CTC Media (CTCM) 10-Q 2007 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the Quarterly Period Ended September 30, 2007

OR

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

For the transition period from          to

Commission file number: 000-52003

CTC MEDIA, INC.

(Exact name of registrant as specified in its charter)

Delaware	58-1869211
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Pravda Street, 15A

125124 Moscow, Russia

+7-495-785-6333

(Address Including Zip Code, and Telephone Number, Including Area Code,

of Registrant’s Principal Executive Offices)

2711 Centerville Road, Suite 400

Wilmington, DE 19808

302-636-5400

(Name, Address Including Zip Code and Telephone
Number, Including Area Code, of Agent for Service)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘‘accelerated filer’’ and ‘‘large accelerated filer’’ in Rule 12b-2 of the Exchange Act. (Check One):

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

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

As of October 30, 2007, there were outstanding 151,910,892 shares of the registrant’s common stock, $0.01 par value per share.

CTC MEDIA, INC.
INDEX

PART I	FINANCIAL INFORMATION	3
Item 1.	Unaudited Condensed Consolidated Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets as of December 31, 2006 and September 30, 2007	3
	Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2006 and September 30, 2007	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and September 30, 2007	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	37
PART II.	OTHER INFORMATION	37
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 6.	Exhibits	54
Signatures		55
Exhibit Index		56

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q and the documents incorporated by reference in this Quarterly Report on Form 10-Q that are not based on historical information are “forward-looking statements”. Any statements (including statements to the effect that we “believe,” “expect,” “anticipate,” “plan,” “could,” “estimate,” “intend,” “may,” “should,” “will,” and “would,” or similar expressions) that are not statements relating to historical matters should be considered forward-looking statements. Such forward-looking statements, which include, among other things, statements regarding growth of the Russian television advertising market and of our audience and market shares and our ability to execute on our growth strategy, reflect our current expectations concerning future results and events. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of CTC Media to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The potential risks and uncertainties that could cause actual future results to differ from those expressed by forward-looking statements include, among others, risks described in Part II, “Item 1A. Risk Factors”. For these statements and all other forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Other unknown or unpredictable factors could have material adverse effects on CTC Media’s future results, performance or achievements. In light of these risks, uncertainties, assumptions and factors, the forward-looking events discussed herein may not occur. You are cautioned not to place undue reliance on these forward-looking statements. CTC Media does not undertake any obligation to publicly update or revise any forward-looking statements because of new information, future events or otherwise.

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PART I.   FINANCIAL INFORMATION

Item 1.Unaudited Condensed Consolidated Financial Statements

CTC MEDIA, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of US dollars, except share and per share data)

	December 31,				September 30,
	2006				2007
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$		176,542		$	248,499
Trade accounts receivable, net of allowance for doubtful accounts (December 31, 2006 - $563; September 30, 2007 - $503)	8,640				15,035
Taxes reclaimable	4,399				9,575
Prepayments	38,302				34,977
Programming rights, net	41,634				53,037
Deferred tax asset	6,263				7,890
Other current assets	2,875				1,990
TOTAL CURRENT ASSETS	278,655				371,003
RESTRICTED CASH	120				180
PROPERTY AND EQUIPMENT, net	22,388				24,952
INTANGIBLE ASSETS, net:
Network affiliation agreements	3,333				1,833
Trade names	5,888				5,950
Broadcasting licenses	43,387				76,253
Cable network connections	409				151
Other intangible assets	354				631
Net intangible assets	53,371				84,818
GOODWILL	70,768				72,845
PROGRAMMING RIGHTS, net	24,267				37,099
SUBLICENSING RIGHTS, net	7,611				3,241
INVESTMENTS IN AND ADVANCES TO INVESTEES	9,319				8,794
PREPAYMENTS	8,713				9,147
DEFERRED TAX ASSET	9,077				10,940
OTHER NON-CURRENT ASSETS	508				841
TOTAL ASSETS	$			484,797	$	623,860
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	13,353				29,725
Accrued liabilities	5,508				8,448
Taxes payable	11,528				12,186
Deferred revenue	12,440				18,209
Deferred tax liability	2,937				971
Other current liabilities	600				77
TOTAL CURRENT LIABILITIES	46,366				69,616
LONG-TERM LOANS	210				220
DEFERRED TAX LIABILITY	14,080				21,582
MINORITY INTEREST	3,124				2,548
COMMITMENTS AND CONTINGENCIES (Note 10)	—				—
STOCKHOLDERS’ EQUITY:
Common stock; $0.01 par value; shares authorized 175,772,173; shares issued and outstanding December 31, 2006 - 151,505,672, September 30, 2007 - 151,872,892)	1,515				1,519
Additional paid-in capital	327,587				341,262
Retained earnings	73,954				150,168
Accumulated other comprehensive income	17,961				36,945
TOTAL STOCKHOLDERS’ EQUITY	421,017				529,894
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	484,797			$		623,860

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

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CTC MEDIA, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME
(in thousands of US dollars, except share and per share data)

	Three months ended September 30,						Nine months ended September 30,
	2006			2007			2006			2007
REVENUES:
Advertising	$	69,438		$	90,095		$	245,901		$	296,020
Sublicensing	954			3,638			5,333			12,656
Other revenue	527			351			1,667			1,676
Total operating revenues	70,919			94,084			252,901			310,352
EXPENSES:
Direct operating expenses (exclusive of amortization of programming rights and sublicensing rights, shown below, exclusive of depreciation and amortization of $4,807 and $6,986 for three months and $12,375 and $17,486 for nine months ended September 30, 2006 and 2007, respectively; and inclusive of stock-based compensation of $26 and $213 for the three months and $35 and $452 for nine months ended September 30, 2006 and 2007, respectively)	(3,919		)	(4,703		)	(11,585		)	(13,601		)
Selling, general and administrative (exclusive of depreciation and amortization of $518 and $564 for the three months and $1,872 and $1,964 for the nine months ended September 30, 2006 and 2007 respectively; inclusive of stock-based compensation of $2,990 and $3,305 for the three months and $4,085 and $9,601 for the nine months ended September 30, 2006 and 2007, respectively)	(16,865		)	(19,599		)	(40,924		)	(53,392		)
Amortization of programming rights	(30,116		)	(36,550		)	(87,126		)	(108,552		)
Amortization of sublicensing rights	(997		)	(1,272		)	(3,046		)	(7,137		)
Depreciation and amortization (exclusive of amortization of programming rights and sublicensing rights)	(5,326		)	(7,550		)	(14,247		)	(19,450		)
Total operating expenses	(57,223		)	(69,674		)	(156,928		)	(202,132		)
OPERATING INCOME	13,696			24,410			95,973			108,220
FOREIGN CURRENCY GAINS (LOSSES)	254			113			1,575			25
INTEREST INCOME	1,316			2,689			1,641			7,318
INTEREST EXPENSE	—			—			(1,773		)	(2		)
GAINS ON SALE OF BUSINESSES	—			—			782			747
OTHER NON-OPERATING (LOSSES) INCOME, net	(32		)	(31		)	(111		)	848
EQUITY IN INCOME OF INVESTEE COMPANIES	274			304			1,161			1,497
Income before income tax and minority interest	15,508			27,485			99,248			118,653
INCOME TAX EXPENSE	(6,304		)	(9,097		)	(31,264		)	(39,029		)
INCOME ATTRIBUTABLE TO MINORITY INTEREST	(761		)	(989		)	(2,774		)	(3,410		)
NET INCOME	$	8,443		$	17,399		$	65,210		$	76,214
Foreign currency translation adjustment	2,398			12,721			13,425			18,984
COMPREHENSIVE INCOME	$	10,841		$	30,120		$	78,635		$	95,198
Net income attributable to preferred stockholders	$	—		$	—		$	(17,116	)	$	—
Net income attributable to common stockholders	$	8,443		$	17,399		$	48,094		$	76,214
Net income per share attributable to common stockholders - basic	$	0.06		$	0.11		$	0.45		$	0.50
Net income per share attributable to common stockholders - diluted	$	0.05		$	0.11		$	0.43		$	0.48
Weighted average common shares outstanding - basic	151,505,672			151,811,275			106,549,359			151,637,017
Weighted average common shares outstanding - diluted	157,604,899			158,253,151			151,388,942			158,049,941

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

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CTC MEDIA, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of US dollars)

	Nine months ended September 30,
	2006			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	65,210		$	76,214
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred tax expense (benefit)	(6,544		)	(8,577		)
Depreciation and amortization	14,247			19,450
Amortization of programming rights	87,126			108,552
Amortization of sublicensing rights	3,046			7,137
Stock based compensation expense	4,119			10,054
Gain on disposal of property and equipment	(327		)	(702		)
Gain on sale of businesses	(782		)	(747		)
Equity in income of unconsolidated investees	(1,161		)	(1,497		)
Income attributable to minority interest	2,774			3,410
Foreign currency (gains) losses	(1,575		)	(25		)
Changes in operating assets and liabilities:
Trade accounts receivable	(279		)	(3,914		)
Prepayments	714			(529		)
Other assets	(2,244		)	(2,401		)
Accounts payable and accrued liabilities	660			4,301
Deferred revenue	5,524			3,340
Other liabilities	(249		)	(107		)
Dividends received from equity investees	123			1,769
Acquisition of programming and sublicensing rights	(93,062		)	(115,763		)
Net cash provided by operating activities	77,320			99,965
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment	(2,856		)	(3,584		)
Acquisitions of intangibles	—			(364		)
Acquisitions of businesses, net of cash acquired	(19,924		)	(32,833		)
Proceeds from sale of businesses, net of cash disposed	882			693
Proceeds from sale of property and equipment	683			1,991
Other	(97		)	2
Net cash used in investing activities	(21,312		)	(34,095		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from issuances of common stock	105,041			—
Common stock issuance costs	(395		)	—
Proceeds from exercise of stock options	5,856			3,368
Proceeds from loans	19,000			—
Repayments of loans	(60,384		)	—
(Increase) decrease in restricted cash	(3		)	(60		)
Dividends paid to minority interest	(2,317		)	(3,958		)
Net cash provided by (used in) financing activities	66,798			(650		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	1,365			6,737
Net increase (decrease) in cash and cash equivalents	124,171			71,957
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	15,300			176,542
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	139,471		$	248,499

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

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CTC MEDIA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars, except share and per share data)

1.ORGANIZATION

The accompanying unaudited condensed consolidated financial statements include the accounts of CTC Media, Inc. and all consolidated subsidiaries (the ‘‘Company’’). CTC Media, Inc., a Delaware corporation, operates the CTC and Domashny television networks in Russia. The Company transmits its signal by satellite to its owned-and-operated affiliate stations and to independent affiliates. The Company’s network operations, including its relationships with its independent affiliates, are managed by CTC and Domashny Networks (the ‘‘Networks’’), its television entertainment network subsidiaries. CTC and Domashny Television Station Groups (the ‘‘Television Station Groups’’) manage the owned-and-operated affiliate stations and repeater transmitters. The Company generates substantially all of its revenues from the sale of television advertising on both a national and regional basis. At the national level and for substantially all of the stations in the Television Station Groups, this advertising is placed through Video International (‘‘Video International’’), an advertising sales house (Note 10). The Company also generates sublicensing revenue primarily from sales of programming rights.

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2007 should be read in conjunction with the consolidated financial statements contained in our Annual Report on Form 10-K filed with the US Securities and Exchange Commission (the ‘‘SEC’’) on March 1, 2007. Our significant accounting policies have not changed since December 31, 2006, except as outlined below.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ended December 31, 2007.

The condensed consolidated balance sheet at December 31, 2006 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for the complete financial statements.

Seasonality

The Company experiences seasonal fluctuations with overall television viewership and advertising revenues. Overall television viewership is lower during the summer months and highest in the fourth quarter.

Accounting for Uncertainty in Income Taxes

On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (‘‘FASB’’) Interpretation No. 48 (‘‘FIN No. 48’’), Accounting for Uncertainty in Income Taxes—an interpretation of SFAS No. 109. FIN No. 48 creates a single model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN No. 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. In addition, FIN No. 48 carves out income taxes from SFAS No. 5. Accounting for Contingencies. The adoption of FIN No. 48 did not have a significant effect on the Company’s financial statements.

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As of December 31, 2006 and September 30, 2007, the Company included accruals for unrecognized income tax benefits totaling $173 and $487, respectively, as a component of accrued liabilities. Approximately $173 of unrecognized tax benefits, if recognized, would affect the effective tax rate. The Company considers it reasonably possible that approximately $210 of the unrecognized income tax benefit will be reversed within twelve months from September 30, 2007, due to expiration of the statute of limitations.

Although the Company believes it is more likely than not that all recognized income tax benefits would be sustained upon examination, the Company has recognized some income tax benefits that have a reasonable possibility of successfully being challenged by the tax authorities. These income tax positions could result in total unrecognized tax benefits increasing by up to $3,534 if the Company were to lose such a challenge by the tax authorities. However, the Company believes that it is reasonably possible that only $349 of the total $3,534 potential increase could occur within twelve months from September 30, 2007. This amount represents certain recognized income tax benefits challenged by the tax authorities during their recent inspection of ZAO CTC Region (Note 10).

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the three and nine months ended September 30, 2007, the Company recognized approximately $47 and $100, respectively, in interest and penalties. At January 1, 2007 and September 30, 2007, the Company had accrued approximately $68 and $168, respectively, for the payment of interest and penalties.

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

Recently Issued Accounting Pronouncements

Fair Value Option

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

3.NET INCOME PER SHARE

Basic net income per share for the three and nine months ended September 30, 2006 and 2007 is computed on the basis of the weighted average number of common shares outstanding, using the ‘‘two-class’’ method. Diluted net income per common share is computed using the ‘‘if converted method’’ with the weighted average number of common shares outstanding plus the effect of the outstanding stock options calculated using the ‘‘treasury stock’’ method. The number of stock options excluded from the diluted net income per common share computation, because their effect was antidilutive for the nine months ended September 30, 2006 and 2007, was 4,968,556 and 675,000 stock options, respectively. All common shares issuable from the assumed conversion of convertible preferred stock outstanding during the three and nine months ended September 30, 2006 have been included in the diluted earnings calculation for such periods. No convertible preferred stock was outstanding during the three and nine months ended September 30, 2007.

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

	Three months ended September 30,				Nine months ended September 30
	2006		2007		2006			2007
Net income	$	8,443	$	17,399	$	65,210		$	76,214
Net income attributable to preferred stockholders	—		—		(17,116		)	—
Net income attributable to common stockholders	$	8,443	$	17,399	$	48,094		$	76,214
Weighted average common shares outstanding—basic
Common stock	151,505,672		151,811,275		106,549,359			151,637,017
Dilutive effect of:
Convertible preferred stock	—		—		37,920,457			—
Common stock options	6,099,227		6,441,876		6,919,126			6,412,924
Weighted average common shares outstanding—diluted	157,604,899		158,253,151		151,388,942			158,049,941
Net income per share attributable to common stockholders:
Basic	$	0.06	$	0.11	$	0.45		$	0.50
Diluted	$	0.05	$	0.11	$	0.43		$	0.48

The numerator used to calculate diluted net income per common share for the three months and nine months ended September 30, 2006 and 2007 was net income.

4.INVESTMENT TRANSACTIONS

In February 2007, the Company acquired a 100% interest in OOO Programma, Service, Montazh, a station in Rostov-on-Don, for a total purchase price of $2,713, consisting of $2,608 in cash consideration and $105 in short-term debt assumed. The Company’s financial statements reflect a preliminary allocation of the purchase price based on a fair value assessment of the assets acquired and liabilities assumed. The Company assigned $3,597 to broadcasting licenses, which are being amortized over an estimated useful life of 5 years.

In February 2007, the Company acquired the remaining 49% interest in ZAO Radio-Volga-TV, a station in Samara, for a total cash consideration of $4,603, bringing its ownership in this station to 100%. The Company’s financial statements reflect a preliminary allocation of the purchase price based on a fair value assessment of the assets acquired and liabilities assumed. The Company assigned $5,192 to broadcasting licenses, which are being amortized over an estimated useful life of 5 years.

In May 2007, the Company acquired a 100% interest in OOO Kontinent-50, a station in Vladivostok, for a total cash consideration of $2,509. The Company’s financial statements reflect a preliminary allocation of the purchase price based on a fair value assessment of the assets acquired and liabilities assumed. The Company assigned $3,430 to broadcasting licenses, which are being amortized over an estimated useful life of 5 years.

In July 2007, the Company acquired a 100% interest in OOO Grand, which in turn owns 50% of ZAO Channel 6, a station in Kazan, thus increasing the Company’s investment in CTC Kazan from 50% to 100%. Total cash consideration was $10,000. The Company’s financial statements reflect a preliminary allocation of the purchase price based on a fair value assessment of the assets acquired and liabilities assumed. The Company assigned $12,225 to broadcasting licenses, which are being amortized over an estimated useful life of 5 years.

In July 2007, the Company also acquired a 49% interest in each of the four stations located in Irkutsk and Irkutsk region, OOO CTC Irkutsk, OOO Irkutsk TV, OOO Region TV and OOO Media Region for a total purchase price of $12,241, $9,901 of which was paid in cash as of September 30, 2007. The remaining $2,340 of the purchase price will be payable in cash upon receipt of certain regional broadcasting licenses.  In September 2007, the Company acquired another 2% in each of

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these companies for total cash consideration of $499, bringing its ownership in OOO CTC Irkutsk, OOO Irkutsk TV, OOO Region TV and OOO Media Region up to 51%. The Company’s financial statements reflect a preliminary allocation of the purchase price based on a fair value assessment of the assets acquired and liabilities assumed. The Company assigned $13,292 to broadcasting licenses, which are being amortized over an estimated useful life of 5 years.

In August 2007, the Company acquired 100% in OOO Stavropolskaya Veshatelnaya Corporatsiya, a station in Stavropol, for a total cash consideration of $3,800. The Company’s financial statements reflect a preliminary allocation of the purchase price based on a fair value assessment of the assets acquired and liabilities assumed. The Company assigned $4,877 to broadcasting licenses, which are being amortized over an estimated useful life of 5 years.

5.PROGRAMMING RIGHTS, NET

Programming rights as of December 31, 2006 and September 30, 2007 comprise the following:

	December 31, 2006			September 30, 2007
Historical cost	$	177,012		$	252,121
Accumulated amortization	(111,111		)	(161,985		)
Net book value	$	65,901		$	90,136
Current portion	41,634			53,037
Non-current portion	24,267			37,099

During the three months ended September 30, 2006 and 2007, the Company recognized impairment charges on programming rights of $1,401 and $1,342, respectively. During the nine months ended September 30, 2006 and 2007, the Company recognized impairment charges on programming rights of $3,110 and $3,145, respectively. The impairment charges are included in amortization of programming rights in the accompanying condensed consolidated statements of income.

6.SUBLICENSING RIGHTS, NET

Sublicensing rights as of December 31, 2006 and September 30, 2007 comprise the following:

	December 31, 2006		September  30, 2007
Released, less amortization	$	5,183	$	1,661
Completed and not released	928		979
In production	717		601
In development or pre-production	783		—
Net book value	$	7,611	$	3,241

As of September 30, 2007, the Company expects the entire $1,661 balance of unamortized sublicensing rights for released products to be fully amortized within three years. In addition, the Company expects approximately $2,134 of the sublicensing rights for released products and completed and not released products to be amortized during the twelve-month period ending September 30, 2008.

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7.INTANGIBLE ASSETS, NET

Intangible assets as of December 31, 2006 and September 30, 2007 comprise the following:

		December 31, 2006					September 30, 2007
	Useful life, years	Cost		Accumulated amortization			Cost		Accumulated amortization
Network affiliation agreements	5	$	10,000	$	(6,667	)	$	10,000	$	(8,167	)
Trade names	indefinite	5,888		—			5,950		—
Broadcasting licenses	5	69,848		(26,461		)	118,110		(41,857		)
Other intangible assets	5	2,938		(2,175		)	4,124		(3,342		)
TOTAL		$	88,674	$	(35,303	)	$	138,184	$	(53,366	)

Amortization expense was $4,135 and $6,158 for the three months ended September 30, 2006 and 2007, respectively. Amortization expense was $10,907 and $15,439 for the nine months ended September 30, 2006 and 2007, respectively.

8.GOODWILL

Goodwill as of December 31, 2006 and September 30, 2007 comprises the following:

	CTC  Network			Domashny Network		CTC  Station Group		Domashny Station  Group		Total
Balance as of December 31, 2006	$		36,538	$	19,679	$	2,418	$	12,133	$	70,768
Accrual of contingent tax liability	—			—		—		185		185
Foreign currency translation adjustment	—			1,090		134		668		1,892
Balance as of September 30, 2007	$	36,538		$	20,769	$	2,552	$	12,986	$	72,845

9.STOCKHOLDERS’ EQUITY

Stock Split

On March 2, 2006, a four-for-one stock split was effected with respect to the Company’s common stock. Concurrently with this stock split, the conversion terms of the Class A Senior preferred stock and Super Senior preferred stock were increased to 1:800. All references in the accompanying consolidated financial statements to share and per share amounts have been retroactively adjusted to reflect these changes.

Initial Public Offering

The Company filed a registration statement with the SEC to register shares of the Company’s common stock in connection with an initial public offering (‘‘IPO’’). Upon the closing of the IPO on June 6, 2006, the Company issued 7,909,748 additional shares of common stock and all the convertible preferred stock outstanding automatically converted into 66,360,800 shares of common stock. On September 30, 2007, the Company had a total of 151,872,892 shares outstanding.

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Stock-Based Compensation

The following table summarizes common stock options and Stock Appreciation Rights (“SAR”) activity for the Company during the nine months ended September 30, 2007:

	Common Stock Options				SAR
	Quantity		Weighted Average Exercise Price		Quantity	Weighted Average Exercise Price
Outstanding as of December 31, 2006	5,440,240		$	15.84	6,217,600	$	1.64
Granted	625,000		26.63		—	—
Exercised	(367,220	)	9.87		—	—
Forfeited	(87,495	)	16.95		—	—
Expired	(27,142	)	8.81		—	—
Outstanding as of September 30, 2007	5,583,383		$	17.45	6,217,600	$	1.64

In May 2007, the Company granted options to the members of management to purchase 375,000 shares of its common stock at an exercise price of $26.91 and 150,000 shares of its common stock at an exercise price of $26.74. In June 2007, the Company granted options to the members of management to purchase 50,000 shares of its common stock at an exercise price of $25.46 and 50,000 shares of its common stock at an exercise price of $25.36.

The following assumptions were used in the option-pricing model:

	375,000 options at $26.91			150,000 options at $26.74			50,000 options at $25.46			50,000 options at $25.36
Risk free interest rate	4.56		%	4.57		%	4.96		%	4.92		%
Expected option life (years)	6.1			5.9			6.1			6.1
Expected dividend yield	—			—			—			—
Volatility factor	44		%	44		%	44		%	44		%
Weighted-average grant date fair value of options (per share)	$	13.28		$	12.98		$	12.75		$	12.76

The following table summarizes information about nonvested common stock options:

	Common Stock Options
	Quantity		Weighted Average Grant-date Fair Value
Nonvested as of December 31, 2006	4,435,118		$	7.93
Granted	625,000		13.12
Vested	(1,315,187	)	7.71
Forfeited	(87,495	)	8.42
Nonvested as of September 30, 2007	3,657,436		$	8.88

The outstanding SAR fully vested as of May 31, 2006.

The following table summarizes information about exercisable common stock options and SAR:

	Common Stock Options				SAR
	Quantity	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Quantity	Weighted Average Exercise Price		Weighted Average Remaining Contractual term
Exercisable as of September 30, 2007	1,925,947	$	16.43	8.6 years	6,217,600	$	1.64	6.0 years

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The Company recognized stock-based compensation expense of $3,016 and $3,518 for the three months ended September 30, 2006 and 2007, respectively, and $4,119 and $10,054 for the nine months ended September 30, 2006 and 2007, respectively. As of September 30, 2007, the total compensation cost related to unvested awards not yet recognized is $32,431 to be recognized over a weighted average period of 2.36 years.

10.COMMITMENTS AND CONTINGENCIES

Purchase commitments

The Company has future purchase commitments of $127,569 as of September 30, 2007. These purchase commitments primarily include the Company’s contractual legal obligations for the acquisition of programming rights, format rights, transmission and satellite fees, leasehold obligations and equipment purchase obligations.

Potential agreement with Mostelecom

Mostelecom, the dominant cable provider in Moscow, upgraded a number of roof antenna systems from 1997 to 2004 to add capacity for a limited number of additional channels. The Company collaborated with Mostelecom in this project, paying an amount per additional household connected, in order to help ensure that the Company’s stations in Moscow were allocated access on Mostelecom’s systems as capacity was increased.

In June 2007, Mostelecom approached the Company to discuss securing the right to continue to broadcast over connections added subsequent to the project ending in 2004 by paying a 400 ruble, one-time “connection fee”.  Included in this proposal are an estimated 270,000 households for CTC Moscow and an estimated 700,000 households for Domashny Moscow. The Company is still verifying the existence of these connected households and negotiating with Mostelecom to agree on the terms and the extent to which the Company’s CTC and Domashny stations in Moscow would benefit from securing the right to broadcast over these new connections.  If the Company was to proceed as proposed, the total value of this project would be approximately $15,600 (at exchange rates as of September 30, 2007). If and when the agreement is finalized, the Company will evaluate the provisions of the agreement including factors such as the contract term of the underlying agreement, the remaining technical life of Mostelecom’s cable network, and the estimated useful life of the underlying broadcast licenses to determine the potential impact on the Company’s financial statements.

Concentrations

National television advertising in Russia is generally not placed directly with channels or networks. Instead, two ‘‘sales houses,’’ Video International and a sales house affiliated with a competitor, control the placement of virtually all national television advertising in Russia. The Company has agreements with Video International under which Video International serves as the Company’s exclusive sales house for the placement of national and regional advertising.

The Company’s agreements with Video International extend through December 2007 and December 2009 for CTC Network and Domashny Network, respectively, and 2010 for the Television Station Groups. In July 2007, CTC Network entered into a new five-year agreement with Video International which becomes effective on January 1, 2008 immediately following the expiration of CTC Network’s existing agreement with Video International. The new CTC Network agreement runs through the end of 2012. These agreements are generally terminable upon 180 days’ notice by either party. A disruption in the relationship with Video International or early termination of the agreements could have a material adverse effect on the Company’s business, financial condition and results of operations. Management believes the likelihood of the agreements being terminated is remote.

The Company’s revenues sold through Video International account for 97% of total operating revenues of $70,919 in the three months ended September 30, 2006 and 95% of total operating revenues of $94,084 in the three months ended September 30, 2007. The Company’s revenues sold through Video International account for 96% of total operating revenues of $252,901in the nine months ended September 30, 2006 and 95% of total operating revenues of $310,352 in the nine months ended September 30, 2007.

Non-income taxes

The Company’s policy is to accrue for contingencies related to non-income taxes in the accounting period in which the liability is deemed probable and the amount is reasonably determinable. In this regard, because of the uncertainties associated

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with the Russian tax system, the Company’s final Russian taxes may be in excess of the estimated amount expensed to date and accrued at December 31, 2006 and September 30, 2007. This is due to a combination of the evolving tax legislation, varying approaches by regional and local tax inspectors, and inconsistent rulings on technical matters at the judicial level. The tax authorities have also aggressively imposed material tax assessments on Russian businesses, at times without a clear legislative basis. As of December 31, 2006 and September 30, 2007, the Company included accruals for contingencies related to non-income taxes totaling $703 and $1,215 as a component of accrued liabilities. Additionally, the Company has identified possible contingencies related to non-income taxes, which are not accrued. Such possible tax contingencies could materialize and require the Company to pay additional amounts of tax. As of September 30, 2007, management estimates such contingencies related to non-income taxes to be up to approximately $687.

It is the opinion of management that ultimate resolution of the Company’s tax liabilities, to the extent not previously provided for, will not have a material effect on the financial condition of the Company. However, depending on the amount and timing of an unfavorable resolution of any contingencies associated with taxes, it is possible that the Company’s future operations or cash flows could be materially affected in a particular period.

Broadcast Licenses

All broadcast television stations in Russia are required to have broadcast and other operating licenses, which generally have renewable terms of five years. Only a limited number of such licenses are available in each locality. In addition, Russian law could be interpreted as requiring cable television operators to have broadcast and other operating licenses for each of the channels or networks they transmit on their cable systems.

The broadcast licenses of affiliate stations contain various restrictions and obligations, including requirements that at least 50% of the programming shown constitute ‘‘Russian content’’ and governmental authorities recently added an additional term to the broadcast licenses of some of CTC’s owned-and-operated stations requiring that 9% of daily broadcast time at these stations be devoted to ‘‘local content’’. Certain affiliates may not have always been in compliance with this requirement. If the terms of a license are not fulfilled, or if a television station violates Russian legislation or regulations, the license may be suspended or terminated. Management believes that the probability of initiation of action against any material affiliate is remote.

Net Assets Position in Accordance with Statutory Requirements

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

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

Russian Environment and Current Economic Situation

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

Legal and Tax Proceedings

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

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In the fourth quarter of 2006, the Company’s wholly-owned subsidiary, ZAO CTC Network, was engaged in litigation with the Russian tax inspectorate in regard to a claim received in August 2006 for approximately $1,658 (at the US dollar/ruble exchange rates as of September 30, 2007) including penalties and interest relating to tax payments transferred in 1998 and 1999 from its bank accounts that were allegedly not received by the government. The Company filed a lawsuit disputing the claim, and the court ruled in its favor in the first instance and in two appeal courts. The tax inspectorate elected not to file for a third, final appeal. The Company believes the risk of unfavorable outcome of this matter to be remote at this time.

In the first quarter of 2007, the Company’s wholly-owned subsidiary, ZAO CTC Network, was subject to a tax inspection for the 2004 and 2005 tax years. Thereafter, the Russian tax inspectorate issued a claim and withdrew funds for approximately $445 (at the US dollar/ruble exchange rate as of September 30, 2007) including penalties and interest. The Company filed a lawsuit disputing the claim, and the court ruled in its favor in the first instance and one appeal court. The Company does not believe an unfavorable outcome of this matter to be probable at this time; therefore, no provision is currently recorded in the financial statements.

In the second quarter of 2007, the Company’s wholly-owned subsidiary, ZAO CTC Region, was subject to a tax inspection for the 2004, 2005 and 2006 tax years. Thereafter, ZAO CTC Region received a claim from the Russian tax inspectorate for approximately $783 (at the US dollar/ruble exchange rate as of September 30, 2007) including penalties and interest.  The Company intends to file a lawsuit disputing the claim. At this time, the Company does not believe an unfavorable outcome in regard to all issues raised in this claim to be probable; therefore, it has only accrued approximately $203 (at the US dollar/ruble exchange rate as of September 30, 2007) in the financial statements.

11.SEGMENT INFORMATION

The Company operates in four business segments—CTC Network, Domashny Network, CTC Television Station Group and Domashny Television Station Group. The Company has presented its business segments consistently with the information used by the chief operating decision maker to manage the operations for purposes of making operating decisions and allocating resources. The Company evaluates performance based on the operating income of each segment, among other performance measures.

	Three Months Ended September 30, 2006
	CTC Network			Domashny Network			CTC Station Group			Domashny Station Group			Business segment results			Eliminations and other			Consolidated results
Operating revenue	$	49,714		$	4,197		$	14,850		$	2,619		$	71,380		$	(461	)	$	70,919
Operating income/ (loss)	18,205			(2,083		)	6,486			(2,502		)	20,106			(6,410		)	13,696
Total assets	265,622			28,800			67,024			58,414			419,860			30,479			450,339
Capital expenditures	(235		)	21			(256		)	(194		)	(664		)	(18		)	(682		)
Depreciation and amortization	(273		)	(138		)	(1,318		)	(3,080		)	(4,809		)	(517		)	(5,326		)
Amortization of programming rights	(25,558		)	(4,021		)	(565		)	(8		)	(30,152		)	36			(30,116		)
Amortization of sublicensing rights	(997		)	—			—			—			(997		)	—			(997		)

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	Three Months Ended September 30, 2007
	CTC Network			Domashny Network			CTC Station Group			Domashny Station Group			Business segment results			Eliminations and other			Consolidated results
Operating revenue	$	64,853		$	7,794		$	18,868		$	3,136		$	94,651		$	(567	)	$	94,084
Operating income/ (loss)	27,565			1,091			5,535			(3,159		)	31,032			(6,622		)	24,410
Total assets	409,267			34,696			78,440			66,517			588,920			34,940			623,860
Capital expenditures	(252		)	(5		)	(464		)	(348		)	(1,069		)	(144		)	(1,213		)
Depreciation and amortization	(241		)	(159		)	(2,913		)	(3,713		)	(7,026		)	(524		)	(7,550		)
Amortization of programming rights	(30,660		)	(4,481		)	(1,391		)	(62		)	(36,594		)	44			(36,550		)
Amortization of sublicensing rights	(1,272		)	—			—			—			(1,272		)	—			(1,272		)

	Nine Months Ended September 30, 2006
	CTC Network			Domashny Network			CTC Station Group			Domashny Station Group			Business segment results			Eliminations and other			Consolidated results
Operating revenue	$	187,451		$	13,490		$	45,254		$	7,392		$	253,587		$	(686	)	$	252,901
Operating income/ (loss)	97,171			(5,162		)	25,103			(7,270		)	109,842			(13,869		)	95,973
Total assets	265,622			28,800			67,024			58,414			419,860			30,479			450,339
Capital expenditures	(609		)	(37		)	(1,019		)	(1,227		)	(2,892		)	(73		)	(2,965		)
Depreciation and amortization	(816		)	(404		)	(3,605		)	(7,881		)	(12,706		)	(1,541		)	(14,247		)
Amortization of programming rights	(73,180		)	(11,963		)	(2,053		)	(31		)	(87,227		)	101			(87,126		)
Amortization of sublicensing rights	(3,046		)	—			—			—			(3,046		)	—			(3,046		)

	Nine Months Ended September 30, 2007
	CTC Network			Domashny Network			CTC Station Group			Domashny Station Group			Business segment results			Eliminations and other			Consolidated results
Operating revenue	$	217,099		$	25,327		$	58,926		$	10,541		$	311,893		$	(1,541	)	$	310,352
Operating income/ (loss)	105,968			1,599			29,196			(8,209		)	128,554			(20,334		)	108,220
Total assets	409,267			34,696			78,440			66,517			588,920			34,940			623,860
Capital expenditures	(577		)	(110		)	(1,643		)	(1,324		)	(3,654		)	(294		)	(3,948		)
Depreciation and amortization	(748		)	(465		)	(6,217		)	(10,446		)	(17,876		)	(1,574		)	(19,450		)
Amortization of programming rights	(88,870		)	(16,085		)	(3,694		)	(62		)	(108,711		)	159			(108,552		)
Amortization of sublicensing rights	(7,137		)	—			—			—			(7,137		)	—			(7,137		)

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‘‘Eliminations and other’’ column principally includes the activities of the corporate headquarters and eliminations of inter-company transactions.

The Company operates within one geographic region, Russia, and generates substantially all of its revenues from television advertising.

12.SUBSEQUENT EVENTS

In October 2007, the Company received approximately $644 in proceeds from the exercise of options to acquire 38,000 shares of the Company’s common stock.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis relates to our financial condition and results of operations for the three and nine months ended September 30, 2006 and 2007. This discussion should be read in conjunction with our Annual Report on Form 10-K filed with SEC on March 1, 2007 and our Unaudited Condensed Consolidated Financial Statements and the notes related thereto appearing elsewhere in this Quarterly Report on Form 10-Q.

Overview

We operate the CTC Network, a Russian television network offering entertainment programming targeted principally at 6-54 year-old viewers, and the Domashny, or ‘‘Home’’ Network, a Russian television network targeted principally at 25-60 year-old women. CTC’s signal is broadcast by over 350 television stations and local cable operators, including 18 owned-and-operated stations and 23 unmanned repeater transmitters. Domashny’s signal is broadcast by over 220 television stations and local cable operators, including 11 owned-and-operated stations and eight unmanned repeater stations.

We organize our operations into four business segments: CTC Network, Domashny Network, CTC Television Station Group and Domashny Television Station Group.

·Networks.   Each network is responsible for its broadcasting operations, including the licensing and commissioning of programming, producing its programming schedule and managing its relationships with its independent affiliates. Both the CTC Network and the Domashny Network generate substantially all of their revenues from the sale of national television advertising, which they place through Video International, their exclusive advertising sales house.

·Television Station Groups.   The CTC Television Station Group manages its 18 owned-and-operated stations and 23 repeater transmitters. The Domashny Station Group manages its 11 owned-and-operated stations and eight repeater transmitters. Both Television Station Groups generate substantially all of their revenues from the sale of local television advertising that is broadcast during the local advertising windows allotted to the affiliates by our Networks. Substantially all of our local advertising has been placed through Video International since January 2006.

Key Factors Affecting Our Results of Operations

Our results of operations are affected primarily by the overall demand for television advertising, the limited supply of television advertising time, our ability to deliver a large share of viewers with desirable demographics, and the availability and cost of quality programming.

Overall demand for television advertising in Russia has experienced significant growth in recent years due to improved general business and economic conditions, including the levels of gross domestic product (‘‘GDP’’), disposable income and consumer spending. Presently, the Russian advertising market is one of the largest and fastest growing in Europe. Despite this rapid growth, however, advertising spending in Russia, both on a per capita basis and as a percentage of GDP, remains low by international standards. We believe this indicates that the television advertising market is still relatively under-developed. We intend to capitalize on this growth by strengthening our position as a leading advertising platform for reaching consumers in Russia.

The supply of television advertising time is limited by Russian legislation (as discussed below). As a result of this limited supply of advertising time, we are only able to increase our revenues by delivering larger audience shares and by increases in the price of advertising.

The continued success of our advertising sales depends on our ability to attract a large share of the key target audiences, especially during primetime. Our ability to attract our key target audiences in turn depends in large part on our ability to broadcast quality programming. To date, we have been able to achieve significant audience share at the CTC Network by broadcasting attractive entertainment programming, including original Russian series and shows, as well as popular foreign series, films and animation. Although we believe we have been successful in licensing programming content that appeals to our key target audiences, we continue to compete with other television broadcasters for programming content, and seek to air programming that addresses evolving audience tastes and trends in television broadcasting. Our programming costs have risen substantially in recent years and we expect that they will continue to do so as competition for high-quality Russian and foreign entertainment programming continues to intensify among Russian television broadcasters, in conjunction with anticipated growth in the Russian television advertising market.

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While the ongoing development and expansion of our television networks represents the core of our strategy, we also seek opportunities to expand our business through the acquisition or launch of additional networks. In addition, we review opportunities to expand in adjacent Russian speaking markets where we can effectively and efficiently leverage our management and programming resources.  For example, in September 2007, we entered into a binding term sheet pursuant to which we agreed to enter into definitive agreements to acquire interests in the Kazakh television broadcast company (discussed below), Teleradiokompaniya 31st Kanal LLP (“Channel 31”). Also, in September 2007, we set up a broadcasting company in Uzbekistan that is expected to start its operation in the beginning of 2008. Moreover, we evaluate opportunities from time to time in selected media and entertainment sub-sectors that offer potential growth opportunities. We will also continue to explore opportunities to further expand our presence in the local advertising market, principally through the careful expansion of our owned-and-operated television stations in major cities. Any such acquisitions or expansion plans, if completed, could subject us to a range of additional factors that could affect our subsequent results of operations.

Television Advertising Sales

In the Russian television market, national advertising is generally not placed directly with broadcasters. Instead, two ‘‘sales houses,’’ Video International and NTV Media, control the placement of virtually all national television advertising in Russia. Since 1999, Video International has placed, on an exclusive basis, our national advertising. Since 2006, we engaged Video International to also place, on an exclusive basis, local advertising at substantially all of our owned-and-operated stations.

Legislation came into effect on July 1, 2006, that imposed stricter limitations on airtime available for advertising, reducing maximum advertising time to no more than 15% of total broadcasting time each day, while at the same time stipulating that no more than 20% of advertising time may be allotted for commercial advertising in any given hour. The legislation will further reduce the maximum permissible amount of advertising to no more than 15% per hour effective January 1, 2008. Video International renegotiated advertising rates with advertisers to reflect the impact of the reduction in available advertising time in 2006. As a result, our advertising rates increased by over 20% in the second half of 2006. We also increased the share of our total daily advertising time allocated to the CTC Network from 70% to 75% (excluding local programming windows), decreasing the amount allocated to our CTC affiliates. As a result, we believe that the reduced amount of available advertising time did not negatively affect our results of operations in 2006 or the first nine months of 2007. In connection with the further reductions in advertising time to be effective from January 1, 2008, we do not believe we will be able to effect further reallocations of our total daily advertising time between either of our networks and our affiliate stations.  Although we expect that Video International will be able to negotiate advertising price increases in connection with these further reductions in advertising time, we cannot guarantee that any such increases will be sufficient to compensate for the loss in advertising time. If the price increases are not sufficient, the further reductions in advertising time will have a material adverse affect on our revenues and results of operations.

Our Agreements with Video International

We have three primary agreements with Video International for the placement of our advertising: one with CTC, one with Domashny and one umbrella agreement for both of our Television Station Groups, with sub-agreements for each of our individual owned-and-operated stations that have retained Video International to place their advertising. The current agreement with the CTC Network runs through December 2007 and has been extended by a new agreement that runs through December 2012. The agreement for the Domashny Network runs through December 2009 and the umbrella agreement for our Television Station Groups, which was recently materially amended as of July 11, 2007, runs through December 2010.

In December 2004 and February 2005, we entered into our present agreements in respect of CTC and Domashny Networks, respectively, providing for a fixed commission of 13% of gross advertising sales placed on the CTC Network and a fixed commission of 12% of gross advertising sales placed on the Domashny Network. In connection with signing these agreements, we paid Video International a one-time $9.9 million signing fee that we are recording on a straight-line basis from 2005 through 2007 as a reduction in revenues. We account for that signing fee as commission, allocating it to the CTC and Domashny Networks proportionally to their revenues. This increases Video International’s effective average commission rate on CTC’s and Domashny’s gross advertising sales.

In July 2007, CTC Network entered into a new five-year agreement with Video International under which Video International will continue to serve as CTC Network’s exclusive advertising sales house. The new agreement becomes effective on January 1, 2008, immediately following the expiration of CTC Network’s existing agreement with Video

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International. Under the terms of the new CTC Network agreement, CTC Network will continue to pay Video International a fixed commission of 13% of its gross advertising sales. As under its existing agreement with Video International, CTC Network bears the credit risk associated with any failure by a CTC Network advertiser to make payments when they are due. Under the new agreement, however, Video International has agreed to guarantee the payment of any unpaid debt of advertising clients to the extent that such debt has been outstanding for at least 180 days and exceeds, in the aggregate, 0.05% of CTC Network’s gross advertising revenues for the year. This guarantee is not applicable in the event of a material downturn in the Russian economy.

Like the existing CTC Network and Domashny Network agreements, the new CTC Network agreement is terminable upon 180 days’ notice by either party. As compensation for early termination, the terminating party under either the CTC Network or Domashny Network agreements must generally pay the other party an amount equal to the commission that was paid for the six-month period preceding the termination date. If, however, the CTC Network agreement is terminated upon six months’ notice by either party as of January 1 of any year other than 2008, no termination fee is payable.

Concurrently with negotiating a new agreement for the CTC Network and in connection with Video International’s recent change of senior management at the regional sales level, CTC Media and Video International agreed to amend the terms of their existing agreements relating to the CTC and Domashny Television Station Groups. The principal purpose of the amendment was to modify the rate of commission payable to Video International on sales of local advertising for the period from April 1, 2007 to December 31, 2007 in order to incentivize Video International to achieve negotiated sales targets through this management transition period. Although agreed in July 2007, this amendment is effective from April 1, 2007.

Historically, the commission rate payable by our individual owned-and-operated stations was fixed at 15% of gross advertising sales regardless of whether the negotiated sales targets were achieved by Video International. Under the amended agreements, the full 15% commission in 2007 will only be payable for existing stations if Video International achieves, on a station-by-station basis, the agreed quarterly sales targets during the period from April 1 to December 31, 2007.  During this period, a nominal fixed monthly commission, generally 25,000 rubles (approximately $1,000 at exchange rates as of September 30, 2007)  per station, will be the only commission payable if sales fall more than 15% below the negotiated sales target. A straight-line sliding scale commission starting from the nominal fixed commission to 15% of sales will be payable on all sales if sales fall between 15% below the negotiated sales target and the sales target. All sales above the sales target will be subject to an 18% commission. Starting January 1, 2008, the fixed rate commission of 15% will be re-instated on all local advertising sales. Moreover, any stations acquired by CTC Media during 2007 will also pay to Video International the 15% fixed commission rather than the variable commission rate.

Under the Television Station Group agreements, we are required to achieve average annual audience share levels at our individual owned-and-operated stations that are not significantly below the respective average 2006 audience share levels. Under these agreements, a deviation of less than 15% in the average annual audience share of our stations in Moscow and St. Petersburg is not deemed significant. In the other cities, deviations of less than 20% are not deemed significant unless otherwise agreed. Presently, the year-to-date audience share at many of our stations would be deemed to be significantly below 2006 audience share levels, including the audience share at CTC-Moscow, which is approximately 24% below its 2006 audience share level based on results through September 30, 2007. If audience share performance at our owned-and-operated stations, particularly CTC-Moscow, does not improve, Video International may seek to renegotiate the commissions payable under our Television Station Group agreements or negotiate lower sales targets for future years.

Pursuant to the amended Television Station Group agreements, Video International has agreed to guarantee unpaid debt of local advertising clients to the extent such debt has not been paid within 60 days of the end of the month in which the related advertising was broadcast and exceeds, in aggregate, 0.05% of a station’s advertising sales for such month. Such guarantee does not apply to unpaid debt resulting from a material downturn in the Russian economy.

The amended Television Station Group agreements can be terminated upon 180 days’ notice by either party. If a station terminates its agreement, it must pay Video International an amount equal to 15% of the amount of the station’s advertising sales for the six months preceding the termination date.  If Video International terminates the agreement, it must pay the station an amount equal to the station’s advertising sales for the six months preceding the termination date, net of commissions paid during that period.

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Recent Acquisitions

In February 2007, we made two acquisitions. We acquired the remaining 49% interest in a station located in Samara for cash consideration of $4.6 million, bringing our ownership in this station to 100%. We also acquired a 100% interest in a station located in Rostov for a total purchase price of $2.7 million, consisting of $2.6 million in cash consideration and $0.1 million in assumed debt.

In May 2007, we acquired a 100% interest in a station located in Vladivostok for cash consideration of $2.5 million.

In July 2007, we acquired the remaining 50% interest in a station located in Kazan for cash consideration of $10.0 million and  we also acquired a 49% interest in each of four stations located in Irkutsk for a total purchase price of $12.2 million, $9.9 million of which was paid in cash as of September 30, 2007. The remaining $2.3 million of the purchase for the Irkutsk stations price will be payable in cash upon receipt of certain regional broadcasting licenses.  In September 2007, we acquired another 2% in each of these stations for total cash consideration of $0.5 million, bringing our ownership interest in each station up to 51%.

In August 2007, we acquired a 100% interest in a station located in Stavropol for cash consideration of $3.8 million.

Potential Acquisition of Kazakh Broadcaster

In September 2007, we entered into a Binding Term Sheet (the “Term Sheet”) pursuant to which we agreed to enter into definitive agreements to acquire interests in the Kazakh television broadcast company, Channel 31, and affiliate companies that will provide the advertising sales function and programming content for Channel 31 (together, the “Channel 31 Group”).  These interests will provide us with a right to 60% of the economic interest of the Channel 31 Group.  In addition, we will have the right, pursuant to a shareholders’ agreement, to appoint the senior management of each company within the Channel 31 Group.

The total consideration in connection with the acquisition will be $65 million, less 50% of the net outstanding debt and certain tax liabilities of Channel 31 at closing.

Upon the closing of the acquisition, we will hold a 20% participation interest in Channel 31 and majority ownership positions in the other companies in the Channel 31 Group.  In the event that Kazakh law is amended to permit non-Kazakh parties to hold more than a 20% interest in a Kazakh television broadcaster, we will have an option to acquire additional participation interests in Channel 31, at no additional cost, so that our total participation interest in Channel 31 is the lesser of 50% or the ownership interest permitted by Kazakh law.  Upon exercise of such option, we would continue to be entitled to 60% of the economic interest of the Channel 31 Group.

The Term Sheet further provides that the definitive agreement will contain customary representations and warranties, covenants and conditions to closing, including completion by us of our due diligence review of the business and affairs of Channel 31 and approval of the transaction by Kazakh broadcasting and anti-monopoly authorities.

Office Space

In November 2006, we entered into agreements in regard to the future 10-year lease of office space in a building currently under construction in Moscow and scheduled to be available for occupancy by July 2008. Pursuant to Russian law and market practice, these agreements are structured as preliminary agreements which allow us to fix certain key terms of a final lease agreement that will be signed in the future. Cancellation of the preliminary agreements would result in the forfeiture of the security deposit paid of $1.8 million (at exchange rates as of September 30, 2007) and payment of certain other expenses incurred by the landlord on our behalf.

The final lease, once entered into, would provide for a base annual rent of approximately $9.0 million (at exchange rates as of September 30, 2007) and annual increases after the second year of between 3% and 6%, based on inflation rates in the United States. For the first twelve months of the lease, the annual rent will be reduced to approximately $6.6 million (at exchange rates as of September 30, 2007) to compensate us for a portion of its fit-out costs. The final lease agreements would require us to pay an annual fee for property management and utilities of approximately $1.4 million (at exchange rates as of September 30, 2007) with increases starting in the second year of occupancy indexed to the Russian rate of inflation. For

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more information about these preliminary lease agreements, refer to our Annual Report on Form 10-K filed with the SEC on March 1, 2007.

Critical Accounting Policies, Estimates and Assumptions

Our accounting policies affecting our financial condition and results of operations are more fully described in our Annual Report on Form 10-K filed with the SEC on March 1, 2007. The preparation of these unaudited condensed consolidated financial statements requires us to make judgments in selecting appropriate assumptions for calculating financial estimates, which inherently contain some degree of uncertainty. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe our critical accounting policies are as follows: foreign currency translation, programming and sublicensing rights, stock-based compensation expense, accounting for acquisitions, goodwill and other intangible assets, and accounting for income taxes. These critical accounting policies involve our more significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements. The only change in our critical accounting policies since filing our Annual Report on Form 10-K with the SEC on March 1, 2007 relates to accounting for uncertainty in income taxes, as outlined below.

Tax provisions and valuation allowance for deferred tax assets

In the course of preparing financial statements in accordance with US GAAP and for non-income taxes, we record potential tax loss contingency provisions under the guidelines of SFAS No. 5, Accounting for Contingencies. In general, SFAS No. 5 requires loss contingencies to be recorded when they are both probable and reasonably determinable. On January 1, 2007, we adopted Interpretation No. 48 (‘‘FIN No. 48’’), issued by the Financial Accounting Standards Board (‘‘FASB’’), Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statements 109. FIN No. 48 carves out income taxes from SFAS No. 5. The adoption of this standard did not have a significant impact on our financial statements. In addition, we record income tax and deferred tax provisions under the guidelines of SFAS No. 109, Accounting for Income Taxes. Significant judgment is required to determine when such provisions should be recorded and, when facts and circumstances change, when such provisions should be released.

Our actual Russian taxes may be in excess of the estimated amount expensed to date and accrued at September 30, 2007 due to ambiguities in, and evolution of, Russian tax legislation, varying approaches by regional and local tax inspectors, and inconsistent rulings on technical matters at the judicial level. For further information on tax contingencies refer to Notes 2 and 10 to our Unaudited Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report.

In the first quarter of 2007, our wholly-owned subsidiary, ZAO CTC Network, was subject to a tax inspection for the 2004 and 2005 tax years. Thereafter, the Russian tax inspectorate issued a claim and withdrew funds for approximately $0.4 million (at exchange rates as of September 30, 2007) including penalties and interest. We filed a lawsuit disputing the claim, and the court ruled in our favor in the first instance and one appeal court. We do not believe a unfavorable outcome of this matter to be probable at this time; therefore, no provision is currently recorded in our financial statements.

In the second quarter of 2007, our wholly-owned subsidiary, ZAO CTC Region, was subject to a tax inspection for the 2004, 2005 and 2006 tax years. Thereafter, ZAO CTC Region received a claim from the Russian tax inspectorate for approximately $0.8 million (at exchange rates as of September 30, 2007) including penalties and interest. We intend to file a lawsuit disputing the claim. At this time, we do not believe an unfavorable outcome in regard to all issues raised in this claim to be probable; therefore, we have only accrued approximately $0.2 million (at exchange rates as of September 30, 2007) in our financial statements.

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Results of Operations

The following table presents our historical consolidated operating results as a percentage of total operating revenues for the periods indicated:

Unaudited condensed consolidated statement of income data

	Three months ended September 30,				Nine months ended September 30,
	2006		2007		2006		2007
Revenues:
Advertising	97.9	%	95.8	%	97.2	%	95.4	%
Sublicensing and other	2.1		4.2		2.8		4.6
Total operating revenues	100.0		100.0		100.0		100.0
Expenses:
Direct operating expenses (exclusive
of depreciation and amortization)	(5.5	)	(5.0	)	(4.6	)	(4.4	)
Selling, general and administrative
(exclusive of depreciation and
amortization)	(23.8	)	(20.8	)	(16.2	)	(17.2	)
Amortization of programming rights	(42.5	)	(38.8	)	(34.5	)	(35.0	)
Amortization of sublicensing rights	(1.4	)	(1.4	)	(1.2	)	(2.3	)
Depreciation and amortization
(exclusive of amortization of
programming rights)	(7.5	)	(8.0	)	(5.6	)	(6.3	)
Total operating expenses	(80.7	)	(74.0	)	(62.1	)	(65.2	)
Operating income	19.3		26.0		37.9		34.8
Foreign currency gains	0.4		0.1		0.6		—
Interest income	1.9		2.9		0.6		2.4
Interest expense	—		—		(0.7	)	—
Gains on sale of businesses	—		—		0.3		0.2
Other non-operating income, net	—		—		—		0.3
Equity in income of investee companies	0.4		0.3		0.5		0.5
Income before income tax and minority interest	21.9		29.3		39.2		38.2
Income tax expense	(8.9	)	(9.7	)	(12.4	)	(12.6	)
Income attributable to minority interest	(1.1	)	(1.1	)	(1.1	)	(1.1	)
Net income	11.9	%	18.5	%	25.8	%	24.5	%

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Comparison of Unaudited Condensed Consolidated Results of Operations for the Three and Nine Months Ended September 30, 2006 and 2007

Total operating revenues

	Three months ended September 30,						Nine months ended September 30,
	2006			2007			2006			2007
	(in thousands, except percentages)
CTC Network	$	49,714		$	64,853		$	187,451		$	217,099
Change period-to-period	—			30.5		%	—			15.8		%
Domashny Network	4,197			7,794			13,490			25,327
Change period-to-period	—			85.7		%	—			87.7		%
CTC Television Station Group	14,850			18,868			45,254			58,926
Change period-to-period	—			27.1		%	—			30.2		%
Domashny Television Station Group	2,619			3,136			7,392			10,541
Change period-to-period	—			19.7		%	—			42.6		%
Eliminations and other	(461		)	(567		)	(686		)	(1,541		)
Total	$	70,919		$	94,084		$	252,901		$	310,352
Change period-to-period	—			32.7		%	—			22.7		%

Our total operating revenues grew by approximately 32.7% and 22.7%, respectively, when comparing the three- and nine-month periods under review. The increase in revenues reflects the continued growth of the Russian television advertising market. In addition, the increase in our revenues when comparing the three and nine months ended September 30, 2006 and 2007 was partially due to the fact that a significant majority of our advertising revenue is denominated in rubles. We estimate that the appreciation of the Russian ruble against the US dollar resulted in an approximate 5.2% and 5.9% increase, respectively, in our advertising revenues when comparing the three- and nine-month periods under review. Because we record our advertising revenues net of commissions, revenues at our Television Station Groups were also favorably impacted in the three and nine months ended September 30, 2007 by the significantly lower commission rate paid by our owned-and-operated stations to Video International in the second and third quarters of 2007 in connection with the variable commission rate negotiated through 2007.

Advertising revenues

	Three months ended September 30,						Nine months ended September 30,
	2006			2007			2006		2007
	(in thousands, except percentages)
CTC Network	48,623			61,167			181,807		204,289
Change period-to-period	—			25.8		%	—		12.4		%
Domashny Network	4,196			7,794			13,488		25,326
Change period-to-period	—			85.7		%	—		87.8		%
CTC Television Station Group	14,475			18,474			44,211		57,837
Change period-to-period	—			27.6		%	—		30.8		%
Domashny Television Station Group	2,149			2,660			5,811		8,508
Change period-to-period	—			23.8		%	—		46.4		%
Eliminations and other	(5		)	—			584		60
Total	$	69,438		$	90,095		$	245,901	$	296,020
Change period-to-period	—			29.7		%	—		20.4		%

We recognize advertising revenues in the period that the corresponding advertising spots are broadcast. Our advertising revenue is recorded net of VAT and sales commissions.

CTC Network.CTC Network’s advertising revenue increased by 25.8% and 12.4%, respectively, when comparing the three- and nine-month periods under review. Advertising revenue increased when comparing the three- and nine- month periods mainly due to increased advertising rates and the appreciation of the Russian ruble against the US dollar, offset by a decrease in audience share. The average audience share of the CTC Network decreased from 10.1% to 8.7% when comparing the three months ended September 30, 2006 and 2007, and from 10.9% to 9.0% when comparing the nine months ended September 30, 2006 and 2007. Decrease in audience share at the

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CTC Network over the periods under review can be explained by increased competition and relative underperformance of our programming.

Domashny Network.   The  Domashny Network  advertising revenue increased from $4.2 million to $7.8 million when comparing the three months ended September 30, 2006 and 2007, and from $13.5 million to $25.3 million when comparing the nine months ended September 30, 2006 and 2007. The increase in revenues reflects growth of the Russian television advertising market, an increase in audience share of the Domashny Network, as well as the appreciation of the Russian ruble against the US dollar. The audience share of the Domashny Network increased from 1.5% to 1.9% when comparing the three months ended September 30, 2006 and 2007, and from 1.3% to1.9% when comparing the nine months ended September 30, 2006 and 2007.

Television Station Groups.   Advertising revenues of the CTC Television Station Group increased from $14.5 million to $18.5 million when comparing the three months ended September 30, 2006 and 2007, and from $44.2 million to $57.8 million when comparing the nine months ended September 30, 2006 and 2007. Advertising revenue increased when comparing the three-month periods primarily due to increased advertising rates, a decrease in the effective commission rate payable to Video International (discussed below), as well as the appreciation of the Russian ruble against the US dollar, offset by a decrease in advertising sellout.  Advertising revenue increased when comparing the nine-month periods primarily due to increased advertising rates, a decrease in the effective commission rate payable to Video International (discussed below), the appreciation of the Russian ruble against the US dollar, and, to a lesser extent, an increase in advertising sellout. Advertising rates have been generally increasing during the periods under review due to an overall increase in the demand for television advertising in Russia. Beginning in the third quarter of 2006, however, the rate of revenue growth of the CTC Television Station Group slowed due to the reallocation of advertising time on the CTC Network which decreased the proportion available to affiliates and owned-and-operated stations from 30% to 25%. Additionally, the new advertising legislation introduced on July 1, 2006 reduced the airtime available for advertising. See ‘‘Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Television Advertising Sales’’ for more information about this reallocation of advertising time and this new legislation.

The Domashny Television Station Group revenue increased from $2.1 million to $2.7 million when comparing the three months ended September 30, 2006 and 2007, and from $5.8 million to $8.5 million when comparing the nine months ended September 30, 2006 and 2007. The increase in revenue was primarily the result of increased advertising sellout, a decrease in the effective commission rate payable to Video International (discussed below), as well as the appreciation of the Russian ruble against the US dollar.

In order to incentivize Video International to achieve negotiated 2007 sales targets and pursuant to the amended Television Station Group agreements, both Television Station Groups will pay variable commission to Video International for the period from April 1, 2007 to December 31, 2007. Under the amended agreements, the full historic 15% commission rate is only payable for stations if Video International achieves, on a station-by-station basis, the agreed quarterly sales targets. See ‘‘Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Agreements with Video International” for more information on the amended agreements. Video International did not achieve the agreed quarterly sales targets for the three months ended September 30, 2007 for a majority of our stations. As a result, the effective commission rate for the CTC Television Station Group was 3% and 6%, respectively, for the three and nine months ended September 30, 2007. The effective commission rate for the Domashny Television Station Group was 4% and 6%, respectively, for the three and nine months ended September 30, 2007. Starting January 1, 2008, a fixed rate commission of 15% will be re-instated on all local advertising sales. Therefore, the Television Station Groups will not continue to benefit from such variable commission rates in 2008.

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Sublicensing and other revenues

	Three months ended September 30,						Nine months ended September 30,
	2006			2007			2006			2007
				(in thousands, except percentages)
CTC Network	$	1,091		$	3,685		$	5,644		$	12,809
Change period-to-period	—			237.8		%	—			126.9		%
Domashny Network	1			1			2			2
Change period-to-period	—			—			—			—
CTC Television Station Group	375			394			1,043			1,089
Change period-to-period	—			5.1		%	—			4.4		%
Domashny Television Station Group	470			476			1,581			2,033
Change period-to-period	—			1.3		%	—			28.6		%
Eliminations and other	(456		)	(567		)	(1,270		)	(1,601		)
Total	$	1,481		$	3,989		$	7,000		$	14,332
Change period-to-period	—			169.3		%	—			104.7		%

Networks.   The increase in sublicensing and other revenues at the CTC Network level primarily resulted from the sale of certain Russian mini-series originally commissioned by us to First Channel in Russia in the first quarter of 2007 and to Studio 1+1 in Ukraine in the second and third quarters of 2007. Generally, we anticipate that our sublicensing activity will slightly increase in future periods as we explore opportunities to earn supplemental revenues from our Russian programming.

Television Station Groups.   Other revenues for the CTC Television Station Group primarily represent fees received from CTC Network for transmission on its repeaters. The Domashny Television Station Group’s other revenues were primarily generated by leasing space and production equipment at its Moscow facility to other group companies and to third-party production companies. The majority of the Television Station Groups’ other revenues are eliminated in consolidation.

Total operating expenses

	Three months ended September 30,								Nine months ended September 30,
	2006			2007				2006					2007
				(in thousands, except percentages)
CTC Network	$	(31,509	)	$		(37,287	)	$		(90,280		)	$	(111,131		)
Change period-to-period	—			18.3			%	—					23.1			%
Domashny Network	(6,280		)	(6,703			)	(18,652				)	(23,728			)
Change period-to-period	—			6.7			%	—					27.2			%
CTC Television Station Group	(8,364		)	(13,333			)	(20,151				)	(29,730			)
Change period-to-period	—			59.4			%	—					47.5			%
Domashny Television Station Group	(5,121		)	(6,295			)	(14,662				)	(18,750			)
Change period-to-period	—			22.9			%	—					27.9			%
Eliminations and other	(5,949		)	(6,056			)	(13,183				)	(18,793			)
Total	$	(57,223	)	$	(69,674		)	$			(156,928	)	$		(202,132	)
Change period-to-period	—			21.8			%	—					28.8			%
% of total operating revenues	80.7		%	74.0			%	62.1				%	65.2			%

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Our total operating expenses as a percentage of operating revenues decreased from 80.7% to 74.1% when comparing the three months ended September 30, 2006 and 2007 mainly due to decreases, as a percentage of operating revenues,  in amortization of programming rights and selling, general and administrative expenses.  Our total operating expenses as a percentage of operating revenues increased from 62.1% to 65.1% when comparing the nine months ended September 30, 2006 and 2007 mainly due to increases, as a percentage of operating revenues,  in amortization of programming rights, amortization of sublicensing rights, selling, general and administrative expenses and depreciation and amortization expense.

Direct operating expenses

	Three months ended September 30,						Nine months ended September 30,
	2006			2007			2006			2007
				(in thousands, except percentages)
CTC Network	$	(1,269	)	$	(1,444	)	$	(3,745	)	$	(4,205	)
Change period-to-period	—			13.8		%	—			12.3		%
Domashny Network	(725		)	(892		)	(2,122		)	(2,691		)
Change period-to-period	—			23.0		%	—			26.8		%
CTC Television Station Group	(1,265		)	(1,469		)	(3,539		)	(4,235		)
Change period-to-period	—			16.1		%	—			19.7		%
Domashny Television Station Group	(890		)	(1,113		)	(2,460		)	(3,153		)
Change period-to-period	—			25.1		%	—			28.2		%
Eliminations and other	230			215			281			683
Total	$	(3,919	)	$	(4,703	)	$	(11,585	)	$	(13,601	)
Change period-to-period	—			20.0		%	—			17.4		%
% of total operating revenues	5.5		%	5.0		%	4.6		%	4.4		%

Networks.   At the Network level, direct operating expenses principally comprise the salaries of our Networks’ engineering, programming and production staff and satellite transmission fees. Direct operating expense at the CTC Network as a percentage of this segment’s total operating revenues decreased from 2.6% to 2.2% when comparing the three months ended September 30, 2006 and 2007 and from 2.0% to 1.9% when comparing the nine months ended September 30, 2006 and 2007 as a result of the increased revenues of this segment. At the Domashny Network, direct operating expense as a percentage of this segment’s total operating revenues decreased from 17.3% to 11.4% when comparing the three months ended September 30, 2006 and 2007, and from 15.7% to 10.6% when comparing the nine months ended September 30, 2006 and 2007 as a result of the increased revenues of this segment. Direct operating expenses at the Network level increased in absolute terms when comparing the three- and nine- month periods primarily due to salary increases and the fact that we switched the denomination of the salaries of most of our employees from dollars to rubles effective July 2006.

Television Station Groups.   At the Television Station Group level, direct operating expenses primarily consist of transmission and maintenance costs and payroll expenses for engineering, programming, production and distribution staff. Direct operating expenses at our Television Station Groups are materially higher as a percentage of those segments’ total operating revenues compared to the Networks because we bear the transmission costs of our owned-and-operated stations. For the CTC Television Station Group, direct operating expenses as a percentage of that segment’s total operating revenues decreased from 8.5% to 7.8% when comparing the three months ended September 30, 2006 and 2007, and from 7.8% to 7.2% when comparing the nine months ended September 30, 2006 and 2007 as a result of the increased revenues of this segment.

For the Domashny Television Station Group, direct operating expenses as a percentage of that segment’s total operating revenues increased from 34.0% to 35.5% when comparing the three months ended September 30, 2006 and 2007, primarily due to acquisition of new stations with higher direct operating expenses as a percentage of their operating revenues.  For the Domashny Television Station Group, direct operating expenses as a percentage of that segment’s total operating revenues decreased from 33.3% to 29.9% when comparing the nine months ended September 30, 2006 and 2007. The increase in expenses in absolute terms was primarily due to the transmission and maintenance expense at newly acquired stations. As we continue to build upon the Domashny brand, we expect direct operating expenses to increase in absolute terms but decrease as a percentage of the segment’s operating revenue.

In April 2007, the Ministry of Information Technologies and Communications of the Russian Federation (the ‘‘Russian Ministry of Telecommunications’’) requested evidence of the legal basis pursuant to which some cable television operators, including those carrying the signals of CTC and Domashny, carry certain broadcasters’ signals over their systems. As a result of this request, some of our cable television operators, including Mostelecom which carries our CTC and Domashny signals in Moscow, indicated that they might be required to begin charging us transmission fees for carrying our signals on their systems. We and representatives of other Russian broadcasters met with the Russian Ministry of Telecommunications in the second quarter of 2007 to understand the ramifications of this inquiry. It was agreed that the broadcasters and cable television operators should try to resolve this issue independently, without involvement of the Russian Ministry of Telecommunication, by the end of 2007. To date, no such resolution has been reached. If our cable television operators were required to charge us transmission fees, we estimate that the annual transmission costs of our Television Station Groups could increase by up to $1.5 million to $2.0 million.

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Eliminations and other.   We eliminate inter-company expenses from direct operating expenses. These inter-company expenses consist primarily of service fees charged to our Networks by our Television Station Groups for the operation and maintenance of repeater transmitters. A portion of our corporate stock-based compensation expense is allocated to direct operating expenses. This expenses increased from nil to $0.2 million when comparing the three months ended September 30, 2006 and 2007, and from nil to $0.5 million when comparing the nine months ended September 30, 2006 and 2007.

Selling, general and administrative expenses

	Three months ended September 30,						Nine months ended September 30,
	2006			2007			2006			2007
	(in thousands, except percentages)
CTC Network	$	(3,412	)	$	(3,670	)	$	(9,493	)		$	(10,172	)
Change period-to-period	—			7.6		%	—				7.2		%
Domashny Network	(1,396		)	(1,171		)	(4,163		)		(4,487		)
Change period-to-period	—			(16.1		)%	—				7.8		%
CTC Television Station Group	(5,216		)	(7,560		)	(10,954		)		(15,584		)
Change period-to-period	—			44.9		%	—				42.3		%
Domashny Television Station Group	(1,143		)	(1,407		)	(4,290		)		(5,089		)
Change period-to-period	—			23.1		%	—				18.6		%
Eliminations and other	(5,698		)	(5,791		)	(12,024		)		(18,060		)
Total	$	(16,865	)	$	(19,599	)	$	(40,924	)		$	(53,392	)
Change period-to-period	—			16.2		%	—				30.5		%
% of total operating revenues	23.8		%	20.8		%	16.2		%		17.2		%

Our selling, general and administrative expenses principally consist of advertising and promotion expenses; salaries and benefits; stock-based compensation; rent and utilities; audit, legal and other consulting fees; travel expenses; insurance costs and non-income taxes.

CTC Network.   Selling, general and administrative expenses of the CTC Network as a percentage of this segment’s total operating revenues decreased from 6.9% to 5.7% when comparing the three months ended September 30, 2006 and 2007, and from 5.1% to 4.7% when comparing the nine months ended September 30, 2006 and 2007. Selling, general and administrative expenses increased in absolute terms when comparing the three- and nine- month periods primarily due to salary increases and the fact that we switched the denomination of the salaries of most of our employees from dollars to rubles effective July 2006.

Domashny Network.   Selling, general and administrative expenses of the Domashny Network as a percentage of the segment’s operating revenue decreased from 33.3% to 15.0% when comparing the three months ended September 30, 2006 and 2007, and from 30.9% to 17.7% when comparing the nine months ended September 30, 2006 and 2007. This decrease reflects growth in Domashny Network’s revenues over the periods under review. Selling, general and administrative expenses decreased in absolute terms when comparing the three-month periods primarily due to cancelation of our fall promotion campaign. Selling, general and administrative expenses increased in absolute terms when comparing the nine- month periods primarily due to increases in salaries and benefits. As we continue to build upon the Domashny brand, we expect selling, general and administrative expenses to increase in absolute terms but decrease as a percentage of this segment’s operating revenues.

Television Station Groups.   Selling, general and administrative expenses of the CTC Television Station Group as a percentage of this segment’s total operating revenues increased from 35.1% to 40.1% when comparing the three months ended September 30, 2006 and 2007, and from 24.2% to 26.4% when comparing the nine months ended September 30, 2006 and 2007. Selling, general and administrative expenses increased in absolute terms when comparing the three- and nine- month periods primarily due to increase in advertising and promotion and, to a lesser extent, increase in salaries and benefits.

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Advertising and promotion expense increased primarily due to an additional advertising campaign in Moscow to promote our 2007 fall season.

Selling, general and administrative expenses of the Domashny Television Station Group as a percentage of this segment’s total operating revenues increased from 43.6% to 44.9% when comparing the three months ended September 30, 2006 and 2007, primarily due to the acquisition of new television stations, and decreased from 58.0% to 48.3% when comparing the nine months ended September 30, 2006 and 2007. Selling, general and administrative expenses increased in absolute terms when comparing the three- and nine- month periods primarily due to an increase in salaries and benefits, as well as increase in rent and utilities.  Salaries and benefits increased between the three- and nine-month periods due to annual raises which became effective at the beginning of 2007, as well as from the addition of new Domashny stations.

Eliminations and other.   Other selling, general and administrative expenses consist principally of the general and administrative expenses of our corporate headquarters. These expenses, excluding stock-based compensation, decreased from $2.9 million to $2.6 million when comparing the three months ended September 30, 2006 and 2007, and increased from $8.2 million to $8.8 million when comparing the nine months ended September 30, 2006 and 2007. The slight decrease in these expenses when comparing the three-month periods was primarily due to approximately $0.9 million in management consulting fees incurred during the third quarter of 2006, offset by the general rise in the selling, general and administrative expenses at the corporate level to address the requirements of becoming a publicly traded company. The increase in these expenses when comparing the nine-month periods was primarily due to the general rise in the selling, general and administrative expenses at the corporate level to address the requirements of becoming a publicly traded company and an increase in our directors and officers insurance premiums. Corporate salaries and benefits expense increased by $0.6 million and $1.2 million, respectively, between the three- and nine-month periods primarily due to additional headcount and compensation increases.

Corporate stock-based compensation expense increased from $3.1 million to $3.3 million when comparing the three months ended September 30, 2006 and 2007, and from $4.1 million to $9.6 million when comparing the nine months ended September 30, 2006 and 2007. This increase over the periods under review resulted from the grant of stock options to our executive officers and other management in June 2006 upon the closing of our IPO, as well as an additional grant of stock options to management in the second quarter of 2007. In May and June 2007 we granted stock options to purchase an aggregate of 625,000 shares of our common stock. The exercise prices for these options are equal to the closing sales price per share of our common stock on the date of the grant and range from $25.36 to $26.91 per share. These options vest on a quarterly basis over three- to four-year periods and have a maximum term of ten years from the grant date. We are required to expense the fair value of these options over their vesting periods.

We expect our general and administrative expenditures at the corporate level to increase during 2007 and subsequent years due to expenses associated with being a publicly traded company, increases in salaries and benefits as we add to our corporate headcount and as competition for qualified personnel continues to intensify in Russia.

Amortization of programming rights

	Three months ended September 30,						Nine months ended September 30,
	2006			2007			2006			2007
	(in thousands, except percentages)
CTC Network	$	(25,558	)	$	(30,660	)	$	(73,180	)	$	(88,870	)
Change period-to-period	—			20.0		%	—			21.4		%
Domashny Network	(4,021		)	(4,480		)	(11,963		)	(16,085		)
Change period-to-period	—			11.4		%	—			34.5		%
CTC Television Station Group	(565		)	(1,391		)	(2,053		)	(3,694		)
Change period-to-period	—			146.2		%	—			79.9		%
Domashny Television Station Group	(8		)	(62		)	(31		)	(62		)
Change period-to-period	—			675.0		%	—			100.0		%
Eliminations and other	36			43			101			159
Total	$	(30,116	)	$	(36,550	)	$	(87,126	)	$	(108,552	)
Change period-to-period	—			21.4		%	—			24.6		%
% of total operating revenues	42.5		%	38.8		%	34.5		%	35.0		%

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CTC Network.   The amortization of programming rights is our most significant expense at the Network level. Amortization of programming rights for the CTC Network segment as a percentage of CTC Network’s total operating revenues decreased from 51.4% to 47.3% when comparing the three months ended September 30, 2006 and 2007 as a result of the increased revenues of this segment. Amortization of programming rights for the CTC Network segment as a percentage of CTC Network’s total operating revenues increased from 39.0% to 40.9% when comparing the nine months ended September 30, 2006 and 2007. The increase in amortization of programming rights in absolute terms for the CTC Network over the periods under review was due primarily to increases in the cost of programming. For 2007, we expect our programming costs to continue to increase in absolute terms in response to intense competition for quality programming.

Domashny Network.   Amortization of programming rights for the Domashny Network segment as a percentage of its operating revenues decreased from 95.8% to 57.5% when comparing the three months ended September 30, 2006 and 2007, and from 88.7% to 63.5% when comparing the nine months ended September 30, 2006 and 2007. We expect Domashny’s amortization of programming expense to decrease as a percentage of its operating revenues for 2007 as we build on this segment’s advertising revenues, but expect that this expense will continue to constitute a higher percentage of its operating revenues than is expected to be the case for the CTC Network as we continue to make substantial investments in programming in order to build Domashny’s audience share.

Television Station Groups.   Our Television Station Groups amortize the programming that they commission for broadcast during the local windows. The investment our owned-and-operated stations make in programming has historically been limited. Governmental authorities recently added an additional term to the broadcast licenses of some of our CTC owned-and-operated stations requiring that 9% of daily broadcast time at these stations be devoted to ‘‘local content’’. We view this action primarily as a positive attempt to standardize the local content requirements in our CTC licenses and in response we have begun to produce additional local programming. This new requirement has and will continue to increase our local programming costs.

Amortization of sublicensing rights

	Three months ended September 30,						Nine months ended September 30,
	2006			2007			2006			2007
	(in thousands, except percentages)
CTC Network	$	(997	)	$	(1,272	)	$	(3,046	)	$	(7,137	)
Change period-to-period	—			27.5		%	—			134.3		%
CTC Television Station Group	—			—			—			—
Change period-to-period	—			—			—			—
Total	$	(997	)	$	(1,272	)	$	(3,046	)	$	(7,137	)
Change year-on-year	—			27.5		%	—			134.3		%
% of total operating revenues	1.4		%	1.4		%	1.2		%	2.3		%

Amortization of sublicensing rights increased from $1.0 million to $1.3 million when comparing the three months ended September 30, 2006 and 2007, and from $3.0 million to $7.1 million when comparing the nine months ended September 30, 2006 and 2007. The increase is mainly due to the sale of certain Russian mini-series to First Channel in Russia in the first quarter of 2007 and to increased sublicensing sales to Studio1+1 in Ukraine in the second and third quarters of 2007.

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Depreciation and amortization (exclusive of amortization of programming rights)

	Three months ended September 30,						Nine months ended September 30,
	2006			2007			2006			2007
	(in thousands, except percentages)
CTC Network	$	(273	)	$	(241	)	$	(816	)	$	(748	)
Change period-to-period	—			(11.7		)%	—			(8.3		)%
Domashny Network	(138		)	(159		)	(404		)	(465		)
Change period-to-period	—			15.2		%	—			15.1		%
CTC Television Station Group	(1,318		)	(2,913		)	(3,605		)	(6,217		)
Change period-to-period	—			121.0		%	—			72.5		%
Domashny Television Station Group	(3,080		)	(3,713		)	(7,881		)	(10,446		)
Change period-to-period	—			20.6		%	—			32.5		%
Eliminations and other	(517		)	(524		)	(1,541		)	(1,574		)
Total	$	(5,326	)	$	(7,550	)	$	(14,247	)	$	(19,450	)
Change period-to-period	—			41.8		%	—			36.5		%
% of total operating revenues	7.5		%	8.0		%	5.6		%	6.3		%

Our depreciation and amortization (exclusive of amortization of programming rights and sublicensing rights) relates to the depreciation of our property and equipment, mainly broadcasting equipment, transmitters, buildings, computer hardware and office furniture, and the amortization of our intangible assets other than programming rights and sublicensing rights, principally broadcast licenses, network affiliation agreements and cable network connections.

Networks.   At the Network level, the depreciation of broadcasting equipment, computer hardware and office furniture represents the principal component of this expense. This expense remained relatively constant in absolute terms for the periods under review.

CTC and Domashny Television Station Groups.   Depreciation and amortization expenses of the CTC Television Station Group as a percentage of this segment’s total operating revenues increased from 8.9% to 15.4% when comparing the three months ended September 30, 2006 and 2007, and from 8.0% to 10.6% when comparing the nine months ended September 30, 2006 and 2007. Depreciation and amortization expenses of the Domashny Television Station Group as a percentage of this segment’s total operating revenues increased from 117.6% to 118.4% when comparing the three months ended September 30, 2006 and 2007, and decreased from 106.6% to 99.1% when comparing the nine months ended September 30, 2006 and 2007. The increase in depreciation and amortization over the periods in absolute terms was due primarily to the acquisition of new television stations.

Mostelecom, the dominant cable provider in Moscow, upgraded a number of roof antenna systems from 1997 to 2004 to add capacity for a limited number of additional channels. We collaborated with Mostelecom in this project, paying an amount per additional household connected, in order to help ensure that our stations in Moscow were allocated access on Mostelecom’s systems as capacity was increased. In June 2007, Mostelecom approached us to discuss securing our right to continue to broadcast over connections added subsequent to the project ending in 2004 by paying a 400 ruble, one-time “connection fee”.  Included in this proposal are an estimated 270,000 households for CTC Moscow and an estimated 700,000 households for Domashny Moscow. We are still verifying the existence of these connected households and negotiating with Mostelecom to agree on the terms and the extent

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 to which CTC and Domashny stations in Moscow would benefit from securing the right to broadcast over these new connections.  If we were to proceed as proposed, the total value of this project would be approximately $15.6 million (at exchange rates as of September 30, 2007). If and when the agreement is finalized, we will evaluate the provisions of the agreement including factors such as the contract term of the underlying agreement, the remaining technical life of Mostelecom’s cable network, and the estimated useful life of the underlying broadcast licenses to determine the potential impact on our financial statements. If we pay Mostelecom to secure these connections, our amortization expense could increase significantly in our Television Stations Groups.

Other.   Other depreciation and amortization expense consists primarily of the amortization expense of $0.5 million recorded in each of the periods under review, recognized as a result of the assignment of $10 million in value to affiliation agreements of the CTC Network in connection with our acquisition in August 2003 of Alfa’s 25% plus one share interest in our CTC Network. These affiliation agreements will be fully amortized by August 2008.

Foreign currency gains (losses)

	Three months ended September 30,				Nine months ended September 30,
	2006		2007		2006		2007
	(in thousands, except percentages)
Foreign currency gains (losses)	$	254	$	113	$	1,575	$	25

The functional currency of our Russian subsidiaries is the ruble. We have experienced insignificant foreign currency gains and losses during the three and nine months ended September 30, 2007 due to our largest Russian subsidiary holding similar amounts of dollar-denominated monetary assets and liabilities.

Interest income

	Three months ended September 30,				Nine months ended September 30,
	2006		2007		2006		2007
	(in thousands, except percentages)
Interest income	$	1,316	$	2,689	$	1,641	$	7,318

During the three and nine months ended September 30, 2007 our interest income primarily represents interest earned on our increasing cash balances.

Interest expense

	Three months ended September 30,				Nine months ended September 30,
	2006		2007		2006			2007
	(in thousands, except percentages)
Interest expense	$	—	$	—	$	(1,773	)	$	(2	)

During the three and nine months ended September 30, 2006 we incurred interest expense on loans extended by Alfa. Our interest expense decreased when comparing the three and nine months ended September 30, 2006 and 2007 as a result of full repayment of our loans with Alfa in the second quarter of 2006.

Gain on sale of businesses

	Three months ended September 30,				Nine months ended September 30,
	2006		2007		2006		2007
	(in thousands, except percentages)
Gain on sale of businesses	$	—	$	—	$	782	$	747

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In April 2006, we sold our 85% interest in two radio stations located in Perm for total consideration of $1.0 million and recognized a $0.8 million gain on the sale. In June 2007, we sold our 100% interest in a radio station in Omsk for total consideration of $0.8 million and recognized a $0.7 million gain on the sale.

Other non-operating income (losses)

	Three months ended September 30,						Nine months ended September 30,
	2006			2007			2006			2007
	(in thousands, except percentages)
Other non-operating income (losses)	$	(32	)	$	(31	)	$	(111	)	$	848

In the second quarter of 2007, we sold a building in Omsk for total consideration of $1.8 million and recognized a $0.7 million gain on the sale.

Equity in income of investee companies

	Three months ended September 30,				Nine months ended September 30,
	2006		2007		2006		2007
	(in thousands, except percentages)
Equity in income of investee companies	$	274	$	304	$	1,161	$	1,497

Under the equity method, we record our interest in the results of operations of stations over which we do not have effective control as an investment rather than consolidating their results with our results of operations, reflecting a portion of net income commensurate with our ownership stake in them. Equity in income of investee companies primarily consists of income attributable to our interests in the station located in Kazan for the first six months of the year and in the station located in Novosibirsk.  In July 2007, we acquired the remaining 50% interest in the station located in Kazan.  Therefore, the operating results of the Kazan station will no longer be reflected in this line in future periods.

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Income tax expense

	Three months ended September 30,						Nine months ended September 30,
	2006			2007			2006			2007
	(in thousands, except percentages)
Income tax expense	$	(6,304	)	$	(9,097	)	$	(31,264	)	$	(39,029	)

Our effective tax rate decreased from approximately 41% to approximately 33% when comparing the three months ended September 30, 2006 and 2007 and slightly increased from approximately 32% to approximately 33% when comparing the nine months ended September 30, 2006 and 2007.  The decrease in our effective tax rate during the three-month periods under review continues to reflect the decrease in non-offsettable losses arising at certain subsidiaries as a percentage of consolidated income before tax.

We do not provide for deferred taxes on the unremitted earnings of our foreign subsidiaries, except for our profitable television stations, as such earnings are generally intended to be reinvested in those operations. We are currently not able to determine the aggregate amount of the deferred tax liability for such earnings. However, the major portion of this unrecognized deferred tax liability is related to our largest Russian subsidiary, ZAO CTC Network. Presently, we intend to redeploy the unremitted earnings of ZAO CTC Network in Russia by investing in that subsidiary’s existing operations and by acquiring suitable businesses. However, if this Russian subsidiary were to make its accumulated earnings previously earmarked for acquisitions of Russian businesses available for distribution to our US parent company, we would be required to provide for deferred taxes on those undistributed earnings to the extent they are not invested in that subsidiary’s current operations, which would result in a significant increase in our effective tax rate. Currently, we estimate the amount of unrecognized deferred tax liability for such undistributed earnings of this subsidiary to be approximately $24 million as of September 30, 2007. See “Item 1A. Risk Factors—We may be required to record a significant charge to our earnings if we are unable to complete acquisitions of Russian businesses”.

Income attributable to minority interest

	Three months ended September 30,						Nine months ended September 30,
	2006			2007			2006			2007
	(in thousands, except percentages)
Income attributable to minority interest	$	(761	)	$	(989	)	$	(2,774	)	$	(3,410	)

Minority interest represents the share of net income of each of our consolidated owned-and-operated stations that is not wholly owned and that is therefore attributable to the minority stockholders of these companies. Income attributable to minority interest increased over the periods under review in line with the increases in profitability of our consolidated owned-and-operated stations comprising our CTC Television Station Group.

Foreign currency translation adjustment

	Three months ended September 30,				Nine months ended September 30,
	2006		2007		2006		2007
	(in thousands, except percentages)
Foreign currency translation adjustment	$	2,398	$	12,721	$	13,425	$	18,984

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Effective January 1, 2006, our Russian domiciled subsidiaries changed their functional currency to the ruble. As a result, the financial statements of these Russian subsidiaries were translated into US dollars using the current rate method. The 2006 amounts included a pick-up charge for the translation differences related to a new ruble cost basis established for all non-monetary assets as of January 1, 2003, when the Russian economy ceased to be considered hyperinflationary.

Consolidated Financial Position—Significant Changes in our Unaudited Condensed Consolidated Balance Sheets at September 30, 2007 Compared to December 31, 2006

Trade accounts receivable, net of allowance for doubtful accounts

Our accounts receivable increased from $8.6 million to $15.0 million from December 31, 2006 to September 30, 2007. Of the total $6.4 million increase, approximately $3.2 million was at our Networks and $3.2 million at our Television Station Groups. Our Networks accounts receivable increased primarily as a result of the balance being seasonally low on December 31, 2006. Our Television Station Group’s accounts receivable increased due to extension of payment terms to our debtors.

Broadcasting licenses

Broadcasting licenses increased from December 31, 2006 to September 30, 2007 due to the acquisition of a 100% interest in a station in Rostov, the remaining 49% interest in a station in Samara, a 100% interest in a station in Vladivostok, the remaining 50% interest in a station in Kazan, a 51% interest in four stations in Irkutsk and a 100% interest in a station in Stavropol. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Acquisitions.”

Sublicensing rights

Sublicensing rights as shown on our balance sheet decreased from December 31, 2006 to September 30, 2007 primarily due to sublicensing certain Russian mini-series to the First Channel in the first quarter of 2007 and to studio 1+1 in Ukraine in the second quarter of 2007.

Accounts Payable

Accounts payable increased primarily due to an increase in amounts due for purchases of programming rights.

Deferred revenue

Deferred revenue increased from December 31, 2006 to September 30, 2007 due to the receipt of advance payments for advertising campaigns to be placed throughout 2007.

Liquidity and Capital Resources

We have financed our operations to date through cash from operations and the pivate placement of equity and our IPO. At September 30, 2007, we had $248.5 million in cash and cash equivalents.

Cash flows

Below is a summary of our cash flows during the periods indicated:

	Nine months ended September 30,
	2006			2007
	(in thousands)
Net cash provided by operating activities:	$	77,320			$	99,965
Net cash used in investing activities:	(21,312		)		(34,095		)
Net cash provided by (used in) financing activities:	66,798				(650		)

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Our cash flow from operating activities increased over the periods under review principally because of the increase in advertising revenues over these periods. Our advertising revenue amounted to $245.9 million and $296.0 million, respectively, during the nine months ended September 30, 2006 and 2007.

Our most significant use of cash in relation to operating assets and liabilities throughout the period under review was for the acquisition of programming and sublicensing rights. Our cash expenditure for the acquisition of programming and sublicensing rights amounted to $93.1 million and $115.8 million, respectively, during the nine months ended September 30, 2006 and 2007. Programming rights and sublicensing rights amortization amounted to $90.2 million and $115.7 million, respectively, during the nine months ended September 30, 2006 and 2007. We expect that in 2007, our cash expenditure for the acquisition of programming rights will continue to increase in absolute terms due primarily to increases in the cost of programming.

Cash used in investing activities includes cash used for the acquisition of property, equipment and intangible assets, and purchases and establishment of new owned-and-operated stations. In the nine months ended September 30, 2007, we paid $6.9 million (net of cash acquired) to acquire the remaining 49% interest in a CTC station in Samara and a 100% interest in a Domashny station in Rostov. In the nine months ended September 30, 2007, we also paid $2.2 million (net of cash acquired) for the acquisition of a 100% interest in a Domashny station in Vladivostok, $3.8 million for the acquisition of a 100% interest in a Domashny station in Stavropol, $10.4 million for the acquisition of 51% interest in two CTC and two Domashny stations in Irkutsk and $9.6 million for the acquisition of the remaining 50% interest in a station in Kazan.

Cash flows from financing activities fluctuated between the periods primarily due to the receipt of $105.0 million in net proceeds from our IPO and $5.9 million from the exercise of stock options during the first nine months of 2006. During the nine months ended September 30, 2006, we borrowed $19.0 million from Alfa Bank prior to our IPO to finance acquisitions and repaid $60.4 million to fully repay our Alfa Bank borrowings. During the nine months ended September 30, 2007, we received $3.4 million from the exercise of stock options and paid $4.0 million in dividends to minority shareholders of our owned-and-operated stations.

We believe that our current cash on hand, along with cash from operations, will provide sufficient capital to fund our operations for at least the next 12 months. We cannot assure you, however, that the assumed levels of revenues and expenses underlying this projection will prove to be accurate.

Contractual obligations

The table below summarizes the principal categories of our contractual obligations for acquisitions of programming rights, format rights, transmission and satellite fees, lease obligations and equipment purchase obligations as of September 30, 2007:

	Payments Due by Period
	Total		Through 2007		2008 through 2009		2010 through 2011		Thereafter
Acquisition of programming rights	$	83,046	$	35,135	$	47,911	—		—
Acquisition of format rights	4,446		1,113		3,333		—		—
Transmission and satellite fees	32,079		1,992		15,738		14,349		—
Lease obligations(1)	7,446		671		2,893		1,422		2,460
Equipment purchase obligations	552		552		—		—		—
Total(2)	$	127,569	$	39,463	$	69,875	$	15,771	$	2,460

(1)The amounts shown exclude lease obligations that would arise upon entering into final lease agreements for the 10-year lease of approximately 12,000 square meters of office space in a building currently under construction in Moscow. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Office Space” for more information about our preliminary lease agreements for this office space.

(2)FIN No. 48 liabilities in the amount of $487 are excluded from this table because we cannot make a reasonably reliable estimate of the period of cash settlement with the taxing authorities.

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Recently Issued Accounting Pronouncements

Fair Value Option

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

Item 3.Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to market risk from changes in foreign currency exchange rates. We do not currently use derivative financial instruments, such as foreign exchange forward contracts or foreign currency options, to manage our foreign exchange risk because the market for these types of financial instruments in Russia is not well developed and the cost of these instruments is relatively high. We do not hold or issue derivatives or other financial instruments for trading purposes.

Prior to 2006, our principal source of revenue (contracts for the placement of advertising) was denominated primarily in US dollars. Because our expenses were also primarily denominated in US dollars, the impact on our results of ruble depreciation was insignificant. Beginning in January 2006, substantially all new advertising contracts between Video International and advertisers are ruble-denominated with the result that substantially all of our advertising revenues in 2007 are denominated in rubles as our longer-term advertising contracts denominated in US dollars expire and are replaced.

In response, we shifted a substantial majority of our expenditures from dollars to rubles. Nevertheless, we can give no assurance that we are adequately protected from the impact of currency fluctuations. Moreover, given that our reporting currency is the US dollar, rubles held in banks and other ruble-denominated assets and liabilities could fluctuate in line with any change in the value of the ruble. Prior to 2006, changes in the value of our ruble-denominated monetary assets and liabilities resulted in foreign currency gains or losses in our income statement. However, effective January 1, 2006 we determined that the functional currency of our subsidiaries domiciled in Russia is the ruble. Therefore, the financial statements of these subsidiaries are translated into US dollars using the current rate method and translation gains and losses are no longer included in net income, but are instead included as part of other comprehensive income.

We can, however, provide no assurance that these measures will adequately protect us from the impact of currency fluctuations. A substantial decline in the value of the Russian ruble against the US dollar could materially adversely affect our results of operations.

The following table provides information about our financial instruments denominated in foreign currency and presents such information in US dollar equivalents (in thousands). All of our instruments that are sensitive to foreign currency exchange rates are denominated in rubles.

	September 30, 2007
	(in thousands, except exchange rate information)
Cash equivalents	$	139,745
Taxes reclaimable	9,415
Taxes payable	11,687
Long-term loans	220
Closing ruble/US dollar exchange rate	24.9493

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Although we have trade accounts receivable and payable denominated in foreign currency, their carrying amount approximates fair value since such balances generally do not have extended payment terms.

Item 4.Controls and Procedures

Evaluation of disclosure controls and procedures.

Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in internal control over financial reporting.

There was no change in the internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.Other Information

Item 1.Legal Proceedings

We are not currently party to any legal proceedings, the outcome of which could have a material adverse effect on our financial results or operations.

Item 1A.Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed with the SEC on March 1, 2007 before purchasing our common stock. The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties of which we are unaware, or that we currently deem immaterial, may also become important factors that affect us. Any of the following risks could adversely affect our business, financial condition and results of operations. In such case, the trading price of our common stock could decline, and you could lose some or all of your investment.

Risks relating to our business and industry

Effective from 2008, Russian law will further limit the amount of advertising time permitted on television, which could materially adversely affect our results of operations.

In early 2006, a new Russian law was introduced to limit the amount of time that a broadcaster may devote to advertising. The new law took effect on July 1, 2006 and, as a result, advertising was limited to 15% of daily broadcasting time, and no more than 20% in any hour, compared to 20% of total broadcasting time per day prior to July 1, 2006. From January 1, 2008, the new law will further limit advertising such that no more than 15% of broadcasting time per hour can be devoted to advertising. In addition, Russia has signed an international convention that, if ratified by the Russian parliament, would further limit the amount of advertising that could be broadcast during feature films. Alexander Rodnyansky, our chief executive officer, has stated in interviews that this convention, if ratified, could significantly reduce the revenues that we are able to generate from the broadcast of feature films.

Video International renegotiated advertising rates with advertisers to reflect the impact of the reduction in available advertising time in 2006. We also increased the share of our total daily advertising time allocated to the CTC Network from 70% to 75% (excluding local programming windows), decreasing the amount allocated to our CTC affiliates. As a result, we believe that the reduced amount of available advertising time did not negatively affect our results of operations in 2006 or the

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first nine months of 2007. In connection with the further reductions in advertising time to be effective from January 1, 2008, and, if it were to be ratified, the international convention discussed above, we do not believe we will be able to effect further reallocations of our total daily advertising time between either of our networks and our affiliate stations.  Although we expect that Video International will be able to negotiate advertising price increases in connection with these further reductions in advertising time, we cannot guarantee that any such increases will be sufficient to compensate for the loss in advertising time. If the price increases are not sufficient, the further reductions in advertising time will have a material adverse affect on our revenues and results of operations.

We derive almost all of our revenues from the sale of advertising, which is sensitive to broader economic conditions, and our revenues may therefore substantially decrease if general economic conditions in Russia were to deteriorate.

Since the introduction of television advertising in Russia following the fall of the Soviet Union, advertising spending has fluctuated substantially, generally increasing during periods of economic growth and decreasing during downturns. For example, in August 1998 the Russian government defaulted on certain of its outstanding financial obligations and the Central Bank of Russia stopped its support of the ruble, leading to a steep devaluation. During the ensuing economic crisis, total spending on television advertising in Russia declined significantly, falling from a pre-crisis high of $550 million in 1997 to a low of $190 million in 1999. Economic recovery following the crisis was slow, and spending on Russian television advertising did not exceed the 1997 figure in US dollar terms until 2002. As a result, our revenues declined significantly after the 1998 economic crisis.

Although the Russian economy has improved substantially since the 1998 crisis, many analysts have expressed concerns that it is overly dependent upon commodities, particularly the natural gas and oil sectors, and therefore substantially dependent upon international supply, demand and pricing conditions in those fields. A sudden or prolonged downturn in the Russian economy could substantially reduce Russian television advertising expenditures. Any decrease in the size of the Russian television advertising market will likely result in a decrease in our advertising revenues, which would materially adversely affect our results of operations.

If free-to-air television does not continue to constitute a significant advertising forum in Russia, our revenues could be materially reduced.

We generate substantially all our revenues from the sale of free-to-air television advertising in Russia, which constituted approximately 47% of all advertising expenditures in Russia in 2005 and 49% in 2006, having increased from 25% in 1999. In the broader advertising market, television competes with various other advertising media, such as print, radio, the internet and outdoor advertising. While television currently constitutes the single largest component of all advertising spending in Russia there can be no assurance that television will maintain its current position among advertising media or that changes in the regulatory environment will not favor other advertising media or other television broadcasters. Increases in competition arising from the development of new forms of advertising media could have an adverse effect on our ability to maintain and develop our advertising revenues and, as a result, on our results of operations. Television viewership is generally declining in Russia. That decline is more pronounced in CTC Network’s target demographic. Continued decline in the appeal of television generally and in particular, our key demographics, whether as a result of the growth in popularity of other forms of media or other forms of entertainment, could adversely affect the attractiveness of television as an advertising medium which, in turn, could have a material adverse effect on our results of operations.

A reduction in our audience shares and ratings would likely result in a reduction in our advertising revenues.

The level of advertising revenues that we receive is directly tied to our audience share and ratings. If our audience share or ratings were to fall as a result, for example, of competitive pressures, the underperformance of key programs, the failure to renew licenses, or a change in the method of measuring television audiences, this would likely result in a material decrease in our advertising revenues. In particular, from time to time we air one or two ‘‘hit’’ series during primetime that contribute disproportionately to our overall audience share, resulting in an overall audience share that we may not be able to sustain once that ‘‘hit’’ series is discontinued or loses popularity. If we do not consistently select programs or obtain rights to programs that achieve particularly high audience shares in key time slots, our overall audience share and, therefore, our revenues will be adversely affected.

Moreover, because of seasonality trends in television viewing and advertising, the fourth quarter has historically been our most significant revenue-producing quarter, ranging from 31.8% to 38.0% of our annual revenues over the past three years. As a result, poor audience share performance in the fourth quarter will have a relatively greater adverse affect on our annual operating results.

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We rely on a single television advertising sales house for substantially all of our revenues, and therefore our operating results could be materially adversely affected if our relationship with this sales house were to deteriorate or if it were to fail to sell advertising on our behalf effectively.

National television advertising in Russia is generally not placed directly with broadcasters. Instead, two ‘‘sales houses,’’ Video International and NTV Media, a sales house affiliated with the television channel NTV (one of our principal competitors), control the placement of most national television advertising in Russia, with a third sales house placing advertising for several smaller channels. Video International currently also places local advertising for local television stations. Video International has served as our exclusive sales house for the placement of national advertising on the CTC Network since 1999 and on the Domashny Network since its launch in March 2005. In January 2006, Video International began acting as the exclusive sales house for the placement of local television advertising for substantially all of the stations in our Television Station Groups.

Payments from Video International accounted for approximately 71% of our total operating revenues in 2005 and 95% in 2006. We expect revenues from Video International to account for substantially all of our consolidated revenues in 2007. We have separate agreements with Video International that run through December 2012 and 2009 for CTC and Domashny, respectively, and 2010 for our Television Station Groups. These agreements are generally terminable upon 180 days’ notice by either party. We cannot guarantee that the Video International agreements will not be terminated prior to their scheduled expiration, or that if they are terminated we will be able to conclude replacement agreements that provide us with the same level of advertising revenues or other benefits as the current agreements.

Video International, typically in consultation with us, determines advertising prices, agrees the terms of sales contracts between it and advertisers and oversees the collection of advertising sales revenue. Video International typically consults with us on general budgeting matters, including average selling prices, the total number of GRPs expected over the year, the allocation of GRPs across the year and similar matters. Our agreements with Video International require it to forward payment to us within three business days of its receipt of funds from advertisers. However, we do not have any direct input into the evaluation of the creditworthiness of potential new advertisers or direct control over collection of advertising sales revenues, and Video International could act unilaterally should it choose to do so when setting advertising prices and allocating GRPs. While we bear the credit risk associated with any failure by an advertiser to make payment, Video International will, under the terms of the new CTC Network agreement that is effective January 1, 2008, guarantee the payment of any unpaid debt of advertising clients to the extent that such debt either has been outstanding for at least 180 days and exceeds, in the aggregate, 0.05% of CTC Network’s gross advertising revenues for the year.  Under the terms of the new Television Station Group agreements that became effective as of April 1, 2007, Video International guarantees any unpaid debt that has been outstanding for more than 60 days after the end of the month in which the related advertising was broadcast and exceeds, in aggregate, 0.05% of a station’s advertising sales for such month.  This guarantee is not applicable in the event of a material downturn in the Russian economy. If Video International were to sell to non-creditworthy customers and fail to honor its guarantee, fail to successfully collect advertising sales revenues or act unilaterally when setting advertising prices or allocating GRPs, our inability to directly control the process and limited provisions for recourse could have a material adverse effect on our business, financial condition and results of operations.

The Russian Federal Anti-monopoly Service has publicly indicated on several occasions in the past, including in 2006, that it intends to regulate Video International as a monopoly with a dominant market position or to require the establishment of a public exchange for the sale of advertising; we are not aware of any specific plans to initiate any such efforts at any particular time. If the Federal Anti-monopoly Service were to do so, under applicable anti-monopoly legislation it could impose various restrictions on Video International and its activities, including forced divestitures of companies within the group. Such actions by the Federal Anti-monopoly Service, if implemented, could disrupt Video International’s ability to effectively place our advertising, which in turn could have a material adverse effect on our business, financial condition and results of operations.

The only other major television advertising sales house in Russia is controlled by one of our principal competitors, NTV. We understand that this sales house coordinates with Video International in the placement of local advertising. Consequently, we do not know whether they would agree to act as our sales house or, if they did, whether they would be as effective as Video International at placing our television advertising.

Early termination of our agreements with Video international, their inability or failure to continue to forward advertising fees to us, their failure to achieve targeted levels of advertising sales for our networks and our owned-and-operated stations and any other disruption in our relationship with Video International would likely have a material adverse effect on our business, financial condition and results of operations. Video International has generally failed to meet sales expectations for a majority of our owned-and-operated stations since the beginning of 2007. Although we have agreed lower variable commission rates from April 1, 2007 for their failure to meet these expectations, those lower commission rates lapse at the end of the year and, under our current agreement with Video International, the fixed commission rate of 15% will be re-instated in 2008. If Video International continues to fail to meet sales expectations, our results of operations will be materially adversely affected.  For more information on our agreements with Video International, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Agreements with Video International”.

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We are seeking opportunities to acquire other stations, networks, content providers and other complementary media companies, and our failure to identify suitable targets will impede our growth strategy and we may encounter difficulties integrating acquired business if we are successful in completing acquisitions.

A significant part of our growth strategy is the acquisition of other stations, networks, content providers and other complementary media companies.  We recently entered into a binding term sheet to acquire a majority financial interest in Channel 31, a television broadcaster in Kazakhstan. Completion of the Channel 31 acquisition will represent an important achievement in our acquisition strategy. Our growth will suffer, however, if we are unable to further implement our acquisition strategy because we fail to identify suitable targets, are outbid by competing bidders or for any other reason.  As a US public company, we are subject to securities laws and regulations requiring that we file with the SEC audited historical financial statements for businesses we acquire that exceed certain materiality thresholds.  Given financial reporting practices in Russia and other CIS countries, such financial statements are often not readily available or not capable of being audited to the standards required by US securities regulations. As a result, we may be prevented from pursuing acquisition opportunities that our competitors and other financial and strategic investors are able to pursue.

Moreover, if we are able to complete acquisitions of new businesses, the integration of these businesses pose significant risks to our existing operations, including:

·additional demands placed on our senior management, who are also responsible for managing our existing operations;

·increased overall operating complexity of our business, requiring greater personnel and other resources;

·difficulties of expanding beyond our core expertise, in the event that we acquire content providers or other ancillary businesses;

·significant initial cash expenditures to acquire and integrate new businesses; and

·incurrence of debt to finance acquisitions and higher debt service costs related thereto.

Additionally, the integration of new businesses, including Channel 31, may be difficult for a variety of reasons, including differing cultures or management styles, legal restrictions in the target’s jurisdiction, poor target records or internal controls and an inability to establish control over cash flows. Furthermore, even if we are successful in integrating new businesses, expected synergies and cost savings may not materialize, resulting in lower than expected profit margins.

We may be required to record a significant charge to our earnings if we are unable to complete acquisitions of Russian businesses.

Our largest Russian operating subsidiary, ZAO CTC Network, has significant accumulated earnings that have not been distributed to our US parent company.  If we are unable to deploy these accumulated earnings in Russia by acquiring suitable businesses or reinvesting in that subsidiary’s current operations, US generally accepted accounting principles require us to record a charge to our earnings representing the taxes that we would be required to pay if this subsidiary were to dividend these accumulated earnings to our US parent company, even if such dividends were not actually declared and paid.  We do not currently record provisions for taxes on the undistributed earnings of this subsidiary, as we currently expect to use these funds for future acquisitions of Russian businesses and reinvestment in the subsidiary’s current operations.  However, a significant portion of these accumulated earnings might become available for distribution to our US parent company if we are unable to execute this subsidiary’s acquisition plans.

As of September 30, 2007, if this Russian subsidiary were to make 50% of its accumulated earnings previously earmarked for acquisitions of Russian businesses and reinvestment in operations available for distribution to our US parent company, we estimate that we would be required to record a tax charge in the amount of approximately $12 million.  If this Russian subsidiary were to make all its accumulated earnings previously earmarked for acquisitions of Russian businesses and reinvestment in operations available for distribution to our US parent company, we estimate that we would be required to record a tax charge in the amount of approximately $24 million.  The actual amount of the charge, if any, depends on the extent to which we are able to reinvest these accumulated earnings in Russia and several other factors, such as the extent to which we can utilize foreign tax credits to offset the resulting tax liability.

Restrictions on foreign involvement in the television business in Russia could potentially be amended or interpreted in such a way as to result in our loss of necessary licenses or to require us to divest majority control of our Russian operating subsidiaries.

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Amendments to the law of the Russian Federation ‘‘On Mass Media’’ (the ‘‘Mass Media Law’’), which went into effect in August 2001, restrict foreign involvement in Russian television businesses in a number of ways. As a result of these amendments, all Russian television companies with existing foreign ownership had to restructure their operations prior to August 6, 2002, to avoid violating the amended Mass Media Law. Unlike other Russian legislation regarding foreign control in certain industries, however, the amendments to the Mass Media Law do not contain ‘‘look-through’’ provisions with respect to the ultimate beneficial ownership of Russian companies engaged in television operations in Russia. Because CTC Media does not broadcast or distribute television programming in the Russian Federation, we believe that CTC Media itself does not fall under the definition of a ‘‘founder of a television or video program,’’ and that CTC Media itself does not violate the foreign involvement restrictions of the Mass Media Law.

In response to the adoption of these amendments to the Mass Media Law, we implemented a restructuring plan pursuant to which we created a holding company structure and reduced CTC Media’s direct ownership in CTC and each of our owned-and-operated stations below 50%. CTC Media’s direct ownership of Domashny, which was acquired subsequent to the adoption of these amendments, is also below 50%. The transfers of CTC and our owned-and-operated stations, other than with respect to our Moscow station that broadcasts CTC, was completed by the August 2002 deadline. The change in the ownership structure for our Moscow station that broadcasts CTC was completed in December 2002, after the specified deadline. To date, no Russian governmental authorities have taken any action against our CTC-Moscow station for its failure to comply with the restrictions on foreign legal ownership by the August 2002 deadline.

If the Mass Media Law or any newly adopted law were to be interpreted by the Russian governmental authorities or a Russian court to extend to, and to prohibit, indirect foreign ownership of or control over Russian broadcasters of television or video programs, Russian governmental authorities may suspend or revoke broadcasting licenses and permits held by our networks and our owned-and-operated stations. If the Mass Media Law were to be amended, or any new law were to be adopted, to expressly restrict indirect foreign ownership and control of Russian television broadcasters and such amendments or law were to be applied retroactively, CTC Media could be obliged to restructure its ownership structure so that it complies with such interpretation or new requirements, including by divesting a controlling stake in our networks and our owned-and-operated stations. If CTC Media were required to restructure its ownership structure in accordance with such new requirements and failed to do so in a timely manner, Russian governmental authorities could suspend or revoke broadcasting licenses and permits held by our networks and our owned-and-operated stations.

Increasing demand for popular Russian content, as well as competition for popular foreign programming, may result in continued material increases in our programming costs, which could materially adversely affect our operating margins and results of operations.

Our ability to attract and retain viewers depends primarily on our success in offering programming that appeals to our target audiences. Russian viewer preferences have been changing in recent years, with increasing demand for programming produced in Russia. There is currently a limited supply of Russian-produced programming and strong competition among the Russian networks and channels for such programming.

As the television advertising market in Russia has grown, competition for western, as well as Russian-produced, programming has resulted in a general increase in programming costs. Therefore, we believe that our programming costs will continue to increase in absolute terms and possibly also relative to our advertising revenues. During the past several years, we have been able to collaborate with some of our competitors, including Channel One, in licensing programming from major studios based in the United States, as well as Russian producers and distributors, on a shared basis. Under these sharing arrangements, the cost of these programming rights to us is substantially reduced. If, in the future, high-quality television programming were unavailable on a shared basis, the costs to us of obtaining licenses for this programming could increase significantly or we may be unable to obtain access to such programming.

If we are unable to secure a steady supply of high-quality programming, or if we fail to anticipate, identify or react appropriately to changes in Russian viewer tastes by providing appropriate programming, our audience share could be negatively affected, which would adversely affect our advertising revenues. Moreover, if any of the programming we license or commission does not achieve the audience share levels we anticipate, we may be required to write-off all or a portion of the carrying cost of such programming, or we could be forced to broadcast more expensive programming to maintain audience share, both of which could have a material adverse impact on our results of operations.

A change in the method of measuring television audiences could reduce our audience share and ratings.

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The system of audience measurement has been evolving in Russia as the advertising market has matured and in response to changing Russian demographics. Most recently, TNS Gallup Media changed the composition and weighting of its panel of measured cities, effective January 1, 2006, based upon 2002 Russian census data that indicated shifting demographic patterns, most notably the movement of populations from rural and smaller urban areas to larger urban areas and a decrease in the percentage of children in the total population. As a result of these changes, 12 additional cities were added to the panel of 40 cities with populations exceeding 100,000 where audiences were previously measured, and the weight of Moscow in the universe of measured cities increased from approximately 12.8% to 15.5%. The overall impact of the change in the measuring methods has generally resulted in slightly lower audience shares for our networks than would have been achieved under the earlier measurement methods. This can be explained, in part, by the decrease in children in the weighting, a demographic where CTC has traditionally been particularly strong, and an increase in the weight of Moscow in the universe of measured cities, where CTC’s ratings are typically lower than in many other Russian cities as a result of greater local competition. When changes to the system of audience measurement occur, we attempt to take steps in respect of our programming and distribution to counteract the effects of such changes. We cannot assure you that these steps or any further changes in the measurement systems would not result in a decrease in our audience share, which could result in a material decrease in our advertising revenues.

The loss of licenses, or the failure to comply with the terms of licenses, could result in the loss of audience share.

All broadcast television stations in Russia are required to have broadcast and other operating licenses, which generally have renewable terms of five years. Only a limited number of such licenses are available in each locality. In addition, Russian law could be interpreted as requiring cable television operators to have broadcast and other operating licenses for each of the channels or networks they transmit on their cable systems. Most of the independent cable television operators that currently carry our networks do not possess such licenses. The issuance of a license, as well as the terms and conditions of any license, are often subject to the exercise of broad discretion by governmental authorities.

The broadcast licenses of our affiliate stations also contain various restrictions and obligations, including requirements with respect to the minimum amount of Russian-produced programming (usually requiring at least 50%) as well as locally-produced programming. Our affiliates have not always been in full compliance with all requirements of their licenses or obtained all the licenses necessary for broadcasting. If the terms of a license are not fulfilled, or if a television station violates applicable Russian legislation or regulations, the license may be suspended or terminated (which decision may be appealed in court). If an affiliate were to broadcast without all the necessary licenses, broadcasting may be terminated and fines could be imposed.

The loss of an existing broadcast license, or the failure to obtain a broadcast license in a new market, could reduce or limit the coverage of our networks and result in a loss of audience share and a fall in ratings, which could materially adversely affect our advertising revenues and business.

The inability of our affiliates to renew existing licenses upon expiration of their terms could also result in the loss of audience share.

The renewal of existing licenses is often subject to the exercise of broad discretion by governmental authorities. In addition, the Russian governmental reorganization during 2004 resulted in extensive delays in the renewal of expiring and expired licenses for all broadcasters. Of our more than 350 affiliates at the CTC Network (including cable television operators) as of September 30, 2007, 195, including all our owned-and-operated stations and unmanned repeater transmitters, operate pursuant to broadcast licenses. Of these, the licenses of approximately 9% had expired and are being extended or modified as of September 30, 2007, and approximately 12% will expire by the end of 2007 including the ones that expired as of September 30, 2007. Of our more than 220 affiliates at the Domashny Network (including cable television operators) as of September 30, 2007, 45, including our owned-and-operated stations and unmanned repeater transmitters, operate pursuant to broadcast licenses. Of these, the licenses of two independent affiliates had expired and were being renewed as of September 30, 2007, and an additional one license expires before the end of 2007.

The inability to renew an existing broadcast license, particularly in a significant market, could reduce or limit the coverage of our networks and result in a loss of audience share and a fall in ratings, which could materially adversely affect our advertising revenues and business.

The loss of independent affiliates could result in a loss of audience share and a fall in ratings.

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We seek to enter into formal agreements with our independent affiliate stations that govern various aspects of the broadcast of our network programming. These agreements generally provide each party with the right to terminate the agreement on 60-days’ notice without penalty. In certain instances, particularly in smaller cities and towns and with local cable networks, our arrangements are governed by letters of understanding that provide us with only limited recourse in the event of a disagreement. We do not pay fees to any of our independent affiliates in return for broadcasting our networks, although we understand that other networks in Russia have done so in some instances. If an independent affiliate in a larger market, particularly in those cities where audiences are measured and in which we do not own and operate a station, were to terminate its agreement with us or to lose its ability to broadcast our signal, this could result in a decrease in our audience share.

We rely on third parties for the production of original Russian programming, and our business could be adversely affected if we are unable to continue such relationships on acceptable terms.

We have no in-house capability to produce full-length original programming and therefore rely on third-party production houses to produce our original programs. If we are unable to continue our close working relationships with the production houses we use or to develop new relationships, our ability to air premium new Russian content may be impeded, which would likely result in a loss of audience share and therefore a reduction in our share of the television advertising market.

We rely on third parties to provide us with re-transmission capabilities in certain locations, and our business would be adversely affected if such parties terminated or adversely changed the terms of those relationships.

In certain locations, we depend on cable operators or other third parties to carry our signal. In Moscow, television signals are transmitted from a central tower to roof antennas located on buildings throughout the city, and then amplified for retransmission within the buildings. The original system, which was introduced in the 1960’s, carried only six VHF channels. Mostelecom, the local provider, upgraded a number of roof antenna systems from 1997 to 2004 to add capacity for a limited number of additional channels. We collaborated with Mostelecom in this project, paying an amount per additional household connected, in order to help ensure that our CTC Network has allocated access on Mostelecom’s systems where capacity was increased. Both CTC and Domashny are currently carried on these systems where capacity was increased. Unlike the state-controlled national channels, however, we currently have no legal or contractual guarantee that Mostelecom will continue to carry our signals. In June 2007, Mostelecom approached us to discuss securing our right to continue to broadcast over connections added subsequent to the project ending in 2004 by paying a one-time “connection fee” per household.  We are still verifying the existence of these connected households and negotiating with Mostelecom to agree on the terms and the extent to which our CTC and Domashny stations in Moscow would benefit from securing the right to broadcast over these new connections. A similar technical system is in place in St. Petersburg, operated by the local provider; there, too, we currently have no binding contractual right of access to the system.

In April 2007, the Russian Ministry of Telecommunications requested evidence of the legal basis pursuant to which some cable television operators, including those carrying the signals of CTC and Domashny, carry certain broadcasters’ signals over their systems. As a result of this request, some of our cable television operators, including Mostelecom which carries our CTC and Domashny signals in Moscow, indicated that they might be required to begin charging us transmission fees for carrying our signals on their networks. We and representatives of other Russian broadcasters met with the Russian Ministry of Telecommunications in the second quarter of 2007 to understand the ramifications of this inquiry. It was agreed that the broadcasters and cable television operators should try to resolve this issue independently, without involvement of the Russian Ministry of Telecommunication, by the end of 2007. To date, no such resolution has been reached.

We may not be able to compete successfully against other television channels and networks that may have broader coverage, greater name recognition, larger market share, wider programming content or access to more funding than we do, or with newer niche channels or pay television services offering competitive programming formats.

The Russian television broadcasting business is highly competitive. Both CTC and Domashny compete for audience share with other national television networks and channels and with local stations, as well as with niche broadcasters. We compete on the basis of both the actual and anticipated size of our audiences for specific time slots, as well as the demographic characteristics of our viewers.

On a national level, CTC competes directly with other national broadcast networks and channels, including Channel One, Rossiya and NTV, as well as with the smaller networks REN-TV and TNT. The Domashny Network competes for

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advertising revenues primarily with other smaller channels such as DTV, MTV, TV-3 and TVC, although it also competes with the national broadcast networks and channels for viewers within its target demographic group. On a local level, our owned-and-operated stations compete with other stations for local advertising. We also compete to a limited extent with pay television and on-demand services and other advertising media.

Channel One and Rossiya were established as state television channels during the Soviet period and they remain under Russian state control. As a result, we understand that these channels receive state benefits not generally available to private companies, including free signal transmission (in the case of Channel One) and direct state budget subsidies (in the case of Rossiya) and preferences in licensing. Moreover, nearly every viewing household in Russia can receive the broadcast signals of Channel One and Rossiya, while only a more limited viewing audience can currently receive our network signals. The much broader coverage and name recognition of Channel One and Rossiya, coupled with programming geared toward a broader demographic group, help them to attract large audience shares. NTV, which is indirectly controlled by the state through Gazprom, the state-controlled natural gas and oil company, also has a broader coverage than CTC and Domashny, and we believe also benefits from free signal transmission. Channel One had an average audience share of 20.3% during the nine months ended September 30, 2007, while Rossiya’s was 17.5% and NTV’s was 13.7%. During the same period, CTC’s average audience share was 9.0%.  We believe that such strong audience shares may give these broadcasters added leverage in negotiations with advertisers, advertising agencies and sales houses.

As we focus on entertainment programming, we are unable to compete with other broadcasters for audiences for news and sporting programs, some of which have among the highest audience shares and ratings in their time slots.

In addition to competing with other free-to-air broadcasters, we compete with pay television services that offer multiple channels to subscribers for a regular subscription fee, and that typically do not generate a significant portion of their revenues from advertising. On a relative basis, the pay television market in Russia is smaller than in the United States and Western European countries. In other countries, such as the United States, growth in pay television services has often resulted in a fragmentation of the market and a corresponding decrease in the audience share of large national networks and channels. Audience share for Russian pay television is, however, increasing. If pay television services continue to grow their customer base in Russia, our audience shares and ratings could be negatively affected, which would adversely affect our advertising revenues.

We have substantial future programming commitments that we may not be able to vary in response to a decline in advertising revenues, and as a result could experience material reductions in operating margins.

Programming represents our most significant expense, and at any given time we generally have substantial fixed commitments for the succeeding two to three years. For example, as of September 30, 2007 we had contractual commitments for the acquisition of approximately $35.1 million in programming rights through the end of 2007 and an additional $47.9 million in 2008-2009. Given the size of these commitments at any time, a reduction in our advertising revenues could adversely affect our operating margins and results of operations. We would have only limited ability to reduce our costs in the short-run in response to such developments.

Our relationships with the co-owners of our television stations may limit our ability to implement our business plans and strategy.

Sixteen of our 29 owned-and-operated stations that are currently broadcasting our networks’ signals are 100% owned by CTC Media. Other investors own between less than 1% and 50% of each of the remaining 13 owned-and-operated stations. In some cases, we depend to a significant extent on our local partners for their familiarity with the local business environment and public authorities and we understand that some of our local partners are also minority shareholders in the local Video International subsidiary that sells local advertising for our owned-and-operated stations. Moreover, we may in the future similarly rely on joint-owners as we acquire additional stations. Any significant disruption in our relationship with these parties could make it more difficult for us to operate our existing stations.

Russian law and some of the agreements governing these stations grant protective rights to our co-owners that enable them to block certain significant corporate actions. Under Russian company law, significant corporate decisions, such as declaring and paying dividends and entering into substantial transactions, require the consent of the holders of two-thirds or three-quarters of the voting interests of the company, depending on the subject matter and the legal structure of the company. In addition, unanimous shareholder approval is required in limited instances, which could further affect our control over certain actions. For example, approval of a joint stock company’s initial charter and reorganization of a joint stock company into a non-commercial partnership require 100% approval of shareholders and, in the case of a limited liability company,

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increases in charter capital, amendments to a limited liability company’s charter, and liquidation, among other actions, require 100% approval of the holders of participation interests.

As a result, we are often required to obtain the consent of our co-owners when making significant corporate decisions. Although we are not aware of any specific transaction in which we failed to obtain the requisite approval of the co-owners of our stations, due to the formalistic nature of Russian law and the large number of corporate actions that are taken annually by our co-owned stations, we believe it is likely that, from time to time, not all necessary minority shareholder consents have been obtained. As a result, we cannot guarantee that co-owners of our stations will not bring claims against us for failure to obtain these necessary consents, which, if successful, could result in the transaction in question being voided. Moreover, even if not technically required by law or contract, we generally prefer to obtain the consent and support of our co-owners before undertaking significant corporate actions. If this consent cannot be obtained, we may decide to forego a transaction that is commercially favorable to us in an effort to preserve goodwill with our co-owners.

A systems failure could prevent us from transmitting our network signal and lead to a loss of viewers, damage to our reputation and a reduction in our advertising revenues.

The CTC and Domashny Network signals originate at our Moscow center and are uplinked to two separate satellite systems, plus one backup system, that transmit our network signals to our affiliate stations and unmanned repeater transmitters. Despite our back-up systems, from time to time we experience signal failures. Most recently, we experienced a 30-minute signal outage on June 3, 2007 that affected both our CTC and Domashny networks on a nationwide basis. Prolonged or repeated disruptions in the CTC or Domashny signal could lead to a loss of viewers, damage to our reputation and a reduction in our advertising revenues. We do not carry business interruption insurance to protect us in the event of a catastrophe or termination of CTC’s or Domashny’s ability to transmit their signals, even though such an event could have a significant negative impact on our business.

One of our principal stockholders owns a controlling interest in a competing Russian television network, and its interests may conflict with ours.

One of our principal stockholders, MTG Broadcasting AB, an affiliate of the publicly listed Modern Times Group MTG AB (‘‘MTG’’), owns 100% of ZAO TV Darial (‘‘DTV’’), a Russian television network with which we compete. Hans-Holger Albrecht, the president and CEO of MTG, is a Co-Chairman of our board and Maria Brunell, the former chief financial officer of MTG and current chief executive officer of one of MTG’s principal stockholders, is also one of our directors. We understand that Mr. Albrecht and Kaj Gradevik, another member of our board of directors, serve on the board of DTV.

DTV broadcasts a mix of entertainment programming that is similar to the programming on CTC. Its audience share for 2006 and the nine months ended September 30, 2007 was 1.7% and 1.9%, respectively. We have a non-competition agreement with MTG pursuant to which it has agreed that it will not compete with us in the area of free-to-air television in Russia and certain other CIS countries, other than through DTV, and agreeing to certain restrictions on DTV’s activities in Russia. Nevertheless, MTG’s ownership of one of our competitors may result in conflicts of interest among MTG, us and our other stockholders in circumstances in which our interests are not aligned. We can provide no assurance that any such conflicts will be resolved in our favor.

Loss of key personnel could affect our growth and future success.

We believe that our growth and our future success will depend in large part upon our ability to continue to retain our Chief Executive Officer and to attract and retain other highly skilled senior management, finance and marketing personnel. The competition for qualified personnel in Russia who are familiar with the television industry in Russia and/or who are knowledgeable about US accounting and legal practices is intense. Nilesh Lakhani has announced that he will be stepping down as our Chief Financial Officer (CFO) to pursue other professional opportunities. Mr. Lakhani will remain our CFO until a successor is named, or through the end of 2007. We are currently engaged in an executive search to secure a successor. Although we have identified, and are in advanced discussions with, a replacement for our current CFO, we can provide no assurance that we will have retained a permanent replacement for him by December 31, 2007. In addition to retaining a new CFO, we may encounter particular difficulty in hiring and/or retaining appropriate financial staff in Russia needed to enable us to comply with the internal controls requirements under the Sarbanes-Oxley Act and related regulations. We cannot assure you that we will be able to hire and retain qualified personnel on reasonable terms or at all.

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We do not carry all of the insurance coverage customary in many countries for a business of our size and nature, and as a result could experience substantial loss or disruption.

The insurance industry is not yet well developed in Russia, and many forms of insurance protection common in other countries are not yet available in Russia on comparable terms, including coverage for business interruption. At present, we have no coverage for business interruption or loss of key management personnel. We do not maintain separate funds or otherwise set aside reserves for these types of losses. Any such loss may cause substantial disruption and may have a material adverse effect on our business, results of operations and financial condition.

Decreases in the value of the Russian ruble compared with the US dollar could materially adversely affect our results of operations.

The value of the Russian ruble has risen generally against the US dollar in recent years. During the nine month period ended September 30, 2007, the ruble appreciated approximately 5.8% against the US dollar. However, the ruble has in the past declined substantially against the US dollar, including a significant drop as a result of the economic crisis of 1998.

Prior to 2006, our principal source of revenue (contracts for the placement of advertising) was denominated primarily in US dollars. Because our expenses were also primarily denominated in US dollars, the impact on our results of the ruble depreciation was insignificant. Beginning in January 2006, substantially all new advertising contracts between Video International and advertisers are ruble-denominated with the result that substantially all of our advertising revenues in 2007 are denominated in rubles as our longer-term advertising contracts denominated in US dollars expire and are replaced.

In response, we shifted a substantial majority of our operating expenses from dollars to rubles. Nevertheless, we can give no assurance that we are adequately protected from the impact of currency fluctuations. Moreover, given that our reporting currency is the US dollar, rubles held in banks and other ruble-denominated assets and liabilities could fluctuate in line with any change in the value of the ruble.

As a result of these factors, any decline in the value of the Russian ruble against the US dollar could materially adversely affect our results of operations. We do not currently undertake any hedging transactions to offset any decline in the value of our ruble cash or non-cash assets.

Risks relating to the political environment in Russia

Businesses in Russia, especially media companies, can be subject to politically motivated actions, which could materially adversely affect our operations.

The Russian government has taken various actions in recent years against business people and companies operating in Russia that have been perceived as having been politically motivated, including actions for technical violations of law or violations of laws that have been applied retroactively, including violations of tax laws. These actions have on occasion resulted in significant fluctuations in the market prices of the securities of businesses operating in Russia, a weakening of investor confidence in Russia and doubts about the progress of market and political reforms in Russia.

Media businesses can be particularly vulnerable to politically motivated actions, in particular ahead of national elections such as the Duma and the presidential election scheduled for December 2007 and March 2008, respectively. NTV, TV-6 and TVS have all experienced what some would characterize as politically motivated actions, including efforts to effect changes of control. As a result of these actions, TV-6, which became TVS, is no longer broadcasting. We believe that our focus on entertainment, and the fact that we broadcast entertainment and celebrity news, but do not offer ‘‘hard’’ news, commentary or analysis on our national networks, could lessen the risk of provoking politically motivated actions. However, we do not restrict the ability of our independent affiliates to broadcast local news in local broadcasting windows, and approximately 19% of our independent affiliates, as well as one of our owned-and-operated stations that carry the CTC Network, broadcast local political news, generally with the approval of our local partners and the local authorities. Any politically motivated action against us, our networks, a group of any of our independent affiliates, or any of our principal stockholders, including Alfa Group, which is active in many industries in Russia, could materially adversely affect our operations.

Broader political developments could adversely affect our business operations and financial condition.

The current Russian presidential administration has taken a number of steps to expand its authority, including by further centralizing power in a number of areas and removing decision making authority from the federal regions. The ultimate extent or impact of these changes is uncertain. These and future changes in the government, major policy shifts or lack of

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consensus between various branches of the government and powerful economic groups could disrupt or reverse economic and regulatory reforms. In addition, the Russian presidential elections scheduled for 2008 could bring more volatility to the market regardless of its outcome. Any disruption or reversal of reform policies could lead to political or governmental instability or the occurrence of conflicts among powerful economic groups, which could have a material adverse effect on our business, financial condition, results of operations and prospects and the value of our common stock.

It has been widely reported in the Russian and foreign media that the Russian government is exerting pressure on the so-called ‘‘oligarchs’’ to cause them to divest their commercial interests in certain areas of economic activity. The media have also reported that the government has exerted significant influence on companies owned or controlled by the oligarchs through tax inspections, management changes, threats of and actual prosecution of management and key officials, and other means. Real and perceived pressure on the oligarchs and their businesses has seriously affected the economic activities of these enterprises and their management. If the current or future governments in Russia were to apply significant pressure on Alfa Group and its affiliated companies, it could have serious adverse effects on our operations and financial results. Such effects could include, but would not be limited to, the inability of the board of directors to act independently from external pressure and the distraction of our management from our day-to-day operations.

Civil conflicts could adversely affect the value of investments in Russia, which could result in a decline in the value of our common stock.

Ethnic, religious, historical and other divisions have, on occasion, given rise to tensions and, in certain cases, military conflict, such as the continuing conflict in Chechnya, which has brought normal economic activity within Chechnya to a halt and disrupted the economies of neighboring regions. The further intensification of violence, including terrorist activities, or its continued spread to other parts of Russia, could have significant political consequences, including the imposition of a state of emergency in some or all of Russia. Moreover, any terrorist attacks and the resulting heightened security measures may cause disruptions to domestic commerce, and could materially adversely affect our business and the value of our common stock.

Risks relating to the economic environment in Russia

Emerging markets such as Russia are subject to greater risks than more developed markets and financial turmoil in any emerging market could disrupt our business, as well as cause the price of our common stock to decline.

Generally, investment in emerging markets is only suitable for sophisticated investors who fully appreciate the significance of the risks involved in, and are familiar with, investing in such markets. Emerging markets such as Russia are also subject to rapid change, and financial turmoil in any emerging market country tends to adversely affect prices of the stock of companies operating in other emerging market countries as investors move their money to more stable, developed markets. As has happened in the past, financial problems or an increase in the perceived risks associated with investing in emerging economies could dampen foreign investment in Russia and adversely affect the Russian economy.

Economic instability in Russia could reduce spending on television advertising, which could adversely affect our results of operations.

Though recent increases in global commodity prices have resulted in increases in disposable income and consumer spending in Russia, the Russian economy has been subject to abrupt downturns, including the severe crisis of 1998.

Many of the largest advertisers in the Russian market, including many of the largest advertisers on CTC and Domashny, are multinational companies that sell consumer products on a worldwide basis. If Russia experiences significant economic or political instability or uncertainty, such as that which occurred during the 1998 financial crisis, these companies may choose to reduce their advertising spending in Russia. If overall spending by these companies in the Russian television advertising market falls substantially, our advertising revenues may be significantly reduced, materially adversely affecting our results of operations.

Russia’s inexperience with a market economy also poses numerous risks. It is difficult for us or our business partners to gauge the creditworthiness of some of our advertisers and business partners, as there are no reliable mechanisms, such as credit reports or credit databases, for evaluating their financial condition. Consequently, we face the risk that some of our advertisers will fail to pay us or that they or other service providers, such as production houses, will fail to comply with the terms of their agreements with us, which could adversely affect our results of operations.

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Recent trends in the Russian economy—such as the increase in the gross domestic product, a relatively stable ruble and a reduced rate of inflation—may not continue or may be abruptly reversed. Additionally, because Russia produces and exports large quantities of natural gas and oil, the Russian economy is especially vulnerable to fluctuations in the price of these commodities on the world market. A strengthening of the ruble in real terms relative to the US dollar, changes in monetary policy, inflation, a decline in natural gas and oil prices or other factors could adversely affect Russia’s economy and our business in the future. Any such market downturn or economic slowdown could also severely limit our and our customers’ access to capital, also adversely affecting our and our customers’ businesses in the future.

The Russian banking system remains underdeveloped, and another banking crisis could place severe liquidity constraints on our business.

Russia’s banking and other financial systems are less developed and regulated than those of many other developed countries, and Russian legislation relating to banks and bank accounts is subject to varying interpretations and inconsistent application. Many Russian banks do not meet international banking standards, and the transparency of the Russian banking sector still lags far behind internationally accepted norms. Furthermore, Russian bank deposits made by corporate entities generally are not insured.

Recently, there has been a rapid increase in lending by Russian banks, which many believe has been accompanied by a deterioration in the credit quality of borrowers. In addition, a robust domestic corporate debt market is leading to Russian banks increasingly holding large amounts of Russian corporate ruble bonds in their portfolios. Weaknesses in the Russian banking sector, combined with the relatively high risk credit portfolios of Russian banks, may result in the banking sector being more susceptible to market downturns or economic slowdowns, including due to Russian corporate defaults. If a banking crisis were to occur, companies operating in Russia would be subject to severe liquidity constraints due to the limited supply of domestic savings and the withdrawal of foreign funding sources that would occur during such a crisis.

There are currently a limited number of creditworthy Russian banks, most of which are located in Moscow and the largest of which are state-owned. Of our $248.5 million cash balance as of September 30, 2007, we held cash with a dollar-equivalent value of $159.2 million in Russian banks (such as Alfa Bank, which is an affiliate of one of our principal stockholders), including subsidiaries of foreign banks. Of that balance, we held $19.5 million in dollar-denominated accounts and rubles with a dollar-equivalent value of $139.7 million in ruble-denominated accounts. There are few, if any, safe ruble-denominated instruments in which we may invest our excess ruble cash. Another banking crisis or the bankruptcy or insolvency of the banks from which we receive or with which we hold our funds could result in the loss of our deposits or affect our ability to complete banking transactions in Russia, which could have a material adverse effect on our business, financial conditions and results of operations.

Risks relating to Russian legislation and the Russian legal system

Weaknesses in the Russian legal system create an uncertain environment for investment and business activity and could have a material adverse effect on our business and the value of our common stock.

Russia is still developing the legal framework required to support a market economy, and its legal system is largely characterized by:

·inconsistencies between and among laws, presidential decrees and governmental, ministerial and local regulations, orders, decisions, resolutions and other acts;

·substantial gaps in the regulatory structure resulting from the delay in adoption or absence of implementing regulations;

·limited judicial and administrative guidance on interpreting Russian legislation;

·the relative inexperience of judges and courts in interpreting recent commercial legislation;

·a lack of judicial independence from political, social and commercial forces;

·under-funding and under-staffing of the court system;

·a high degree of discretion on the part of the judiciary and governmental authorities; and

·poorly developed bankruptcy procedures that are subject to abuse.

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As is true of civil law systems generally, judicial precedents generally have no binding effect on subsequent decisions. Not all Russian legislation and court decisions are readily available to the public or organized in a manner that facilitates understanding. The Russian judicial system can be slow, and enforcement of court orders can in practice be very difficult. All of these factors make judicial decisions in Russia difficult to predict and effective redress uncertain. Additionally, court claims and governmental prosecutions are sometimes used in furtherance of political aims.

In addition, several key Russian laws, including the amended Communications Law and law on advertising, have only recently become effective. The untested nature of much of recent Russian legislation, the lack of consensus about the scope, content and pace of economic and political reform and the rapid evolution of the Russian legal system in ways that may not always coincide with market developments may place the enforceability and underlying constitutionality of laws in doubt and result in ambiguities, inconsistencies and anomalies in the Russian legal system. Any of these weaknesses could affect our ability to enforce our rights under our licenses and under our contracts, or to defend ourselves against claims by others. Furthermore, we cannot assure you that regulators, judicial authorities or third parties will not challenge our compliance with applicable laws, decrees and regulations.

These uncertainties also extend to property rights. Although legislation has been enacted to protect private property against expropriation and nationalization, due to the lack of experience in enforcing these provisions and due to political factors, these protections may not be enforced in the event of an attempted expropriation or nationalization. Expropriation or nationalization of any of our entities or their assets, potentially without adequate compensation, would have a material adverse effect on our business, financial condition, results of operations and prospects.

Unlawful, selective or arbitrary government action may have an adverse effect on our business and the value of our common stock.

Government authorities have a high degree of discretion in Russia and have at times exercised their discretion selectively or arbitrarily, without hearing or prior notice, and sometimes in a manner that is contrary to law or influenced by political or commercial considerations. The government also has the power, in certain circumstances, to interfere with the performance of, nullify or terminate contracts. Unlawful, selective or arbitrary actions have included withdrawal of licenses, sudden and unexpected tax audits, criminal prosecutions and civil actions. Federal and local government entities have also used common defects in documentation as pretexts for court claims and other demands to invalidate and/or to void transactions, apparently for political purposes. We cannot assure you that regulators, judicial authorities or third parties will not challenge our compliance (including that of our subsidiaries) with applicable laws, decrees and regulations in Russia. Unlawful or arbitrary government action could have a material adverse effect on our business and on the value of our common stock.

If the Russian Federal Anti-monopoly Service were to conclude that we acquired or created a new company in contravention of anti-monopoly legislation, it could impose administrative sanctions and require the divestiture of this company or other assets.

Our business has grown in part through the acquisition and establishment of companies, many of which required the prior approval of or subsequent notification to the Russian Federal Anti-monopoly Service or its predecessor agencies. In part, relevant legislation restricts the acquisition or establishment of companies by groups of companies or individuals acting in concert without this approval or notification. This legislation is vague in parts and subject to varying interpretations. If the Federal Anti-monopoly Service were to conclude that an acquisition or establishment of a new company was effected in contravention of applicable legislation and competition has been reduced as a result, it could impose administrative sanctions and require the divestiture of this company or other assets, adversely affecting our business strategy and our results of operations.

Russian law requires the approval of certain transactions by the minority shareholders of our subsidiaries, including many of our own-and-operated television stations, and failure to receive this approval could adversely affect our business and results of operations.

We own less than 100% of many of our owned-and-operated stations. Under Russian law, certain transactions defined as ‘‘interested party transactions’’ require approval by disinterested members of the board of directors or disinterested shareholders of the companies involved. Our owned-and-operated stations that have other shareholders engage in numerous transactions with us that require interested party transaction approvals in accordance with Russian law. These transactions have not always been properly approved, and therefore may be contested by minority shareholders. In the event that these other shareholders were successfully to contest past interested party transactions, or prevent the approval of such transactions

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in the future, our flexibility in operating these television stations could be limited and our results of operations could be adversely affected.

Certain transactions between members of our consolidated corporate group may constitute interested party transactions under Russian law even when the companies involved are wholly owned by us. Although we generally endeavor to obtain all corporate approvals required under Russian law to consummate these transactions, we have not always applied special approval procedures in connection with our consummation of transactions with or between our subsidiaries. In the event that a claim is filed in relation to certain transactions with or between our subsidiaries, such transactions are found to have been interested party transactions, and we are found to have failed to obtain the appropriate approvals, such transactions may be declared invalid. The unwinding of any transactions concluded with or between our subsidiaries may have a negative impact on our business and results of operations.

If one of our principal subsidiaries is forced into liquidation due to negative net assets, our results of operations could suffer.

If at the end of any fiscal year a Russian company’s net assets as determined in accordance with Russian accounting regulations are below the minimum amount of charter capital required by Russian law, the company is required to convene a shareholders meeting to adopt a decision to liquidate. If it fails to do so within a ‘‘reasonable period,’’ the company’s creditors may request early termination or acceleration of the company’s obligations to them, as well as damages, and governmental authorities may seek to cause the involuntary liquidation of the company. Under an earlier version of this law, the company’s shareholders could also bring an action to force the liquidation of the company. It is unclear under Russian law whether an historical violation of this requirement may be retroactively cured, even if a company later comes into compliance with the requirement. On occasion, Russian courts have ordered the involuntary liquidation of a company for having negative net assets even if the company has continued to fulfill its obligations and had net assets in excess of the minimum amount at the time of liquidation.

At December 31, 2003 and at prior dates, CTC Network, our most significant subsidiary, had net assets below the minimum charter capital required by law, as reported in its Russian statutory accounting statements. At December 31, 2006, ten of our subsidiaries failed to meet the minimum net assets requirements. In 2006, approximately 8% of our consolidated revenues were attributable to these subsidiaries. None of these companies has applied for voluntary liquidation. We have not taken any steps to remedy the negative net asset value of these subsidiaries or included it as a contingency in our financial statements because we believe that, so long as these subsidiaries continue to fulfill their obligations, the risk of their forced liquidation is remote.

There has been no judicial or other official interpretation of what constitutes a ‘‘reasonable period’’ within which a company must act to liquidate. If any of our subsidiaries were to be liquidated involuntarily, we would be forced to reorganize the operations we currently conduct through that subsidiary. The liquidation of any of the subsidiaries within our Television Station Groups would result in the termination of their existing broadcast and other licenses, and we cannot assure you that we would be able to secure new licenses needed for these stations to continue to operate. Accordingly, any liquidation could have a material adverse effect on our business.

Shareholder liability under Russian legislation could cause us to become liable for the obligations of our subsidiaries.

The Russian Civil Code, the Law on Joint Stock Companies and the Law on Limited Liability Companies generally provide that shareholders in a Russian joint stock company or limited liability company are not liable for the obligations of the company and bear only the risk of loss of their investment. This may not be the case, however, when one person (an ‘‘effective parent’’) is capable of determining decisions made by another (an ‘‘effective subsidiary’’). The effective parent bears joint and several responsibility for transactions concluded by the effective subsidiary in carrying out these decisions if:

·this decision-making capability is provided for in the charter of the effective subsidiary or in a contract between the companies; and

·the effective parent gives obligatory directions to the effective subsidiary.

In addition, an effective parent is secondarily liable for an effective subsidiary’s debts if an effective subsidiary becomes insolvent or bankrupt as a result of the action or inaction of an effective parent. This is the case no matter how the effective parent’s capability to determine decisions of the effective subsidiary arises. For example, this liability could arise through ownership of voting securities or by contract. In these instances, other shareholders of the effective subsidiary may claim

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compensation for the effective subsidiary’s losses from the effective parent that caused the effective subsidiary to act or fail to act, knowing that such action or inaction would result in losses. Accordingly, in our position as an effective parent, we could be liable in some cases for the debts of our effective subsidiaries. Although the total indebtedness of our effective subsidiaries is currently immaterial, it is possible that we could face material liability in this regard in the future, which could materially adversely affect our business and our results of operations.

Changes in the Russian tax system or arbitrary or unforeseen application of existing rules could materially adversely affect our financial condition.

Our tax burden may become greater than the estimated amount that we have expensed to date and paid or accrued on our balance sheets. Russian tax authorities have often been arbitrary and aggressive in their interpretation of tax laws and their many ambiguities, as well as in their enforcement and collection activities. Many companies are often forced to negotiate their tax bills with tax inspectors who may demand higher taxes than applicable law appears to provide. Any additional tax liability, as well as any unforeseen changes in Russian tax laws, could have a material adverse effect on our future results of operations or cash flows in a particular period. We have at times accrued substantial amounts for contingent tax liabilities, a substantial portion of which accruals we have reversed as contingencies have been resolved favorably or changes in circumstances have occurred. The amounts currently accrued for tax contingencies may not be sufficient to meet any liability we may ultimately face. We have also identified tax contingencies of up to approximately $4.2 million for which we have not provided an accrual. Such unaccrued tax contingencies could materialize and require us to pay additional amounts of tax.

Under Russian accounting and tax principles, financial statements of Russian companies are not consolidated for tax purposes. As a result, each Russian-registered entity in our group pays its own Russian taxes and we cannot offset the profits or losses in any single entity against the profits and losses of any other entity. Consequently, our overall effective tax rate may increase as we expand our operations, unless we are able to implement an effective corporate structure that minimizes the effect of these Russian accounting and tax norms.

The Russian tax system imposes additional burdens and costs on our operations in Russia, and complicates our tax planning and related business decisions. The uncertainty involved potentially exposes us to significant fines and penalties and enforcement measures despite our best efforts at compliance, and could result in a greater than expected tax burden on our subsidiaries. These factors raise the risk of a sudden imposition of arbitrary or onerous taxes on our operations in Russia. This could adversely affect our business and the value of our common stock.

Any US or other foreign judgments you may obtain against us may be difficult to enforce against us in Russia.

Although CTC Media is a Delaware corporation, subject to suit in US federal and other courts, we have no operations in the United States, many of our assets are located in Russia, and most of our directors and their assets are located outside the United States. Although arbitration awards are generally enforceable in Russia, judgments obtained in the United States or in other foreign courts, including those with respect to US federal securities law claims, may not be enforceable in Russia. There is no mutual recognition treaty between the United States and the Russian Federation, and no Russian federal law provides for the recognition and enforcement of foreign court judgments. Therefore, it may be difficult meaningfully to enforce any US or other foreign court judgment obtained against our company, any of our operating subsidiaries or any of our directors in Russia.

Risks relating to our stock

The price of our common stock may be volatile.

Prior to June 1, 2006, there was no public trading market for our common stock. Moreover, as of October 15, 2007, approximately 30% of our outstanding common stock was held by parties other than our directors, executive officers and principal stockholders (holding 5% or more of our outstanding stock) and their respective affiliates. As a result, only a relatively small number of shares of our common stock are currently actively traded in the public market. The limited liquidity of our common stock may have a material adverse effect on the price of our common stock.

The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may adversely affect the trading price of our common stock.

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In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our profitability and reputation.

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock relies in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of our stock could decline if one or more equity research analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

Insiders continue to have substantial control over us and could delay or prevent a change in corporate control.

As of October 15, 2007, our directors, executive officers and principal stockholders (holding 5% or more of our outstanding stock), and their respective affiliates, beneficially owned, in the aggregate, approximately 70% of our outstanding common stock. As a result, these stockholders, if acting together, may have the ability to determine the outcome of matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these persons, acting together, may have the ability to control the management and affairs of our company. In particular, our principal stockholders have entered into a voting arrangement that determines the composition of our board of directors.

Anti-takeover provisions in our charter documents and under Delaware law could prevent or delay change-of-control transactions.

Anti-takeover provisions of Delaware law and our charter documents may make a change in control of our company more difficult. For example:

·Stockholders’ meetings may only be called by one of the Co-Chairmen of our board of directors, our Chief Executive Officer or the majority of the board of directors.

·Our stockholders may not take action by written consent.

·We have a classified board of directors, which means that our directors serve for staggered three-year terms and only one-third of our directors are elected each year. This structure may make it more difficult for an acquirer to take control of our company, which may make our company a less desirable acquisition target.

Delaware law also prohibits a corporation from engaging in a business combination with any holder of 15% or more of its capital stock until the holder has held the stock for three years unless, among other possibilities, the board of directors approves the transaction. The board may use this provision to prevent changes in our management. Under applicable Delaware law, our board of directors may adopt additional anti-takeover measures in the future.

In addition, we are party to a stockholders’ agreement with our two largest stockholders pursuant to which each of these stockholders has agreed not to acquire additional shares of our capital stock to the extent that such acquisition would cause its beneficial ownership to exceed 50% of the voting power of our outstanding shares without making a tender offer for all of our outstanding shares in compliance with the tender offer rules under the Securities Exchange Act of 1934, unless it reaches this ownership level through the exercise of rights of first offer set forth in the stockholders’ agreement.

If there are substantial sales of our common stock in the market by our existing stockholders, our stock price could decline.

If our existing stockholders sell a large number of shares of our common stock or the public market perceives that existing stockholders might sell shares of common stock, the market price of our common stock could decline significantly. The holders of over 70% of our common stock have the right under specified circumstances to require us to register their shares for resale to the public or participate in a registration of shares by us.

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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

We registered shares of our common stock in connection with our IPO under the Securities Act. Our registration statement on Form S-1 (Reg No. 333-132228) in connection with our IPO was declared effective by the SEC on May 31, 2006. The offering commenced as of May 31, 2006 and has since terminated. Including shares sold pursuant to the exercise by the underwriters of their over-allotment option, 7,909,748 shares of our common stock were registered and sold in the IPO by us and an additional 19,270,580 shares of common stock were registered and sold by the selling stockholders named in the registration statement. All the shares were sold at a price to the public of $14.00 per share. The aggregate gross purchase price of the offering was $380.5 million.

The managing underwriters of the offering were Morgan Stanley & Co. Incorporated and Deutsche Bank Securities Inc. We and the selling stockholders paid the underwriters $19.6 million in underwriting discounts.

Of the $105.0 million of net IPO proceeds to us, we have used $22.0 million to repay short-term loans from Alfa Bank, $24.9 million for acquisition of television stations, $1.4 million for various IPO-related expenses, and $0.9 million for general corporate purposes.

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Item 6.Exhibits

Exhibit  Number	Description
31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a.)
31.2	Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a.)
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 USC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CTC MEDIA, INC.
By:	/s/ NILESH LAKHANI
	Nilesh Lakhani Chief Financial Officer
	Date: October 30, 2007
CTC MEDIA, INC.
By:	/s/ JOHN DOWDY
	John Dowdy Chief Accounting Officer
	Date: October 30, 2007

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EXHIBIT INDEX

Exhibit  Number	Description
31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a.)
31.2	Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a.)
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 USC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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