Annual Report 2008

2008

ANNUAL REPORT 2008

ANNUAL REPORT TABLE OF CONTENTS

SITRONICS overview

About SITRONICS ...... 4 Key events 2008 ...... 5 Business Geography ...... 7

Chairman statement ...... 9 Ceo’s statement ...... 11

Financial and operational highlights ...... 13 Key Markets ...... 15

Operating and Financial Performance Overview Group Overview ...... 16 Segmental Overview ...... 17

Business overview

Overview of the Main Business Segments SITRONICS Telecommunication Solutions ...... 19 SITRONICS IT Solutions ...... 21 SITRONICS Microelectronics ...... 23 Research and development ...... 25

Corporate governance

General information ...... 26 Asset structure ...... 27 Board of directors ...... 28 Committees of the Board of Directors ...... 31 Top management ...... 32

To shareholders & investors

Shareholder Capital ...... 36 General Shareholder Meeting /Dividend Policy .....37 Risks ...... 39

Social responsibility

Social Responsibility ...... 41 Human Resources ...... 42

Financial statements ...... 43

Contacts ...... 92 About SITRONICS

4 sitronics SITRONICS is a leading hi-tech company in Eastern Eu- Strengthening Market Position: We are intended to be- annual report 2008 rope providing telecommunication solutions, information come a key partner of the Government in the field of in- technologies, system integration and consulting, as well frastructure improvements in Russia and CIS countries. as development and production of microelectronics. Performance: We are currently centralizing all the Today, SITRONICS provides services to over 3,500 clients management functions to reduce costs, improve per- globally. SITRONICS has over 10,000 employees with ap- formance and competitiveness of our products. prox. 4,500 involved into research and development. Promising Partnerships: We have established solid re- In February 2007, SITRONICS made an initial public of- lations with the global technology leaders and continue fering (SITR) on the London Stock Exchange (LSE. Its seeking new partners. The global collaboration opens new shares are also listed on the Russian Trading System horizons, enables for the implementation of challenging (RTS) and the Moscow Stock Exchange (MSE) ex- unique projects and supporting the industry progress. changes in Russia.

The Company was established in December 2002 as Concern Scientific Centre which constituent a joint venture of Russian microelectronics supplier NIIME and Mik- ron and the Czech manufacturer of telecommunication equipment and software STROM Telecom. Acquisition of Business structure the controlling interest in the Ukrainian Kvazar-Micro, the leading IT supplier in Ukraine and establishment of IT- related business segment in July 2004 became the next step in its development. In 2005, the assets of Concern Scientific Centre, Kvazar-Micro and SITRONICS supply- Information Telecom ing consumer electronics under SITRONICS were united Technologies Solutions under SITRONICS brand name. Acquisition of the controlling interest of Greek INTRACOM TELECOM in June 2006 brought the Company into telecommunication markets of Southern Europe, Middle East and Africa, ensured Micro- Consumer the significant synergy of the product line, as well as pro- electronics Goods and Services vided an access to the wide range of R&D practices.

SITRONICS is a part of CJFC Sistema – a leading public diversified company focused on the service market.

SITRONICS has been nominated the largest Russian IT- A leading provider of comprehensive solutions in the company in 2008 under rating agency “Expert”. field of systems for supporting operation and business activities, next generation networks, broadband The mission of SITRONICS lies in contributing to the glob- access networks and solutions for digital television. al development of high technology industry and genera- Provides services for manufacturing electronics for tion of knowledge economy in Russian and worldwide. telecoms and IT-market companies under contract as well as for third-party manufacturers of consumer electronics. Development Principles A leading Russian manufacturer of microelectronics providing a complete chain for manufacturing and Leadership: We are striving to become an interna- delivery of integrated circuits, solutions based on tional hi-tech company with a leading position in the smart and RFID-technologies: SIM-cards, bank key markets cards, transport and contact-type smart cards. One of the leading providers of solutions, products Innovation: We are developing competitive products and services in the area of information technologies based on our partners’ technologies and our own strong within CIS countries and Eastern Europe. solutions. Key Events of 2008 July A contract signed for the development of a 2.5G network for K-TELECOM, the largest mobile communica- SITRONICS OVERVIEW January tion operator in Armenia for US$ 24 million. 5 SITRONICS entered in a number of major contracts and promising partner agreements. In particular, coop- August eration between Kvazar-Micro and LAMPERTZ, the world SITRONICS – Nanotechnologies Project was included leading supplier of physical security of IT systems began. into the list of programmes financed from the Investment Fund of the Russian Federation. February A new product market lunch– SITRONICS Dateri- umTM” Mobile Data Processing Centres (MDPC). SITRONICS took part at the MOBILE WORLD CON- GRESS 2008 International Exhibition and Conference in September Barcelona, where it presented advanced decisions in A contract signed with the Ministry of Education of the sphere of convergent online billing, switching and Romania for 122.5 million on furnishing computer class- service management. es in over 8,000 schools. Turnkey construction of the communication network March for the telecommunications services operator Sistema A facility agreement entered into with Dresdner Bank Shyam TeleServices in India (now MTS India) complet- AG for US$ 75 million with duration of one year and ed. The amount of contract is US$ 5.7 million. annual interest rate 9.25%. Cash assets mobilized according to this facility agreement are channelled for the October partial refinancing of current liabilities and financing the floating capital of subsidiaries. SITRONICS is recognized as The Largest High Tech Company per Capitalization Level according to the Ex- pert 400 rating of major Russian companies. April SITRONICS Microelectronics Solutions Segment The strategy of development of Kristall for 2008 – 2010 signed a contract with the Chinese company CMC on approved. Main objectives: creating competitive products the supply of microchips for the electronic equipment for based on in-house technologies and partner solutions, US$ 29 million. making the company the key partner of the country, creating partnerships with the world technological leaders. November According to the Moscow Management School May Skolkovo’s rating SITRONICS became one of the top 25 The first phase of works completed on the develop- major transnational companies of Russia. ment of IT infrastructure of Warid Telecom – telecom- A contract concluded with the Wightman Telecom munications operator in Uganda, Africa. The contractual communication operator (Canada, Ontario) on the im- value amounts to US$ 22.7 million. plementation of the in-house fs|cdn solution, which en- Presence in the Middle East is enhanced. A 40 mil- sures rendering IPTV services. lion contract signed with Syrian Wireless Organization for the construction of a new wireless telecommunication network in Syria. December SITRONICS entered into the agreement with the June leading Armenian cellular communication operator K- Development of the WiBAS networks began for the six Telecom for US$ 24 million. major operators of Europe and Asia: T-Mobile in Slovakia, By the Resolution of the Government Committee Globul in Bulgaria, Smart Telecom in Ireland, MTS in Russia, on Enhancing Stability of the Development of Russian Kazakhtelecom in Kazakhstan and Mediacom in Poland. Economy SITRONICS is included into the list of back- Entry to the market of Malaysia: launch of the project bone strategic enterprises which comprises 295 leading on developing a WiBAS. companies in total. Atlanta

Business Geography

SITRONICS is a leading supplier of hi-tech products in Representative CIS Europe Russian and CIS countries; it has achieved a strong mar- offices Armenia / Yerevan Albania / Tirana ket position in the Central and South Europe and expands Russia Belarus / Minsk Bulgaria / Sophia its presence in Asia, Middle East and Africa. The main fa- Moscow Kazakhstan / Astana Bosnia and cilities of the SITRONICS Telecommunication Solutions are Kazakhstan / Almaty Herzegovina / Sarajevo located in Prague, Czech Republic and Athens, Greece. Novorossiysk The R&D centre of SITRONICS Telecommunication Solu- Samara Moldova / Kishinev Cyprus/ Nicosia tions is based in Kiev, Ukraine and the SITRONICS Micro- Vladivostok Uzbekistan / Tashkent Czechia / Prague electronics business unit is located in Zelenograd, Russia. Yekaterinburg Ukraine / Kiev France / Paris The headquarters are in Moscow. Greece / Athens St. Petersburg

Zelenograd Moscow Yekaterinburg Vilnius Kazan Minsk Samara Novosibirsk Amsterdam Prague Kiev Astana Bratislava Khmelnitskyi Paris Budapest Voronezh Kishinev Ljubljana Belgrade Almaty Sarajevo Novorosiysk Skopje Bucharest Tirana Sofia Yerevan Vladivostok Patras Xanthi Tashkent Athens

Cyprus Damascus

Tripoli

New Delhi Guangzhou Dubai

Riyadh

Kuala Lumpur

Hungary / Budapest Asia USA CIS Plants Holland / Amsterdam China / Guangzhou Atlanta Ukraine / Kiev Russia Lithuania / Vilnius India / New Delhi Ukraine / Khmelnitski Voronezh Macedonia / Skopje Libya / Tripoli R&D Zelenograd Romania / Bucharest Malaysia / Kuala Russia Europe Serbia / Belgrade Lumpur Kazan Czech / Prague Europe Slovakia / Bratislava Saudi Arabia / Riyadh Moscow Greece / Athens Romania / Bucharest Slovenia / Ljubljana Syria / Damascus Novosibirsk Greece / Xanti UAE / Dubai St.Petersburg Greece / Patras Yekaterinburg Slovakia / Bratislava Denis Muratov Chairman of the Board of Directors, Non-Executive Director

The ability to create hi-tech products and solutions is becoming one of the main conditions of the long-term integration into the economic area Chairman’s statement

Dear Colleagues, Investors, Clients and Partners,

The year of 2008 which became a challenge for the global financial system has finished. Many countries with SITRONICS OVERVIEW a rapid developing economy, including Russia, experienced to the fullest extent that primary resources cannot9 remain to be a sole development factor. In the current context, the public intellectual potential is gaining more and more value. The ability to create hi-tech products and solutions in demand by the global market is becoming one of the main conditions of the long-term integration into the economic area.

I would like to point out that the competitiveness of our country is determined by the ability to create state-of-the- art products and technologies. The governmental concept of the national development up to 2020 is based on four I’s – Intuitions, Investments, Infrastructure and Innovations. However, neither government, nor business sector or science community can create the up-to-date innovation system alone. The mechanisms to determine the further development of our economy may only be created by a large-scale public private program.

The Russian government provides consistent support for knowledge-intensive industries, and the business sector makes investments into perspective developments and commercialization of scientific knowledge. Being one of the leading hi-tech provider in the Russian market, SITRONICS is a reliable partner of the government in implementation of a number of Federal Target Programs and National Projects. The recognition of our partnership success is evidenced by entering into the list of companies of a strategic importance for the national economy.

It should be noted that to preserve the competitive ability it is crucial to establish a partnership with international companies creating innovation environment globally. The most needed “asset” of the most of the Russian companies is understanding the needs of the global market and the ability for efficient market activity. During the previous year, SITRONICS has been intensively developing new markets in rapidly developing regions – Middle East, Asia and Africa. The significant share of our projects was implemented in association with international partners. This enabled for implementation of projects meeting high international standards and gaining experience in global markets. We also continue the integration of our company into scientific and technology organizations which enables us to be aware of the standards being developed, learn about technology innovations prior to their implementation, and promote our own solutions with an impact on the industry technical policy.

Shareholding in JSFC Sistema, one of the largest Russian corporation, is important for SITRONICS sustainable development. Being its “technology wing” we have an access to significant financial and management resources owned by the corporation; we are involved in active cooperation with other subsidiaries holding the leading positions in their markets.

Today, SITRONICS is a largest Russian hi-tech corporation with foreign capital. In the context of the current economic conditions, our activities will be focused on retaining the leading positions and revenues in the key industry and geographical markets. We will be able to meet the expectations of our clients which consider hi-tech products as one of the ways to improve the performance and reduce costs of their business.

Hi-tech industry has been a sort of progress engine during last several years. Due to its achievements many countries have experienced economic development, improvement in the living standards, generation of new culture of virtual communication and business process practices. And today we have all the necessary conditions for hi-tech to become the industry which will give a start to a new milestone of the global economy development. Sergey Aslanian President, Executive Director JSC SITRONICS

We are looking forward with reasonable optimism, despite the adverse changes in the market environment CEO’s STATEMENT

Dear Colleagues, Clients and Partners,

During the last year, SITRONICS has expanded its business and strengthened its position in the hi-tech markets SITRONICS OVERVIEW of Russia, CIS and foreign countries in terms of all major business performance figures. 11 In 2008, the Company’s revenues increased by 23.5% and amounted to USD 2.000,9 mln, its OIBDA constituted US$ 133.1 mln with performance level at 6.7%. We have lived up to our promises given to the investment community at the beginning of the year, and we hope that new milestones of the Company’s growth will allow SITRONICS to secure a strong position in new market niches and reach new horizons in 2009.

SITRONICS’s success of the previous year was possible due to a number of positive initiatives implemented by the Company. First of all, we have revised our product portfolio and focused on the production and development of high-margin products and solutions. Secondly, we have entered into new regions: the geography of our presence has expanded due to the access to the fast-growing markets of Asia, Africa and Middle East. Thirdly, we have strengthened our partnerships with leading world technology companies. These strategic partnerships provided our clients with an access to high quality state-of-the-art solutions. Finally, we continued our successful cooperation with the Russian government. In 2008, SITRONICS joined a number of projects under the Russian Federal Target Program. SITRONICS was also listed among the Russian strategic companies in December 2008 which proves the importance given by the government to the development of non-primary industry and companies with a scientific and technical potential.

Certainly, 2008 became an important year for our Company. We are looking forward with reasonable optimism, despite the adverse changes in the market environment. The companies which are able to adapt to changing economic conditions and make the most of new opportunities are well positioned to occupy new niches when the economy stabilizes after the crisis. Our employees are working on technological decisions which help clients to offer highly-competitive services, achieve more business profitability and strengthen their positions in the market.

I would like to thank our shareholders, clients and partners for their trust and support! I am sure that our solidary and spirited team will reach new success in all our key business segments: microelectronic solutions, telecommunications and IT, which form the foundation for successful development of the hi-tech market of Russia. FINANCIAL AND OPERATIONAL HIGHLIGHTS

OFFICES IN COUNTRIES TOTAL ASSETS UP 6.9% YEAR ON YEAR TO 36 ALL AROUND THE WORLD US$ 2,016.7 MILLIONS TOP-1 RUSSIAN IT-COMPANIES

Revenue (US$, mln)

CONSOLIDATED REVENUES UP 23.5% YEAR ON YEAR TO US$ 2,000.9 MILLIONS

EXPORT MORE THAN IN 99.1 473. 6 952.6 1 610.7 1 619.6 2 000.9

2003 2004 2005 2006 2007 2008 60 COUNTRIES Sitronics business structure WESTERN AND EASTERN EUROPE, MIDDLE EAST, (by revenues, %) NORTH AMERICA, CENTRAL AND SOUTH-EAST ASIA, NORTH AFRICA

15%

MANUFACTURING 39% IN RUSSIA, GREECE, CZECH REPUBLIC, ROMANIA AND CHINA 44%

R&D CENTERS Telecom Solutions OVER CLIENTS Information Technologies IN RUSSIA, UKRAINE, Microelectronics CZECH REPUBLIC AND GREECE 3500 Consumer Services and Products FINANCIAL AND OPERATIONAL HIGHLIGHTS

OFFICES IN COUNTRIES TOTAL ASSETS UP 6.9% YEAR ON YEAR TO 36 ALL AROUND THE WORLD US$ 2,016.7 MILLIONS TOP-1 RUSSIAN IT-COMPANIES

Revenue (US$, mln)

CONSOLIDATED REVENUES UP 23.5% YEAR ON YEAR TO US$ 2,000.9 MILLIONS

EXPORT MORE THAN IN 99.1 473. 6 952.6 1 610.7 1 619.6 2 000.9

2003 2004 2005 2006 2007 2008 60 COUNTRIES Sitronics business structure WESTERN AND EASTERN EUROPE, MIDDLE EAST, (by revenues, %) NORTH AMERICA, CENTRAL AND SOUTH-EAST ASIA, NORTH AFRICA

15%

MANUFACTURING 39% IN RUSSIA, GREECE, CZECH REPUBLIC, ROMANIA AND CHINA 44%

R&D CENTERS Telecom Solutions OVER CLIENTS Information Technologies IN RUSSIA, UKRAINE, Microelectronics CZECH REPUBLIC AND GREECE 3500 Consumer Services and Products Key Markets

14 sitronics Currently, the company sees telecommunication, in- mand for FTTx and BWA technologies. Up to 40%, is annual report 2008 formation technology, and microelectronic markets in expected in Western Europe followed by Latin America, Russia, CIS, Greece, Eastern Europe, Middle East, and Eastern Europe, Middle East, Africa and Asia markets. South-Eastern Africa as the target direction for its development. These markets demonstrate one of the highest According to Dittberner Associates, Inc, the supplies growth rates in the world. Herewith, Telecommunication, of DSL equipment reduced by 11% in 2008 as com- information technology, and microelectronics sectors pared to 2007. At the same time the supplies of VDSL are underdeveloped as compared to Western Europe equipment grew by 59%, up to 11 million items, which and North America markets, providing an essential po- gives evidence of the increased interest in cutting-edge tential for future growth. SITRONICS actively develops technologies. competencies and product line to secure and expand its presence on these markets. Gartner defines volume of the market for microwave mobile backhaul (point-to-point and point-to-multipoint) Telecommunications Market at the level of US$2.75 billion in 2009 and expects the segment to grow on the average by 9% until 2012. Telecommunication industry has been going through the period of active growth during the last two decades, driv- According to Gartner estimates there is a positive trend en by technological innovations, Internet development in customer billing management segment. Recent re- and deregulation of numerous markets. Telecommunica- search on OSS/BSS markets gives evidence that billing tion market will see the future growth primarily due to the and charging systems market in Eastern Europe, where demand for next generation networks and convergent Russia provides the highest revenue, will grow by 4-6% services including voice communication, data and video during two upcoming years and by 2012 it will reach the transfer softswitches and associated systems which are capacity of US$1.239 billion as compared to US$1.164 going to play the key role in this transition process. billion in 2008. Average growth on Western and Eastern Europe markets will equal to 4.8% and 6.6% respec- Both on developed and fast-growing markets IP based tively, high demand for billing systems is expected in platform for accessing miscellaneous services will be- Middle East and Africa. In general customer billing man- come the most efficient network type. Mobile and wire- agement solutions segment in EMEA is going to grow line ground communication service providers currently from US$26.6 billion in 2008 to US$33.9 billion in 2012. strive to increase their market margin and ARPU index; they offer various hi-tech services to their subscribers: Russian telecommunications market slowed down after high-speed wire-line and mobile broadband Internet unprecedented growth during last five years. Accord- access, streaming video and on-line games, Internet ing to Gartner, it leaped from US$36 million in 2003 to phone calls (VoIP), “triple-play” services (voice + data US$162 million in 2007. ACM consulting calculations + TV), high definition television (HDTV), etc. show that its volume amounted to US$181 million by the end of 2008. Despite the fact that the Russian market of Such dynamics in its turn stimulates demand for data- mobile communication is reaching saturation point, other exchange equipment, broadband infrastructure, routers segments have a significant potential for growth. Gartner and other similar products primarily in Russia and CIS analysts point out that house hold consumer broadband countries, as well as in Eastern Europe, Middle East, Af- connections market grew just by 5% in 2007 but during rica, and Asia-Pacific Region. the upcoming five years its growth will reach 14%.

According to Gartner, compound annual growth rate It is expected that major Russian service providers will (CAGR) of broadband access market will reach 10% in continue to expand their business abroad encouraging 2008-2012, as the result of significantly increased de- stable demand for telecommunication solutions. Information Technologies Market Microelectronics Market

Accelerated development of new business models, According to analytic group Semiconductor Industry SITRONICS OVERVIEW globalization, constant changes in competition envi- Association, the volume of microelectronics market15 ronment, and rapid renewal of technologies are major was $248.6 billions in 2008, which is 2.8% lower than in growth factors for IT-sector in the whole world. 2007. This is the first decline in semiconductors segment since 2001. The market was influenced by the collapse According to Gartner estimates IT expenses grew by of international economies and banking crisis. Herewith, 7.52% in 2008, but in 2009 growth rate of the indus- few other manufacturing industries were able to show try will reduce to 2.17%. Therewith, estimated aver- CAGR= 11.3% during the last 21 years (1986-2007). age growth of information technologies global market in 2007-2011 is 5.07%. It will develop primarily for the Economic decline and appreciation of borrowed funds account of growing markets in Middle East and Africa, caused the decline of capital investments $50.4 billions Asia-Pacific region and Central and Eastern Europe will in 2007 to $47.8 billions in 2008. show slower growth. At the same time, decelerated growth rate of the world The overall volume of Russian information technology microelectronics market has a insignificant impact on market including services, software, and hardware ex- the Russian market outlooks. Its average growth rate will ceeded US$11.0 billions in 2007 and according to ana- reach 25.4% from 2006 to 2010, this result will be fueled lysts’ estimates it reached US$18.3 billions in 2011. by the increased demand in the processing industry and telecommunications market, as well as by Russian gov- The consequences of the economic crisis had a signifi- ernment purchasing of semi-conductors for aerospace cant effect on Russian IT-market during the second half and military industries, as well as social projects. of 2008. On the one hand, IDC analysts forecast further decline in 2009 up to 22.1% as compared to 10.5% de- Smart-card market is stable in Russia and CIS countries celeration in 2008. On the other hand, the crisis encour- due to two contrary trends: average price reduction and ages a lot of companies to treat investments in IT as an demand growth in items. The market is still far from satu- opportunity to cut costs and keep up efficient operation ration, thus, despite of general demand decline in 2008, in hard conditions. Fast-growing companies that de- it showed positive dynamics. ployed comprehensive IT-infrastructure during the period of economic growth are currently seeking for ways to Mobile communication market is the largest segment scale up the efficiency of existing information systems. for SIM-cards with microprocessor due to the growth of subscribers and their flow. Banking sector holds the According to IDC analysts’ opinion, by 2012 the Russian second position in terms of smart-cards sales in Russia. IT-market will increase by more than 25% as compared Transport tickets sector is a perspective direction for to 2008 and its volume will reach US$29.5 billions. microprocessor cards application. The Russian government is also going to implement new types of identifica- Gartner analysts highlight several major trends for in- tion documents, including electronic passports, which ternational IT-market development including Green IT will encourage steady demand for semi-conductors. (develop the production of eco-friendly components); Cloud computing (scalability); Near Field Communica- Russian smart-card market is still dominated by foreign tion; Social computer platforms; virtual presence. manufacturers, despite of the fact that home production costs are lower. Eventual increase and modernization of manufacturing capacity by Russian companies will scale up the market margin of domestic suppliers. Operating and Financial Performance Overview

16 sitronics Net cash used in investing activities amounted to US$ annual report Group Overview 2008 281.6 million for the full year compared to US$ 219.3 mil- Consolidated revenues increased despite the adverse lion in 2007, and included capital expenditure of US$ 180.0 market conditions, and were up 24% for the full year. million in 2008 compared to US$ 236.0 million in 2007. The The Group has won a further US$ 926 million of new investments included the US$ 107.5 million acquisition of contracts since the beginning of 2008. the remaining 49% of Kvazar-Micro, the financing of the enlarged RFID ticketing project, the development of the Operating expenses were down 14% year on year 0.18 micron technology and 65 nanometre microchip pro- to US$ 270.2 million for the full year following the cost duction, and the Group’s ongoing R&D programmes. saving measures implemented during 2008. Selling, general and administration expenses, net of stock The Group’s cash and cash equivalents decreased to option expenses and bad debt provisions, represented US$ 125.7 million from US$ 185.5 million during the year 10.2% of revenues for the full year, compared to 11.6% but were up from US$ 105.4 million as at September in 2007. 30, 2008. Group net debt, excluding capital leases and derivatives, increased to US$ 607.5 million in 2008 from SITRONICS therefore reported an OIBDA profit of US$ US$ 326.8 million in 2007. 133.1 million for the full year compared to a loss of US$ 101.1 million in 2007. The Group therefore delivered OI- The Company’s borrowing level increased in 2008 and BDA margins of 6.7% for the full year. amounted to US$ 733.2 million as compared to US$ 512.2 million in 2007. SITRONICS secured a US$ 230 The OIBDA results for the full year included US$ 17.4 million loan from Vnesheconombank in November 2008, million of stock option expenses, compared with ex- which was partly used to refinance the US$ 200 million penses of US$ 29.0 million for 2007. Dresdner bank loans in the fourth quarter of 2008 and the first quarter of 2009, and the US$ 84.0 million of loans in the Czech Republic in December 2008. 2007 2008 (USD, mln) Revenue 1 619.6 2 000.9 OIBDA (101.1) 133.1 Growth of Company's revenue Total Assets 1 887.3 2 016.7 (From 2003 to 2008, $, mln)

The Group therefore reported US$ 59.3 million of operating income in 2008 compared to an operating loss of US$ 157.6 million in 2007.

The Group incurred foreign exchange losses of US$ 55.0 million for the full year due to the difference in value of the Group’s US dollar denominated borrowings between the balance sheet dates. The Group would have reported a net profit for the full year when excluding foreign exchange losses, compared to net losses of US$ 233.9 million for the full year 2007.

The Group’s net interest expenses increased year on year to US$ 38.2 million from US$ 25.5 million in 2007 following the increase in the Group’s net debt levels during the year.

Net cash provided by operating activities amounted to US$ 22.1 million for the full year 2008, compared to US$ 99.1 473. 6 952.6 1610.7 1619.6 2 000.9 1.6 million for the full year 2007. 2003 2004 2005 2006 2007 2008 Segmental Overview 17SITRONICS OVERVIEW SITRONICS IT Solutions SITRONICS Microelectronics

2007 2008 2007 2008 (USD, mln) (USD, mln) Revenue 763.3 873.2 Revenue 217.2 291.7 OIBDA 21.0 52.9 OIBDA 38.4 61.7 Total Assets 252.1 435.5 Total Assets 486.1 544.3

SITRONICS Information Technologies demonstrated SITRONICS Microelectronics demonstrated a 34.3% a 14.4% year on year revenue growth, which mainly year on year revenue growth, due to increased demand resulted from the new contracts related to deployment for microchips from the Russian Government, as well as of business applications, as well as deployment of a successful RFID ticketing technology project for the telecommunications equipment for the major telecom Moscow Metro. operators in Russia and Ukraine. Segment OIBDA was up 60.6% for the full year 2008, Segment OIBDA more than doubled for the full year due with increased OIBDA margins of 21.2% for the full to increased volume of sales, as well as an increased year 2008. The company set up its own production of proportion of higher margin system integration semi-finished components for RFID cards and therefore revenues and the effects of the ongoing cost reduction significantly decreased the cost of sales. Previously, the programme. components were supplied by third parties.

SITRONICS Telecom SITRONICS Consumer Services Solutions and Products

2007 2008 2007 2008 (USD, mln) (USD, mln) Revenue 569.8 787.1 Revenue 69.3 48.9 OIBDA (74.3) 55.1 OIBDA (55.4) (6.1) Total Assets 991.0 977.1 Total Assets 112.8 49.9

Revenues were up 41.5% year on year in the fourth quar- Revenues were lower year on year due to the ongoing ter and 38.1% for the full year 2008, due to the growth in restructuring of the business. sales of the Access/ Wireless transmission solution, and the launch of the educational IT project in Romania. At the end of the third quarter 2008 SITRONICS has ceased assembly of consumer electronics in The Telecom Solutions business reported an OIBDA Zelenograd, in line with the decision to focus on higher profit of US$ 55.1 million for the full year 2008, com- margin products. The Group currently rents out a part of pared to an OIBDA loss of US$ 74.3 million for the full the segment’s facilities. year of 2007. SITRONICS Telecom Solutions

In 2008, our business sector demonstrated a stable and positive growth. In the context of a non- stable global financial system achieving our objectives was more complicated, but possible. We took all the necessary steps to deal with the situation and to show better results compared to the last year – decrease the loss and increase the revenue regardless of the situation in the world market.

Pavel Pavlovsky, Vice President, Head of SITRONICS Telecom Solutions

SITRONICS Telecom Solutions Business Unit field of systems for supporting operation and combines a Greek company INTRACOM Tele- business activities, next generation networks, com of which JSC SITRONICS holds 51% of broadband access networks and solutions for shares as well as international company SI- digital television at the markets of Russia, CIS, TRONICS Telecommunications Solutions es- Central and South-East Europe, Africa and tablished at the premises of Czech company Middle East countries. STROM Telecom. The following companies are among the key SITRONICS Telecom Solutions is a leading partners: Cisco Systems, Oracle, Alcatel, Mo- provider of comprehensive solutions in the torola, Ericsson, Agilent, HP. Results in 2008 The main result of the 2008 is finalization of company SITRONICS Telecom Solutions has strengthened its reorganization. Now financial stabilization trends due to presence in already existing markets and enlarged geo- BUSINESS OVERVIEW newly formed team of professionals and, newly devel- graphical presence. So a number of clients and proj19- oped corporate strategy. We have completed a number ects in Europe and Africa tends to increase. Markets of of strategic projects and have entered new markets. Middle East and South-East Asia are also perspective. Company has signed contracts for delivery of the billing Year started with appropriate measures towards inter- systems to Uzdunrobita, Uzbekistan, and Shyam Tele- nal problems solving and risk management: the costs com, India. have been reduced, debt portfolio has been restructed. Financial state has been stabilized due to positive trend Outlook of Q2 and Q3. Global financial crisis impacts key company’s markets. The cost of borrowing is growing; new credits are difficult Revenue were up 38.1% year on year in 2008 and to attract. SITRONICS Telecom Solutions key clients- reached US$ 787.1 million compared to US$ 569.8 mil- telecom operators – also depend on loans; therefore lion. The Telecom Solutions segment reported an OI- their CAPEX plans in 2009 will probably be reduced. BDA profit of US$ 55.1 million compared to an OIBDA loss of US$ 74.3 million for the full year of 2007. Company is going to optimize project portfolio of new product development. There was a decision made to sell a number of assets, including shares in the subsidiaries. The Company The development of the company’s target markets will continues dealing with the banks and searching for the exceed the growth rate of the global market due to fore- alternative sources of financing; working on a number casts, which can be considered as a positive factor. In of perspective contracts which will provide revenue particular, the penetration rate of mobile connections increase. to the key regions demonstrates stable growth. WiMax implementation is a new opportunity on the key markets Products and Projects when the infrastructure for access to the stationary lines Convergent billing has become a major solution in the is lack of investment. product line of BSS (Business Support System), based on FORIS OSS (Operation Support System) and FORIS Telecommunication companies should more promptly NG (Next Generation) integration. SITRONICS Telecom react to customer requirements, cut time for new tech- Solutions emphasizes IMS (IP Multimedia Subsystem) nologies development, and be more flexible to change implementation as a new opportunity for the conver- the strategy. Early feedback brings success to the key gent operators. companies as well to the whole market.

A number of strategically important projects have been The convergence of the communication services will finished last year. Particularly migration of the post- continue in spite of crisis that will cause demand for paid and pre-paid subscribers (MTS in Russia and proper technologies and for implementation, integration Ukraine) to billing system FORIS, launch of FORIS FIX and support of these solutions. for Comstar-MGTS, implementation of FORIS NG solution in Congo and Uganda. Company has also pro- Developing markets of the CIS, Asia and Africa also vided end-to-end solution to a virtual mobile operator have large potential. The demand for infrastructure net- Callax (Germany) based on FORIS NG, MEDIO SMSC, work solutions and for business management is growing IVR, TENNET HLR products. Convergent billing FORIS along with penetration rate growth. NG was installed on the IMS platform for Vodafone in Czech Republic. Also UTILIS system was launched for Austrian company SWF.

Company has managed to complete a number of new projects, to deliver MSCP/FORS for MTS Ukraine and to perform partnership orders. SITRONICS Information Technologies

In spite of the financial distress and pessimistic outlook, last year was a successful one for our business segment. We have signed promising partnership contracts, entered new markets, and expanded our client portfolio. All this will help us live through the period of adversity for the global markets with little loss.

Vladimir Yasinsky, President of Kvazar-Micro, Head of SITRONICS IT Solutions

SITRONICS Information Technologies a lead- The company employs more than 1300 pro- ing provider of solutions, products and ser- fessionals with large experience in the IT and vices in IT segment in the CIS and Eastern Eu- management segment. Head offices are lo- rope, was established in 1990. Up until June cated in Moscow and Kiev, there is a head- of 2008 it operated under the brand name quarters in Minsk, resource offices and com- Kvazar-Micro. In June of 2008 the company petence centers in Russia, Ukraine, Lithuania migrated under the umbrella brand SITRON- and Kazakhstan. ICS and changed its name to SITRONICS In- formation Technologies. Integration and brand The following companies are among key part- name change followed an increase of the SI- ners: Intel, Microsoft, IBM, Oracle, Sun Micro- TRONICS stake in Kvazar-Micro to 100% in systems, Cisco Systems, Hewlett-Packard and June of 2008. many others.

Results in 2008 nologies. In 2008, it has put into operation a system of In 2008, SITRONICS Information Technologies has com- consolidated accounts for System Capital Management. pleted a number of large IT projects in consulting and in- The projects of installing an integrated automation sys- BUSINESS OVERVIEW frastructure in Russia, Ukraine, Belarus, Baltic countries tem on the basis of Oracle products in a Kazakh insur21- and in the Central Asia. ance company London-Almaty and in BTA – the largest Kazakh bank – are already completed. In 2008 SITRONICS Information Technologies demonstrated a 14.4% year on year revenue growth reaching Partnership with governmental structures has been US$ 873.2 million. Segment OIBDA more than doubled strengthened. For Office of the Prosecutor General of the year on year and reached US$ 52.9 million compared Russian Federation SITRONICS Information Technologies to US$ 21.0 million in 2007. has built an automated information-operative system. It was also implemented a computerized information system In 2008 new partnerships were set up with a number Personnel reserve for the Ministry of Economic Develop- of global vendors: Avaya, Firetide, Exanet, LAMPERTZ, ment and Trade of the Russian Federation. Company also Emerson, Axios, Perimetrix. SITRONICS Information took part in modernization of the Crisis Management Cen- Technologies is also in the process of receiving a sta- tre FGYP Rosatom and has created an information system tus of a certified partner of Oracle Hyperion. A partner- for Goskomstat Ukraine (this system connected regional ship agreement with SAP was signed as well. In August a subdivisions with the regional and central network). SAP-training subdivision was created in Ukraine that will be responsible for the projects in the neighboring states. Offering solutions based on best practices, SITRONICS Information Technologies develops and implements its After the end of the period, in April 2009, the Group sold own innovative solutions: Mobile center for data pro- the distribution companies in its wholly-owned SITRON- cessing (MCDP) Daterium and MIOS (multi-service infor- ICS IT B.V. subsidiary, which was previously known as mation educational networks) which is used in hundreds Kvazar-Micro Corporation B.V. The companies, which of Russian schools today. Company has supplied the are engaged in the distribution of hardware and soft- equipment for the computer classrooms to the schools ware in Eastern Europe and the CIS, have been trans- of South Ossetia. Ministry of Education and Science of ferred to Melrose Holding Company for a valuation of Ukraine has distinguished company’s contribution to US$ 50 million and have been deconsolidated from the progress of innovative education technologies. Group’s results with effect from April 2009. The businesses accounted for approximately a third of Group SITRONICS Information Technologies products and so- revenues in 2008. The disposal of the companies is in lutions have been formalized on international market. line with the Group’s strategy to focus on higher margin and less capital intensive businesses. Outlook To maintain the existing customer base, to increase brand Products and Projects capitalization and to unify its positioning, to find new op- In 2008, company has completed building a Moscow portunities for cooperation with customers and partners WiMAX network for Comstar-OTS and finished the first and to combine abilities with technologies are the key stage of installing the Oracle Siebel CRM system for Mo- factors which will cause company’s stable growth. bile TeleSystems. A project for creating data processing centers in the MTS macro-regions has been started, and The company pays attention to IT-outsourcing, virtualiza- master-system Oracle E-Business Suite for CenterTele- tion systems, business analysis and corporate perfor- com and SibirTelecom was also developed. mance management while developing its abilities. Taking in account the expected decline of the Russian IT-market One of the largest projects in Ukraine was creation of by 20%, a number of state infrastructure IT-projects is ex- the CDMA-2000 network for MTS-Ukraine in cooperation pected to be grown up to 30% of the total order volume. with Alcatel Lucent. Together with AMT-Group SITRON- SITRONICS Information Technologies tries to expand its ICS Information Technologies has built a multi-service presence in this segment as most perspective. data transmission network based on the NGN solutions for Comstar-Ukraine. IT sector will grow due to developing regions where SITRON- ICS Information Technologies operates: Central and Eastern Companies which do not operate in the telecommunica- Europe, Russia, Ukraine and other CIS countries. So com- tion segment also turn to SITRONICS Information Tech- pany tends to operate on potentially perspective markets. SITRONICS Microelectronics

In 2008, SITRONICS Microelectronics continued to expand its production and developing new products and markets, and maintained its status of the largest supplier of the electronic components in Russia, possessing leading technologies. Diversified product portfolio, which includes products as well as product components, and a balance between internal and export sales ensures the stability of our business during the recession.

Gennady Krasnikov, Director of NIIME and Mikron, Vice-President, Head of SITRONICS Microelectronics

SITRONICS Microelectronics develops, manu- social, transport applications and access con- factures and promotes microelectronics prod- trol systems. SITRONICS Microelectronics is a ucts, based on leading technologies. Benefit- leading provider of the micro-chips for indus- ing from its position of a Russian technology trial enterprises. leader, the company takes part in the private- state partnership programs, among them R&D Among company’s key partners: STMicro- projects, Federal Target Programs and building electronics (France), Infineon (Germany), a new large-scale microelectronic production. Giesecke&Devrient (Germany), UPM (Finland).

Company product portfolio includes micro- Results in 2008 chips and discrete components for consumer, SITRONICS Microelectronics demonstrated a telecommunication and industrial engineer- 34.3% year on year revenue growth reaching ing;, smart and RFID cards for telecom, bank, US$ 291,7 million. Segment OIBDA was up 60.6% reaching US$ 61.7 mil- system for electronic passports, RFID chips for contact- lion compared to US$ 38.4 million in 2007. free cards, and memory storage devices. Company has

created a unique integrated operating system designed BUSINESS OVERVIEW To a certain extent the result was influenced by mismatch for identity, payment and smart-cards. 23 of the customer’s credit and payment system, moving some orders to 2009-2010 years. However, last year SITRONICS Microelectronics continues to meet obligations sales of the micro-chips manufactured by SITRONICS on a contract with Chinese State Corporation under the gov- Microelectronics in Russia have grown by 3% compared ernmental program of USSR debt retirement. The contract to 2007. There was also a 17% growth in demand for value US$ 16,291,080 was extended up until June 30, 2009. newly discovered products. A decision to sign a new contract for 2009-2010 for the total value of CHF 36,000,000 (USD 31,446,590) was taken. SITRONICS Microelectronics is increasing its export share of packaged micro-chips. The sale of these micro- In 2008 company started delivering its products to India chips went up to 17% in 2008 compared to 10% in 2007 for Shyam Telelink operator (currently MTS India). Op- (we expect that in 2009 the sale of packaged micro-chips erators, which do not belong to the MTS group, have will up to 30-40%). Last year 8 new types of products also became company clients such as Sonnik-DUO and were introduced on export market (product lines of DC- Altel (Kazakhstan). DC converters). The company has opened up and certified a full cycle Revenue of the telecom-cards subdivision went down of production, personalization and distribution of bank by 10% (US$ 47.5 mln and US$ 53 mln in 2008 and cards. In 2009 the company plans to promote actively 2007) because of the card production optimization and a smart-card line and expects that its share in the total due to sales growth of small memory cards (32-64K). revenue will be 5% or above.

SITRONICS Microelectronics is the largest card provid- Outlook er for regional GSM operators which covers almost 25% SITRONICS Microelectronics will continue adopting the of the SIM-market. The company has produced cards products under the 0.18 μm technology and will keep for 3G MTS, RUIM cards, ATA platform and has also its majority on the Russian micro-chip and smart-card created its own operating system. markets.

Research and development in microelectronics were This year company will continue to expand its 0.18 μm conducted within federal and regional programs budget, production to specified standards s of 0.13 and 0.09 μm and by company’s own resources. In 2008 R&D expenses (90nm). Development of the production capacities will were about 20% in the total business segment revenue be conducted under the private-government partner- that is close to world leaders’ expenses in this area. ship with the support of one of the international leaders in the sector. Products and Projects In 2008, Moscow Metropoliten completely switched to Company expects further growth of RFID tickets market, the RFID tickets, which are manufactured by Mikron. since their use opens new opportunities and competi- The production volume of the contactless cards in 2008 tive advantages. In 2009 SITRONICS Microelectronics increased significantly, for example deliveries to the expects to use its chips in the transport tickets. Moscow Metro were 25 mln per month. Company also expects a growing demand from the in- Mikron is the head company of the SITRONICS Micro- dustrial sector due to new state contracts. electronics and is one of the largest scientific centers conducting research and development under the Fed- SITRONICS Microelectronics intends keeping its share eral Target Program Development of the Electronic in the telecom-card market delivering products to the Component Base and Radio-electronics in 2008-2015 new regions for MTS group and expanding cooperation through the request of Ministry of Industry and Trade with operators, which do not belong to JSFC Sistema’. of the Russian Federation. In 2008 this enterprise has developed 25 new types of micro-chips. Three product SITRONICS Microelectronics also plans to cover 15% of lines were implemented under the 0.18 μm technology: a new shaped market for production and personaliza- identification chips (ID cards), including chip-based tion of the bank cards. Research and Development

24 sitronics annual report 2008

Innovation is the key factor in the development of SI- TRONICS and the basis for its success on the Russian and world technological markets. SITRONICS has in- house research and development facilities and main- tains strategic partnership with the world vendors of innovative solutions and services. Research and development is performed by business segments, Corporate Research Centre NII SITRONICS, and through the global and local partnership mechanisms, within the cooperation framework with international research institutions, and through venture funds. R&D laboratory centres in Athens, Prague and Zelenograd are equipped with the latest hardware, software and test tools in compliance with the highest international standards

R&D project management of world class has been implemented in SITRONICS in 2008; the programme for the improvement of the system of managing product and services quality was started, research and development budget for 2009 was formed.

Research

In April 2008 in association with the Institute for Infor- mation Transmission Problems of the Russian Academy of Sciences (Kharkevich Institute) the Corporate Re- search Centre NII SITRONICS was established. This is a non-commercial partnership, which is open for other academic institutes. With NII SITRONICS the company acquired the opportunity to participate in the development of technological standards, particularly, to define priority activities and projects, and to develop perspective products and technologies promptly. The organization also takes an active part in scientific research programmes with co-financing budget.

NII SITRONICS focuses on a number of priority direc- tions. In the telecommunications sphere wireless broadband access and data transmission systems are primarily. Feasibility of creating all sorts of medical electronic diagnostics equipment are investigated as well as research related to public safety: voice recognition systems, movements monitoring, object identification, etc. NII SITRONICS has initiated more than 20 perspective projects; 8 of them are undergoing additional expertise New Products and Solutions and/or on stage of business plan development.

While appraisal of investment potential of pilot and re- BUSINESS OVERVIEW search projects they have considered over 60 bids in In 2008, (MDC20 Daterium ™) Mobile Data Processing25 association with NII SITRONICS, finally they have formed Centre went through full product life cycle to prototype. the portfolio of 14 most perspective projects, and have The product is ready for manufacturing production; defined US$ 40.7 million for potential investments. they have started to accept customer’s orders. The solution is protected by two patents and a number of The company intends to extend its cooperation with the patent applications. state institutions, in particular, with Rusnanotech state company to work jointly on the promising technologies Multiservice information educational system (MIOS) is of the future, first of all, in microelectronics and biotech- an innovative domestic solution for the education sys- nologies. tem based on interactive technologies. It embraces all basic educational processes and is installed in various configurations in over 500 schools and 10 higher educational institutions of Russia. A pilot project in Turk- Intellectual Property menistan has been completed, projects in the Ukraine and Kazakhstan are ongoing. In 2008 the policy of intellectual property management was developed in company. Two patents and two cer- Angioscan project has opened a new perspective di- tificates of registration of IC chips layout obtained, eight rection of SITRONICS activity – bio and medical tech- patent applications in microelectronics and telecommu- nologies based on invention for grading human vessels nications submitted. state. SITRONICS has signed an agreement with the inventors, has developed a product and has performed In 2009 a new motivation system, which stimulates em- necessary tests. This product is going to be presented ployees to participate in inventive and rationalization ac- in the market soon. tivities will be implemented in all company units. To en- hance patent activity is also important, they plan to submit In 2009, it is planned to develop a new series of mo- 15-20 new patent requests relating to most priority areas. bile data centres, to create an internal 3G system, chip sets, hardware and software for telematic services, and to develop bio and medical technology projects. OSS/ BSS-applications, RFID technologies and fiber-optic Partner Interaction communication are developing.

The main partners of SITRONICS in R&D projects in 2008 were technology Park Sistema-Sarov, the Institute for Information Transmission Problems of the Russian Academy of Sciences, and the Coral-Sistema Invest- ment Fund. Under cooperation with last mentioned they have started to develop new products with Exanet (provider of innovative solutions in data storage) and Firetide (leading developer of the new generation wireless data transfer networks - full mesh Wi-Fi) companies.

To deal with potential investors and partners in 2009 is primarily in particular with state and commercial organi- sations also to benefit from the technology parks and special economic zones in order to make SITRONICS innovative activities more effective. CORPORATE GOVERNANCE

26 sitronics SITRONICS develops its system of corporate gover- annual report 2008 nance in line with the best world-wide practices and adheres strictly to the Russian and British laws, which regulate stock exchange standards and requirements.

Lately due to the entry to IPO the structure of corporate governance has been permanently improved, and it has become more transparent and efficient. Special attention is given to the protection of the interests of shareholders along with the company growth.

In 2008 the Code of Corporate Conduct of SITRONICS was adopted, which aims to form and implement in daily activities the principles of corporate conduct, which promote long term successful development, increase of the company capitalization, observing legal rights of the shareholders, and creating a positive image.

Today there are seven committees working under the Board of Directors, which are responsible for the basic issues affecting the company activity on behalf of the shareholders.

In 2008 were established the Committee on Human Re- sources and Remuneration, Committee on Bidding and Procurement, Committee on Investor Relations. A year earlier the Committee on Strategy, Mergers and Acqui- sitions began functioning, and in 2006 – the Audit Com- mittee and the Budget Committee.

The Committee on Disclosure of Essential Information as a consultation and advisory body assists in fulfilling the obligations of SITRONICS to disclose timely reliably and fully the essential information on the company activities to the investor community. All essential information is timely posted on the corporate web site, and is disclosed in conformity with the rules of the regulatory bodies in Russia and the UK.

SITRONICS works in many countries of the world, so it strives to introduce unified corporate governance standards, which stimulate personnel development, intercompany communications, increase of innovations and a better openness. A clear governance system im- proves interaction between business segments of the company and it allows to effectively supervise their activity, which corresponds to the interests of customers and shareholders of SITRONICS. SITRONICS Asset structure 27CORPORATE GOVERNANCE

JSFC SISTEMA

SITRONICS SITRONICS Consumer Services Microelectronics and Products SITRONICS IT Solutions SITRONICS Telecom Solutions

77,08% 51% SITRONICS SITRONICS IT B.V. JSC «SITRONICS INTRACOM S.A. Telecom MIKRON JSC JSC KVANT The Kingdom Telecom Telecom Solutions, Czech of the Netherlands Solutions» Solutions Republic a.s.

CJSC VZPP- JSC ELAKS Subsidiary MIKRON Enterprise InterTel Siberia, «SITRONICS LLC Telecom Solutions – TASHKENT» JSC ELION SC «Research institute of SITRONICS Precision Telecom Solutions Machine Foreing Enterprise Ukraine, LLC Manufacturing» CJSC SITRONICS KONCEL Telecom Solutions SITRONICS – Management, LLC SITRONICS Smart CJSC AMFITEL, LLC technologies, SITRONICS LLC Personal solutions

CJSC EastWind

SITRONICS Europa, s.r.o.

JSC NIS

SITRONICS – ZTE ltd 28 sitronics annual report Board of Directors 2008 The Board of Directors provides overall management of SITRONICS, except matters in the General Meeting of Shareholders sphere. The Board of Directors members are:

Denis Muratov | Chairman of the Board of Directors, Non-Executive Director

Denis Muratov became the Board of Directors’ member in January 2007 and has served as Chairman of the Board of Directors of SITRONICS since June 2007 and as Vice-President for innovations and science at Sistema since February 2006. Previously, in 2004, Mr. Muratov was appointed General Director of the Idea In- novation and Industrial Technopark in Kazan, as Chairman of the Board of Master Kamskiy Industrial Park and served as economic adviser to the First Vice Prime Minister of the Russian Republic of Tatarstan. From 1992 to 2004, he worked in Sweden, heading several companies, including Anton Invest AB, Nordic Industrial Development AB, Scantat AB, and Media Resources International Scandinavia AB. During 2008, Mr. Muratov has been a member of the Board of Directors in Technopark Sistema-Sarov JSC, Navigation and Information Systems JSC, and Radiotechnical and Information Systems JSC. Mr. Muratov studied in the Sver- dlovsk Institute of Architecture and graduated from the Chalmers University of Technology, Goteborg, Sweden, with a master’s degree in architecture.

Sergey Aslanian | President, Executive Director

Sergey Aslanian is the President and Executive Director of SITRONICS. Previously, he served as Vice-President for network and information technology at MTS since July 2006, prior to which he was MTS’s Vice-President for information technology from December 2003. Mr. Aslanian worked as deputy Director of information technologies at TNK-BP Management (formerly OJSC Tyumenskaya Oil Company) between 2001 and 2003, and as a consultant at PriceWaterhouseCoopers from 1997 until 2001. Mr. Aslanian is a Chairman of the Board of Directors of INTRACOM S.A. TELECOM SOLUTIONS, a member of the Supervision Board and the Board of Directors of SITRONICS Telecom Solutions, Czech Republic a.s., SITRONICS IT B.V., NIIME and Mikron, and Kvant. Mr. Aslanian graduated from Lomonosov Moscow State University with a degree in mathematics and cybernetics.

Dmitry Gaev | Non-Executive Director

Dmitry Gaev has been a member of the Board of Directors since 2005. Mr. Gaev is Head of the Moscow Metropolitan since 1995. From 1990 to 1995 he served as first deputy Head of the Moscow Metropolitan. From 1973 to 1982 Mr. Gaev worked for the railways, holding various positions at the Moscow Railway Depart- ment and the Ministry of Railways. Mr. Gaev graduated from the Moscow Institute of Railway Transportation Engineers and the Moscow Institute of Management. Yuval Almog | Non-Executive Director

Yuval Almog has been a member of the Board of Directors since January 2007. CORPORATE GOVERNANCE Since 1986 Mr. Almog was a venture capital specialist with Coral Capital Man29- agement and its predecessor, IAI Venture Capital Group, as well as the President of Coral Group. Mr. Almog is currently on the Boards of Directors of Celight Inc., Exanet, and Wireless Channels. Prior to his investment career, he spent 14 years as an entrepreneur and operational executive. He also served on the Boards of Directors of several private and US and international public portfolio companies. Mr. Almog graduated from the University of Alabama with a bachelor’s degree in computer science and economics and a bachelor’s degree in mathematics in 1976, and from the Massachusetts Institute of Technology with a master’s degree in management in 1979.

Igor Busarov | Non-Executive Director

Igor Busarov has been a member of the Board of Directors of SITRONICS since 2005. Since December 2007 he was the deputy Director of the Finance Depart- ment and Head of the Department of Asset Operations for the Finance and Invest- ment Complex of Sistema, and Head of Treasury at Sistema from 2000. Since 2002 he has been the President of Sistema-Leasing, and from 2004, the general Direc- tor of Finexport-M Limited. He is a member of the Boards of Directors of Invest- ment-Pension Company, Sistema Finance Investments, Cottage-Construction-17, Invest-Svyaz Holding, and the Moscow Bank for Reconstruction and Development (MBRD), where he was a member of the Audit Commission from 2002 to 2005. Mr. Busarov graduated from the Moscow Institute of Physics and Technology in 1986 with a degree in physics and mathematics sciences.

Evgeny Modorsky | Non-Executive Director

Evgeny Modorsky has been a member the Board of Directors of SITRONICS since June 2008. He is the Head of the Investment Analysis Department in the JSFC Sistema’s Strategy and Development Complex. Since 2007 – a member of the Board of Directors of the Moscow Bank for Reconstruction and Development. Since 2007 to 2008 – the Head of the Corporate Management Development of JSFC Sistema. Since 2004 to 2006 – the adviser of the representative office of Boston Consulting Group (Moscow) Limited. Since 2002 to 2004 - HEC School of Management, Paris, France, MBA program. Mr. Madorsky graduated from the Saint Petersburg University of Economics and Finance with postgraduate degree in global economics (Ph.D. in Economics) in 1999, and from the Paris Dauphine University (Paris, France) in June 1995. 30 sitronics Rudi Lamprecht | Independent Director annual report 2008 Rudi Lamprecht joined the Board of Directors in January 2008. He is an executive advisor to the CEO of global technology company Siemens AG, a post he has held since 2008. Since 2004, he has served as a member of the Corporate Ex- ecutive Committee of Siemens AG. Previously, in 2000, he was appointed Presi- dent of Siemens’s Information and Communication Mobile Group and member of the company’s Managing Board. From 1996 to 2000 he served as Head of the European Region of Siemens Nixdorf Informationssysteme AG (SNI), member of SNI’s executive management and President of the Private Communication Systems Group. From 1993 to 1995 Mr. Lamprecht was President of European operations at Tektronix International AG. He held various positions at Hewlett- Packard in Germany, Europe (Geneva), and U.S. (Palo Alto) from 1972 to 1993. Mr. Lamprecht holds degrees from Massachusetts Institute of Technology (MIT), Stanford, and the European Institute for Business Administration (INSEAD).

Evgeny Utkin | Non-Executive Director

Evgeny Utkin was President of SITRONICS from 2006 to 2007. Prior to this, he headed Kvazar- Micro Corporation, which became a part of SITRONICS in 2004. Mr. Utkin was the founder of Kvazar-Micro, and has been its President and Chair- man since 1990. Before founding Kvazar-Micro, Mr. Utkin directed laboratory research at the Kvazar Plant in Kiev, Ukraine, a center for study of microelectronics in the Soviet Union. As a former student of Moscow Institute of Electronic Engi- neering, Mr. Utkin worked as an engineer at the Scientific Research Institute of Precision Technology in Moscow. Mr. Utkin holds a diploma from the Moscow Institute of Electronic Engineering (graduated in 1982). In 1995 he studied at the HP Academy, completed the AMP program at the INSEAD Business School in 2001, and IMD (Switzerland) in 2008. Evgeny Utkin served as the Chairman of the Council of Entrepreneurs under the Cabinet of Ministers of Ukraine. In 1998 Evgeny Utkin was named Businessman of the Year in Ukraine. In 1999 he founded and became the President of the Ukrainian Association of Software Developers. In 2000 he co-founded The Ukrainian Union of Intellectual Property.

Nihad Hurem | First Vice-President for new product and technology development of SITRONICS Since 1993 to 2007, Mr. Hurem served as the CEO and Chairman of the Board of Directors of STROM Telecom (Czech Republic), SITRONICS Telecom Solutions, Czech Republic a.s. In 2005-2006 – a member of the Board of Directors of JSC MGTS and in 2006 – the Chairman of the Board of Directors of CJSC Mediatel. In 2006, he was appointed the First Vice-President of SITRONICS, New Product and Technology Development. Since 2006 to 2008 - a member of the Board of Direc- tors of INTRACOM S.A. TELECOM SOLUTIONS, SITRONICS IT B.V. (Kvazar-Micro Corporation B.V.) Mr. Hurem currently serves as the Chairman of the Supervision Board of SITRONICS Telecom Solutions, Czech Republic a.s., and the Chairman of the Board of Directors of SITRONICS-ZTE Ltd. He graduated from the University of Belgrade (the Republic of Yugoslavia) with a degree in Electrotechnics. Committees of the Board of Directors of SITRONICS 31CORPORATE GOVERNANCE Audit Committee HR and Remuneration Committee Assists the Board of Directors of the company in con- Develops and submits to the Board of Directors recom- trolling the completeness and credibility of financial mendations on personnel policy of SITRONICS, as well and other reports, the process of their preparation and as the incentive and remuneration system of the Board submission, functioning of internal control systems and of Directors members, senior management of SITRON- internal audit, risk management, the process of ensur- ICS, who are direct reports of the President of the com- ing legal compliance, observing the regulations of the pany, and other officers according to the Charter of SI- Charter and internal documents of the company, it also TRONICS. The Committee members are Denis Muratov evaluates the qualification and level of independence of (Chairman), Dmitry Gaev, Rudolf Lamprecht. external auditors, and the quality of rendered services. The Committee members are Evgeny Utkin (Chairman), Igor Busarov and Evgeny Madorsky. Committee for Corporate Behavior Develops recommendations for the Board of Directors on designing in SITRONICS the efficient system of corporate Budget Committee governance, which conforms to international standards, Undertakes the preliminary review of issues related to ensures increasing efficiency of management, warrants the budget, business plans, and investment plans, and protection of rights and interests of the shareholders, works out recommendations for the Board of Directors ensures better investment prospects for the Company on the issues of preparation, approval and monitoring securities, growth of ratings, reduction of the cost of bor- implementation of budgets, business plans and invest- rowing, increase of the effectiveness of interaction of the ment plans. The Committee members are Igor Busarov Board of Directors with the management of SITRONICS. (Chairman), Marina Zabolotneva and Dmitry Ustinov. The Committee members are Evgeny Utkin (Chairman), Aleksander Semyonov, Oleg Scherbakov.

Committee on Strategy, Takeovers and Mergers Presents to the Board of Directors recommendations as regards determining strategic development goals, as- Committee on Investor Relations sessment of activity outputs, and regarding mergers and Develops recommendations for the Board of Directors acquisitions. The Committee members are Yuval Almog regarding the system aimed to maintain the efficient (Chairman), Sergey Aslanian, Oksana Kovalevskaya, relations with the financial community and to increase Sergey Lubarsky, Evgeny Madorsky, Olesya Peskova, investment prospects of the Company’s securities. The Dmitry Ustinov and Evgeny Utkin, Oleg Fomichev. Committee members are Sergey Aslanian (Chairman), Maksim Arkhipov, Marina Zabolotneva, Irina Lanina.

Committee on Tenders and Procurement Ensures control over SITRONICS and its subsidiaries complying with the procurement rules established by the regulations of SITRONICS, and shapes up the main trends to increase efficiency of procurement. The Com- mittee members are Nihad Hurem (Chairman), Sergey Aslanian, Maksim Stepanov, Vladimir Uvakin. 32 sitronics annual report SITRONICS TOP MANAGEMENT 2008

Sergey Aslanian | President, Executive Director

Marina Zabolotneva | Vice-President, Finance and Investments

Ms. Zabolotneva was appointed a Vice-President for Finance and Investments of SITRONICS in June 2008. Since 2006, she served as the Vice-President for Finance and Investments in VAO Introurist. Since 2003, she held office of the JSC MTS’s Treasury Director. In 2001, worked for Coca-Cola HBC Eurasia. Marina Zabolotneva graduated from the Volgograd State University with degree in economics and postgraduate degree in the Economics, Planning and Management, and Accounting and Business Analysis. In 1995, studied in the University of Akron (Akron, Ohio, USA). She is holder of ACCA Certificate and the Russian Profes- sional Accountant Certificate.

Oksana Kovalevskaya | Vice-President, Strategy

Ms. Kovalevskaya was appointed a Vice-President for Strategy of SITRONICS in October 2008. In 2004, she served as the Executive Director of the Corporate Management Department of JCFC Sistema, and in 2006, held office of the Deputy Director General for Strategy and M&A in JCS Sistema Mass Media. Since 2002 to 2004, Ms. Kovalevskaya worked for CJSC NTV Plus as the Deputy Sales Director. In 1998-2000, she held office of the Web-based service manager in the Russian division of Sonera (former Telecom Finland). Oksana Kovalevskaya graduated from the Moscow Engineering Physics Institute (MEPhI) in 1995, and has held the MBA degree from the University of Michigan Business School (USA) since 2002. Alexander Krasovsky | Vice-President, Sales and Marketing

Alexander Krasovsky has been Vice-President for Sales and Marketing since No- CORPORATE GOVERNANCE vember 2007. Previously, from 2006 to 2007, Mr. Krasovsky was Vice-President33 for business development at BAC/StepLogic. From 2005 to 2006 he served as chief sales officer for Avaya Russia. From 2001 to 2005 he was Head of Sales Group for Avaya CRM Solutions in Central and Eastern Europe and the CIS. From 1998 to 2001 he was a senior adviser for sales in EMEA region at Avaya’s headquarters in Vienna, Austria. From 1996 to 1998 he was a sales manager at AT&T (Lucent Technologies). He graduated from the Labor and Social Relations Acad- emy, with a specialization in finance and credit.

Irina Lanina | Vice-President, Corporate Communications

Irina Lanina has been Vice-President for Corporate Communications since Decem- ber 2007. Previously, from 2002 to 2007, she served as Director of Marketing Com- munications Department for Huawei Technologies. From 2000 to 2002 she worked as Marketing Director for Navison. From 1997 to 2000 she was marketing communications manager for the Moscow Representative Office of Novell. Ms. Lanina graduated from the Russian State University for the Humanities with a specialization in administration, having also done post-graduate work.

Konstantin Khachaturov | Vice-President, Corporate Development

Konstantin Khachaturov has served as Vice-President for Corporate Develop- ment at SITRONICS since January 2008. Previously, from 2006 to 2007, he was Head of technology strategy in the Strategic Planning and Control Department of MTS. From 2004 to 2006 Mr. Khachaturov worked as the Head of IT Strategy and Processes Division in the Planning and Cooperation Department of MTS. In 2003 and 2004 he was leading consultant at IBM Eastern Europe and Asia. From 1997 to 2002 he was an expert and leading consultant at PriceWaterhouseCoopers. From 1995 to 1997 he was an expert in telecommunications systems for LVS Group. Mr. Khachaturov graduated from the Moscow State University of Radio Technology, Electronics and Automated Equipment.

Oleg Sherbakov | Vice-President, Corporate Responsibility

Oleg Sherbakov has served as Vice-President and Head of the Corporate Re- sponsibility Department since May 2006. Previously he served in Sistema’s Cor- porate Responsibility Department. In 1994, he graduated from the Law Department of the Military University in Moscow. 34 sitronics Mikhail Minkovsky | Vice-President, New Technology annual report 2008 Mikhail Minkovsky has served as Vice-President for New Technology since No- vember 2007. Previously he served as Head of the Technology Architecture De- partment of MTS. Prior to this, he held a number of IT positions in several companies in the US and Russia. From 2001 to 2003 Mr. Minkovsky managed the implementation of the infrastructure platform at Corio Inc., USA, and then headed the Business Technologies Department of TNK-BP. From 1997 to 2001 he worked as a senior consultant at PriceWaterhouseCoopers. From 1990 to 1997 Mr. Mink- ovsky worked in the Lebedev Physical Institute of the Russian Academy of Sci- ences. Mr. Minkovsky graduated from Moscow Engineering Physics Institute.

Gennady Krasnikov | Director of NIIME and Mikron, Vice-President, Head of SITRONICS Microelectronics

Gennady Krasnikov has served as Head of the Microelectronics segment since April 2006, and as general Director of NIIME and Mikron since September 2005. From 2002 to 2003 Mr. Krasnikov was President and CEO of Concern SITRON- ICS, and was chief designer and research manager of Concern SITRONICS from 2003 to 2005. In December 2006 Mr. Krasnikov became a member of the Council on Science, Technology, and Education, an advisory council to the President of the Russian Federation. From 1981 to 1997 he worked at the Institute for Scien- tific Research of Microelectronics and at Mikron where he held various positions, including senior engineer, foreman, and assistant manager to the Director Gen- eral for production. Mr. Krasnikov graduated in 1981 from the Moscow Institute of Electronic Engineering with a degree in engineering and physics (Doctor of Engineering Science).

Vladimir Yasinsky | President of Kvazar-Micro, Head of SITRONICS IT Solutions

Vladimir Yasinsky was appointed President of Kvazar-Micro in February 2008. Previously, from 2006 to 2007, he served as First Vice-President of SITRONICS and member of the Management Board of Kvazar-Micro, where he oversaw the strategic development of the company. From 1994 to 2006 Mr. Yasinsky held a number of positions at Kvazar-Micro, including Vice-President for finance from 2004 to 2006. Prior to that, he was a sales manager and Director of business development. He graduated from Moscow Physics and Technology Institute, and studied finance at Amsterdam Institute of Finance, the Netherlands Alexandros Stergios Manos | CEO of Intracom Telecom

Mr. Manos has served as CEO of Intracom Telecom since January 2006. From CORPORATE GOVERNANCE 1998 Mr. Manos worked in Intracom Holding as general manager of the Corporate35 Marketing and International Operations Service Unit and Executive Director of the Telecom Systems Division. In January 2002 he joined Intracom subsidiary Conklin Corporation in Atlanta, Georgia, US, where he became CEO in December 2002. Mr. Manos has a degree in electrical engineering and economics from Brown University and a master’s degree in electrical engineering and computer technology from the Massachusetts Institute of Technology.

Pavel Pavlovsky | CEO of CJSC SITRONICS Telecom Solutions, Vice-President, Head of SITRONICS Telecom Solutions

Pavel Pavlovsky was appointed Vice-President and Head of Telecom Solutions Segment in February 2008. Previously, from 2007 to 2008, he served as Vice-Pres- ident of MTS Ukraine and MTS-Foreign Subsidiaries. From 2005 to 2007 he served as Director of MTS-Foreign Subsidiaries. From 2003 to 2005 he served as Director of Corporate Development Department at MTS. From 2002 to 2003 Mr. Pavlovsky worked as an independent consultant. From 2000 to 2002 he was a senior consultant at Mercer Management Consulting in London. From 1995 to 1998 Mr. Pav- lovsky worked as a consultant at A.T. Kearney consultancy in St. Petersburg and Moscow. Mr. Pavlovsky graduated from the St. Petersburg State University with honors, and holds an MBA degree from INSEAD (Fontenblo, France).

Sergei Urezchenko | President of Kvant, CEO of Elaks, Vice-President, Head of SITRONICS Consumer Services and Products

Sergei Urezchenko was appointed President of Kvant and CEO of Elaks in No- vember 2007. Previously, from 2006 to 2007, he was CEO of Southern Airports. For more than five years, Mr. Urezchenko was a consultant for strategic trans- formation and investment consulting at PriceWaterhouseCoopers. From 2000 he worked as Senior Vice-President for strategic development at transportation company Unitrans; as an advisor to Sheremetyevo International Airport, where he was in charge of infrastructure development, including construction of the Shereme- tyevo- 3 terminal; as general Director of Aeroexpress; and as Vice-President for aviation at the Kaskol group of companies. He graduated from the Moscow Insti- tute for Electronics and Mathematics with a degree in applied mathematics, and completed further education programs in strategic planning, finance management and business evaluation. TO SHAREHOLDERS & INVESTORS

36 sitronics annual report Shareholder Capital 2008 As of December 31, 2008 the share capital of SITRON- In February 2007 SITRONICS conducted its initial public ICS amounted to 9,547,087,190 ordinary registered offering at the London Stock Exchange and the Rus- shares with nominal value RUR 1 per share. SITRONICS sian stock exchanges; during which 1,675,000,000 or- shares are traded in the form of global depository re- dinary shares were sold or 17.55% of the charter capital ceipts (GDRs) at the London Stock Exchange under the of the Company. 1,549,839,000 of them are the shares “SITR” ticker. Each GDR is equal to 50 ordinary shares. newly issued by SITRONICS in the form of GDRs, and The ordinary shares are listed at the Russian Trading 125,160,800 are ordinary shares offered by private System Stock Exchange and the Moscow Stock Ex- shareholders and company founders. The cost of of- change under the “SITR” ticker. fering amounted to USD 0.24 per one ordinary share and USD 12.00 – per one GDR. The offering raised USD 356.4 million net after fees and expenses for SITRON- ICS, and this means the Company was valued at USD 2.3 billion. After IPO and other transactions carried out Structure of SITRONICS Shareholder Capital during the year the share of Sistema in SITRONICS re- in percentage as of December 31, 2008 duced to 61.3%. Company management controls 7.75% of shares. Alexander Goncharuk retained a 3.14% share of the Company while the European Bank for Re- construction and Development retained a 3.07% share. Other minority shareholders owned 7.19% of shares as of December 31, 2008.

4,09% 3,07% 61,33% 3,07% 3,14% 7,75%

17,55%

JSFC «Sistema» and affiliated companies Free float (including GDR holders) «SITRONICS Management» Alexander Goncharuk EBRD Melrose Holdings S.A. Others General Shareholder Meeting Dividend Policy

The General Shareholder Meeting is the supreme gov- SITRONICS dividend policy is based on the fundamen- TO SHAREHOLDERS& INVESTORS erning body of the company, which elects the members tal principle, which presupposes the balance between37 of the Board of Directors, who in their turn carry out reinvesting profit in further business development and current supervision and strategic management of the the distribution of a part of profit between shareholders. company’s executive management. The General Share- SITRONICS is a young and a fast-growing company, holder Meeting allows the company owners to exercise and to support the dynamics of its development at the their right in securing and maximizing the value of their current stage significant capital investments are essen- investments. The Annual General Shareholder Meeting tial. The Board of Directors of the company opts for the is held once a year, while extraordinary General Share- dividend policy, which maximizes investments into long holder Meetings are convened to adopt important deci- term development and increase of the company share sions, which influence the future for SITRONICS. capital.

The Annual General Shareholder Meeting is held not SITRONICS dividend policy approved by the Board of earlier than after two months and not later than six Directors in December 2005 limits the payment of divi- months after the end of the previous fiscal year. Its dends to 2% of the annual net consolidated profit ac- agenda includes election of the Board of Directors for cording to US GAAP subject to other restrictions set by the next year, approval of the annual report and ac- the Russian laws. Currently, the company management counts, profit distribution, more specifically, dividend is not expecting dividend payment before 2009 fiscal payment and other relevant issues. An extraordinary year. At the same time company development results meeting can be convened by the decision of the Board and other changes may cause revision of this policy. of Directors upon its own initiative, or at the request of the Audit Committee, company auditor, and at the request of a shareholder or a group of shareholders who own at least 10% of SITRONICS shares.

Comprehensive description of the procedure for con- vening annual and Extraordinary General Shareholders Meeting is given in the regulatory documents of SITRON- ICS – the Regulations on the General Shareholders Meet- ing and the Charter of the Company. These rules were developed based on the best international experience and they fully conform to the current Russian laws in the sphere of corporate law, and they regulate such procedures as the timely notification of shareholders, eligibility for participation, adopting the agenda of the meeting, and providing information materials to the participants so that they can take informed decisions while voting. RISKS

38 sitronics As a largest hi-tech company in Eastern Europe with annual report 2008 3,500 clients and export markets in more than 60 countries, SITRONICS faces a broad range of country, industry, and business risks. The ongoing world financial crisis brings additional uncertainty to the company’s business increasing its exposure to financial risks and threatening its economic sustainability.

The identification, reduction, and management of risk are crucial to operational and strategic decision-making within the Company.

Below is a summary of salient industry, company, and country risk factors identified by the management; however, this list is not meant to be exhaustive.

Financial Risks

World financial crisis has led to unstable capital markets, significant decrease in the liquidity of the banking sector and reduction of available borrowings for companies with a conjoined growth of the borrowing value. SITRONICS management is now taking all necessary steps to prolong the current debt portfolio. To minimize the risk of tightening the borrowings, the company is striving for external borrowings with fixed interest rates. As of the end of Q4 2008, the share of fixed rate loans accounted for 50% which will allow to avoid the growth of debt service costs in a short term. The company is intended to use financial instruments interest rate hedging, including interest swap contracts.

The growth of company’s costs may also be caused by fluctuations in the Ruble exchange rate, and in the cross rates of Euro and Czech Crone to U.S. Dollar. To reduce exchange risks, SITRONICS enters into agreements denominated in the currencies of those countries where it operates as well as it adjusts the sale prices depending on the exchange rate. Thus, the company’s financial flows are well balanced in all major currencies.

A high inflation level may also have an adverse effect on the company’s business. According to the Ministry of Economic Development and Trade of the Russian Feder- ation, the inflation rate reached 13% in 2008 against 8-9% forecasted initially. The growth of prices was caused by the consequences of the financial crisis which led to inflation in many countries. The inflation risk is reduced by integration of the policy of operation costs and capital investment reduction. In addition, the program of liquida- tion of low-efficiency business segments has been developed under this policy which will enable the improvement of the overall operating efficiency of the company. Business Risks Country Risks

Challenging economic situation will likely cause the re- The Russian economy has experienced several years TO SHAREHOLDERS& INVESTORS duction of capital investments of the company’s clients of administrative and economic reforms leading to sta39- which will result in the decrease in sales. The measures ble macroeconomic situation and improvement of the aimed at maintaining business revenues and minimiz- investment climate. Nonetheless, Russia’s economy ing the risk of sales reduction planned by SITRONICS is exposed to market fluctuations and decrease in the include further optimization of product portfolio, niche development rates of the world economy. In addition, investments into high-margin solutions, as well as diver- due to the fact that Russia produces and exports large sification of the client base. Due to the fact that SITRON- volumes of natural gas and oil, the Russian economy is ICS operates in the markets of many countries and re- extremely sensitive to any changes in the world oil and gions, it has a possibility to refocus its marketing policy energy prices. and efforts aimed at the maintenance of sales to the markets experiencing a higher demand for company’s Under the impact of the world financial crisis, the coun- products and services. try is experiencing the fall of economical growth rates, restriction of access to refinancing, and decrease in the The company is exposed to the risk of loss, termination household income. However, the Russian government and worsening of relations with its suppliers and dealers along with the largest economies of the world is taking which may have an adverse effect on the company’s a number of steps to resolve the current situation in- financial and operational performance. The company is cluding those aimed at the maintenance of the banking seeking to minimize this risk factor and its dependency system’s liquidity. on the growth of prices for raw materials and components. To do so, SITRONICS diversifies the vendor base In addition, since Russian laws are in the process of be- tracking the best offers in the market, and stiffly controls ing developed, there exist ambiguities in relation to in- production costs. vestments and commercial activity, as well as risks of a reduction of legal protections for investor rights. Federal Industry Risks and local laws are not always consistent and are some- times in contradiction. Insufficient development of the The industries in which the Company operates are char- court system could lead to increase in the time required acterized by rapid technological change, frequent im- for bringing and hearing court cases and accordingly to provements and introduction of new types of products, the growth of the relevant costs. Similarly, changes in industry standards, and changing requirements of con- the Russian tax system and ambiguities in the existing sumers. Delays in the development and introduction of Russian tax laws could lead to higher tax rates for the new products could lead to a reduction in sales and an Company or to current or historical tax claims against increase in production costs. the company.

SITRONICS possesses a significant research and de- In the event of negative impact of the changing situation velopment potential and has several R&D centers both in Russia and other countries of the company’s pres- in Russia and other countries. It is actively cooperating ence the SITRONICS management is intended to take with international companies and industry leaders in de- all necessary measures to reduce the impact of such veloping new products and improving existing products changes on its business. and solutions. These measures allow the company to minimize the impact of this risk on the business. In addition, the company is trying to reduce its exposure to the competitive risk by the way of ensuring market advantages for its products through meeting specific needs of the clients, adjusting products and solutions to the market requirements, and offering unique products and solutions with no direct equivalents in the market. Social Responsibility

40 sitronics While building business processes, SITRONICS is gov- In September 2008, SITRONICS opened the first Russian annual report 2008 erned by the Corporate Social Responsibility (CSR) private public SITRONICS Scientific Research Institute principles. (NII SITRONICS) established in association with the Insti- tute for Information Transmission Problems of the Russian With a view of meeting the word standards, our compa- Academy of Sciences (Kharkevich Institute). In October ny is committed to ten principles in the areas of human 2008, NII SITRONICS acted as a partner of the Russian rights, labor, environment and anti-corruption universally Conference of Young Scientists held in Gelendzhik (Kras- accepted under the UN Global Compact. Corporate So- nodar Territory) by the Institute for Information Transmis- cial Responsibility includes the company’s efforts aimed sion Problems of the Russian Academy of Sciences. at the compliance with the legal, moral, ethic, professional and environment standards. In September 2008, five sets of mobile computer classrooms were donated to Tskhinvali high schools by SITRONICS carries out charity activity implementing the SITRONICS representatives. Each mobile computer veteran and children support programs, as well as run- classroom is integrated into a complex innovation so- ning medical, education and environment initiatives in lution for educational establishment known as Multiser- Russia and other countries of the company’s presence. vice Information Educational Environment (MIOS) and includes 16 notebooks, WiFi access point and external Environmental Initiatives equipment. Environmental concern is considered to be by no means important aspect of our company’s social activity. In Greece, SITRONICS provides annual sponsorship for holding various technology forums aimed at encourag- In May, the Environment Management Systems (EMS) ing research in engineering, electronics and electro- in NIIME and Mikron were certified according to ISO technics. 14001:2004 standard. It makes SITRONICS the first Russian supplier of microelectronic solutions that had Education undertaken such international expert evaluation. SITRONICS is implementing a number of training programs for employees, including: training for new hires or In the Czech Republic, SITRONICS is involved into the people assuming new positions, helping workers to gain joint initiative with the Ministry of Environment Manage- certification for new equipment and specialists to obtain ment aimed at the increase in the number of trees and new qualifications. land restoration. In addition, the company holds special business games, Science and Innovation Program courses, training sessions, seminars (e.g. American Support for scientific development is one of the main Certified Chartered Accountancy (ACCA) qualifications, priorities of the company’s CSR policy. The company English language courses, etc. contributes to the development of technical education system, cooperates with the specialized high educa- SITRONICS’s employees are also involved in the pro- tional establishments, and participates in educating and cess of obtaining additional education (professional training programs aimed at the popularization of sci- technical education, higher and postgraduate educa- ence among the youth and the students. tion including graduate school, Master’s program and MBA, as well as second higher education). Since 2005, SITRONICS and the Electronic Technol- ogy Faculty of the Czech Technical University in Prague SITRONICS establishes training programs for employ- have led a joint project known as the SITRONICS Scien- ees of all four business segments and takes part in the tific Research Center. The Centre supports the develop- HR exchange with international companies, such as Infi- ment of new services, systems and equipment in the neon, Agilent, STMicroelectronics enabling for research field of telecommunications technology, as well as gives and technology partnership. students an opportunity to work with the most advanced systems by facing real-world challenges. Human Resources Program Ukraine In the HR selection process, SITRONICS is focused on In 2008, the Ministry of Labor and Social Policy of Ukraine the local candidates; expats are only hired when there received over half a million rubles from our company for SOCIAL RESPONSIBILITY is need for employees with the expertise required for the mitigation of consequences of natural disaster in the41 successful business in the international markets and in- Western part of Ukraine. teraction with foreign counterparts. SITRONICS provides employment benefits including In addition, we support veterans of the Great Patriotic corporate mobile phone, vehicle, business trip services, War, provide comprehensive financial assistance and voluntary medical insurance and accident insurance take part in the arrangement of various events for veter- provided to each employee. ans. SITRONICS cooperates with the Labor and Great Patriotic War Veteran Council, the Kiev Charity Fund SITRONICS subsidiaries (Mikron and Elion) operate pro- for Death Camp Prisoners and many other charitable fessional union organizations in charge of various social institutions. events, consulting the employees regarding labor legal issues and arrangement of vacation for employees’ chil- Our company donated New Year presents for children dren in summer camps. from Mother and Child Care hospital and Clinical Hos- pital No. 2 and brand-new school boards for the Kiev Charity specialized school No. 193. We are running active charity activity supporting disad- Family boarding schools in the Kiev Region also receive vantaged social groups. our assistance.

Russia Czech Republic It have been several years since SITRONICS (NIIME and It have been several years since SITRONICS supports Mikron) has been making donations to the Mercy Re- Racek orphans house donating funds for first needs and gional Charitable Fund established to provide social sup- New Year presents. We have purchased cardiac moni- port for the retired employees, disabled and veterans. tors for diagnostics and research of the sudden infant death syndrome under our cooperation with the Red In 2008, two million rubles were donated to the Blagove- Cross. Our Company made it possible for children from st Fund to help children injured as a result of military low-income families to spend their summer vacations in conflict in South Ossetia. the children camp in Votice.

We take active part in infrastructure development in SITRONICS has been a partner of the refugees consult- the regions of our presence. SITRONICS (NIIME and ing centre for a number of years. Mikron) supports the International Transport Academy, the Alferov Fund (Education and Science Development Greece Fund), as well as the Entrepreneurship Development Under our cooperation with Medecins Sans Frontieres Fund of Zelinograd Administrative District. we take part in financing medical programs in Africa. At New Year holidays, we decided to withdraw from tra- SOS Children’s Village charity fund receives donations ditional New Year presents for our partners and custom- for the improvement of infrastructure and living condi- ers and transferred all the funds to help those who need tions of children. We also make donations to the fund to it. SITRONICS has made a donation of 95 brand-new support children suffering from cerebral palsy. beds to the Vereysk Elderly Care Institution. Our participation the Crystal Children charity event arranged by the charity fund of JSFC Sistema has given a chance to children suffering from osteogenesis(congenital bone brittleness) to live a normal healthy life. Human Resources

42 sitronics It is said that people are the most valuable asset to any In 2008, SITRONICS corporate Intranet was introduced annual report 2008 company, and highly qualified employees and managers for the purposes of corporate culture development. are the key to its success. Today, SITRONICS has over This resource enables the employees in all the coun- 10,000 employees working in its divisions all over the tries of the company’s presence to receive information world. The company’s human resources policy is aimed about the events and changes planned, as well as learn at the development of employees’ potential, attraction of daily news. young promising employees and building a solid highly professional team with a single mission and goals. All SITRONICS business segments conduct a number of training programs: both dedicated ones (assimilation In 2008, in view of the growing competition in the human of new equipment, certification trainings, etc.) and those resources market of the high tech segment, SITRON- of a general nature. As of the end of 2008, about 1,500 ICS carried out a number of activities related to human employees joined external short-term training sessions resources, including those aimed at building a positive and 183 employees acquired education in different employer’s image and a unique corporate culture, the training facilities. Long-term development program for development and implementation of a number of poli- graduates provides for education of employees in the cies and procedures regulating remuneration, incentive Corporate University of JSFC Sistema, Lomonosov plans, assessment, training and development of employ- MSU School of Management and Innovations, as well ees. The amount and structure of compensation are in as training programs abroad. The company continues line with those suggested by the company’s peers (cal- human resources exchange with international compa- culation is based on the annual data disclosed by Price- nies, such as Infineon, Agilent and STMicroelectronics. WaterhouseCoopers and Watson Wyatt). SITRONICS has established three candidate pools: Suc- cession Pool: top and medium-level managers; Strate- In addition to financial incentives, much attention is paid gic Pool (SITRONICS “DNA”): 20% of the most com- to additional privileges, such as voluntary medical insur- petent experts in key fields; Perspective Pool (HiPo): ance, accident insurance, available bank loans at the young employees with high potential and leadership reduced interest rate provided by partners, access to inclination. private pension insurance funds (JSFC Sistema Fund). SITRONICS subsidiaries (Mikron and Elion) operate pro- The company cooperates with over 30 higher educa- fessional union organizations. tion institutions in the regions of its presence (Moscow Electrotechnic Institute (MIET), Moscow State Technical In 2008, the company introduced a key productivity in- University n.a. N.E. Bauman (MSTU), Novosibirsk State dicators (KPIs) system. This system is aimed at setting University, Ural Polytechnic University, Kiev Polytechnic clear objectives and assessing each employee on the University, Technical University of the Czech Republic; basis of predetermined quantitative and qualitative indi- and the Greek division INTRACOM TELECOM provides cators (the performance assessment is conducted on a financing to the Athens Information Technology Institute quarterly basis). (AIT)). There are a number of ongoing programs encouraging young specialists to work for SITRONICS. The Some of the SITRONICS subsidiaries have optimized the Company invites students to take part in traineeships number of employees and revised the organizational struc- in its divisions, provides grants to undergraduates who ture, which enabled for adjustment of expenses, as well as have decided to start their career within the company, building and strengthening the vertical management. as well as joins recruitment fairs and Career Days. JSC SITRONICS AND SUBSIDIARIES

Consolidated Financial Statements Years ended December 31, 2008 and 2007 Table of contents

44 sitronics annual report 2008

INDEPENDENT AUDITORS’ REPORT...... 45

Consolidated financial statements as of December 31, 2008 AND 2007, and for the years ended December 31,2008 and 2007

Consolidated balance sheets as of December 31, 2008 and 2007 ...... 46

Consolidated statements of operations and comprehensive loss for the years ended December 31, 2008 and 2007...... 48

Consolidated statements of cash flows for the years ended December 31, 2008 and 2007...... 49

Consolidated statements of changes in shareholders’ equity for the years ended December 31, 2008 and 2007...... 51

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007...... 52 45 FINANCIAL STATEMENTS JSC SITRONICS AND SUBSIDIARIES

Consolidated Balance Sheets as of December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars)

46 sitronics annual report 2008 Notes 2008 2007

Assets

Current assets: Cash and cash equivalents 4 $ 125,695 $ 185,486 Short-term investments 5 7,379 9,489 Trade receivables, net 6 675,794 616,611 Other receivables and prepaid expenses, net 7 122,432 145,342 Inventories, net 8 198,980 210,490 Restricted cash 13 7,492 7,525 Deferred tax assets, current portion 22 5,395 7,203

Total current assets 1,143,167 1,182,146

Property, plant and equipment, net 9 499,644 470,074 Intangible assets, net 10 160,201 100,385 Goodwill 10 86,858 - Inventories, net 8 30,768 63,134 Long-term investments 11 10,441 3,201 Long-term trade receivables 12 58,650 36,629 Restricted cash 13 - 2,120 Deferred tax assets, non current portion 22 24,486 27,553 Other long-term assets 2,476 2,054

Other long-term assets $ 2,016,691 $ 1,887,296

See notes to consolidated financial statements JSC SITRONICS AND SUBSIDIARIES

Consolidated Balance Sheets as of December 31, 2008 and 2007 (continued) (Amounts in thousands of U.S. dollars, except share and per share amounts)

47 FINANCIAL STATEMENTS No t e s 2008 2007

Liabilities and shareholders’ equity

Current liabilities: Trade accounts payable 14 $ 365,458 $ 294,067 Taxes payable 26,482 38,613 Accrued expenses and other current liabilities 15 188,166 159,918 Derivative financial instruments 21 241 52,563 Short-term loans and notes payable 16 410,055 254,246 Current portion of long-term debt 17 123,436 175 Deferred tax liabilities, current portion 22 10,542 9,380

Total current liabilities 1,124,380 808,962

Long-term liabilities: Capital lease obligations 18 3,963 877 Long-term debt 17 199,716 257,821 Other long-term liabilities 20 9,507 11,776 Deferred tax liabilities, non current portion 22 24,248 15,618

Total long-term liabilities 237,434 286,092 Total liabilities 1,361,814 1,095,054

Minority interests 159,676 206,372 Commitments and contingencies 27 - - Shareholders’ equity: Share capital (9,547,087,190 and 9,547,087,190 23 335,764 335,764 shares authorized and issued as of december 31, 2008 and 2007, respectively, with par value of 1 ruble) Treasury stock (739,856,026 and 796,776,440 shares 23 (50,940) (53,659) with par value of 1 ruble as of December 31, 2008 and 2007, respectively) Shareholder’s receivable 23 (9,552) (9,256) Additional paid-in capital 23 423,999 409,724 Accumulated deficit (220,166) (163,565) Accumulated other comprehensive income 16,096 66,862 Foreign currency items 15,920 66,932 Defined benefit pension plan 176 (70)

Total shareholders’ equity 495,201 585,870

Total liabilities and shareholders’ equity $ 2,016,691 $ 1,887,296

See notes to consolidated financial statements JSC SITRONICS AND SUBSIDIARIES

Consolidated statements of operations and comprehensive loss for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars unless otherwise stated)

48 sitronics annual report o t e s 2008 N 2008 2007

Revenues $ 2,000,940 $ 1,619,605

Cost of sales, exclusive of depreciation and amortization (1,597,615) (1,404,818) shown separately below

Research and development expenses (39,094) (44,828) Selling, general and administrative expenses (230,882) (271,955) Depreciation and amortization (73,769) (56,452) Other operating (expenses) / income, net (248) 867

Operating income / (LOSS) 59,332 (157,581)

Interest income 4,387 14,397 Interest expense (42,589) (39,885) Foreign currency transactions losses (54,994) (8,852) Other non-operating losses - (1,336)

Loss before income tax and minority interests (33,864) (193,257) Income tax expense 22 (15,264) (27,398)

Loss before minority interests (49,128) (220,655) Minority interests (4,764) (13,274)

NET LOSS $ (53,892) $ (233,929)

Translation adjustment, net of minority interests of (51,012) 38,991 ($ 10,927) and $15,785, respectively, and income tax effect of $nil Unrecognized actuarial gains, net of minority interests of 246 484 $ 237 and $ 466, respectively, and income tax effect of $nil

COMPREHENSIVE LOSS $ (104,658) $ (194,454)

Weighted average number of common shares 8,774,622,491 8,511,003,404 outstanding, basic and diluted:

Loss per share, basic and diluted, USD: (0.01) (0.03)

See notes to consolidated financial statements JSC SITRONICS AND SUBSIDIARIES

Consolidated statements of cash flows for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars)

49 FINANCIAL STATEMENTS 2008 2007

OPERATING ACTIVITIES: Net loss $ (53,892) $ (233,929)

Adjustments to reconcile net loss to net cash provided by/ (used in) operations: Depreciation and amortization 73,769 56,452 Minority interests 4,764 13,274 Loss from disposal of property, plant and equipment 534 87 Gain on disposal of subsidiaries (5,871) (4,585) Deferred income tax (925) 5,050 Bad debt expense 8,999 54,859 Loss on early extinguishment of debt - 7,644 Stock based compensation 13,583 20,402 FIN 48 effect 3,644 3,257 Other non-operating losses - 1,336 Foreign currency transactions loss / (gain) on loans and notes 46,123 (1,119) within financing and investing activities

Changes in operating assets and liabilities: Trade receivables (159,918) 98,145 Other receivables and prepaid expenses 8,930 (36,921) Inventories 16,394 (4,377) Accounts payable 93,980 (20,323) Taxes payable (8,545) 429 Accrued expenses and other current liabilities (19,463) 41,886

Net cash provided by operating activities $ 22,106 $ 1,567

INVESTING ACTIVITIES: Purchases of property, plant and equipment (128,311) (203,130) Proceeds from disposals of property, plant and equipment 7,224 3,084 Purchases of intangible assets (51,647) (32,853) Purchases of businesses, net of cash acquired (107,470) (44,709) Proceeds from disposal of business 1,164 - Change in restricted cash 2,110 40,899 Purchases of short-term investments (4,147) (4,121) Proceeds from sales of short-term investments 8,624 23,651 Purchases of long-term investments (9,194) (2,081)

Net cash used in investing activities $ (281,647) $ (219,260)

See notes to consolidated financial statements JSC SITRONICS AND SUBSIDIARIES

Consolidated statements of cash flows (continued) for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars)

50 sitronics annual report 2008 2008 2007

FINANCING ACTIVITIES: Proceeds from short-term borrowings $ 1,128,575 $ 288,453 Principal payments on short-term borrowings (926,599) (215,129) Proceeds from long-term borrowings 197,849 122,626 Principal payments on long-term borrowings (177,625) (206,632) Principal payments on capital lease obligations (7,472) (3,106) Debt issuance costs (1,190) (1,310) Proceeds from stock options exercised 3,810 5,554 Proceeds from issuance of common stock - 355,123 Repurchase of common stock (3,800) (36,000)

Net cash provided by financing activities $ 213,548 $ 309,579

Effects of exchange rate changes on cash and cash equivalents (13,798) 3,760

(DECREASE) / INCREASE IN CASH AND CASH EQUIVALENTS $ (59,791) $ 95,646

CASH AND CASH EQUIVALENTS, beginning of the year $ 185,486 $ 89,840

CASH AND CASH EQUIVALENTS, end of the year $ 125,695 $ 185,486

CASH PAID DURING THE YEAR FOR: Interest, net of amounts capitalized $ (30,750) $ (32,582) Income taxes (47,097) (25,521)

NON-CASH ITEMS: Equipment acquired under capital lease $ 11,881 $ 60 Amounts due for purchase of long-lived assets 38,865 3,225

Non-cash investing and financing activities for the years ended December 31, 2008 and 2007 included acquisitions and disposals of subsidiaries and stock-based compensation, as described in Notes 3 and 24.

See notes to consolidated financial statements JSC SITRONICS AND SUBSIDIARIES

Consolidated statements of changes in shareholders’ equity for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars)

51 FINANCIAL STATEMENTS Accu- (Accu- mulated Share- Additional mulated Share Treasury other holder’s paid-in deficit)/ Total capital stock compre- receivable capital retained hensive earnings income

Balances at January 1, 2007 $ 276,941 $ (27,135) $ (11,102) $ 94,868 $ 86,564 $ 27,387 $ 447,523

Issuance of common stock 58,823 - - 293,257 - - 352,080 Repurchase of common stock - (36,000) - - - - (36,000) Stock-based compensation - - - 20,402 - - 20,402 Stock options exercised - 9,476 - - (3,923) - 5,553 Payment from shareholder - - 3,043 - - - 3,043 Interest on shareholder’s - - (1,197) 1,197 - - - receivable Effect of FIN 48 - - - - (12,277) - (12,277) implementation Unrecognized actuarial gains - - - - - 484 484 net, of minority interests of $466 and income tax of $nil Translation adjustment, net of - - - - - 38,991 38,991 minority interests of $15,785 and income tax of $nil Net loss - - - - (233,929) - (233,929)

Balances at December 31, 2007 $ 335,764 $ (53,659) $ (9,256) $ 409,724 $ (163,565) $ 66,862 $ 585,870

Repurchase of common stock - (3,800) - - - - (3,800) Stock-based compensation - - - 13,583 - - 13,583 Stock options exercised - 6,519 - (2,709) - 3,810 Change in shareholders’ - - (296) 692 - (396) - receivables Unrecognized actuarial gains - - - - - 246 246 net, of minority interests of $237 and income tax of $nil Translation adjustment, net of - - - - - (50,616) (50,616) minority interests of $(10,927) and income tax of $nil Net loss - - - - (53,892) - (53,892)

Balances at December 31, 2008 $ 335,764 $ (50,940) $ (9,552) $ 423,999 $ (220,166) $ 16,096 $ 495,201

See notes to consolidated financial statements. JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

52 sitronics annual report 1. Background and description of business 2008 The financial statements of JSC SITRONICS (“SITRONICS”) and subsidiaries (together, the “Group”) reflect the consolidation of separate financial statements of operating entities related by means of direct or indirect ownership of a majority voting interest by the Group’s holding company, JSC SITRONICS, including accounts of variable interest entities, where the Group is the primary beneficiary. The Group’s business was established upon the acquisition by JSFC Sistema (“Sistema”) of semiconductor and industrial electronics assets, through a combination of privatization and private transactions from 1994 to 1998. In 2002, Sistema established a holding company for these technology businesses that was subsequently renamed into JSC SITRONICS. At the same time, the Group obtained control over Strom Telecom that was subsequently renamed into SITRONICS TS CR, a Czech telecommunication equipment and software manufacturer. In July 2004, Sistema acquired a 51% stake of Kvazar-Micro, a Ukrainian IT and systems integration company, which the Group acquired from Sistema in October 2005. In March-June 2008, the Group purchased a 49% stake of Kvazar-Micro for $174.8 million and completed the acquisition of the company. During the year ended December 31, 2008, Kvazar-Micro was renamed into SITRONICS IT. In June 2006, the Group acquired a 51% stake in Intracom Telecom S.A., a Greek telecommunication solutions provider.

On February 7, 2007, SITRONICS completed an initial public offering of 1,675,000,000 common shares, with a par value of 1 RUB per share comprising 125,160,800 ordinary shares and 30,996,784 global depositary receipts (“GDRs”), with 1 GDR representing 50 shares. The GDRs were admitted to trade on the London Stock Exchange. Proceeds from the offering, net of the underwriters’ discount, amounted to $352.1 million. Sistema remains the controlling shareholder of SITRONICS, which represents the Technology business segment of Sistema.

During the year ended December 31, 2007, SITRONICS merged its Consumer Electronics and Electronics Manu- facturing Services business segments into the Consumer Services and Products segment. This merger was executed to streamline the decision-making process within the combined division.

The Group currently operates along four operating segments:

Telecommunication Solutions segment is engaged in the design, manufacture and distribution of hardware and software products including convergence solutions. It also offers system integration and customization services for fixed line, mobile telecommunication and other operators.

Information Technologies Solutions segment is engaged in computer hardware distribution, systems integration, IT consulting and software development services for telecommunication operators, banking and financial institutions and the public sector.

Microelectronic Solutions segment is engaged in the design, manufacture, testing and distribution of semiconductor products and components; distribution and production of chip cards, microchip packaging and related solutions.

Consumer Services and Products segment is engaged in providing services for manufacturing electronics for telecoms and IT-market companies under contract as well as for third-party manufacturers of consumer electronics.

The Group’s operations are conducted in the Russian Federation (“RF”), Ukraine, Czech Republic, Greece and Romania.

2. Summary of significant accounting policies

Basis of Presentation of Financial Statements – The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Group’s entities maintain accounting records in local currencies in accordance with the requirements of accounting and tax legislation in the countries of their incorporation. The accompanying consolidated financial statements differ from the financial statements prepared for statutory purposes in that consolidated statements are expressed JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

53 in terms of US dollars (see “Foreign Currency Translation Methodology” below) and reflect certain adjustments, FINANCIAL STATEMENTS appropriate to present the financial position, results of operations and cash flows in accordance with U.S. GAAP, which are not recorded in the accounting books of the Group’s entities.

Principles of Consolidation – The consolidated financial statements include the accounts of SITRONICS, and its majority-owned subsidiaries. The consolidated financial statements also include accounts of variable interest entities as defined by FIN 46 (R) Variable Interest Entities (including Cosmos Wealth) where the Group is the primary beneficiary. The assets and liabilities of the subsidiaries transferred to the Group by Sistema are recorded in these financial statements at the historical cost recognized by Sistema. Any difference between the historical cost of net assets and the consideration paid is accounted for as an adjustment to the shareholders' equity of the Group.

The effective ownership interest and proportion of voting power of SITRONICS in its significant subsidiaries, as well as the locations of their principal business operations as of December 31, 2008 and 2007 were as follows:

Effective ownership interest Voting interest as of as of December 31, December 31,

Operating entities 2008 2007 2008 2007

Telecommunication Solutions segment: Intracom Telecom S.A. (Greece) (“Intracom 51% 51% 51% 51% Telecom”) Intrarom (Romania) 34% (1) 34% (1) 67% 67% SITRONICS TS CR (Сzech Republic) 100% 100% 100% 100% SITRONICS TS (Russia) 100% 100% 100% 100%

Information Technologies Solutions segment: SITRONICS IT B.V. 100% 51% 100% 51% (Kvazar-Micro Corporation (Netherlands)) Kvazar-Micro International 100% 51% (1) 100% 100% (United Kingdom) Kvazar-Micro Techno (Ukraine) 100% 51% (1) 100% 100% Kvazar-Micro.ru (Russia) 100% 51% (1) 100% 100%

Microelectronic Solutions segment: Mikron (Russia) 77% 77% 77% 77% VZPP-Mikron (Russia) 100% 100% 100% 100% SITRONICS Smart Technologies (Russia) 65% 65% 65% 65%

Consumer Services and Products segment: SITRONICS CE disposed 100% disposed 100% (JSC Digital electronics) (Russia) Kvant (Russia) 78% 78% 88% 88% Elaks (Russia) 84% 84% 84% 84% Elion (Russia) 75% 75% 90% 90% Concel (Russia) 100% 100% 100% 100%

______(1)– Including indirect ownership JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

54 sitronics Business Combinations – Acquisitions of businesses from third parties are accounted for using the purchase annual report 2008 method. On acquisition, the assets and liabilities of an acquired entity are measured at their fair values as at the date of acquisition. The interest of minority shareholders, if applicable, is stated at the minority’s proportion of the book values of the assets and liabilities recognized. Goodwill arising on acquisitions is recognized as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognized. Any excess of the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of the business combination is allocated on a pro-rata basis to decrease the value of certain long-term assets.

The Group accounts for the acquisition of the minority interests using the purchase method. On acquisition of minority interests, (1) the carrying amount of the minority interest is reduced to the extent of the interest acquired, and (2) the acquired entity’s assets and liabilities are increased from historical cost to fair value for the portion of the assets acquired and liabilities assumed based on the additional ownership acquired.

Any such entities are included in the Group’s financial statements from the beginning of the year when control was acquired.

Acquisitions of entities under common control are accounted for on a carryover basis, with the assets and liabilities recorded based on the historical value of assets and liabilities of the acquired entity. The results of operations from these transactions are combined with the results of the Group for all periods presented. Any difference between the purchase price and the net assets acquired is reflected in shareholders’ equity.

Accounts of disposed entities are excluded from the Group’s financial statements from the date when control does not rest with the Group.

All intercompany transactions, balances and unrealized gains/ (losses) on transactions are eliminated.

Variable Interest Entity – The Group consolidates Cosmos Wealth, a variable interest entity, of which the Group is a primary beneficiary. Cosmos Wealth operates in Southeast Asia, buying wafers from Russian entities of the Microelec- tronic Solutions segment, dicing the wafers into integrated circuits (ICs) and packaging the ICs for resale to original equipment manufacturers. Cosmos Wealth is directly owned by Sistema. The assets of Cosmos Wealth, as well as results of its operations have not been significant to the Group during the years ended December 31, 2008 and 2007.

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

Examples of significant estimates include revenue recognition, costs to complete projects, allowance for doubtful accounts, carrying value of long-lived assets and inventories, useful lives and recoverability of long-lived tangible and intangible assets, fair value of financial instruments, valuation allowance on deferred tax assets, warranty liabilities, obligations related to employee benefits, and contingencies.

Foreign Currency Translation Methodology – The Group follows a translation policy in accordance with State- ment on Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation”.

Management has determined that the functional currency of SITRONICS and its significant subsidiaries for the year ended December 31, 2008 are the currencies of the countries of their domicile, with the exception of Kvazar- Micro International Ltd, a company incorporated in the United Kingdom, whose functional currency is the US dollar (“USD”) due to the pervasive use of the USD in its operations. JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

55 The Group has selected the USD as its reporting currency and has translated the financial statements of subsid- FINANCIAL STATEMENTS iaries with a different functional currency into the USD. Assets and liabilities are translated at the exchange rates current at the balance sheet date. Shareholders’ equity is translated at the applicable historical rates, income and expense items are translated at weighted-average rates of exchange prevailing during the period. The resulting translation gain/(loss) is recorded as a separate component of other comprehensive income.

Cash and Cash Equivalents – Cash and cash equivalents include cash on hand, amounts on deposit in banks and cash invested temporarily in various instruments having original maturities of less than three months. Any cash over which there is restriction as to its use is excluded from cash and cash equivalents and is reflected as restricted cash on the consolidated balance sheet.

Fair Value of Financial Instruments – Financial instruments carried on the balance sheet include cash, accounts receivable, investments, derivative financial instruments, accounts payable and fixed and variable rate debts. The particular recognition methods adopted are disclosed in the individual policy statements associated with each item.

The Group has estimated the fair value of its financial instruments as follows:

The fair value of Group’s financial instruments with subsidiaries and affiliates of Sistema approximates their carrying value except for the borrowings obtained at 0% interest rate (Note 16) and unless it’s stated otherwise in the description of the respective financial instrument;

The fair value of short-term financial instruments approximates the carrying value due to the short term nature of the instruments;

Carrying value is equivalent to fair value for long-term variable rate financial instruments as management believes these are consistent with the terms upon which it could enter into similar agreements at December 31, 2008;

Due to the fixed interest nature of the Russian Bonds as disclosed in Note 17 the carrying value does not approximate the fair value.

Derivative Financial Instruments and Hedging Activities – The Group accounts for derivative instruments in accordance to SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. All derivatives are measured at fair value and recognized as either assets or liabilities on the balance sheets.

The Group’s derivatives have not been designated as hedge for accounting purposes. Accordingly, gains and losses from changes in the fair value are included in the consolidated statements of operations. The Group does not use derivatives for trading purposes.

Fair Value Measurements – Effective January 1, 2008, the Group adopted SFAS No. 157, “Fair Value Measure- ments” (“SFAS 157”). SFAS 157 requires a new framework for measuring fair value of financial and non-financial instruments and expands related disclosures.

Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.

The valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, whilst unobservable inputs reflect our market assumptions. Observable inputs are used as the preferred source of inputs. Unobservable inputs are only used in the absence of market inputs. JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

56 sitronics The inputs are categorized into the following fair value hierarchy: annual report 2008 Level 1 Quoted prices for identical instruments in active markets Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable Level 3 Significant inputs to the valuation model are unobservable

Accounts Receivable – Accounts receivable are stated net of allowance for doubtful accounts. Such allowance reflects either specific cases of delinquencies or defaults or estimates based on evidence of collectability.

The Telecommunication Solutions segment of the Group enters into sale agreements with certain of its clients, including, but not limited to, Sistema subsidiaries and affiliates, where the final payment is not due until more than 12 months from the delivery date. Long-term trade receivables from parties other than Sistema subsidiaries are measured at amortized cost using the effective interest method less any allowance.

Value-Added Taxes – Value-added taxes (“VAT”) related to sales are payable to the tax authorities on an accrual basis based upon the issuance of invoices to the customer. VAT incurred for purchases may be reclaimed, subject to certain restrictions, against VAT related to sales. VAT related to purchase transactions that are reclaimable after the balance sheet dates are recorded in other receivables and prepaid expenses.

Inventories – Inventories comprise raw materials and spare parts, work-in-progress, finished goods and goods for resale and are stated at the lower of cost or market value.

The Information Technologies Solutions segment accounts for its inventories using the first-in, first-out (“FIFO”) cost method. The cost of inventories of other Group’s entities is computed on an average cost basis.

The cost of raw materials includes the cost of purchase, customs duties, transportation and handling costs. Work- in-progress and finished goods are stated at production cost, which includes manufacturing overheads. The Group periodically assesses its inventories and spare parts for obsolete and slow-moving stock.

Property, Plant and Equipment – Property, plant and equipment (“PP&E”) are stated at cost, less accumulated depreciation. PP&E transferred to the Group from Sistema are recorded at the carrying value recognized by Sistema at the time of transfer.

The cost of PP&E includes major expenditures for improvements and replacements which extend the useful lives of the assets or increase their revenue generating capacity. Repairs and maintenance are charged to the consolidated statements of operations as incurred.

Items of PP&E that are retired or otherwise disposed of are eliminated from the consolidated balance sheet along with the corresponding accumulated depreciation. Any gain or loss resulting from such retirement or disposal is included in the consolidated statement of operations.

Land is not depreciated. PP&E are depreciated on a straight-line method utilizing estimated useful lives of the assets as follows:

Buildings 40-50 years Leasehold improvements Lesser of the estimated useful life or the term of the lease Plant, machinery and equipment 3-15 years JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

57 Intangible Assets – Intangible assets represent values of purchased and internally developed software, values of FINANCIAL STATEMENTS customer contracts and the related customer relationships, trademarks and licenses.

The initial values of intangible assets acquired by Sistema and transferred to the Group in the course of the merger described in Note 1, are recorded based on their fair values at the date of acquisition by Sistema. For the entities acquired by the Group subsequent to the merger described in Note 1, intangible assets were assigned their fair values at the date of acquisition by the Group. All subsequent purchases of intangible assets have been recorded at fair value.

Costs of developing computer software products incurred by the Group are accounted for in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed.” Ac- cordingly, software development costs incurred subsequent to establishing technological feasibility and market- ability of a software product are capitalized. Technological feasibility is established when the Group has completed all planning, designing, coding, and testing activities that are necessary to establish that a product can be produced to meet its design specifications including functions, features, and technical performance requirements.

Customer relationships are amortized on an accelerated basis determined in proportion to the estimated discounted future cash inflows expected from these relationships. Other finite-life intangible assets are amortized on a straight-line basis. The useful lives of intangible assets are estimated as follows:

Software development costs Greater of the ratio of current product revenues to total projected product revenues or the estimated economic life of the product (3-5 years) Customer contracts and customer relationships 3-7 years Purchased software, licenses and other intangible assets 3-10 years

At each balance sheet date, the unamortized capitalized costs of the computer software product are compared to the net realizable value of that product. The amount by which the unamortized capitalized costs of a computer software product exceed the net realizable value of that asset is written off.

Amortized customer contracts and customer relationships are tested for impairment according to SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”.

Investments – Investments in corporate shares where the Group does not have the ability to exercise significant influence are accounted for at cost or fair value. Investments in private companies are carried at cost, less provisions for other than temporary impairment in value. For public companies that have readily determinable fair values, the Company classifies its equity investments as available-for-sale and, accordingly, records these investments at their fair values with unrealized holding gains and losses included in the consolidated statements.

Debt Issuance Costs – Debt issuance costs are capitalized and included either in other receivables and prepaid expenses or other long-term assets sections on the consolidated balance sheet and amortized using the effective interest method over the terms of the related debt. Debt issuance costs amounted to $2.6 million and $1.8 million as of December 31, 2008 and 2007, respectively.

Impairment of Long-lived Assets excluding Goodwill – The Group periodically evaluates the recoverability of the carrying amount of its long-lived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. Whenever events or changes in circumstances indicate that the carrying amounts of those assets may not be recoverable, the Group compares the undiscounted net cash flows estimated to be generated by those assets to the carrying amount of those assets. When these undiscounted cash flows are less than the carrying amounts of the assets, the Group records impairment losses to write the asset down to fair value, measured by the estimated discounted net future cash flows expected to be generated from the use of the assets. JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

58 sitronics Impairment of Goodwill – Goodwill is not amortized to operations, but instead is reviewed for impairment, at annual report 2008 least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In accordance with SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS No. 142”), goodwill is reviewed for impairment by comparing the carrying value of each reporting unit's net assets (including allocated goodwill) to the fair value of those net assets. If the reporting unit's carrying amount is greater than its fair value, then a second step is performed whereby the portion of the fair value that relates to the reporting unit's goodwill is compared to the carrying value of that goodwill. The Company recognizes a goodwill impairment charge for the amount by which the carrying value of goodwill exceeds the fair value. The Company has determined that there are no impairment losses in respect of goodwill for any of the reporting periods covered by these consolidated financial statements.

Leasing Arrangements – The Group accounts for leases, which include leases of equipment and vehicles, as well as office premises, based on the requirements of SFAS No. 13, “Accounting for Leases.”

Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as capital leases. For capital leases, the present value of the future minimum lease payments at the inception of the lease or fair value, whichever is less, is reflected as an asset and a liability in the balance sheet. Principal amounts due within one year are classified as current liabilities and the remaining balance as long-term liabilities.

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the statement of operations on a straight-line basis over the period of the lease.

Revenue Recognition – The Group’s segments recognize revenues only when all of the following conditions have been met: (i) there is persuasive evidence of an arrangement; (ii) delivery has occurred; (iii) the fee is fixed and determinable; and (iv) collectability of the fee is reasonably assured.

For the sale when the right of return exists, which may exist within all four segments, the Group applies provisions of SFAS No 48, “Revenue recognition when right of return exists”. Revenue from those sales transactions is recognized at time of sale only if all of the conditions specified by the Statement are met. If those conditions are not met, revenue recognition is postponed; if they are met, sales revenue and cost of sales reported in the income statement is reduced to reflect estimated returns and expected costs or losses are accrued.

Revenues under arrangements specific to respective segments of the Group are recognized as follows:

Telecommunication Solutions segment

The segment’s arrangements for the sale of software products are multiple-element arrangements, involving the provision of related services, including customization, implementation and integration services, as well as ongoing support and maintenance provided to customers.

If the services element of the arrangement is deemed essential to the functionality of the software arrangement, the accounting for performance of construction-type contracts is applied, provided that the following conditions are met: (a) contracts executed by the parties normally include provisions that clearly specify the enforceable rights regarding goods or services to be provided and received by the parties, the consideration to be exchanged, and the manner and terms of settlement; (b) the buyer can be expected to satisfy its obligations under the contract; and (c) the Group can be expected to perform its contractual obligations. The measurement of progress towards completion is based on efforts devoted to a contract at the particular stages. At SITRONICS TS CR, the extent of progress is measured by the ratio of hours performed to date as compared to the estimated total hours at completion. Intracom Telecom calculates the extent of progress based on the ratio of costs incurred to total estimated costs. A contract is considered as substantially completed when (a) product is delivered, and (b) product is accepted by the customer. JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

59 If the services element of the arrangement is not deemed essential to the functionality of the software, the service FINANCIAL STATEMENTS revenues are accounted for separately from the software revenues. In such multiple-element arrangements, the software component is accounted for using the residual method.

In cases where extended payment terms exist, license and related customization fees are recognized when payments are due, unless a history of collection, without providing concessions, has been established under comparable arrangements.

Information Technologies Solutions segment

Because of frequent sales price reductions and rapid technology obsolescence, revenues from the segment’s computer hardware sales to dealers under agreements allowing price protection are deferred until the dealers sell the merchandise.

The segment’s arrangements regarding systems integration services typically include multiple elements, such as equipment and software, installation services and post-contract support. A multiple-element arrangement is separated into more than one unit of accounting if all of the following criteria are met: i) the delivered items have value to the customer on a standalone basis; ii) there is objective and reliable evidence of the fair value of the undelivered items; and iii) the arrangement includes a general right of return relative to the delivered items, delivery or performance of the undelivered items is considered probable and substantially in the control of the Group.

If evidence of the fair value of the undelivered elements of the arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value does exist, or until all elements of the arrangement are delivered. Fees allocated to post-contract support are recognized as revenue on a pro rata basis over the support period. Fees allocated to other services are recognized as revenue as services are performed.

Revenue and cost of sales from contracts involving solutions achieved through modification of complex telecommunications equipment and software are recognized by reference to the stage of completion of the contract activity at the balance sheet date when the outcome of a contract can be estimated reliably. This is normally measured by the proportion that contract costs incurred for work performed to date relate to the estimated total contract costs, except where this would not be representative of the stage of completion. Variations in contract work, claims and incentive payments are included to the extent that they have been agreed with the customer. Where the outcome of a contract cannot be estimated reliably, contract revenue is recognized to the extent of contract costs incurred that it is probable will be recoverable. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognized immediately.

Microelectronic Solutions, Consumer Services and Products segments

The Consumer Services and Products segment enters into arrangements with certain manufacturers and distributors of consumer electronics products to assemble such products at its facilities. Where the Group’s responsibility to the customer is limited solely to assembly services or where the Group buys components from and subsequently sells the assembled devices to the same counterparty, the Group records only the net amount retained as its revenues.

The products of these segments are generally sold with a limited warranty of product quality. The product return reserves, warranty and other post-contract support obligations are accrued at the time of sale. The Group accrues for known warranty if a loss is probable and can be reasonably estimated, and accrues for estimated incurred but unidentified issues based on historical activity.

Vendor Rebates and Allowances – Funds received from IT vendors for price protection, vendor rebates, marketing, training, product returns and promotion programs are recorded as adjustments to product costs, revenue, or selling, general and administrative expenses according to the nature of the program. JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

60 sitronics Research and Development Costs – Research and development (“R&D”) costs are fully charged to the annual report 2008 consolidated statements of operations when incurred. Costs of software development incurred between the start date of the related projects and the date on which technological feasibility is established are expensed as research and development costs. The costs of materials and equipment or facilities that are acquired or constructed for research and development activities and that have alternative future uses (in research and development projects or otherwise) shall be capitalized as tangible assets when acquired or constructed. The cost of such materials consumed in research and development activities and the depreciation of such equipment or facilities used in those activities are research and development costs. However, the costs of materials, equipment, or facilities that are acquired or constructed for a particular research and development project and that have no alternative future uses (in other research and development projects or otherwise) and therefore no separate economic values are research and development costs at the time the costs are incurred. The costs of intangibles that are purchased from others for use in research and development activities and that have alternative future uses (in research and development projects or otherwise) shall be capitalized and amortized as intangible assets in accordance with SFAS No. 142. The amortization of those intangible assets used in research and development activities is a research and development cost. However, the costs of intangibles that are purchased from others for a particular research and development project and that have no alternative future uses (in other research and development projects or otherwise) and therefore no separate economic values are research and development costs at the time the costs are incurred.

Income Taxes – Income taxes for the Group’s subsidiaries have been computed in accordance with the respective local laws. Income tax rates effective during the years ended December 31, 2008 and 2007, in countries where the Group primarily operates were as follows:

2008 2007 RF 24% 24% Ukraine 25% 25% Czech Republic 21% 24% Greece 25% 25% Romania 16% 16%

Deferred income taxes are accounted for under the asset and liability method and reflect the tax effect of all significant temporary differences between the tax bases of assets and liabilities and their reported amounts in the accompanying consolidated financial statements. A valuation allowance is provided for deferred tax assets, if it is more likely than not that these items will either expire before the Group will be able to realize the benefit, or the future deductibility is uncertain.

In accordance with changes in Russian Tax Legislation, starting from January 1, 2009 the income tax rate applied in Russia is reduced from 24% to 20%.

Starting from January 2009, the income tax rate in the Czech Republic was changed from 21% to 20%.

Starting from January 2007, the Group adopted the provisions of the FASB Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes” – an interpretation of FASB Statement No. 109. This interpretation of Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes,” prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In order to minimize the diversity in practice existing in the accounting for income taxes, FIN 48 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

61 The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties FINANCIAL STATEMENTS in operating expenses.

Retirement and Post-Retirement Benefits – Subsidiaries of the Group contribute to the local state pension funds and social funds, on behalf of all their employees.

(a) Defined contribution plans:

In the RF, all social contributions, including contributions to the pension fund, are substituted with a unified social tax (“UST”) calculated by the application of a regressive rate from 26% to 2% of the annual gross remuneration of each employee. UST is allocated to three social funds, including the pension fund, where the rate of contributions vary from 20% to 2%, respectively, depending on the annual gross salary of each employee.

Other subsidiaries of the Group are required to contribute a specified percentage of each employee’s payroll up to a fixed limit to a pension fund, an unemployment fund and a social security fund.

(b) Other post-retirement benefits:

At Intracom Telecom, employees are entitled to an indemnity in the event of termination of employment, including in the case of retirement, with the amount of payment varying in relation to the employees’ compensation and length of service. In addition, Intracom Telecom should pay a lump-sum payment between 14 and 28 monthly salaries, depending on past service, upon death of an employee. Intracom Telecom is responsible for financing the compensation. The Group accounts for this plan following the requirements of SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”, as amended by SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans and SFAS No. 132R, “Employers’ Disclosure about Pensions and Other Postretirement Benefits. The plan is unfunded.

Borrowing Costs – Borrowing costs are recognized as an expense in the period in which they are incurred. Borrowing costs for assets that require a period of time to get them ready for their intended use are capitalized and amortized over the related assets’ estimated useful lives. The capitalized borrowing costs for the years ended December 31, 2008 and 2007 amounted to $19.4 million and $8.8 million, respectively. The remaining borrowing costs are recognized as an expense in the period in which they are incurred.

Advertising Costs – Advertising costs are expensed as incurred. Advertising costs for the years ended December 31, 2008 and 2007 were $0.6 million and $1.7 million, respectively, and were reflected as a component of selling, general and administrative expenses in the consolidated statements of operations.

Earnings per Share – Earnings per share (“EPS”) are computed using the weighted average number of shares outstanding during the years ended December 31, 2008 and 2007. Diluted earnings per share are computed on the basis of the weighted average number of shares outstanding plus any dilutive effect of the outstanding stock options.

Minority Interests – Minority interests represent shares in the book value of the net assets of the Group’s subsidiaries proportional to equity interests in those entities owned by shareholders that are not members of the Group.

Distributions to Shareholders – In Russia, distributions to shareholders can only be paid out of distributable earnings. The distributable retained earnings of SITRONICS are based on amounts determined in accordance with Russian statutory accounting regulations and differ significantly from the amounts calculated on the basis of U.S. GAAP.

Asset Retirement Obligations – In accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations”, the Group calculates an asset retirement obligation and an associated asset retirement cost when the Group JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

62 sitronics has a legal or contractual obligation in connection with the retirement of tangible long-lived assets. The Group’s annual report 2008 obligations under SFAS No. 143 relate primarily to the cost of removing equipment from its leased production facilities and other leased sites. As of December 31, 2008 and 2007, the estimated assets retirement obligations were not significant to the Group’s consolidated financial position and results of operations.

Comprehensive Income / (Loss) – The Group accounts for comprehensive income / (loss) under the provisions of SFAS No. 130, “Reporting Comprehensive Income,” which established standards for the reporting and display of comprehensive income / (loss) and its components. Comprehensive income / (loss) represents the change in shareholders’ equity during a period from transactions and other events and circumstances from non-owner sources.

Stock Options – The Group accounts for stock-based compensation in accordance with the provisions of SFAS No. 123R (revised 2004), “Share-Based Payment”. Under SFAS No. 123R, companies must calculate and record the compensation cost, such as stock options or restricted stock, awarded to employees for services received in the income statement for the year ended December 31, 2008. The compensation cost is measured based on the fair value of the instruments on the date they are granted using a Black-Scholes option pricing model and is recognized over the period during which the employees are required to provide services in exchange for the equity instruments. The stock options were anti-dilutive in 2008.

New Accounting Pronouncements

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP (the GAAP hierarchy). This statement will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The group does not believe that the adoption of SFAS No. 162 will have an impact on its consolidation financial position, results of operations or cash flows.

In June, the FASB issued FASB Staff Position (“FSP”) on Emerging Issues Task Force (“EITF”) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP-EITF No. 03-6-1”). Under FSP-EITF No. 03-6-1, unvested share-based payments awards that contain rights to receive nonfortfeitable dividends (where paid or unpaid) are participating securities, and should be included in the two-class method of computing earnings per share. FSP-EITF No. 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. The Group does not expect the adoption of FSP- EITF No. 03-6-1 to have a material impact on the determination of its earnings per share.

In March 2008, the FASB issued FASB Statement No. 161 (“SFAS No. 161”), “Disclosures about Derivative Instruments and Hedging Activities”. The new standard requires enhanced disclosures about derivative instruments and hedging activities to enable investors to better understand their effects on an entity’s financial statements. SFAS No. 161 becomes effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Management is currently evaluating the potential impact, if any, of the adoption of SFAS No. 161 on the Group’s financial statements.

In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the Useful Life of Intangible Assets. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008 and early adoption is prohibited. Management are currently evaluating the impact of the pending adoption of FSP FAS 142-3 on our consolidated financial statements.

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. Statement 157 defines fair value, establishes a framework for measuring fair value and expands fair value measurement disclosures. In JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

63 February 2008, the FASB issued FASB Staff Position No. FAS 157-1, Application of FASB Statement No. 157 FINANCIAL STATEMENTS to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 and FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157. Collectively, the Staff Positions defer the effective date of Statement 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities except for items that are recognized or disclosed at fair value on a recurring basis at least annually, and amend the scope of Statement 157. We have adopted Statement 157 except for those items specifically deferred under FSP No. FAS 157-2. Management is currently evaluating the impact of the full adoption of Statement 157 on our consolidated financial statements. SFAS No. 157 also established a hierarchy that classifies the inputs used to measure fair value. This hierarchy prioritizes the use of inputs used in valuation techniques into three levels based on observable and unobservable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Group. Unobservable inputs, which require more judgment, are those inputs described above that reflect management’s views on the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs.

In June 2008, the FASB issued FASB Staff Position (FSP) EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” Under the provisions of this standard, unvested awards of share-based payments with rights to receive dividends or dividend equivalents, such as our restricted stock units (RSUs), are considered participating securities for purposes of calculating earnings per share. As a result, these participating securities will be included in the weighted average number of shares outstanding as disclosed on the face of the income statement. This FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior period earnings per share data presented in financial reports after the effective date shall be adjusted retrospectively to conform to the provisions of this FSP. Early application is not permitted. The Group has evaluated the potential impact of this standard and anticipates it will have no material impact on our previously reported earnings per share amounts.

In October 10, 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarifies how companies should apply the fair value measurement methodologies of SFAS 157 to financial assets when markets they are traded in are illiquid or inactive. Under the provisions of this FSP, companies may use their own assumptions about future cash flows and appropriately risk- adjusted discount rates when relevant observable inputs are either not available or are based solely on transaction prices that reflect forced liquidations or distressed sales. This FSP is effective as of September 30, 2008. There was no impact to our financial position or results of operations from the adoption of this FSP.

In February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115” (“SFAS No. 159”), which permits an entity to measure certain financial assets and financial liabilities at fair value. SFAS No. 159 offers an irrevocable option to carry the vast majority of financial assets and liabilities at fair value, with changes in fair value recorded in earnings (the fair value option, or FVO). Effective January 1, 2008, the Group adopted SFAS No. 159. On adoption and as of December 31, 2008, the Group did not elect to measure any financial instruments and liabilities at fair value other than those required to be accounted for at fair value under other accounting standards. Therefore, the adoption of SFAS No. 159 did not have any impact on the Group’s financial position, results of operations or cash flows.

In December 2007, the FASB issued FASB Statement No. 141R, “Business Combinations” (“SFAS No. 141R”), and FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS No. 160”). These statements change the way companies account for business combinations and noncontrolling interests (minority interests in current GAAP). SFAS No. 141R and SFAS No. 160 will require, among other changes: (a) more assets acquired and liabilities assumed to be measured at fair value as of the acquisition date; (b) liabilities related to contingent consideration to be remeasured at fair value in each subsequent reporting period; (c) an acquirer to expense acquisition-related costs; and (d) noncontrolling interests in subsidiaries initially JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

64 sitronics to be measured at fair value and classified as a separate component of equity. Both Statements are to be applied annual report 2008 prospectively (with one exception related to income taxes) for fiscal years beginning on or after December 15, 2008. However, SFAS No.160 requires entities to apply the presentation and disclosure requirements retrospectively (e.g., by reclassifying noncontrolling interests to appear in equity) to comparative financial statements, if presented. Both standards prohibit early adoption. The Group expects SFAS No.141R will have an impact on its accounting for future business combinations once adopted, but the effect is dependent upon the acquisitions that are made in the future.

In connection with the issuance of SFAS No. 160, EITF Topic D-98, “Classification and Measurement of Redeemable Securities” (“Topic D-98”), was revised to include the SEC Staff’s views regarding the interaction between Topic D-98 and SFAS No. 160. The revised Topic D-98 indicates that the classification, measurement, and earnings-per- share guidance required by Topic D-98 applies to noncontrolling interests (e.g., when the noncontrolling interest is redeemable at a fixed price or fair value by the holder or upon the occurrence of an event that is not solely within the control of the issuer). The revisions to Topic D-98 that are specific to accounting for noncontrolling interests should be applied no later than the effective date of SFAS No. 160.

In November 2008, the FASB issued EITF Issue No. 08-6, “Equity Method Investment Accounting Considerations” (“EITF Issue No. 08-6”). EITF Issue No. 08-6 considers the effects of the issuances of SFAS No. 141R and SFAS No. 160 on an entity’s application of the equity method under Opinion 18, “The Equity Method of Accounting for Investments in Common Stock,” i.e. determination of the initial carrying value of an equity-method investment, impairment assessment of an underlying indefinite-lived intangible asset of an equity-method investment, accounting for issuance of shares by an equity investee, and accounting for a change in an investment from the equity method to the cost method. EITF No. 08-6 is effective for transactions occurring in fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years. Early adoption is not permitted. The Group does not expect the adoption of EITF No. 08-6 to have a significant impact on its financial position, results of operations and cash flows.

In November 2008, the FASB issued EITF Issue No. 08-7, “Accounting for Defensive Intangible Assets” (“EITF Issue No. 08-7”). EITF Issue No. 08-7 applies to all acquired intangible assets in situations in which an entity does not intend to actively use the asset but intends to hold (lock up) the asset to prevent others from obtaining access to the asset (a defensive intangible asset), except for intangible assets that are used in research and development activities. The EITF reached a consensus that a defensive intangible asset should be accounted for as a separate unit of accounting and should be assigned a useful life that reflects the entity's consumption of the expected benefits related to the asset, noting that it would be rare for a defensive intangible asset to have an indefinite life. This EITF Issue No. 08-7 is effective for intangible assets acquired on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Group expects EITF Issue No. 08-7 will have an impact on its accounting for future acquisitions of intangible assets once adopted, but the effect is dependent upon the acquisitions that are made in the future. JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

65 FINANCIAL STATEMENTS 3. Acquisitions and disposals

Intracom Telecom – In June 2006, SITRONICS acquired 51.0% of the common shares of Intracom Telecom for EUR 120.0 million (equivalent of $150.6 million at the date of the transaction) from Intracom Holdings S.A., of which $106.7 million was paid in cash in June 2006. In May 2007, the purchase price was reduced by $1.0 million as per the terms of the agreement and $39.6 million of the outstanding balance was paid in cash. As of December 31, 2008 $7.1 million remained outstanding and is recorded as a liability (Note 15).

SITRONICS IT B.V. – In 2008, the Group purchased the remaining 49% interest in its subsidiary, Kvazar-Micro Corporation B.V. (KMC) for $174.8 million. During the first stage of the transaction, 36% of KMC’s issued shares were acquired from Melrose Holding for $ 116.9 million in March 2008. The acquisition was financed by cash. In June 2008 Kvazar-Micro acquired the remaining 13% of its shares from Melrose Holding Company for $57.9 million and retired those shares. As of December 31, 2008 $67.3 million remained outstanding and was recorded as a liability (Note 15). During the year ended December 31, 2008, the company was renamed into SITRONICS IT B.V.

The purchase price allocation was as follows:

Property, plant and equipment $ 3,016 Other intangibles 147 Customer contracts 1,573 Customer relationships 62,890 Goodwill 87,597 Other net assets 34,620 Deferred tax liability (15,093)

Total purchase price $ 174,750

Customer contracts and the related customer relationships acquired are amortized over the remaining contractual terms or estimated useful life of approximately 3-7 years. Other intangibles acquired are amortized over the remaining contractual terms of approximately 3-5 years. The goodwill associated with the transaction represented the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets and liabilities recognized.

Digital Electronics JSC – In September 2008, SITRONICS disposed of its 100% stake in its subsidiary – Digital Electronics JSC to a third party for consideration of $2.0 million. Resulting gain in the amount of $95.7 million was offset with the provision for the loan to the Digital Electronics in the amount of $92.4 million. This loan was not reflected in the consolidated balance sheet. JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

66 sitronics annual report 4. Cash and cash equivalents 2008 Cash and cash equivalents as of December 31, 2008 and 2007 comprised the following:

2008 2007

RUB, USD, EUR current accounts with subsidiary of Sistema: Moscow Bank for Reconstruction and Development (MBRD) $ 22,623 $ 86,665

RUB and USD deposits with subsidiary of Sistema Moscow Bank for Reconstruction and Development (MBRD) 851 26,781

Term deposits with third parties: JPY bank deposits 20,672 8,062 EUR deposits 11,541 349 RUB bank deposits 6,031 - UAH deposits 105 10,891 USD deposits 29 7,781 Other deposits 371 1,047

Current accounts with third parties: USD current accounts 25,318 7,648 ROL current accounts 19,650 660 EUR current accounts 3,412 7,238 RUB current accounts 2,997 12,450 CZK current accounts 2,254 1,858 Other current accounts 8,285 12,904

Cash on hand 1,556 1,152

Total $ 125,695 $ 185,486

Term deposits have original maturities less than three months. As of December 31, 2008, bank deposits bear interest from 2.7% to 9.0% per annum. Interest income earned on MBRD current accounts and deposits is disclosed in Note 26. JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

67 5. Short-term investments FINANCIAL STATEMENTS

USD and RUB denominated short-term investments as of December 31, 2008 and 2007 comprised the following:

Annual interest rate Maturity date 2008 2007

Promissory notes of Sistema 0% on demand $ - $ 6,327 and its subsidiaries Other 9%-11% 2009 7,379 3,162

Total $ 7,379 $ 9,489

Management anticipates no losses in respect of short-term investments.

6. Trade receivables, NET

Trade receivables, net of provision for doubtful accounts, as of December 31, 2008 and 2007 comprised the following:

2008 2007

Trade receivables $ 699,705 $ 643,621 Less: provision for doubtful accounts (23,911) (27,010)

Total $ 675,794 $ 616,611

Included in trade receivables as of December 31, 2008 and 2007 are receivables for services provided and products shipped to subsidiaries and affiliates of Sistema in the amounts of $197.2 million and $160.0 million, respectively (Note 26).

The change in the provision for doubtful debts resulted from a bad debt charge of $2.4 million primarily related to the Telecommunication Solutions and Information Technologies Solutions segments, offset by a decrease in bad debt provision of $5.5 million upon the disposal of Digital Electronics JSC. JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

68 sitronics annual report 7. Other receivables and prepaid expenses, NET 2008 Other receivables and prepaid expenses, net of provision for doubtful accounts, as of December 31, 2008 and 2007 comprised the following:

2008 2007

Advances to suppliers $ 49,884 $ 103,486 Other taxes prepaid 22,036 23,850 Prepaid expenses 19,238 18,004 Recoverable VAT 18,111 25,312 Receivable from Digital Electronics JSC 16,001 - Rental receivable 4,620 2,214 Loans to employees 1,081 1,451 Debt issuance costs, current portion 1,001 1,370 Other 12,296 12,923 Less: provision for doubtful accounts (21,836) (43,268)

Total $ 122,432 $ 145,342

The change in the provision from 2007 resulted from an increase to the provision for doubtful accounts in the amount of $6.0 million primarily related to the Microelectronic Solutions segment, offset by the decrease in bad debt provision of $27.4 million upon the disposal of Digital Electronics JSC.

8. Inventories, NET

Inventories and spare parts as of December 31, 2008 and 2007 comprised the following:

2008 2007

Raw materials and spare parts $ 89,219 $ 92,219 Work-in-progress 43,763 54,548 Finished goods and goods for resale 96,766 126,857

229,748 273,624

Less: long-term portion (30,768) (63,134)

Total $ 198,980 $ 210,490

As of December 31, 2008 and 2007, inventory with a carrying amount of $13.8 million and $17.7 million, respectively, was pledged to Intel (Note 14). JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

69 The Group accounted for obsolete inventory of $10.7 million and $22.9 million, for the years ended December 31, FINANCIAL STATEMENTS 2008 and 2007, respectively.

In the year ended December 31, 2008, the Group has re-evaluated the classification of inventories and determined that $30.8 million of inventories is expected to be sold in the years ended December 31, 2010 and 2011. Accordingly, this amount has been classified into long-term assets.

9. Property, Plant and equipment, NET

Property, plant and equipment, net of accumulated depreciation, as of December 31, 2008 and 2007 comprised the following:

2008 2007

Land $ 20,521 $ 21,200 Buildings and leasehold improvements 187,712 174,817 Plant, machinery and equipment (including leased vehicles 147,305 145,745 and equipment of $24,081 and $23,453, as of December 31, 2008 and 2007, respectively) Construction in progress and equipment for installation 224,528 196,477

580,066 538,239

Less accumulated depreciation: Buildings and leasehold improvements (47,564) (44,352) Plant, machinery and equipment (including leased vehicles (32,858) (23,813) and equipment of $7,780 and $7,258, as of December 31, 2008 and 2007, respectively)

(80,422) (68,165)

Total $ 499,644 $ 470,074

Depreciation expense for property, plant and equipment for the years ended December 31, 2008 and 2007 was $35.9 million and $28.3 million, respectively.

Land, buildings and equipment with an approximate carrying value of $33.3 million and $5.8 million as of December 31, 2008 and December 31, 2007, respectively were pledged to collateralize the outstanding balance of debt to Sberbank and BAWAG Bank (Note 16). JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

70 sitronics annual report 10. Intangible assets & goodwill, net 2008 Intangible assets, net of accumulated amortization, as of December 31, 2008 and 2007 comprised the following:

2008 2007 Gross Accumu- Net carrying Gross Accumu- Net carrying lated value carrying lated carrying value amorti- value amorti- value zation zation

Finite-life intangible assets: Customer contracts and the $ 84,223 $ (24,292) $ 59,931 $ 21,334 $ (14,984) $ 6,350 related customers relationships Software costs 130,509 (57,763) 72,746 115,557 (36,626) 78,931 Licenses 15,327 (3,329) 11,998 12,531 (2,729) 9,802 Other 12,567 (286) 12,281 2,281 (208) 2,073

242,626 (85,670) 156,956 151,703 (54,547) 97,156

Indefinite-life intangible assets: Trademarks 3,245 - 3,245 3,229 - 3,229 Goodwill 86,858 - 86,858 - - -

Total $ 332,729 $ (85,670) $ 247,059 $ 154,932 $ (54,547) $ 100,385

Amortization expense for the years ended December 31, 2008 and 2007 was $37.8 million and $28.1 million, respectively.

The estimated amortization expense for the finite-life intangible assets existing as of December 31, 2008 for each of the five succeeding fiscal years and thereafter is as follows:

2009 $ 19,797 2010 22,294 2011 25,852 2012 29,312 2013 29,899 Thereafter 29,802

Total $ 156,956

The actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible assets acquisitions, changes in useful lives and other relevant factors. JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

71 11. Long-term investments FINANCIAL STATEMENTS

Long-term investments as of December 31, 2008 and 2007 comprised the following:

2008 2007

Share in Coral/ Sistema Strategic Fund, LLC $ 8,409 $ 1,176 Other 2,032 2,025

Total $ 10,441 $ 3,201

In the year 2008 the Group invested a further $7.2 million in cash in the Coral/ Sistema Strategic Fund, LLC. The fund will invest in companies of strategic value for the Group and other subsidiaries of Sistema.

The Group has a majority of voting shares in ICE, but it does not have control of this entity. Thus, ICE is not consolidated by the Group.

12. Long-term trade receivables

The long-term portion of trade receivables as of December 31, 2008 and 2007 comprised the following:

Annual interest rate Maturity date 2008 2007

Trade receivables from 3-month EURIBOR +1.8% 2010-2014 $ 41,959 $ 33,518 third parties 3-month EURIBOR +1.6% LIBOR + 1.5% EURIBOR + 1.5% 6.35% 7%

Trade receivables from 0% 2010-2012 16,691 3,111 Sistema affiliates 3-month LIBOR + 1.5% 3-month EURIBOR + 2.75% 6.35%

Total $ 58,650 $ 36,629

The major part of long-term trade receivables relates to Intracom Telecom. JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

72 sitronics annual report 13. Restricted cash 2008 Subject to the terms of the share purchase agreement for Intracom Telecom, EUR 35 million was placed by SITRONICS in an escrow account as a deposit. In May 2007, an amount of EUR 29.2 million ($42.7 million as of December 31, 2007) was paid according to the share purchase agreement. An amount of EUR 5.3 million ($7.5 million as of December 31, 2008) is remaining on the escrow account.

14. Trade accounts payable

As of December 31, 2008 and 2007, the Group’s accounts payable included $15.1 million and $11.4 million, respectively, due to Intel. The amounts payable to Intel are guaranteed by all proceeds (including accounts receivable) derived by the Group from the sale of Intel’s products, the Group’s inventory purchased from Intel, and a guarantee in the amount of $1.3 million issued by ING Bank. ING Bank’s guarantee is collateralized by the Group’s cash deposit of $0.7 million in the bank.

15. Accrued expenses and other current liabilities

Accrued expenses and other current liabilities as of December 31, 2008 and 2007 comprised the following:

2008 2007

Purchase consideration (Note 3) $ 67,279 $ - Customers’ prepayments and billings in excess of project costs 54,252 76,135 Interest payable on debt 13,553 6,511 FIN 48 provision (Note 22) 12,709 16,987 Accrued payroll and vacation 13,273 15,697 Payable for purchase of Intracom Telecom shares (Note 3) 7,053 7,320 Warranty obligations 2,902 4,432 Current portion of capital lease (Note 18) 2,818 2,675 Current portion of postretirement benefit obligations (Note 19) 2,001 703 Other 12,326 29,458

Total $ 188,166 $ 159,918

Customers’ prepayments and billings in excess of project costs as of December 31, 2008 and 2007 included amounts related to transactions with subsidiaries and affiliates of Sistema of $8.7 million and $28.3 million, respectively (Note 26). JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

73 16. Short-term loans and notes payable FINANCIAL STATEMENTS

At December 31, 2008 and 2007, short-term loans and notes payable comprised the following:

Annual interest rate 2008 2007 (Actual at December 31, 2008)

Revolving credit facilities:

Including: RUB-denominated 15%-17% $ 17,869 $ - USD-denominated 13% 5,555 - LIBOR + 2.5% EUR-denominated EURIBOR + 0.9%-1.25% - 17,569 CZK-denominated PRIBOR + 0.9% - 16,595

23,424 34,164

RUB-denominated loans and notes 0% 85,620 10,398 payable to Sistema and subsidiaries

Loans and notes payable to other parties: Including: USD-denominated 9.25% 271,509 139,835 5.25% 10.7% 13% 17% LIBOR + 2.5% LIBOR + 2.75% LIBOR + 7% Mosprime + 2.5% EUR-denominated EURIBOR +1.25% 24,726 221 EURIBOR + 1.5% LIBOR + 4% RUB-denominated 11% 2,658 753 12.5% 15%-17% CZK-denominated PRIBOR + 0.5%-0.85% 2,118 68,875 PRIBOR + 0.35%

301,011 209,684

Total $ 410,055 $ 254,246 JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

74 sitronics Revolving credit facilities annual report 2008 During the year ended December 31, 2008, SITRONICS Microelectronic Solutions entered into a number of credit facility agreements with Sberbank and HSBC bank denominated in RUB and USD, limited in aggregate to $23.4 million. The drawdowns bear interest rates of 15%-17% for RUB-denominated facilities and LIBOR+2.5% for USD- denominated facilities per annum. The drawdowns mature at the end of 2009. Property, plant and equipment of Mikron with an approximate carrying value of $28.7 million are pledged as security under the agreement with Sberbank.

RUB-denominated loans and notes payable to Sistema and subsidiaries

During the year ended December 31, 2008 and 2007, Sitronics Management issued RUB-denominated promissory notes to Finexkort-M, a related party. The promissory notes are interest free and mature upon demand. The amount outstanding under the promissory notes comprised $37.3 million and $8.7 million as of December 31, 2008 and 2007, respectively.

During the year ended December 31, 2008, Sitronics Management also issued RUB-denominated promissory notes to Sistema and its subsidiary – Finkonsaltproekt. Promissory notes are interest free and mature upon demand. The amount outstanding under these promissory notes comprised $38.2 million as of December 31, 2008.

Other loans, overdrafts and credit facilities are taken from MBRD bank and mature in 2009.

Loans and notes payable to other parties

In March 2008, SITRONICS entered into a USD-denominated loan agreement with Alexandria Capital PLC, bearing an interest rate of 9.25% per annum. Dresdner Bank AG was appointed as an agent under this loan agreement. As of December 31, 2008, the outstanding amount comprised $75.0 million. The agreement matures in March 2009.

During the year ended December 31, 2008, SITRONICS TS entered into a USD-denominated loan agreement with HSBC Bank bearing interest rate of 10.7% and maturing in June 2009. The amount outstanding under this agreement comprised $15.0 million.

SITRONICS TS CR obtained a CZK-denominated loan of $2.3 million from BAWAG Bank. The loan bears interest of PRIBOR + 0.35% per annum. Land and buildings of SITRONICS TS CR with an approximate carrying value of $4.6 million are pledged as security under the agreement.

During the year ended December 31, 2008, SITRONICS Microelectronic Solutions entered into several USD- denominated loan agreements with HSBC bank and Commerzbank (Eurasia) bearing interest of LIBOR+2.5% and LIBOR+2.75%, respectively and maturing in April 2009. As of December 31, 2008, the amount outstanding under these agreements comprised $18.5 million.

In December 2008, SITRONICS entered into a USD-denominated loan agreement with Vnesheconombank bearing interest of LIBOR+7% and maturing in November 2009. As of December 31, 2008, the amount outstanding under this agreement comprised $155.0 million.

During the year ended December 31, 2008, Sitronics IT entered into USD-denominated loan agreement with Melrose Holdings S.A. bearing an interest rate of 17% and maturing in January 2009. As of December 31, 2008, the amount outstanding under this agreement comprised $7.0 million.

During the year ended December 31, 2008, Intracom Telecom entered into EUR-denominated loan agreements with SOC.GEN. – GENIKI BANK, ING Bank and HELLENIC Bank bearing interest rates of 3 months EURIBOR+1.5%, JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

75 1 month EURIBOR+1.25%, and 3 months LIBOR+4.0%. As of December 31, 2008, the amounts outstanding under FINANCIAL STATEMENTS these agreements comprised $14.1 million, $6.4 million, and $4.4 million, respectively.

The borrowings outstanding at December 31, 2007, were repaid, refinanced or extended during the 2008.

17. Long-term debt

Long-term debt as of December 31, 2008 and 2007 consisted of the following:

Annual interest Currency rate (Actual at 2008 2007 December 31, 2008)

Russian bonds RUB 10% $ 102,109 $ 122,219 Syndicated loan to Intracom USD LIBOR + 1.5% - 120,261 Telecom (2002) Syndicated loan to Intracom USD 6-month 211,575 - Telecom (2008) EURIBOR + 1.2% Science and Industrial Policy RUB 6.5% 7,386 8,840 Department of the Moscow Government BAWAG Bank CZK PRIBOR + 0.35% - 2,328 Other loans various 0-3.33% 2,082 4,348

Subtotal 323,152 257,996

Less amounts maturing within one year (123,436) (175)

Total $ 199,716 $ 257,821

Russian bonds – In September 2007, SITRONICS issued RUB-denominated bonds. The 3-year RUB 3 billion issue was priced at face value with an annual coupon of 10% and a put option after 1.5 years at which time the coupon rate could be reset. Coupon payments are made on a semi-annual basis. Subsequent to year end, the majority of these bonds were repurchased (see Note 29).

Syndicated loan to Intracom Telecom – In June 2008, Intracom Telecom Solutions S.A. entered into a new syndicated loan agreement with a number of banks (Alphabank, HSBC Bank plc, Geniki Bank of Greece S.A. National Bank of Greece S.A., Piraeus Bank S.A. EFG Eurobank S.A., FBB-First Business Bank S.A., Aspis Bank, Millennium Bank S.A.). The loan bears interest of six month EURIBOR+1.2% per annum. The loan is guaranteed by JSC Sitronics and Intracom Holding S.A. and contains certain restrictive covenants, including, but not limited to, compliance with certain financial ratios. Management believes that as of December 31, 2008, Intracom Telecom is in compliance with all existing covenants.

The borrowings outstanding on the syndicated loan in place at December 31, 2007 were repaid in January 2008.

Science and Industrial Policy Department of the Moscow Government – In December 2005, Mikron entered into a credit facility with the Science and Industrial Policy Department of the Moscow Government. The facility is JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

76 sitronics limited to RUB 217.0 million ($7.4 million as of December 31, 2008). The facility bears interest determined as one annual report 2008 fourth of the official rate of the Central Bank of Russia (6.5% as of December 31, 2008) and matures in 2010. As of December 31, 2008, $7.4 million was outstanding under this credit facility.

The following table presents the aggregate scheduled maturities of the total debt outstanding as of December 31, 2008:

Year ended December 31, 2009 $ 123,436 2010 7,386 2011 192,102 2012 - 2013 - Thereafter 228

Total $ 323,152

18. Capital lease obligations

The capital lease obligations as of December 31, 2008 and 2007 are presented as follows:

2008 2007

Total minimum lease payments (undiscounted) $ 9,596 $ 3,688 Less: amount representing interest (2,815) (136) Present value of net minimum lease obligations 6,781 3,552 Less: current portion of lease obligations (Note 16) (2,818) (2,675)

Non-current portion of lease obligations $ 3,963 $ 877

The major lease agreements were entered into in the year 2008 by Microelectronic Solutions for equipment and vehicles. Most of the agreements expire in 2009 through 2011 and assume the transfer of ownership of the leased assets to the Group at the end of the lease term.

Future rental payments under capital leases in effect as of December 31, 2008, are as follows:

Year ended December 31, 2009 $ 4,738 2010 3,226 2011 1,632 Less: amount representing interest (2,815)

Total $ 6,781 JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

77 19. Postretirement benefits FINANCIAL STATEMENTS

According to the Greek labor legislation, Intracom Telecom is obliged to provide certain post-retirement benefits to its employees (Note 2). The pension plan is unfunded.

The following are the key assumptions used in determining the projected benefit obligation and net periodic pension expense:

Discount rate 5.6% p.a. Annual payroll increase 4.5% p.a. Long-term inflation 2.0% p.a. Staff turnover for voluntary resignation (up to 30) 11.0% p.a. Staff turnover for voluntary resignation (from 31 to 50) 5.5% p.a. Staff turnover for voluntary resignation (for ages above 51) 2.0% p.a. Staff turnover for dismissal (for ages below 51) 0.2% p.a.

The change in the projected benefit obligation for the year ended December 31, 2008 is presented in the following table:

2008 2007

Projected benefit obligation, beginning of the year $ 7,255 $ 6,790 Service cost 675 680 Interest cost 369 297 Amendments 3,054 570 Benefit payments (2,343) (861) Actuarial gain (483) (950) Currency translation effect (312) 730

Projected benefit obligation, end of the year $ 8,215 $ 7,256

The future payments to employees under the plan are expected as follows:

Year ended December 31, 2009 $ 2,001 2010 818 2011 889 2012 959 2013 1,030 2014-2018 2,518

Total $ 8,215 JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

78 sitronics The components of the net periodic benefit costs for the years ended December 31, 2008 and 2007 are as follows: annual report 2008

2008 2007

Service cost $ 675 $ 680 Interest cost 369 297

Net periodic benefit cost $ 1,044 $ 977

Amounts recognized in other comprehensive income for the years ended December 31, 2008 and 2007 are as follows:

2008 2007

Unrecognized gain $ 246 $ 484

Total recognized in other comprehensive income $ 246 $ 484

As of December 31, 2008, the long-term portion of post-retirement benefit obligations were $6.2 million and are included in other long-term liabilities on the consolidated balance sheet and the short-term portion was $2.0 million and included in accrued expenses and other current liabilities.

20. Other long-term liabilities

As of December 31, 2008 and 2007, other long-term liabilities of the Group comprised the following:

2008 2007

Post-retirement benefit obligations, long-term portion (Note 19) $ 6,214 $ 6,553 Accounts payable for construction 1,831 3,225 Warranty obligations, long-term portion 1,462 1,998

Total $ 9,507 $ 11,776 JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

79 21. Derivative financial instruments FINANCIAL STATEMENTS

Intracom Telecom – In December 2007, Intracom Holdings S.A. entered into a flexible forward agreement with EFG EUROBANK to eliminate the foreign currency exposure risk. At the beginning of 2008, the forward agreement was closed without any impact on cash flow. In January 2008, Intracom Holdings S.A. entered into a second flexible forward agreement with EFG EUROBANK. The arrangements did not qualify for hedge accounting. In relation to these instruments the Group recorded a loss of $0.2 million for the year ended December 31, 2008.

SITRONICS Telecom Solutions (Czech Republic) – During the year ended December 31, 2008, STS (Czech Republic) recognized a loss of $0.4 million on derivative instruments embedded in other contracts.

22. Income tax

The Group’s provision for income taxes for the years ended December 31, 2008 and 2007 was as follows:

2008 2007

Current tax expense $ 16,190 $ 22,348 Deferred income tax (credit) / expense (926) 5,050

Total income tax expense $ 15,264 $ 27,398

The provision for income taxes is different from that which would be obtained by applying the Russian statutory income tax rate of 24% to the net loss before income tax and minority interests. The items causing this difference are as follows:

2008 2007

Income tax provision computed on net loss before taxes and $ (8,127) $ (46,061) minority interests at Russian statutory rate Adjustments due to: Expenses not deductible for tax purposes 48,926 26,295 Valuation allowance (9,314) 40,250 Tax loss carried forward (5,764) - Effect of sale of Corona - (2,310) FIN 48 adjustments (3,662) 3,257 Effect of different tax rates in foreign subsidiaries (2,690) (2,323) Effect of changes in tax rates (805) - Stock based compensation (3,300) 8,290

Income tax expense $ 15,264 $ 27,398 JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

80 sitronics Temporary differences between the tax and accounting bases of assets and liabilities give rise to the following annual report 2008 deferred tax assets and liabilities as at December 31, 2008 and December 31, 2007:

2008 2007

Deferred tax assets Tax losses carried forward 34,964 29,200 Inventories and spare parts 17,861 19,661 Property, plant and equipment $ 15,153 $ 17,683 Accounts receivable 2,376 10,915 Accrued expenses 4,706 8,926 Advances from customers 2,214 - Other 1,971 407 Valuation allowance (30,936) (40,250)

Total deferred tax assets $ 48,309 $ 46,542

Deferred tax liabilities Property, plant and equipment (14,884) (14,631) Undistributed untaxed profit (11,401) (14,191) Intangible assets (17,536) (4,112) Advances to suppliers (2,833) - Revaluation reserves (2,266) - Inventories and spare parts (1,509) - Other (2,789) (3,850)

Total deferred tax liabilities $ (53,218) $ (36,784)

Net deferred tax assets, current $ 5,395 $ 7,203 Net deferred tax assets, long-term 24,486 27,553 Net deferred tax liabilities, current (10,542) (9,380) Net deferred tax liabilities, long-term (24,248) (15,618)

As of December 31, 2008, deferred tax assets relating to tax losses carried forward in the amount of $0.8 million are attributable to Intracom Telecom, and $32.7 million to Sitronics TS CR. The remaining balance of deferred tax assets is attributable to the Russian subsidiaries. These tax losses can be utilized within 10 years in Russia, till 2011 in Greece and till 2012 in the Czech Republic.

The Group accounts for uncertain tax positions in accordance with FIN 48 starting from January 1, 2007. The resulting tax assets and liabilities are attributed to retained earnings as at January 1, 2007 in the amount of $12.3 million. The effect on the consolidated statement of operations for the year ended December 31, 2008 and December 31, 2007 was $3.7 million gain and $3.3 million loss respectively. JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

81 A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: FINANCIAL STATEMENTS

2008 2007

Opening balance $ (5,726) $ (4,789) Decrease/(increase) due to the change 2,333 (937) of tax positions during the current year

Closing balance $ (3,393) $ (5,726)

Beginning from 2007 the Group also accounts for the interest and penalties related to unrecognized tax benefits. A reconciliation of beginning and ending balances of interest and penalties related to unrecognized tax benefits are as follows:

2008 2007

Opening balance $ (9,808) $ (7,488) Decrease due to reversal of tax positions during the current year 1,329 (2,320)

Closing balance $ (8,479) $ (9,808)

The Group considers it reasonably possible that approximately $1.7 million of the unrecognized income tax benefit will be reversed within the next twelve months.

23. Equity transactions

During the year ended December 31, 2008 SITRONICS purchased 37,716,542 of its own shares from the management of SITRONICS for a consideration of $3.8 million. The transaction was recorded as an increase in treasury stock.

In July 2008 the Group transferred 94,636,956 of its own shares to participants of the stock option program for a consideration of $4.1 million. The transaction was recorded as a decrease in treasury stock.

24. Stock options

In July 2007, the Group established a stock option plan (“Plan”) for certain of its employees that provided for the issuance of 627,783,96 shares, representing 6.57% of the share capital. The shares are to be issued from the Group’s treasury stock. The options are contingent on the continued employment of the grantees with the Group or, in some cases, with Sistema. According to the terms of the plan, the grantees are entitled to buy option shares in four installments, representing 16.7% of the total amount due to each person during the years 2007, 2008, 2009, and the remaining amount of 49.9% in 2010. The exercise price is 1 RUB per share. The Group recognizes expense for stock-based compensation on a straight-line basis over the period represented by each tranche of options. All the participants are restricted from selling their shares until 2010. JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

82 sitronics In July 2008, 94,636,956 stock options were exercised under the stock option program for a consideration of $4.1 annual report 2008 million (representing 1 Ruble per share). The Group transferred the equivalent number of treasury shares to the participants. The transaction resulted in a decrease in retained earnings in the amount of $2.7 million.

From the grant date till December 2008, a number of the Program participants left the Group and forfeited options exercisable in future periods.

The compensation cost recorded during the year ended December 31, 2008 and 2007 was $13.6 million and $20.4 million, respectively and is included in general and administrative expense. The offsetting amount has been credited to additional paid-in capital.

The activity relating to the stock options for the year ended December 31, 2008 was as follows:

Number of shares Exercise price

Outstanding at December 31, 2007 538,668,491 - Options granted - - Options exercised (94,636,956) 0.04 Options forfeited (93,247,912) -

Outstanding at December 31, 2008 350,783,623 0.04

The assumptions used for the Black-Scholes model for each option are summarized in the table below:

Assumptions used Option 2 Option 3 Option 4 Option 5 in Black-Scholes Model

Grant date fair value 0.14 0.14 0.14 0.14 Excercise price 0.04 0.04 0.04 0.04 Option lifetime, years 0.0082 1.0103 2.0096 2.6749 Expected volatility p.a. 27.1% 27.1% 27.1% 27.1% Dividend yield 0.0% 0.0% 0.0% 0.0% Risk-free rate p.a. 4.5% 5.3% 5.8% 5.9% Exercise date 5 July 2007 5 July 2008 5 July 2009 5 March 2010

Assumptions on the expected volatility have been made on the basis of the average volatility of four different peer companies. The volatility for each of these companies was calculated based on quotes for the 3 years prior to the date of the grant, and volatility was based on daily observations of share prices for each peer company. The aggregate intrinsic value of the options outstanding at December 31, 2008 was $39.3 million.

As of December 31, 2008, there was $7.6 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a 2-year period. JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

83 25. Segment information FINANCIAL STATEMENTS

SFAS No. 131, “Disclosures about Segments of an Enterprise and the Related Information”, establishes standards for reporting information about operating segments in the financial statements. Operating segments are defined as components of an enterprise engaging in business activities for which separate financial information is available that is evaluated regularly by the chief operating decision maker or group in deciding how to allocate resources and in assessing performance.

The classification of the business entities by segments, mentioned above, is based on the nature of the production process and product specification of each segment. The Group’s management evaluates performance of the segments based on their operating income.

The intercompany eliminations presented below consist primarily of intercompany sales transactions, intercompany investments and loans and other intercompany transactions and balances conducted in the normal course of operations.

An analysis and reconciliation of the Group’s business segment information to the respective information in the consolidated financial statements for the years ended December 31, 2008 and 2007 is as follows:

Telecom- Information Micro- Consumer For the year ended munication Technologies electronic Services and Corporate Total December 31, 2008 Solutions Solutions Solutions Products

Sales to external $ 787,106 $ 873,246 $ 291,712 $ 48,876 $ - $ 2,000,940 customers Intersegment sales 1,595 6,590 26 5,522 - 13,733 Depreciation and (49,998) (9,850) (11,006) (2,546) (369) (73,769) amortization Operating income/ 5,084 43,041 50,713 (8,655) (30,851) 59,332 (loss)

Telecom- Information Micro- Consumer For the year ended munication Technologies electronic Services and Corporate Total December 31, 2007 Solutions Solutions Solutions Products

Sales to external $ 569,815 $ 763,308 $ 217,164 $ 69,318 $ - $ 1,619,605 customers Intersegment sales - 3,101 88 1,564 - 4,753 Depreciation and (44,558) (3,027) (5,511) (2,894) (462) (56,452) amortization Operating (loss)/ (118,838) 17,940 32,922 (58,273) (31,332) (157,581) income JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

84 sitronics The reconciliation of segment operating income to the consolidated income before income tax and minority annual report 2008 interests is as follows:

2008 2007

Total segment operating income / (loss) $ 59,332 $ (157,581) Interest income 4,387 14,397 Interest expense (42,589) (39,885) Foreign currency transactions loss, net (54,994) (8,852) Other non-operating losses - (1,336)

Consolidated loss before income tax and minority interests $ (33,864) $ (193,257)

Information about the Group’s revenues attributed to different geographic areas for the years ended December 31, 2008 and 2007 is shown below. The revenue is attributed by the location of the registered office of the customer.

2008 2007

Russia and CIS, except for Ukraine $ 863,259 $ 639,018 Ukraine 374,886 325,386 Central and Eastern Europe 411,708 306,986 Greece 178,146 218,410 Asia-Pacific region 79,580 30,616 Middle East and Africa 59,510 76,062 Others 33,851 23,127

Total sales to external customers $ 2,000,940 $ 1,619,605

As of December 31, 2008 and 2007, the total assets of reportable segments comprised the following:

2008 2007

Telecommunication Solutions $ 977,078 $ 990,975 Information Technologies Solutions 435,480 252,138 Microelectronic Solutions 544,308 486,139 Consumer Services and Products 49,884 112,821

2,006,750 1,842,073

Corporate 573,019 679,103 Intersegment eliminations (563,078) (633,880)

Total assets 2,016,691 $ 1,887,296 JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

85 For the years ended December 31, 2008 and 2007, the Group’s additions to property, plant and equipment and FINANCIAL STATEMENTS intangible assets, comprised the following:

2008 2007

Telecommunication Solutions $ 64,270 $ 35,788 Information Technologies Solutions 151,158 937 Microelectronic Solutions 148,882 190,045 Consumer Services and Products 3,255 7,743 Corporate 662 1,469

Total additions to property, plant and equipment and intangible assets $ 368,227 $ 235,982

As of December 31, 2008 and 2007, the Group’s property, plant and equipment and intangible assets, net of accumulated depreciation and amortization in respect of their geographical location was as follows:

2008 2007

Russia $ 398,288 $ 343,984 Greece 136,039 137,128 Czech Republic 43,768 58,739 Romania 17,341 19,846 Ukraine 147,377 6,700 Other 3,890 4,062

Total property, plant and equipment and intangible assets, net of accumulated depreciation and amortization $ 746,703 $ 570,459 JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

86 sitronics annual report 26. Related party transactions 2008 The Group enters into several related party transactions, such as for the sale of software and telecommunications equipment, sale of smartcards, and providing of services for implementation of system integrations with entities affiliated with the Group through common ownership. A majority of these transactions are executed in the normal course of business at customary rates established with third parties.

During the years ended December 31, 2008 and 2007, the Group entered into transactions with related parties as follows:

2008 2007

Sales of software and telecommunication equipment $ 201,348 $ 106,879 Systems integration 235,599 148,138 Sales of smart cards 42,829 41,516 Interest income 835 5,517 Interest expense (1,279) (1,326) Operating services consumed (11,815) (6,293) Other income 2,168 -

Sales of software and telecommunication equipment

Mobile TeleSystems (“MTS”) – During the years ended December 31, 2008 and 2007, Sitronics TS CR and Sitronics TS entered into transactions with MTS, a subsidiary of Sistema, and its affiliates Mobile TeleSystems Belarus (“MTS Belarus”) and MTS Ukraine (previously named “UMC”) for sales of communications software support systems and telecommunication equipment. Pursuant to these contracts, Sitronics TS CR and Sitronics TS sold software, equipment and related services for approximately $138.1 million and $68.0 million during the years ended December 31, 2008 and 2007, respectively.

Comstar UTS – During the years ended December 31, 2008 and 2007, Telecommunication segment companies entered into transactions with subsidiaries of Sistema currently comprising Comstar UTS (MGTS, MTU-Inform, Comstar). Pursuant to these contracts, the Telecommunication segment companies sold telecommunication equipment and rendered system maintenance services for approximately $29.0 million and $31.0 million during the years ended December 31, 2008 and 2007, respectively.

Other subsidiaries of Sistema – During the years ended December 31, 2008 and 2007, Sitronics TS CR sold telecommunication equipment to MTT, an affiliate of Sistema, for $1.0 million and $4.0 million, respectively. During the year ended December 31, 2008, SITRONICS TS also sold telecommunication equipment to Stream TV and MSS (affiliates of Sistema) for $4.0 million in total. Also during the period ended December 31, 2008, Intracom Telecom sold telecommunication equipment to K-Telecom (subsidiary of Comstar UTS) and Shiyam Telelink for $29.0 million.

Systems integration

During the years ended December 31, 2008 and 2007, SITRONICS IT provided systems integration services to MTS and other Sistema subsidiaries and affiliates for $223.1 million and $148.1 million, respectively. The sales to other related parties amounted to $12.5 million in 2008. JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

87 FINANCIAL STATEMENTS Sales of smart cards

During the year ended December 31, 2008 and 2007, SITRONICS Smart Technologies (previously named Smart Cards) sold smart cards to MTS for $42.8 million and $41.5 million, respectively.

Interest income

During the year ended December 31, 2008, the Group has earned $0.8 million from deposits placed at MBRD. The rest of the interest income was earned from different transactions with the companies of JSFC Sistema.

Interest expense

During the years ended December 31, 2008 and 2007, the Group had several short-term and long-term loans outstanding from Sistema and its subsidiaries, including MBRD (Note 16). Interest expense on these loans amounted to $1.3 million and $1.3 million for the years ended December 31, 2008 and 2007, respectively.

Transactions and balances with Intracom Holdings S. A.

During the period ended December 31, 2008, Intracom Telecom entered into transactions with subsidiaries and affiliates of Intracom Holdings S.A., its minority shareholder. For the period ended December 31, 2008, revenues from these transactions amounted to $133.2 million; the corresponding balances of accounts receivable and advances received as of December 31, 2008 comprised $94.1 million and $11.5 million, respectively. In addition, Intracom Telecom’s expenses for services consumed and inventories purchased from these entities amounted to $29.4 million for the period ended December 31, 2008. As of December 31, 2008, trade and other payables to subsidiaries and affiliates of Intracom Holdings S.A. were $24.6 million.

27. Commitments and contingencies

Operating Leases

The Group leases land and buildings and vehicles from other parties through contracts, which expire in various years through 2019. Rental expenses under these leases were $15.2 million and $8.0 million for the years ended December 31, 2008 and 2007, respectively, and were included in operating expenses in the consolidated statements of operations.

Future minimum rental payments under operating leases in effect as of December 31, 2008, were as follows:

Year ended December 31, 2009 $ 11,914 2010 6,015 2011 3,835 2012 2,414 2013 2,002 Thereafter 10,670

Total $ 36,850 JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

88 sitronics Legal Proceedings annual report 2008 In the ordinary course of business, the Group may be party to various legal and tax proceedings, and be subject to claims. In the opinion of the management, the Group’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 Group.

Import of Goods

Kvazar-Micro utilizes third parties to import goods into the CIS countries. There is a risk that the third parties’ import transactions may be challenged by regulatory authorities and determined as inappropriate. The impact that this determination may potentially have on the Group’s net income and financial position cannot be quantified at this stage due to the lack of precedent for such determinations. No contingent liabilities have been recorded in the Group’s financial statements in relation to these transactions.

Guarantees

In 2005, the Group issued a guarantee to MBRD. The guarantee requires that the Group reimburse MBRD for defaults by Videophone MV up to an aggregate of $3.8 million. The guarantee will be effective until the cumulative amount of payments made by Videophone MV to MBRD equals to $3.8 million.

In June 2008, the Group issued a guarantee to MBRD. The guarantee requires that the Group reimburse MBRD for defaults by Digital Electronics JSC up to an aggregate of $0.2 million. The guarantee will be effective until the cumulative amount of payments made by Digital Electronics JSC to MBRD equals to $0.2 million.

28. Concentrations

Credit Risks

During the years ended December 31, 2008 and 2007, the Group’s sales to Sistema’s subsidiaries and affiliates amounted to $468.2 million and $297.6 million, respectively, or 23.3% and 18.3% of the Group’s consolidated revenues for the respective periods. The Group’s trade receivables from Sistema’s subsidiaries and affiliates as of December 31, 2008 and December 31, 2007 are disclosed in Note 6; the Group’s cash and short-term investments balances with Sistema’s subsidiaries and affiliates are disclosed in Notes 4 and 5, respectively.

Sitronics IT collects proceeds from distribution of computer hardware products in the RF and Ukraine through a small number of independent dealers. Amounts due from these dealers as of December 31, 2008 and 2007 were $98.3 million and $50.9 million, respectively. During the years ended December 31, 2008 and 2007, revenues of Sitronics IT from distribution of products purchased under a distribution agreement with Intel International B.V. (“Intel”) amounted to $194.4 million and $216.7 million, respectively, or 9.7% and 13.3% of the Group’s consolidated revenues for the respective periods.

Intracom Telecom encounters a concentration of revenue and receivables among a few significant customers. Five customers in this segment accounted for revenues of $267.0 million in the year ended December 31, 2008, which is 13.3% of the Group's consolidated revenues for this period. Trade receivables from these customers amounted to $116.6 million as of December 31, 2008.

Operating Environment

The Russian and Ukrainian economies, while deemed to be of market status, continue to display certain traits consistent with that of emerging markets. These characteristics have in the past included higher than normal JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

89 inflation, insufficient liquidity of the capital markets, and the existence of currency controls. The continued success FINANCIAL STATEMENTS and stability of the Russian and Ukrainian economies will be subject to their respective governments’ continued actions with regard to legal and economic reforms.

Russia and Ukraine currently have a number of laws related to various taxes imposed by governmental authorities. Applicable taxes include VAT, corporate income tax, and payroll taxes, together with others. The policies on implementation of these regulations are often inconsistent or nonexistent. Accordingly, few precedents with regard to tax rulings have been established. Tax declarations, together with other legal compliance areas (for example, customs and currency control matters), are subject to review and investigation by a number of authorities, which are enabled by law to impose extremely severe fines, penalties and interest charges. These facts create tax risks in Russia and Ukraine that are more significant than typically found in countries with more developed tax systems. Management believes that it has adequately provided for tax liabilities in the Group’s consolidated financial statements; however, the risk remains that relevant authorities could take a different position with regard to interpretive issues.

Industry & Financial Risks

The industries in which the Group operates are characterized by rapid technological changes, competitive pricing pressures and cyclical market patterns. The Group’s financial results are affected by a wide variety of factors, including general economic conditions in the countries where the Group’s entities operate, industry-specific economic conditions, the timely implementation of new manufacturing technologies, the ability to safeguard patents and intellectual property in rapidly evolving markets and reliance on vendors and independent distributors. The Group is exposed to the risk of obsolescence of its inventory depending on the mix of future business. As a result, the Group may experience significant period-to-period fluctuations in future operating results due to the factors mentioned above or other factors.

In 2008, the markets where the Group offers its products and services, have been affected by the deepening global economic crisis and the recession in North America and Western Europe, decreases in the employment rate and lack of consumer confidence. The industries continued to show growth in Eastern Europe and in Asia Pacific in 2008, although the growth in these areas moderated from previous levels and is beginning to show the effects of the credit market crisis.

As shown in the accompanying financial statements, the Company has incurred net losses in 2008 and in 2007 of $54 million and $234 million respectively, thus showing a $180 million improvement. The devaluation of currencies against US dollar resulted in $55 million of losses in 2008. Absent to this factor, the company would have positive net income in 2008. The fluctuations of currency exchange rates will continue to influence the financial results of the Group.

The operating income has increased by $217 million from $158 million losses in 2007 to $59 million income in 2008. To achieve this Management has instituted a cost reduction program which included a reduction in labor and fringe costs. In addition, the Group has redesigned certain product lines, revised price-lists, obtained more favorable material costs, and has instituted more efficient management techniques. Management believes these factors will continue to contribute towards improving profitability.

The economic crises has also affected capital and credit markets globally and led to increase in cost and ability of the companies to attract financing. Despite the measures, taken by Russian Federation government and governments in other countries to stimulate demand, to increase the liquidity and support local banks and finance institutions, there’s the potential for economic uncertainties to have an effect in the foreseeable future on the financial position of the businesses in Russia and worldwide.

The management believes that it has been taking all the necessary steps to overcome the challenging period. While many markets and geographical areas, where we sell our products and services may have little to no growth in 2009, there still remain a large number of businesses and consumers who have yet to use the solutions and services provided by the Group. As economies and market conditions improve we will present new opportunities to our customers. JSC SITRONICS AND SUBSIDIARIES

Notes to consolidated financial statements for the years ended December 31, 2008 and 2007 (Amounts in thousands of U.S. dollars, except share amounts or if otherwise stated)

90 sitronics However, in the context of the current global economic environment, the degree of volatility could be very different annual report 2008 from what is expected and what the management is planning for. This may affect the financial position and results of operations of the Group. The effect of this influence cannot be predicted with a fair degree of confidence.

29. Subsequent events

Repayment of Dresdner Bank loan – In March 2009 SITRONICS repaid the remaining $75 million loan from Dresdner bank. The initial amount of the loans provided by the bank, totaled $200 million. The repayment was financed through borrowings from Vnesheconombank and is repayable in 1 year with an extension option for 1 more year and bears interest of LIBOR+7%. Total amount of debt outstanding under the bank agreement with Vnesheconombank after this tranche comprised $230.0 million.

Interest payment to bondholders – In March 2009 SITRONICS made its third interest payment on the series 01 bond issue. The coupon rate comprised 10%. The total amount of interest paid was RUB 149.6 million.

Reacquisition of bond issue – In March 2009 SITRONICS reacquired 99% of its series 01 bond issue for RUB 2.96 billion ($87.93 million). The repayment was financed with credit notes at the amount of 2.96 billion ($87.93 million) from MBRD-Finance. The note bears interest at 20.5% p.a. and due in March, 2010.

Disposal of assets – In April 2009, SITRONICS disposed of a portion of the distribution business of its wholly- owned subsidiary, SITRONICS IT B.V. (previously known as Kvazar-Micro Corporation B.V.). Seven companies engaged in the distribution of hardware and software in Eastern Europe and the CIS have been transferred to Melrose Holding (a Company owned by current and former management of Sitronics IT BV) for a total consideration of $50 million. The distribution business accounted for 30% of our 2008 Group revenues. The disposal of these companies is in line with the Group’s strategy to exit low margin and capital intensive businesses. Responsibility Statement

91 To the best of my knowledge (a) the financial statements, prepared in accordance with the US GAAP, give a true and FINANCIAL STATEMENTS fair view of the assets, liabilities, financial position and profit or loss of JSC SITRONICS and the undertakings included in the consolidation taken as a whole; and (b) the management report includes a fair review of the development and performance of the business and the financial position of JSC SITRONICS and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

Yours sincerely,

Sergey Aslanian President, Executive Director JSC SITRONICS CONTACTS

92 sitronics JSC «SITRONICS» annual report 2008 39/5 3-ya Tverskaya-Yamskaya St., building 1 Moscow, 125047, Russia tel. +7 (495) 225-00-30 fax +7 (495) 225-00-36 E-mail: [email protected] www.sitronics.ru

«SITRONICS Telecom Solutions» Novoslobodskaya 29, building 2 Moscow, 127055, Russia Tel.: +7 (495) 921-48-81 Fax: +7 (495) 921-48-85 E-mail: [email protected] www.sitronicsts.com

INTRACOM TELECOM 19.7 km Markopoulou Ave. Peania Athens, Greece, GR-19002 Tel.: +30 210 66 71 000 Fax: +30 210 66 71 001 E-mail: [email protected] www.intracom-telecom.com

«SITRONICS Information Technologies» 13/1/22, Milutinsky str. Moscow, 101000, Russia Tel.: +7 (495) 739-89-99 Fax: +7 (495) 739-87-58 E-mail: [email protected] http://it.sitronics.com

«SITRONICS Microelectronics» 1st Zapadny proezd 12/1 Zelenograd, Moscow, 124460, Russia Tel.: +7 (495) 229-70-01 Fax: +7 (495) 229-77-02 E-mail: [email protected] www.mikron.ru