Note 14: Share Based Compensation

The Stock Option Plan

In 2000, MTS established a stock bonus plan and stock option plan (”the Stock Option Plan”) for selected officers, key employees and key advisors. During its initial public offering in 2000 (see Note 1) MTS allotted 9,966,631 shares of its common stock to fund the Stock Option Plan.

Since 2002, MTS has made several grants pursuant to its stock option plan to employees and directors of the Group. These options generally vest over a two year period from the date of the grant, contingent on continued employment of the grantee with the Company. The options are exercisable within two weeks after the vesting date, and, if not exercised, are forfeited. The exercise price of the options equaled average market share price during the hundred day period preceding the grand date.

A summary of the status of the Group’s Stock Option Plan is presented below:

Stock options outstanding as of December 31, 2007 will vest during the year ended December 31, 2008. None of the stock options outstanding as of December 31, 2007 were exercisable.

The fair value of options granted during the years ended December 31, 2007 and 2005, was estimated using the lattice model based on the following assumptions:

Compensation costs under Stock Option Plan of $2.8 million, $1.7 million and $1.5 million was recognized in consolidated statements of operations during the years ended December 31, 2007, 2006 and 2005, respectively.

The effect from forfeitures comprised $0.3 million for the year ended December 31, 2005. The effect of the estimated forfeitures on Group’s operations since adoption of SFAS No. 123R was $1.7 million and $1.0 million in 2007 and 2006, respectively.

As of December 31, 2007, there is $3.0 million of total unrecognized compensation cost related to non-vested stock‑based compensation awards under Stock Option Plan. This amount is expected to be recognized over a weighted‑average period of 0.54 years.

In accordance with the Russian legislation, MTS Board members and key employees may be considered insiders with respect to the Group and thus may be restricted from selling their shares.

Phantom Stock Plan

In June 2007, MTS board of directors approved the Phantom Stock Plan to provide deferred compensation to certain key employees (the “Participants”) of the Group. The plan is based on units equivalent to the Company’s common shares (the “Phantom Shares”). Under the Phantom Stock Plan, the Participants are entitled to a cash payment equal to the difference between the initial grant price and the exercise price of Phantom Shares, multiplied by the number of Phantom Shares granted, upon vesting of the award. The initial grant price is determined based on average market share price during the hundred day period preceding the grant date. The exercise price of Phantom Shares is determined based on average market share price during the hundred day period preceding the vesting date. The vesting period is two years from the grant date, contingent upon the continuing employment of the Participants by the Group. Further, the award shall vest only if at the end of the vesting period the cumulative percentage of the Company’s market capitalization growth since the grant date exceeds the cumulative cost of equity determined by the Board of Directors for the same period.

The Group has a maximum of 3,600,000 phantom ADSs, or 18,000,000 Phantom Shares, reserved for issuance under the Phantom Stock Plan, of which 720,000 ADSs, or 3,600,000 Phantom Shares, were granted in 2007. A summary of the status of the Group’s Phantom Stock Plan is presented below:

All Phantom Shares outstanding as of December 31, 2007 are non-vested and will vest in 2009. None of the Phantom Shares were exercisable as of December 31, 2007.

The fair value of the liability under the Phantom Stock Plan as of December 31, 2007, were estimated using the Monte‑Carlo simulation technique based on the following assumptions:

The compensation cost under the Phantom Stock Plan recognized in consolidated statements of operations for the year ended December 31, 2007 amounted to $7.6 million and related deferred tax benefit amounted to $1.8 million. The respective liability of $7.6 million was included in other long-term liabilities in the consolidated balance sheet as of December 31, 2007.

As of December 31, 2007, there was $23.7 million of total unrecognized compensation cost related to non-vested Phantom Shares. This amount is expected to be recognized over a weighted‑average period of 1.5 years. The Group is required to estimate expected forfeiture rate, as well as the probability that performance conditions that affect the vesting of Phantom Shares awards will be achieved and only recognize expense for those shares expected to vest. The Group’s estimated forfeiture rate was 5.1%. The effect of forfeitures amounted to $2.0 million for the year ended December 31, 2007.