Quarterly report

Raw materials and the Issuer’s suppliers

Due to specific character of the Issuer’s core activity – rendering telecom services - raw materials are not used.

Suppliers accounting for 10% and more of all inventory holdings supplies in the last complete fiscal year and for the last completed reporting quarter:

Supplier	Location	Share in total volume of supplies in 2Q2007, %
LLC "SBSV-Klyuchavto Mitsubisci"	Krasnodar	11.1
LLC "Avatray"	Krasnodar	21.3
LLC "Computer systems"	Krasnodar	14.6

Changes in prices of main materials in the last complete fiscal year and for the last completed reporting quarter:

In 3Q2007 prices of cables increased by 26% over 3Q2006.

Share of import in supplies of materials and commodities for 3Q2007: none

The Issuer’s forecast related to accessibility of the specified sources in future:

Forecast related to accessibility of the specified material assets sources in future is estimated as favorable. Main sources of material and fixed assets are represented by reliable and long-term partners of the Issuer which production activity is focused on main clients – communication enterprises. Structure of material assets suppliers is not expected to change. Supply of imported products used by the Company in its activity exceeds the Issuer’s demand. Thus, the Issuer does not expect any difficulties in accessibility of the specified material assets sources in the nearest future.

Possible alternative sources:

Attraction of other suppliers of material assets on a competitive basis.

3. Issuer's Products (Works, Services) Sales Markets

General information on the Issuers sales markets:

Territory of the Southern federal district of the Russian Federation (except for Chechen Republic, Ingushetia and Dagestan).
"UTK" PJSC major markets are the following:
• Local and intra-zonal telephony market.

• Value added services (Internet) market.

• Broadband access market.
The major end-user groups of communication services rendered by "UTK" PJSC are the following:

• Households

• Corporate clients

• State-financed organizations

Potential factors that may negatively affect the issuer’s sales of its products (works and services):

The major trends in the telecommunications sector are the following:

• 
  active penetration of telecommunications technologies in all spheres of the society and growing demand for integrated on-line services of voice communication, data transmission and content
  
• 
  Active development of mobile telecom market
  
• 
  Active development of data transmission and Internet market
  
• 
  Simultaneous implementation of several governmental social programs
  

Taking into consideration these market development trends, "UTK" PJSC sees the following risks:

• 
  creation of an alternative infrastructure for providing convergent services;
  

- adverse impact of a regulator on the wholesale traffic price;

• 
  liberalization of the “last mile” access;
  
• 
  distribution of investment and organizational resources for participation in social programs while these resources are necessary for realization of commercial projects under conditions of stringent cost control.
  

Actions of the Company’s management in case of occurrence of adverse factors:

The Company sees the following ways to minimize the specified risks:

• 
  legal possibility to obtain license for provision of DLD and ILD services;
  
• 
  legal opportunity to obtain licenses and frequency permissions for provision of services on the basis of WiMax and WiFiMesh;
  
• 
  participation in partnership programs on providing convergent services;
  
• 
  creation of the added value on the basis of bundling of fixed-line services and multimedia services.
  

Thus, the conditions have been formed under which;

• 
  customer preferences migrate from fixed telephony to mobile communications (especially in the republics of the Southern federal district where solvent demand of the population is one of the lowest in the Russian Federation);
  
• 
  services of voice, data and content transmission are integrating;
  
• 
  non mutually exclusive concepts “mobile phone” and “home phone” are being differentiated;
  
• 
  market demands provide for the market players’ desire to broaden the range of their products.
  

At present the conditions have been formed for growing demand for high-speed data transmission technologies that will increase share of revenues from Internet access and data transmission services in the telecom market revenue structure. These market segments are considered to be most attractive for investments and development and are included in the Issuer’s development priorities.

Measures on development of broadband access services on fixed-line networks will allow the Issuer to increase consumer value of local telecom services and to prevent significant reduction of subscriber base. Thus, it is possible to prevent significant reduction of local services share in the Issuer’s revenue structure.

Growing demand for high-speed Internet access and data transmission, mobile access to telecom services has a great impact on demand structure in all market segments (population, organizations and operators).

Priority products for population will be:

• 
  Internet access from home phone using different technologies;
  
• 
  Voice telephony, access to the Internet and multimedia services in one package;
  
• 
  TV + Internet;
  
• 
  Modeling of own content space.
  

Priority products for corporate client will be:

• 
  Fixed-line communication;
  
• 
  Voice telephony and access to the Internet in one package;
  
• 
  Services of Call Center;
  
• 
  Mobile services including Internet access from mobile phone;
  
• 
  Intelligent services.
  

Priority products for telecom operators will be:

• 
  Participation in development of convergent services;
  
• 
  Building presence in the broadband access market;
  
• 
  Work with business sector on the basis of SLA;
  
• 
  Avoidance of participation in social projects;
  
• 
  Lobbying their interests while interacting with the regulator;
  
• 
  Making their product lines more flexible.