Adjustments to Reconcile
																														Business Segment to
																														Consolidated Results
		Business				Carrier																Business								Equity
		and				and				Consumer				Mobile				Corporate &				Segment				Consolidated				Method				Affiliate
		Corporate				Operator				Internet				Services				Eliminations				Total				Results				Ventures				Adjustments
		(in thousands)
Three Months Ended June 30, 2007
Revenue from external customers		$	167,466			$	116,883			$	13,445			$	3,666			$	—			$	301,460			$	297,669			$	(5,602	)		$	1,811
Intersegment revenue			—				—				—				—				—				—				—				—				—
Operating income (loss)			47,578				12,790				(4,528	)			(275	)			(5,971	)			49,594				48,826				(768	)			—
Identifiable assets			809,745				540,818				357,770				48,342				53,959				1,810,634				1,773,546				(37,088	)			—
Capital expenditures			42,450				14,883				14,364				2,950				754				75,401				76,000				599				—

GOLDEN TELECOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

																														Adjustments to Reconcile
																														Business Segment to
																														Consolidated Results
		Business				Carrier																Business								Equity
		and				and				Consumer				Mobile				Corporate &				Segment				Consolidated				Method				Affiliate
		Corporate				Operator				Internet				Services				Eliminations				Total				Results				Ventures				Adjustments
		(in thousands)
Six Months Ended June 30, 2006
Revenue from external customers		$	216,432			$	133,821			$	24,502			$	5,211			$	—			$	379,966			$	375,108			$	(8,089	)		$	3,231
Intersegment revenue			—				21				—				—				(21	)			—				—				—				—
Operating income (loss)			57,016				14,432				304				1,035				(8,922	)			63,865				62,085				(1,780	)			—
Identifiable assets			520,706				364,875				73,136				9,145				(2.968	)			964,894				935,924				(28,970	)			—
Capital expenditures			43,123				17,400				7,962				5,661				29				74,175				73,460				(715	)			—

																														Adjustments to Reconcile
																														Business Segment to
																														Consolidated Results
		Business				Carrier																Business								Equity
		and				and				Consumer				Mobile				Corporate &				Segment				Consolidated				Method				Affiliate
		Corporate				Operator				Internet				Services				Eliminations				Total				Results				Ventures				Adjustments
		(in thousands)
Six Months Ended June 30, 2007
Revenue from external customers		$	315,474			$	216,015			$	23,718			$	5,503			$	—			$	560,710			$	553,408			$	(9,749	)		$	2,447
Intersegment revenue			—				4				—				—				(4	)			—				—				—				—
Operating income (loss)			81,023				18,416				(9,658	)			(656	)			(12,088	)			77,037				76,927				(110	)			—
Identifiable assets			809,745				540,818				357,770				48,342				53,959				1,810,634				1,773,546				(37,088	)			—
Capital expenditures			72,091				32,213				21,511				3,624				760				130,199				124,390				(5,809	)			—