CTC Media, Inc. - FORM 10-Q

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TABLE OF CONTENTS

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2011
or
o		TRANSITION 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 (State or other jurisdiction of incorporation or organization)		58-1869211 (I.R.S. Employer Identification No.)

31A Leningradsky Prospekt
125284 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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

As of April 28, 2011, there were outstanding 157,255,383 shares of the registrant's common stock, $0.01 par value per share.

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CTC MEDIA, INC.
INDEX



PART I	FINANCIAL INFORMATION	4
Item 1.	Financial Statements	4
	Unaudited Condensed Consolidated Balance Sheets as of December 31, 2010 and March, 31, 2011	4
	Unaudited Condensed Consolidated Statements of Income for the three months ended March 31, 2010 and 2011	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2011	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56
Item 4.	Controls and Procedures	57
PART II.	OTHER INFORMATION	58
Item 1.	Legal Proceedings	58
Item 1A.	Risk Factors	58
Item 6.	Exhibits	77
Signatures		78
Exhibit Index		79

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements that involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will," and "would," or similar words. You should read statements that contain these words carefully because they discuss future expectations, contain projections of future results of operations or of financial position or state other "forward- looking" information. The factors described in the "Risk Factors" section of this quarterly report on Form 10-Q, as well as any cautionary language elsewhere in this quarterly report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations described in these forward-looking statements. Other unknown or unpredictable factors could have material adverse effects on our future results, performance or achievements. In light of these risks, uncertainties, assumptions and factors, the forward-looking events discussed herein may not occur and actual performance and results may vary from those anticipated or otherwise suggested by such statements. You are cautioned not to place undue reliance on these forward-looking statements. We do 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. 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, 2010			March 31, 2011

ASSETS
CURRENT ASSETS:
	Cash and cash equivalents			$	59,565		$	81,547
	Short-term investments				117,457			82,116
	Trade accounts receivable, net of allowance for doubtful accounts (December 31, 2010—$780; March 31, 2011—$833)				35,516			36,602
	Taxes reclaimable				16,151			17,326
	Prepayments				37,766			46,906
	Programming rights, net				95,026			98,043
	Deferred tax assets				23,228			31,010
	Other current assets				911			1,637

		TOTAL CURRENT ASSETS			385,620			395,187

PROPERTY AND EQUIPMENT, net					44,149			47,512
INTANGIBLE ASSETS, net:
	Broadcasting licenses				172,469			189,689
	Cable network connections				29,474			30,514
	Trade names				16,956			18,177
	Network affiliation agreements				4,479			4,201
	Other intangible assets				3,309			3,681

		Net intangible assets			226,687			246,262
GOODWILL					237,875			255,005
PROGRAMMING RIGHTS, net					75,633			87,465
INVESTMENTS IN AND ADVANCES TO INVESTEES					5,455			6,082
PREPAYMENTS					4,703			555
DEFERRED TAX ASSETS					18,127			16,019
OTHER NON-CURRENT ASSETS					1,211			1,351

		TOTAL ASSETS		$	999,460		$	1,055,438

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
	Accounts payable				73,665			75,962
	Accrued liabilities				33,603			30,999
	Taxes payable				37,643			21,466
	Deferred revenue				12,393			13,209
	Deferred tax liabilities				9,457			11,646

		TOTAL CURRENT LIABILITIES			166,761			153,282

DEFERRED TAX LIABILITIES					38,058			41,550
COMMITMENTS AND CONTINGENCIES (Note 10)					—			—
STOCKHOLDERS' EQUITY:
		Common stock ($0.01 par value; shares authorized 175,772,173; shares issued and outstanding December 31, 2010—156,955,746; March 31, 2011—157,209,500)			1,569			1,572
	Additional paid-in capital				457,521			467,059
	Retained earnings				397,997			395,674
	Accumulated other comprehensive loss				(64,063	)		(6,166	)
	Non-controlling interest				1,617			2,467

			TOTAL STOCKHOLDERS' EQUITY		794,641			860,606

			TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	999,460		$	1,055,438

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

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

			Three months ended March 31,

			2010			2011
REVENUES:
	Advertising		$	116,983		$	163,105
	Sublicensing and own production revenue			6,042			1,862
	Other revenue			175			574

		Total operating revenues		123,200			165,541

EXPENSES:
	Direct operating expenses (exclusive of amortization of programming rights, sublicensing rights and own production cost, shown below; exclusive of depreciation and amortization of $2,765 and $3,194 for the three months ended March 31, 2010 and 2011, respectively; and exclusive of stock-based compensation expense of $2,648 and $2,029 for the three months ended March 31, 2010 and 2011, respectively)			(9,825	)		(10,710	)
	Selling, general and administrative (exclusive of depreciation and amortization of $612 and $742 for the three months ended March 31, 2010 and 2011, respectively; and exclusive of stock-based compensation expense of $4,682 and $4,190 for the three months ended March 31, 2010 and 2011, respectively)			(15,576	)		(37,696	)
	Stock-based compensation expense			(7,330	)		(6,219	)
	Amortization of programming rights			(49,461	)		(70,738	)
	Amortization of sublicensing rights and own production cost			(1,355	)		(314	)
	Depreciation and amortization (exclusive of amortization of programming rights, sublicensing rights and own production cost)			(3,377	)		(3,936	)

		Total operating expenses		(86,924	)		(129,613	)

OPERATING INCOME				36,276			35,928
FOREIGN CURRENCY GAINS (LOSSES)				(273	)		1,133
INTEREST INCOME				1,359			1,486
INTEREST EXPENSE				(692	)		(100	)
OTHER NON-OPERATING INCOME (LOSS), net				1,623			(27	)
EQUITY IN INCOME OF INVESTEE COMPANIES				94			177

		Income before income tax		38,387			38,597

INCOME TAX EXPENSE				(12,260	)		(14,903	)

CONSOLIDATED NET INCOME			$	26,127		$	23,694

LESS: INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST			$	(928	)	$	(902	)

NET INCOME ATTRIBUTABLE TO CTC MEDIA, INC. STOCKHOLDERS			$	25,199		$	22,792

Net income per share attributable to CTC Media, Inc. stockholders—basic			$	0.16		$	0.15

Net income per share attributable to CTC Media, Inc. stockholders—diluted			$	0.16		$	0.14

Weighted average common shares outstanding—basic				154,227,746			157,001,909

Weighted average common shares outstanding—diluted				154,703,273			158,002,195

Dividends declared per share			$	0.065		$	0.16

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)

				Three months ended March 31,

				2010			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated net income				$	26,127		$	23,694
Adjustments to reconcile net income to net cash provided by operating activities:
	Deferred tax expense (benefit)				1,389			(15	)
	Depreciation and amortization				3,377			3,936
	Amortization of programming rights				49,461			70,738
	Amortization of sublicensing rights and own production cost				1,355			314
	Stock-based compensation expense				7,330			6,219
	Equity in income of unconsolidated investees				(94	)		(177	)
	Foreign currency losses (gains)				273			(1,133	)
	Changes in operating assets and liabilities:
		Trade accounts receivable			(2,993	)		(166	)
		Prepayments			(1,315	)		(2,136	)
		Other assets			(5,164	)		1,211
		Accounts payable and accrued liabilities			1,110			3,368
		Deferred revenue			(1,703	)		(358	)
		Other liabilities			(10,637	)		(15,591	)
		Settlement of SARs			—			(214	)
		Acquisition of programming and sublicensing rights			(63,464	)		(77,410	)

			Net cash provided by operating activities		5,052			12,280

CASH FLOWS FROM INVESTING ACTIVITIES:
		Acquisitions of property and equipment and intangible assets			(4,447	)		(4,031	)
		Acquisitions of businesses, net of cash acquired			(12,829	)		(7,726	)
		Proceeds from sale of businesses, net of cash disposed			2,026			—
		(Investments in)/Receipts from short-term deposits			(11,171	)		38,597

			Net cash (used in)/provided by investing activities		(26,421	)		26,840

CASH FLOWS FROM FINANCING ACTIVITIES:
		Proceeds from exercise of stock options			—			3,901
		Repayments of loans			(28,250	)		—
		Dividends paid to stockholders			(10,025	)		(25,115	)
		Dividends paid to noncontrolling interest			(215	)		(186	)
		Decrease in restricted cash			119			—

			Net cash used in financing activities		(38,371	)		(21,400	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS					1,245			4,262
			Net (decrease)/increase in cash and cash equivalents		(58,495	)		21,982
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD					84,441			59,565

CASH AND CASH EQUIVALENTS AT END OF PERIOD				$	25,946		$	81,547

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 consolidated financial statements include the accounts of CTC Media, Inc. and all consolidated subsidiaries (the "Company"). CTC Media, Inc., a Delaware corporation, has operated the CTC, Domashny and DTV television networks in Russia, since 1996, 2005 and 2008, respectively. The Company transmits its signals by satellite to its owned-and-operated affiliate stations and repeater transmitters and to independent affiliate stations. The Company's network operations, including its relationships with its independent affiliates, are managed by its network subsidiaries: the CTC, Domashny and DTV television networks (the "Networks"). The CTC, Domashny and DTV Television Station Groups (the "Television Station Groups") manage the owned-and-operated affiliate stations and repeater transmitters for each respective network. In addition, since 2008, the Company operates the Channel 31 network, a Kazakh television broadcaster, and a broadcaster in Moldova. These two broadcasters comprise the additional business segment—the Commonwealth of Independent States Group (the "CIS Group"). Moreover, since 2008, the Company has another business segment, Production Group, comprising the Company's in-house production operations, specializing in producing sitcoms, series, sketchcoms and entertainment TV shows for the Networks.

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 currently placed through the Company's own advertising sales house, which serves as the exclusive advertising sales agent for all of the Company's Russian networks and Television Station Groups in respect of Moscow-based clients from January 1, 2011 (Notes 2 and 10). The Company also generates revenues from the sublicensing of programming rights and licensing of internally-produced programming to third parties.

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements for the three months ended March 31, 2011 should be read in conjunction with the consolidated financial statements contained in the Company's Annual Report on Form 10-K filed with the US Securities and Exchange Commission (the "SEC") on March 1, 2011. The Company's significant accounting policies and estimates have not changed since December 31, 2010. In addition to the policies that existed at December 31, 2010 effective January 1, 2011, the Company established a revenue recognition policy for recent changes in sales structure to account for advertising sales made directly to advertisers under new sales arrangements with them. (See "Revenue recognition" below and Note 10).

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 with the instructions to Form 10-Q 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 months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

The condensed consolidated balance sheet at December 31, 2010 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.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2010.

Principles of Consolidation

Wholly owned subsidiaries and majority owned ventures where the Company has operating and financial control, as well as variable interest entities where the Company has been deemed the primary beneficiary with power and ability to control, are consolidated. Those ventures where the Company exercises significant influence, but does not exercise operating and financial control, are accounted for under the equity method. The Company uses the purchase method of accounting for all business combinations. Results of subsidiaries acquired and accounted for under the purchase method are included in operations from the date of acquisition. Noncontrolling interests represent a noncontrolling shareholder's proportionate share of the equity in certain of the Company's consolidated entities. Intercompany accounts and transactions are eliminated upon consolidation. Disposals are reflected at the time risks and rewards of ownership have been transferred.

The Company is the primary beneficiary of the Channel 31 Group, a variable interest entity consisting of a 20% participation interest in Teleradiokompaniya 31st Kanal LLP ("Channel 31"), and a 70% and 60% interest in Prim LLP and Advertising and Marketing LLP, respectively, which provide programming content and the advertising sales function to Channel 31 (together, the "Channel 31 Group"). These interests provide the Company with a right to 60% of the economic interest of the Channel 31 Group. The Company consolidates the Channel 31 Group. As of March 31, 2011, the Channel 31 Group had assets (excluding intercompany assets) totaling $23,204 and liabilities (excluding intercompany liabilities) totaling $15,442. These assets and liabilities primarily relate to broadcasting licenses, and the related deferred tax liabilities and tax contingencies assumed at acquisition of the Channel 31 Group. The Company finances the Channel 31 Group's operations during the ordinary course of business. As of March 31, 2011 the amount of intercompany payables of the Channel 31 Group totaled $5,507. Channel 31 Group's net loss attributable to CTC Media, Inc. stockholders totaled $122 for the three-months period ended March 31, 2011. This amount includes intercompany expenses of $181.

Seasonality

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

Business Segments

The Company operates in eight business segments—CTC Network, Domashny Network, DTV Network, CTC Television Station Group, Domashny Television Station Group, DTV Television Station Group, CIS Group and Production Group. The Company evaluates performance based on the operating results of each segment, among other performance measures (Note 11).

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Use of Estimates

The preparation of financial statements in conformity with the accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in the financial statements include, among others, the estimate of fair values in business combinations, estimates of the fair value of the Company's common stock in determining stock- based compensation, the amortization method and periods for programming rights and sublicensing rights, useful lives of tangible and intangible assets, impairment of goodwill, valuation of indefinite-lived intangible assets and long-lived assets, estimates of contingencies, and the determination of valuation allowances for deferred tax assets. Consequently, actual results may differ from those estimates.

Revenue Recognition

Revenue is recognized when there is persuasive evidence of an arrangement, advertising services have been rendered, the price is fixed or determinable and collectability is reasonably assured. The Company recognizes advertising revenues at the moment when the advertising broadcasting takes place net of Value Added Taxes ("VAT").

Historically, the Company's advertising has not generally been placed directly with advertisers. Video International placed the Company's advertising on an exclusive basis under the agency agreements. Based on such relationships with advertisers and Video International in place prior to 2011, the Company recognized the commissions paid to Video International as an offset to revenue as opposed to a cost incurred ("net basis").

Effective 2011, the Company has terminated agency agreements with Video International in respect of its network sales and sales from regional advertising placed by Moscow-based clients, and has developed a new structure for the sale of its advertising. Effective January 1, 2011, the Company's own sales house serves as the exclusive advertising sales agent for all of the Company's networks in Russia. The advertising is placed with advertisers and their agencies under direct sales arrangements with them. The Company's sales house is primarily responsible for all of the Company's national and regional advertising sales, with the exception of advertising sales to local clients of the Company's regional stations, which continue to be made through Video International.

At the same time the Company agreed a new model of cooperation with Video International based on the licensing of specialized advertising software by Video International to its sales house, together with the provision by Video International of related software maintenance and analytical support and consulting services.

Starting from January 1, 2011, following the change in the sales structure, the Company recognizes Russian advertising revenues, excluding regional advertising revenues from local clients, based on the gross amount billed to the advertisers under direct sales arrangements. Compensation expenses payable to Video International for use of advertising software, related maintenance and analytical support and consulting services are included in selling, general and administrative expenses in the consolidated statement of income. Advertising sales to local clients under the agency agreements with Video International continue to be recognized net of agency commissions. See "Comparative figures" below and Note 10.

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Sublicensing, own production and other revenue primarily represent revenue the Company earns from sublicensing its rights to programming and from licensing of internally-produced programming. Sublicensing and own production revenue is recognized at such time as there is persuasive evidence that a sale or arrangement with a customer exists, the underlying programming is complete and has been transferred to the customer, the licensing period has commenced and the customer can begin exploitation, the arrangement fee is fixed or determinable, and collection of the arrangement fee is reasonably assured.

Payments received in advance for advertising and other revenue are recorded as deferred revenue until earned.

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy prescribed by the standard contains three levels as follows:

Level 1—Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.

Level 2—Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets in non-active markets; (3) inputs other than quoted prices that are observable for the asset or liability; and (4) inputs that are derived principally from or corroborated by other observable market data.

Level 3—Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management's estimates of market participant assumptions.

In the three months ended March 31, 2011, the Company measured at fair value for its broadcasting licenses and liabilities recognized as a result of acquisitions or as a part of impairment tests for broadcasting licenses, which were all Level 3 measurements. There were no transfers between categories during the periods presented.

The carrying amounts of the Company's financial instruments, which include cash and cash equivalents, short-term investments, accounts receivable and accounts payable approximate their fair value as of December 31, 2010 and March 31, 2011, respectively.

Goodwill and Indefinite-Lived Intangible Assets Impairment Tests

Goodwill and indefinite-lived intangible assets are reviewed for impairment annually, in the fourth quarter, or between annual tests if events or changes in circumstances indicate that an asset might be impaired. Outside the annual review, there are a number of factors which could trigger an impairment review and these could include:

•: under-performance of operating segments or changes in projected results;
•: changes in the manner of utilization of an asset;

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

•: severe and sustained declines in the traded price of the Company's common stock that are not attributable to factors other than the underlying value of its assets;
•: negative market conditions or economic trends; and
•: specific events, such as new legislation, new market entrants, changes in technology or adverse legal judgments that the Company believes could have a negative impact on its business.

The Company determines whether an impairment of goodwill has occurred by assigning goodwill to the reporting units and comparing the carrying amount of the entire reporting unit to the estimated fair value based on discounted cash flows of the reporting unit (Step 1). If the carrying value of the reporting unit is more than the estimated fair value of the reporting unit, the Company compares the implied fair value of goodwill based on a hypothetical purchase price allocation to the carrying value of the goodwill (Step 2). If the carrying value of goodwill exceeds the implied fair value of goodwill based on Step 2, goodwill impairment is deemed to have occurred, and the Company recognizes a loss for the difference between the carrying amount and the implied fair value of goodwill. Prior to testing goodwill for impairment, the Company compares fair values of indefinite-lived intangible assets with their carrying values to determine whether the assets might be impaired. The Company has determined that its reporting units are the same as its operating segments.

Indefinite-lived intangible assets are evaluated for impairment by comparing the fair value of the asset to its carrying value. Any excess of the carrying value over the fair value is recognized as an impairment charge. Broadcasting licenses and tradenames are evaluated at the individual asset level.

Assessing goodwill and indefinite-lived intangible assets for impairment is a process that requires significant judgment and involves detailed quantitative and qualitative business-specific analysis and many individual assumptions which fluctuate with the passage of time.

The Company's estimate of the cash flows its operations will generate in future periods forms the basis for most of the significant assumptions inherent in the impairment reviews. The Company's expectations of these cash flows are developed during its long- and short-range business planning processes, which are designed to address the uncertainties inherent in the forecasting process by capturing a range of possible views about key trends which govern future cash flow growth.

The Company has observed over many years a strong positive correlation between the macroeconomic performance of its markets and the size of the television advertising market and ultimately the cash flows the Company generates. With this in mind, the Company has placed a high importance on developing its expectations for the future development of the macroeconomic environment in general and the advertising market and the Company's share of it in particular. While this has involved an appreciation of historical trends, the Company has placed a higher emphasis on forecasting these market trends, which has involved detailed review of macroeconomic data and a range of both proprietary and publicly-available estimates for future market development.

The Company determines the fair values calculated in impairment tests using free cash flow models involving assumptions that are based upon what the Company believes a hypothetical marketplace participant would use in estimating fair value on the measurement date. In valuing broadcasting licenses, the Company allocates cash flows that the licenses generate both from national

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

and regional advertising using the "direct value" method. The most significant of the assumptions used in its valuations are discussed below:

•: Cost of capital: The cost of capital reflects the return a hypothetical market participant would require for a long-term investment in an asset and can be viewed as a proxy for the risk of that asset. The Company calculates the cost of capital according to the Capital Asset Pricing Model using a number of assumptions, the most significant of which is a Country Risk Premium ("CRP"). The CRP reflects the excess risk to an investor of investing in markets other than the United States and generally fluctuates with expectations of changes in a country's macroeconomic environment. If the Russian macroeconomic environment becomes less stable and the risk to investors investing in Russian markets increases, the cost of capital may increase, which in turn will decrease the fair value of the respective assets or reporting units. Additionally, changes in the financial markets, such as an increase in interest rates or an increase in the expected required return on equity by market participants within the industry, could increase the discount rate, thus decreasing the fair value of assets. The cost of capital used by the Company in its analysis ranged from 13.5% to 18.4% in 2010 and in the first quarter of 2011, based on the level of risk related to each particular asset or reporting unit.
•: Growth rate into perpetuity: Growth rate into perpetuity reflects the level of economic growth in each of the Company's markets from the last forecasted period into perpetuity and is the sum of an estimated real growth rate, which reflects the long-term expectations for inflation. These assumptions are inherently uncertain. The growth rate into perpetuity used by the Company in its 2010 and first quarter of 2011 analysis was 4%. In its calculations, the perpetuity period starts after nine years. The Company's estimates of these rates are based on observable market data.
•: Total advertising market: The size of the television advertising market effectively places an upper limit on the advertising revenue the Company can expect to earn. The Company's estimate of the total advertising market is developed from a number of external sources, in combination with a process of on-going consultation with operational management. In general, expenditures by advertisers tend to reflect overall economic conditions and buying patterns. Economic conditions in Russia and other CIS countries where the Company operates appear to be improving and the valuation model used by the Company assumes recovery from the downturn in the economy, which started in the middle of 2008, by 2012. If, however, such improvements are not sustainable or if the economic instability resumes, the size of the television advertising market may decrease which, in turn, may adversely affect the fair value of the respective assets or reporting units.
•: Allocation of cash flows from national advertising to broadcasting licenses: Regional stations broadcast programming received by satellite from the Networks, including national advertising. Therefore, the Company's regional broadcasting licenses generate revenues for the Company at the Networks level. Russian television viewing data, including ratings, audience shares and related metrics, are currently gathered by TNS Russia. The TNS measurement system uses internationally recognized methods and is the standard currently used by all major television broadcasters, advertisers and advertising agencies in Russia. The audience rating for any channel is measured based on the ratings in cities included in a panel measured by TNS. The Company's assumptions on the share of national revenue generated by each of its broadcasting licenses are developed from a number of external sources, in combination with a process of on-going consultation with operational management. If the system of audience measurement were to

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change or the weighting of the panel of cities were to change in a manner that increased the weight in areas where the Company does not have coverage, it could impact the fair value of our reporting units and broadcasting licenses by lowering the Company's ratings.

•: Market shares: This assumption is a function of the audience share the Company expects to generate from its reporting units, and the relative price at which the Company can sell advertising. For broadcasting licenses, the Company estimates market shares based on assumptions related to the market participants potentially willing to acquire the station in each particular region. The Company's estimates of the market shares are developed from a number of external sources, in combination with a process of on-going consultation with operational management. If the Company's audience shares or ratings, or shares or ratings of market participants, 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 decrease in fair value of the respective reporting units/broadcasting licenses.
•: Forecasted operating costs: The level of cash flow generated by each operation is ultimately governed by the extent to which the Company manages the relationship between revenues and costs. The Company forecasts the level of operating costs by reference to (a) the historical absolute and relative levels of costs the Company has incurred in generating revenue in each reporting unit and regional station, (b) the operating strategy of each business, (c) specific forecasted operating costs to be incurred and (d) expectations as to what these costs would be for an average market participant. The Company's estimates of forecasted operating costs are developed from a number of external sources, in combination with a process of on-going consultation with operational management. These forecasts could vary from the Company's projections.
•: Forecasted capital expenditure: The size and phasing of capital expenditure, both recurring expenditure to replace retired assets and investments in new projects, has a significant impact on cash flows. The Company forecasts the level of future capital expenditure based on current strategies and specific forecast costs to be incurred, as well as expectations on what these costs would be like for an average market participant. The Company's estimate of forecasted capital expenditure is developed from a number of external sources, in combination with a process of on-going consultation with operational management. These forecasts could vary from the Company's projections.

The Company believes that the values assigned to key assumptions and estimates described above represent the most realistic assessment of future trends. In order to check the reasonableness of the fair values implied by cash flow estimates the Company also calculates the value of its common stock implied by its cash flow forecasts and compares this to actual traded values.

Impairment reviews during 2010 and first quarter of 2011

In the fourth quarter of 2010, the Company performed its annual impairment review, which did not result in any impairment charges.

The DTV Network reporting unit and DTV broadcasting umbrella license were the most sensitive to changes in the assumptions described above. In the 2010 impairment review, the Company concluded that the fair values of the DTV reporting unit and broadcasting license exceeded its carrying

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values. The level of advertising revenues that the Company earns is directly tied to its audience shares and ratings. During the first quarter of 2011, the audience share of DTV channel was below the first quarter of 2010 and the forecasted audience share, as a result of increased competition and underperformance of certain programs. This relative underperformance resulted in a corresponding decrease in forecasted future revenues. In the first quarter of 2011, the Company performed impairment review for DTV Network reporting unit DTV umbrella broadcasting license, which did not result in any impairment charges. Due to the revision of forecasted operating results in response to decreased audience share, the excess of fair values over carrying values of the DTV's reporting unit and the broadcasting umbrella license decreased from 33% and 24% to 28% and 11%, respectively, when compared with the fair values estimated during the annual 2010 impairment tests. As of March 31, 2011, the DTV Network reporting unit had $145,145 of goodwill, and $60,750 attributed to the broadcasting umbrella license.

If DTV's audience shares were to decrease further and/or fall behind the currently forecasted growth of audience share as a result, for example, of additional competitive pressures or the underperformance of key programs, this could result in a further decrease in the fair value of the DTV's reporting unit and/or broadcasting license. In order to evaluate the sensitivity of the fair value calculations on its impairment analysis, the Company applied a hypothetical 10% decrease to the forecasted audience share of the DTV's channel. If the DTV's forecasted audience share were lower by 10%, the Company would have recognized impairment charge of its broadcasting umbrella license of approximately $22,300.

Although management considered all current information in the impairment reviews, any future changes in events or circumstances, such as changes in the economy, the planned transition to digital broadcasting, further decreases in audience shares or ratings, increased competition from cable providers, or changes in the audience measurement system, could result in decreases in the fair value of the Company's intangible assets and it is probable that the Company will have to recognize impairment charges in future periods.

Cash and Cash Equivalents and Short-Term Investments

The Company classifies cash on hand and deposits in banks and any other investments with an original maturity of 90 days or less as cash and cash equivalents. Deposits in banks with an original maturity ranging from 91 to 365 days are classified as short-term investments.

As of December 31, 2010 and March 31, 2011, the Company held cash and deposits with a maturity of 90 days and less of $57,452 and of $77,579, respectively, in Russian banks, including subsidiaries of foreign banks.

In addition, the Company had deposits with a maturity of more than 90 days in the amount of $117,457 and of $82,116 in Russian banks as of December 31, 2010 and March 31, 2011, respectively. As of March 31, 2011, the amount of deposits included ruble-denominated deposits of $70,562 bearing interest ranging from 2.6% to 6.0%, and US dollar-denominated deposits of $11,554 bearing interest ranging from 1.0% to 2.75%. Management periodically reviews the creditworthiness of the banks in which it holds its cash.

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Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are shown at their net realizable value which approximates their fair value.

The Company establishes an allowance for doubtful accounts receivable based on specific identification and management estimates of recoverability. In cases where the Company is aware of circumstances which may impair a receivable, the Company records a specific allowance against amounts due, and thereby reduces the net recognized receivable to the amount the Company believes will be collected. In addition to the allowance for specific doubtful accounts, the Company applies specific rates to overdue balances depending on the history of cash collections and future expectations of conditions that might impact the collectability of accounts receivables.

If all collection efforts have been exhausted, the receivable is written off against the allowance. The Company's credit policy does not require to enter into any netting agreements or collateral from customers.

Comparative Figures

In 2010, the Company recognized advertising revenues net of Value Added Taxes ("VAT") and accrued sales commissions payable to Video International. Starting from 2011, the Company no longer pays sales commissions to Video International since the model of cooperation with Video International at the Network level and at Television Station Groups in respect of Moscow-based clients has changed. Under the terms of the new agreement, the Company pays Video International fees for the use of the advertising software package and for services rendered such as maintenance of the software package, technical support, consulting along with integration of the software and Russian advertising market analytical services. Such compensation payable to Video International from January 1, 2011, is included within selling, general and administrative expenses in the consolidated statement of income. In the three months ended March 31, 2011, the amount of such compensation expense included within selling, general and administrative expenses comprised $18,090, as compared to the Video International commission fees of $16,302 recorded as a deduction to advertising revenue in the three months ending March 31, 2010. See "Revenue Recognition" above and Note 10.

Also, reclassifications have been made to the prior period consolidated financial statements to conform to the current period presentation.

New Accounting Pronouncements

In January 2010, the FASB issued the Accounting Standards Update ("ASU") 2010-06, (ASC 820, Fair Value Measurements and Disclosures). This amendment has improved disclosures about fair value measurements on the basis of input received from the users of financial statements. This is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures related to purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early adoption is permitted. The adoption of this amendment did not have an impact on the Company's financial statements.

In April 2010, the FASB issued ASU 2010-13, an amendment to its stock-based compensation guidance to clarify that employee stock options that have exercise prices denominated in the currency of any market in which a substantial portion of the entity's equity securities trade should be classified as equity, assuming all other criteria for equity classification are met (EITF Issue 09-J; ASC 718,

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Compensation—Stock Compensation). The amendment is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Early adoption is permitted. The adoption of this amendment did not have an impact on the Company's financial statements.

In December 2010, the FASB issued ASU 2010-29, an amendment to the disclosure of supplementary pro forma information for business combinations (EITF Issue 10-G; ASC 805, Business Combinations). This amendment specified that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendment also expanded the supplemental pro forma disclosures under ASC 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of this amendment did not have an impact on the Company's financial statements.

In December 2010, the FASB issued ASU 2010-28, an amendment to the goodwill impairment test for reporting units with zero or negative carrying amounts (EITF Issue 10-A; ASC 350, Intangibles-Goodwill and Other). The amendment affects all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. As a result, the amendment eliminates an entity's ability to assert that a reporting unit is not required to perform Step 2 because the carrying amount of the reporting unit is zero or negative despite the existence of qualitative factors that indicate the goodwill is more likely than not impaired. For public entities, the amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. Upon adoption of the amendments, an entity with reporting units that have carrying amounts that are zero or negative is required to assess whether it is more likely than not that the reporting units' goodwill is impaired. If the entity determines that it is more likely than not that the goodwill of one or more of its reporting units is impaired, the entity should perform Step 2 of the goodwill impairment test for those reporting unit(s). Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings as required by Section 350-20-35. The adoption of this amendment did not have an impact on the Company's financial statements.

3. NET INCOME PER SHARE

Basic net income per share for the three months ended March 31, 2010 and 2011 is computed on the basis of the weighted average number of common shares outstanding. 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 outstanding stock options calculated using the "treasury stock" method. The number of shares subject to stock options excluded from the diluted net income per common share computation because their effect was antidilutive was 8,915,925 and 4,691,163 for the three months ended March 31, 2010 and 2011, respectively.

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

		Three months ended March 31,

		2010		2011
Net income attributable to CTC Media, Inc. stockholders		$	25,199	$	22,792

Weighted average common shares outstanding—basic
Common stock			154,227,746		157,001,909
Dilutive effect of:
	Common stock options		475,527		1,000,286

Weighted average common shares outstanding—diluted			154,703,273		158,002,195
Net income per share attributable to CTC Media, Inc. stockholders:
	Basic	$	0.16	$	0.15
	Diluted	$	0.16	$	0.14

The numerator used to calculate diluted net income per common share for the three months ended March 31, 2010 and 2011 was net income attributable to CTC Media, Inc. stockholders.

4. INVESTMENT TRANSACTIONS

Acquisitions

In February 2011, the Company acquired a 100% interest in a television station in Tomsk for total cash consideration of $4,547. 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, using the best information available as of the date of these financial statements. The Company assigned $5,577 to the broadcasting license. The remainder of the purchase price was assigned to other assets acquired and liabilities assumed.

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5. PROGRAMMING RIGHTS, NET

Programming rights as of December 31, 2010 and March 31, 2011 comprise the following:

			December 31, 2010			March 31, 2011

Internally produced—TV broadcasting and theatrical:
	Released:
		Historical cost	$	88,828		$	99,015
		Accumulated amortization		(70,266	)		(87,007	)

	Released, net book value			18,562			12,008

	Completed and not released			3,356			7,012
	In production			460			3,074

Total				22,378			22,094

Acquired rights:
	Historical cost			487,947			534,761
	Accumulated amortization			(339,666	)		(371,347	)

Net book value				148,281			163,414

Total programming rights			$	170,659		$	185,508

Current portion			$	95,026		$	98,043

Non-current portion			$	75,633		$	87,465

The Company expects to amortize approximately $17,028 of internally produced TV programming for its completed and released programs and completed but not yet released programs during the twelve months ending March 31, 2012. In addition, the Company expects to amortize all of its unamortized internally produced programming rights within the three years following March 31, 2011.

The Company recognized impairment charges on programming rights of $3,097 and $8,636 for the three months ended March 31, 2010 and 2011, respectively. The impairment charges are included in amortization of programming rights in the accompanying condensed consolidated statements of income.

6. INTANGIBLE ASSETS, NET

Intangible assets as of December 31, 2010 and March 31, 2011 comprise the following:

	December 31, 2010					March 31, 2011

	Cost		Accumulated amortization			Cost		Accumulated amortization
Broadcasting licenses	$	172,469	$	—		$	189,689	$	—
Trade names		16,956		—			18,177		—
Cable network connections		42,245		(12,771	)		45,667		(15,153	)
Network affiliation agreements		20,762		(16,283	)		15,407		(11,206	)
Other intangible assets		5,994		(2,685	)		6,725		(3,044	)

Total	$	258,426	$	(31,739	)	$	275,665	$	(29,403	)

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Amortization expense was $2,017 and $2,357 for the three months ended March 31, 2010 and 2011, respectively.

7. GOODWILL

Goodwill as of December 31, 2010 and March 31, 2011 comprises the following:

	Balance December 31, 2010		Foreign currency translation adjustment		Balance March 31, 2011

CTC Network	$	41,380	$	2,981	$	44,361
Domashny Network		17,002		1,225		18,227
DTV Network		135,397		9,748		145,145
CTC Television Station Group		2,089		150		2,239
Domashny Television Station Group		9,832		708		10,540
CIS Group		99		7		106
Production Group		32,076		2,311		34,387

Total	$	237,875	$	17,130	$	255,005

The Company has accumulated impairment losses against goodwill totalling $58,189 at each balance sheet date presented related entirely to the CIS segment. These impairment losses were recorded in 2008 as a result of annual impairment tests. See also Note 10.

8. STOCKHOLDERS' EQUITY

The following table summarizes the changes in stockholders' equity during the three months ended March 31, 2010 and 2011:

	Total			CTC Media, Inc. stockholders			Noncontrolling interest

Stockholders' equity, December 31, 2009	$	663,824		$	662,774		$	1,050
Net Income		26,127			25,199			928
Other comprehensive income		20,701			20,633			68

Comprehensive income	$	46,828		$	45,832		$	996

Additional paid-in capital		6,072			6,072			—
Dividends declared		(10,486	)		(10,025	)		(461	)

Stockholders' equity, March 31, 2010	$	706,238		$	704,653		$	1,585

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	Total			CTC Media, Inc. stockholders			Noncontrolling interest

Stockholders' equity, December 31, 2010	$	794,641		$	793,024		$	1,617
Net Income		23,694			22,792			902
Other comprehensive income		58,031			57,897			134

Comprehensive income	$	81,725		$	80,689		$	1,036

Share capital		3			3			—
Additional paid-in capital		9,538			9,538			—
Dividends declared		(25,301	)		(25,115	)		(186	)

Stockholders' equity, March 31, 2011	$	860,606		$	858,139		$	2,467

Other comprehensive income consists entirely of currency translation adjustments for the three months ended March 31, 2010 and 2011. The increase in additional paid-in capital includes proceeds in excess of par value from exercises of stock options and stock-based compensation expenses recognized in the Company's earnings (Note 9).

During the first three months of 2011, the following dividends were declared and paid:

Declaration date		Per Share Dividend			Aggregate Dividend			Record Date			Payment Date

February 16, 2011		$	0.16		$	25,115			March 1, 2011			March 28 and 29, 2011

9. STOCK-BASED COMPENSATION

Stock options under the 2009 Stock Incentive Plan

On February 16, 2011, the Compensation Committee of the Company's Board approved the additional grants of options to purchase up to 580,000 shares of common stock to certain employees of the Company, at an exercise price of $22.32. The exercise price represents the closing price of the Company's common stock on the grant date. These options are divided equally into two tranches: options that vest over four years and are subject only to passage of time (with 25% of options vesting on the first anniversary and the remainder vesting on a quarterly basis over the following three years) (the "Time-based Tranche") and options that are subdivided in four equal sub-tranches that vest upon the achievement of certain performance criteria set by the board of directors for each of 2011, 2012, 2013 and 2014 (the "Performance-based Tranche").

On February 16, 2011, the Compensation Committee of the Company's Board approved performance criteria for the 2011 Performance-based sub-tranche in respect of options to purchase an aggregate of 512,500, 43,125, 15,000 and 72,500 shares of common stock, under the October 2009, December 2009, April 2010 and February 2011 grants, respectively.

Equity-based incentive awards

Pursuant to the Company's 2009 Retention Bonus Program, each recipient of an option granted in October 2009 (including both Time-based and Performance-based tranches) will have the right to receive potential cash payments in respect of any appreciation of the Company's share price above $14.00 per share, capped at $16.80 per share, and tied to both the vesting and exercise of the corresponding stock options. The Company remeasures these awards at each reporting date at their fair

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value until settlement, to the extent that this value does not exceed the maximum benefit available to option holders. The fair value of unsettled awards is recognized in liabilities.

The following assumptions were used in the option-pricing model to assess the fair values of the options granted in the three months ended March 31, 2011 and the fair value of equity-based incentive awards:

	Options	Equity-based incentive awards

Risk free interest rate	1.13-2.37%	0.1-1.1%
Expected option life (years)	2.5-5.0	0.1-2.9
Expected dividend yield	2.87%	2.70%
Volatility factor	74.7-94.3%	74%
Weighted-average grant date fair value (per share)	$11.81	$2.80

The following table summarizes common stock options and equity-based incentive awards activity for the Company during the three months ended March 31, 2011:

	Common Stock Options					Equity-based incentive awards

	Quantity			Weighted Average Exercise Price		Quantity			Weighted Average Exercise Price
Outstanding as of December 31, 2010		7,426,499		$	16.78		3,192,483			14.00

Granted		504,375			20.20		170,833			14.00
Exercised		(253,755	)		15.37		(76,550	)		14.00
Forfeited		(66,146	)		16.18		(17,187	)		14.00
Expired		(13,750	)		15.21		—			—

Outstanding as of March 31, 2011		7,597,223			17.06		3,269,579			14.00

The following table summarizes information about nonvested common stock options:

	Common Stock Options					Equity-based incentive awards

	Quantity			Weighted average grant-date fair value		Quantity			Weighted average grant-date fair value
Nonvested as of December 31, 2010		4,204,468		$	10.97		2,276,667		$	2.80
Granted		504,375			12.25		170,833			2.80
Vested		(1,087,709	)		11.60		(485,833	)		2.80
Forfeited		(66,146	)		9.08		(17,187	)		2.80

Nonvested as of March 31, 2011		3,554,988			11.13		1,944,480			2.80

As of March 31, 2011, the total compensation cost related to unvested granted awards not yet recognized of $31,629 is to be recognized over a weighted average period of 2.49 years.

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10. COMMITMENTS AND CONTINGENCIES

Operating environment

Russia and Kazakhstan continue economic reforms and development of their legal, tax and regulatory frameworks as required by a market economy. The future stability of the Russian and Kazakh economies is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the governments.

The Russian and Kazakh economies are vulnerable to market downturns and economic slowdowns elsewhere in the world. In the first quarter of 2011, the Russian and Kazakh governments continued to take measures to support the economies in order to overcome the consequences of the global financial crisis. Despite some indications of recovery there continues to be uncertainty regarding further economic growth, access to capital and cost of capital, which could negatively affect the Company's future financial position, results of operations and business prospects.

While management believes it is taking appropriate measures to support the sustainability of the Company's business in the current circumstances, unexpected further deterioration in the areas described above could negatively affect the Company's results and financial position in a manner not currently determinable.

Exchange rate

Although the Company's reporting currency is the US dollar, it generates almost all of its revenues through the sale of advertising, which in Russia is sold primarily in rubles. The ruble is also the functional currency of the Company's principal operating subsidiaries. As a result, the Company's reported revenues and results of operations are impacted by fluctuations in the exchange rate between the US dollar and the Russian ruble. Additionally, given that substantially all of its revenues are generated in rubles, the Company faces exchange rate risk relating to payments that it must make in currencies other than the ruble. The Company generally pays for non-Russian produced programming in US dollars.

In the three months ended March 31, 2011, the Russian ruble appreciated against the US dollar by 7%, and was on average 2% higher than the average value of the Russian ruble compared to the US dollar during the same period of 2010. In 2009 and 2010, the Russian ruble depreciated approximately 2.9% and 1%, respectively, against the US dollar.

If the exchange rate between the ruble and the US dollar were to depreciate, the revenues and operating results of the Company, as reported in US dollars, will be adversely affected.

Television advertising sales

In the Russian television market, national television advertising historically was not placed directly with broadcasters. Instead, sales houses, including Video International, historically controlled the placement of a large portion of national television advertising. In Russia, the Company had several agreements with Video International for the placement of advertising on each of the Networks and Television Station Groups. In Kazakhstan the Company places all of its national advertising through Video International.

As a result of an amendment to the Russian advertising law that became effective from January 1, 2011, television broadcasters are prohibited from signing agreements with media sales houses that control more than 35% of the Russian television advertising market. Video International controlled

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more than 35% of the Russian television advertising market before 2011. In order to bring the Company's cooperation with Video International into compliance with the new legislation, it terminated its agency agreements with Video International in respect of the Networks and Television Station Groups of Moscow-based clients effective December 31, 2010, and developed a new structure for the sale of its advertising going forward.

Starting January 1, 2011, the Company's own sales house serves as the exclusive advertising sales agent responsible for all of the Company's national and regional advertising sales, with the exception of advertising sales to local clients of the regional stations, which continue to be made through Video International.

The Company also agreed a new model of cooperation with Video International. Under the terms of this agreement, the Company pays Video International both fixed license fees for the use of the software package and variable service fees, which depend on the amount of services rendered. The aggregate amount of compensation payable is calculated on the basis of the Company's Russian channels' television advertising revenues (including network revenues and the revenues from regional advertising placed by Moscow-based clients, but excluding revenues from social advertising and some sponsorship revenues, as well as placement by Video International of national advertising. The parties have also agreed that the compensation payable to Video International under the new agreement may be decreased by the mutual consent of the parties on an annual basis. In the three months ended March 31, 2011, the amount of compensation expense related to services provided by Video International comprised $18,090, as compared to the agency commission fees of $16,302 paid to Video International in respect of national and regional advertising from Moscow-based clients in the three months ending March 31, 2010.

In addition to the agreement between the Company's sales house and Video International described above, a number of Company's owned-and-operated regional stations have signed agency agreements with local subsidiaries of Video International with respect to advertising sales to local clients. Under the terms of such agreements, the Company pays Video International a commission fee set as a percentage of the actual gross revenues received from advertising sales by the relevant local station. The aggregate headline commission payable to Video International under such agreements annually is 12% of the regional station's total gross advertising revenues, including VAT. The parties have also agreed that the commission payable to Video International under those agreements may be subject to reduction upon mutual consent of the parties on an annual basis.

The agreements are terminable either by mutual written agreement, or unilaterally by giving 180 calendar days' notice. As compensation for early termination, the terminating party must pay the other party a forfeit fee based on a certain percentage of the regional station's actual gross revenues for the six full calendar months preceding the termination date. Such forfeit fee will be subject to further negotiations between the parties and may be subject to adjustment.

In Kazakhstan, the Company has an agreement with Video International for the placement of advertising in Channel 31 that expires in 2015. The Channel 31 agreement may be terminated upon 180 days' notice by either party.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

The Company may be unsuccessful, especially in the short-term, in transitioning to a new system of advertising sales that produces the same advertising volumes and revenues, at the same margins, as it has enjoyed historically.

Assets with indefinite useful lives

The Company has assets recorded on its consolidated balance sheet, such as broadcasting licenses, trademarks and goodwill, which have indefinite lives and represent a significant portion of the Company's total assets. Assets with indefinite useful lives are not subject to amortization but are tested for impairment annually, in the fourth quarter, or between annual tests if events or changes in circumstances indicate that an asset might be impaired. Outside the annual review, there are a number of factors which could trigger an impairment review and these could include: under-performance of operating segments or changes in projected results; changes in the manner of utilization of an asset; severe and sustained declines in the traded price of the Company's common stock that are not attributable to factors other than the underlying value of its assets; negative market conditions or economic trends; and specific events, such as new legislation, new market entrants, changes in technology or adverse legal judgments that the Company believes could have a negative impact on its business.

The DTV Network reporting unit and DTV umbrella broadcasting license are the most sensitive to changes in the assumptions inherent in the impairment review. During the first quarter of 2011, the audience share of DTV channel was below the first quarter of 2010 and the forecasted audience share, as a result of increased competition and underperformance of certain programs. This relative underperformance resulted in a corresponding decrease in forecasted future revenues. In the first quarter of 2011, the Company performed impairment review for DTV Network reporting unit DTV umbrella broadcasting license, which did not result in any impairment charges. Due to the revision of forecasted operating results in response to decreased audience share, the excess of fair values over carrying values of the DTV's reporting unit and the broadcasting umbrella license decreased from 33% and 24% to 28% and 11%, respectively, when compared with the fair values estimated during the annual 2010 impairment tests. As of March 31, 2011, the DTV Network reporting unit had $145,145 of goodwill, and $60,750 attributed to the broadcasting umbrella license.

The Company considers all current information in respect of determining the need for or calculating any impairment charge, however, future changes in events or circumstances, such as changes in the economy, further decreases in the Company's audience shares or ratings, increased competition from cable providers, or changes in the audience measurement system could result in decreases in the fair value of the Company's intangible assets and may require the Company to record additional impairment losses that could have adverse impact on its net income. In addition, the Russian government has announced plans to introduce digital broadcasting in various stages throughout Russia. The specific terms of the transition are not yet fully determined. When these terms are determined, the

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

transition to digital broadcasting also could adversely impact the Company's operations or the value of its broadcasting licenses and goodwill.

Purchase commitments

The Company has commitments to purchase programming rights, for which the license period has not started or the underlying program is not yet available. As of March 31, 2011, such commitments amounted to $235,729 (at the US dollar/ruble exchange rate as of March 31, 2011). The Company is obligated to pay $136,262, $51,423 and $48,044 in 2011, 2012 and 2013, respectively, under these commitments.

In addition, the Company has commitments to purchase format rights. As of March 31, 2011, these commitments amounted to $1,123 (at the US dollar/ruble exchange rate as of March 31, 2011), all of which is payable in 2011.

The Company also has commitments to purchase transmission and satellite services. As of March 31, 2011, these commitments amounted to $88,291 (at the US dollar/ruble exchange rate as of March 31, 2011), of which $11,801, $16,889, $18,418, $19,894 and $21,289 are payable in the years from 2011 to 2015, respectively. The amounts for these commitments depend on future inflation rates in Russia, which could change the prices for such services.

Also, the Company has commitments for cable connections to secure the right of our stations to be connected by cable to additional households. As of March 31, 2011, these commitments amounted to $11,502 (at the US dollar/ruble exchange rate as of March 31, 2011), of which $3,232, $1,712, $1,712, $1,712 and $3,134 are payable in the years from 2011 to 2015, respectively.

In addition, in October 2010 the Company signed an agreement to upgrade its broadcasting equipment at cost of $16,320, of which the outstanding amount to be paid in 2011 amounts to $3,792.

Operating leases

The Company has several operating leases for satellite transponders and office space with terms ranging from one to eleven years.

On December 30, 2010, the Company entered into definitive lease agreements in respect of new headquarters facilities in Moscow. These definitive leases have retroactive effect from November 17, 2010. Pursuant to the Lease Agreements, the Company is leasing an aggregate of 7,000 square meters of office space in an office building in central Moscow. The Lease Agreements have 10-year initial terms and the Company has the right to extend the term for an additional 10-year period, at the the current market rate. The base rent is approximately $475 per square meter per annum (at exchange rate as of March 31, 2011), for a total of approximately $3,325 per year inclusive of all taxes and levies and exclusive of VAT. The base rent for the first year of the lease agreements starting November 17, 2010 ending November 16, 2011 will be approximately $450 per square meter per annum (at exchange rate as of March 31, 2011), thus the total amount of the rent for the first year will be approximately $3,152. In addition to the lease payments described above, the Company is also required to pay technical costs arising from maintenance of the premises and some supplementary municipal services.

Income Taxes

As of December 31, 2010 and March 31, 2011, the Company included accruals for unrecognized income tax benefits and related interest and penalties totaling $5,280 and $5,281, respectively, as a

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

component of accrued liabilities, including amounts relating to pre-acquisition operations of the Channel 31 Group of $3,464 and $3,504, respectively. All of the unrecognized income tax benefits, if recognized, would affect the Company's effective tax rate.

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 $3,402 if the Company were to lose such a challenge by the tax authorities. However, the Company believes that it is reasonably possible that only $1,467 of the total $3,402 potential increase could occur within twelve months from March 31, 2011. This amount mainly represents certain recognized income tax benefits which may be challenged by the tax authorities during their current inspections of CTC Network, Maraphon TV, Teleexpress, Soho Media and certain income tax penalties which may be imposed by US tax authorities as the result of late payment by CTC Media, Inc. of estimated tax for 2007.

The total amount of unrecognized tax benefit that could significantly change within 12 months due to a lapse of statutory limitation term comprised $2,400 as of March 31, 2011.

The tax years ended December 31, 2008, 2009 and 2010 and the three months ended March 31, 2011 remain subject to examination by the Russian and US tax authorities. The tax years ended December 31, 2006 through 2010 and the three months ended March 31, 2011 remain subject to examination by the Kazakh tax authorities.

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 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, 2010 and March 31, 2011. This is due to a combination of the evolving nature of applicable 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, 2010 and March 31, 2011, the Company included accruals for contingencies related to non-income taxes totaling $5,023 and $4,995, respectively, as a component of accrued liabilities, including amounts relating to pre-acquisition operations of the Channel 31 Group of $3,589 and $3,630, respectively.

Additionally, the Company has identified possible contingences related to non-income taxes, which are not accrued. Such possible non-income tax contingencies could materialize and require the Company to pay additional amounts of tax. As of March 31, 2011, management estimates such contingencies related to non-income taxes to be up to approximately of $3,112.

It is the opinion of management that the 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.

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Broadcast Licenses

All broadcast television stations in Russia are required to have broadcasting and other operating licenses. Only a limited number of such licenses are available in each locality. These licenses generally require renewal every five years.

A broadcaster must conform its programming to the programming concept outlined in the broadcasting license. In particular, the broadcaster is obliged to ensure compliance of their programming with the declared genres of the channel and to sustain necessary balance in a volume-genre ratio of a broadcasted materials both prescribed in the license. Until recently, the broadcasting licenses of the Company's independent affiliate stations also contained various restrictions, including requirements with respect to the minimum amount of locally produced programming that must be broadcast.

The broadcasting license of Channel 31 in Kazakhstan contains various restrictions and obligations. Under Kazakh laws, broadcasters are required to broadcast at least 50% of their programming in the Kazakh language during every six-hour slot.

The Company may not always be in full compliance with these requirements. Also, the Company's independent 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 complied with, or if a television station otherwise violates applicable Russian legislation or regulations, the license, after a warning notice from the regulator, may be suspended or terminated (which decision may be appealed in court). If an independent affiliate were to broadcast without all the necessary licenses, broadcasting may be terminated and fines could be imposed. Management believes that the probability of initiation of action against any material owned-and operated station or independent 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 their 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.

Certain of the Company's regional subsidiaries have had, and some 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.

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 proceedings 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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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

11. SEGMENT INFORMATION

In September 2010, the Company established its own sales house, Closed Joint Stock Company "EvereST-S", which serves as the exclusive advertising sales agent for all of its Russian Networks and Television Station Groups in respect of Moscow-based clients, effective January 1, 2011. See Note 10, "Television advertising sales". The sales house does not represent an operating segment but rather a functional sales department. The sales house expenses are allocated to the Company's reportable segments based on the revenues earned by each of the segments.

	Three months ended March 31, 2010

	Operating revenue from external customers		Intersegment revenue			Operating income/ (loss)			Identifiable assets			Depreciation and amortization			Amortization of programming rights			Amortization of sublicensing rights
CTC Network	$	82,639	$	620		$	39,483		$	712,507		$	(285	)	$	(36,602	)		(1,065	)
Domashny Network		13,431		51			2,811			48,890			(207	)		(6,822	)		—
DTV Network		9,885		10			283			183,777			(692	)		(6,031	)		(203	)
CTC Television Station Group		12,128		383			7,333			112,463			(574	)		(77	)		—
Domashny Television Station Group		1,681		510			1			53,269			(371	)		(1	)		—
DTV Television Station Group		674		9			(1,460	)		98,729			(971	)					—
CIS Group		2,217		68			(895	)		20,501			(151	)		(1,565	)		—
Production Group		442		7,175			(264	)		42,332			(39	)		—			(6,326	)
Business segment results	$	123,097	$	8,826		$	47,292		$	1,272,468		$	(3,290	)	$	(51,098	)	$	(7,594	)

Eliminations and other		103		(8,826	)		(11,016	)		(425,922	)		(87	)		1,637			6,239
Consolidated results	$	123,200	$	—		$	36,276		$	846,546		$	(3,377	)	$	(49,461	)	$	(1,355	)

	Three months ended March 31, 2011

	Operating revenue from external customers		Intersegment revenue			Operating income/ (loss)			Identifiable assets			Depreciation and amortization			Amortization of programming rights			Amortization of sublicensing rights
CTC Network	$	108,293	$	130		$	33,036		$	792,937		$	(571	)	$	(52,611	)	$	(426	)
Domashny Network		19,748		3			3,158			64,092			(224	)		(9,914	)		—
DTV Network		12,671		—			(435	)		193,561			(744	)		(8,114	)		—
CTC Television Station Group		17,859		468			10,716			108,068			(551	)		(86	)		—
Domashny Television Station Group		2,629		710			438			55,572			(427	)		(1	)		—
DTV Television Station Group		1,054		383			(1,750	)		124,655			(1,164	)		(1	)		—
CIS Group		3,079		—			(359	)		23,902			(152	)		(1,850	)		—
Production Group		22		2,213			(553	)		50,409			(23	)		—			(1,748	)
Business segment results	$	165,355	$	3,907		$	44,251		$	1,413,196		$	(3,856	)	$	(72,577	)	$	(2,174	)

Eliminations and other		186		(3,907	)		(8,323	)		(357,758	)		(80	)		1,839			1,860
Consolidated results	$	165,541	$	—		$	35,928		$	1,055,438		$	(3,936	)	$	(70,738	)	$	(314	)

12. SUBSEQUENT EVENTS

On April 28, 2011, the Company's Board declared a dividend of $0.22 per outstanding share of common stock, or approximately $35 million in total, which will be paid on or about June 30, 2011 to shareholders of record as of June 1, 2011. The Company's Board currently intends to pay further

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

dividends in each of the following quarters of 2011. Although it is the Board's current intention to declare and pay further dividends in the remaining quarters of 2011, there can be no assurance that such additional dividends will in fact be declared and paid. Any such declaration is at the discretion of the Board and will depend upon factors such as Company's earnings, financial position and cash requirements.

In April 2011, options to purchase 56,771 shares of common stock were exercised at average exercise price of $16.80.

In April 2011, the Company acquired a 56% interest in several television stations in the Samara region for total cash consideration of $4,250.

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 months ended March 31, 2010 and 2011. This discussion should be read in conjunction with our annual report on Form 10-K filed with the SEC on March 1, 2011 and our Unaudited Condensed Consolidated Financial Statements and the notes thereto appearing elsewhere in this quarterly report.

Overview

We currently operate three Russian television networks—CTC, our flagship network, Domashny and DTV; one television network in Kazakhstan—Channel 31; and a television channel in Moldova, all offering entertainment programming. In addition, we have in-house production operations focused on series, sitcoms and shows.

We currently organize our operations into eight business segments: CTC Network, Domashny Network, DTV Network, CTC Television Station Group, Domashny Television Station Group, DTV Television Station Group, CIS Group and Production Group.

Russian Networks

•: CTC Network. CTC Network's principal target audience is 6-54 year-old viewers. CTC's technical penetration is 93.7% with its signal covering approximately 100 million people in Russia.
•: Domashny Network. The Domashny, or "Home", Network is targeted principally at 25-60 year-old women. Domashny's technical penetration is 81.6% with its signal covering approximately 62 million people in Russia.
•: DTV Network. DTV Network's target audience is 25-54 year-old viewers. DTV's technical penetration is 72.5% with its signal covering approximately 60 million people in Russia.

Each of our networks is responsible for its own broadcasting operations, including the licensing and commissioning of programming, producing its programming schedule and managing its relationships with its independent affiliates. Substantially all of the revenues of our networks are generated from the broadcast of national television advertising.

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Russian Television Station Groups

•: CTC, Domashny and DTV Television Station Groups. The CTC Television Station Group, Domashny Television Station Group and DTV Television Station Group manage 53, 43 and 37 owned-and-operated stations and repeater transmitters, respectively. Our Television Station Groups provide 56.7% technical penetration for the CTC Network (or 60.5% of its total penetration of 93.7%); 43.4% technical penetration for the Domashny Network (or 53.2% of its total penetration of 81.6%); and 35.9% technical penetration for the DTV Network (or 49.5% of its total penetration of 72.5%). All 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 all owned-and-operated and independent affiliates of our networks.

Sales house

•: Sales house. In September 2010, we established our own sales house, Closed Joint Stock Company "EvereST-S", a wholly owned subsidiary of CTC Network, which serves as the exclusive advertising sales agent for all of our Russian Networks and Television Station Groups in respect of Moscow-based clients, effective January 1, 2011. See "—Television Advertising Sales". The sales house does not represent an operating segment but rather a functional sales department. The sales house expenses are allocated to our reportable segments based on the revenues earned by each of the segments.

CIS Group

•: CIS Group. Since 2008, we operate the Channel 31 network, a Kazakh television broadcaster, and a broadcaster in Moldova. Channel 31 is targeted principally at 6-54 year-old viewers. The signal of Channel 31 is broadcast by over 60 television stations and local cable operators, including 10 owned-and-operated stations and repeater transmitters.

Production Group

•: Production Group. Our Production Group comprises our in-house production operations that specialize in sitcoms, series, sketchcoms and entertainment TV shows for our networks.

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. Our results of operations are also affected by the value of the Russian ruble compared to the US dollar.

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 largely 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 by broadcasting attractive entertainment programming, including original Russian series, sitcoms and shows, as well as popular foreign series, films and animation. Although we believe we have been successful in broadcasting programming content that appeals to our key target audiences, we face strong competition from other television

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broadcasters for programming content, and we must continue to strive to air programming that addresses evolving audience tastes and trends in television broadcasting.

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 select media acquisitions that complement our existing businesses, including opportunities in Russian-speaking markets where we can effectively and efficiently leverage our management and programming resources. We 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. These 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 historically has generally not been placed directly with broadcasters. Instead, so-called "sales houses" have historically controlled the placement of a large portion of national television advertising. From 1999 to 2010, Video International, one of the largest of these sales houses, placed our national advertising on an exclusive basis. From 2006 to 2010, we also engaged Video International to place, on an exclusive basis, local advertising at substantially all of our owned-and-operated stations. In Kazakhstan we continue to place all of our national advertising through Video International. Therefore, advertising placed through Video International accounted for substantially all of our advertising revenues in 2010.

As a result of an amendment to the Russian advertising law that became effective in 2011, television broadcasters are prohibited from signing agreements with media sales houses that control more than 35% of the Russian television advertising market. Video International historically controlled more than 35% of the Russian television advertising market. In order to bring our cooperation with Video International into compliance with the new legislation, we terminated our agency agreements with Video International in respect of the Networks and Television Station Groups of Moscow-based clients, effective December 31, 2010, and have developed a new structure for the sale of our advertising going forward, as described below.

In September 2010, we established our own sales house, which now serves as the exclusive advertising sales agent for all of our networks in Russia from January 1, 2011. At the same time we agreed a new model of cooperation with Video International based on the licensing of specialized advertising software by Video International to our sales house, together with the provision by Video International of related software maintenance and analytical support and consulting services. Our sales house is responsible for all of our national and regional advertising sales, with the exception of advertising sales to local clients of our regional stations, which continue to be made through Video International. See "—Our Agreements with Video International" , "—Critical Accounting Policies, Estimates and Assumptions" below, and "Item 1A. Risk Factors—Recent changes to the Russian law "On Advertising" have fundamentally changed the way in which we sell advertising, which could adversely affect our business, financial condition and results of operations".

Current Russian law limits the amount of time that a broadcaster may devote to advertising to no more than 15% of any broadcasting hour. In Kazakhstan, the maximum airtime available for advertising is limited to no more than 20% of total broadcasting time each day.

Because advertisers often seek to reach particular demographic groups, including particular ages and genders, they will often base their advertising placement decisions on ratings among such groups, rather than among the overall population. CTC's advertising has generally been placed on the basis of our ratings in CTC's target audience, the 6-54 year-old demographic; Domashny's advertising has generally been placed on the basis of our ratings in Domashny's target audience, 25-60 year-old

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women; and DTV's advertising has generally been placed on the basis of our ratings in DTV's target audience, 25-54 year-old viewers.

We generally derive no direct revenues from our independent affiliates. These independent affiliates broadcast our network signal in their local areas in exchange for the right to broadcast local advertising during designated time windows, from which they derive their own revenues. We also pay fees to some of our independent affiliates in exchange for broadcasting our network signals. By providing us with a means of expanding our broadcast coverage with limited investment on our part, these independent affiliates help to increase our audience share and ratings, thereby indirectly increasing our national advertising revenues.

Television advertising sales vary over the course of the year. As a result of seasonal trends in viewing, the broadcasting industry generally achieves a greater proportion of advertising revenues in the fourth quarter. In 2010 approximately 36% of our total annual advertising revenues was generated in the fourth quarter.

Generally, our ability to grow our revenues depends primarily on increases in the price of our advertising, which is sold primarily in rubles, demand for advertising and our ability to increase our advertising inventory by increasing our audience shares.

Our Agreements with Video International

Historically, we had several agency agreements with Video International for the placement of advertising on each of our Russian networks and each of our Russian Television Station Groups. An amendment to the Russian advertising law that became effective from January 1, 2011 prohibited us from entering into agreements with an advertising sales house that controls more than 35% of the Russian television advertising market, such as Video International. In order to bring our cooperation with Video International into compliance with the new legislation, we terminated all of our agency agreements with Video International, effective December 31, 2010, and have developed a new structure for the sale of our advertising going forward, as described below.

In November 2010, we entered into a new agreement with Video International to govern our cooperation in the area of television advertising sales, effective January 1, 2011. Under the terms of this agreement, our sales house received a license to use Video International's proprietary advertising software package (including modules such as Automated System for the Placement of Television Advertising, Automated Document Management System, and Media Calculator). In addition, the Video International group provides a number of supporting services related to maintenance of the software package, such as technical support and consulting along with integration of the software; as well as Russian advertising market analytical services including forecasts, market surveys and research. In particular, Video International provides detailed analysis of the Russian television market, including audience share and advertising market dynamics.

Under the terms of this agreement, we will pay Video International both fixed license fees for the use of the software package and variable service fees, which depend on the amount of services rendered. The aggregate amount of compensation payable is calculated on the basis of our Russian channels' television advertising revenues (including network revenues and the revenues from regional advertising placed by Moscow-based clients, but excluding revenues from social advertising and some sponsorship revenues, as well as placement by Video International of national advertising by certain of its subsidiaries). We expect that the overall compensation payable to Video International annually will be in the range of 10% to 12% of our Russian channels' advertising revenues. The parties have also agreed that the compensation payable to Video International under the new agreement may be decreased by the mutual consent of the parties on an annual basis.

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The new agreement has a five-year term, running through the end of 2015, and may be unilaterally terminated by either party effective January 1st of any year during the term without penalty, provided that such party provides written notice of termination not later than 180 days before such date. In addition, we have the exclusive right to terminate the agreement unilaterally under certain defined circumstances in the event that our advertising sales under-perform the overall Russian television advertising market by specified margins. In the event of termination on such grounds, the parties have also agreed on an option to seek to negotiate an amendment to the financial terms of the agreement should they desire to continue their cooperation. In any other case of early termination, the terminating party will be required to pay to the other party compensation in an amount approximately equal to the aggregate fees payable under this agreement in respect of the six calendar months prior to such termination.

In addition to the agreement between our sales house and Video International described above, a number of our owned-and-operated regional stations have signed agency agreements with local subsidiaries of Video International with respect to advertising sales to local clients. Under the terms of such agreements, we pay Video International a commission fee set as a percentage of the actual gross revenues received from advertising sales by the relevant local station. The aggregate headline commission payable to Video International under such agreements annually is 12% of the regional station's total gross advertising revenues, including VAT. The parties have also agreed that the commission payable to Video International under those agreements may be subject to reduction upon mutual consent of the parties on an annual basis.

We understand that such agency agreements for the direct placement of local advertising by Video International continue to be in compliance with the amended Russian advertising law since the aggregate volume of our local sales through Video International will not exceed 4% of our Russian advertising sales, and accordingly we understand that Video International will not exceed the 35% share limit established by the amended law in respect of the regional market.

We also have an agreement with Video International for the placement of advertising on Channel 31 expiring in 2015. Under the Channel 31 agreement, the commission rate payable by us is fixed at 13.0% of gross advertising sales in 2011, 12.5% of gross advertising sales in 2012, and 12.0% of gross advertising sales in years 2013 through 2015.

New Lease Agreement

On December 30, 2010, we entered into two definitive lease agreements in respect to our new headquarters facilities in Moscow. These leases have retroactive effect from November 17, 2010. The two lease agreements cover separate floors in the building, and contain identical terms, other than with respect to the premises covered and the applicable aggregate lease and other payments.

Pursuant to these two lease agreements we are leasing an aggregate of 7,000 square meters of office space in central Moscow. The leases have 10-year initial terms and we have the right to extend their term for an additional 10-year period, at the then current market rate. The base rent is approximately $475 per square meter per annum (at exchange rate as of March 31, 2011), for a total of approximately $3.3 million per year inclusive of all taxes and levies and exclusive of VAT. The base rent for the first year of the lease agreements starting November 17, 2010 ending November 16, 2011 will be approximately $450 per square meter per annum (at exchange rate as of March 31, 2011), thus the total amount of the rent for the first year will be approximately $3.2 million. The lessors may

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unilaterally increase the base rent once a year by a maximum of 4% of the rate effective as of the date of the increase, starting from the fourth anniversary of the respective lease agreement.

Under the terms of these lease agreements, we concluded a maintenance services agreement with the building managing company, at an aggregate annual rate of approximately $0.3 million, exclusive of VAT, for each of the first three years; such amount does not include utilities. After the third anniversary of the maintenance service agreement, the parties have the right to renegotiate maintenance prices. We have an expansion option and a right of first offer on any additional space that becomes available in the building at the then-current market rent.

We are currently in the process of negotiating leases for additional space of approximately 2,300 square meters in this office facility.

Recent Acquisitions and Disposals

In February 2011, we completed an acquisition of a television station in Tomsk for cash consideration of $4.5 million.

In April 2011, we acquired a 56% interest in several television stations in the Samara region for total cash consideration of $4.3 million.

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, 2011. In addition to the policies that existed at December 31, 2010, effective January 1, 2011, we established a revenue recognition policy for recent changes in our sales structure to account for advertising sales made directly to advertisers under sales arrangements with them. See"—Revenue recognition" below. The preparation of our 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 for 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.

Revenue recognition—Revenue is recognized when there is persuasive evidence of an arrangement, services have been rendered, the price is fixed or determinable and collectability is reasonably assured. A bad debt provision is maintained for estimated losses resulting from our customers' inability to make payments. We recognize advertising revenues at the moment when the advertising broadcasting takes place net of Value Added Taxes ("VAT").

Prior to 2011 Video International placed our advertising on an exclusive basis under the agency agreements and the sales commission paid by us to Video International was recorded as an offset to revenue ("net basis").

Effective from 2011, we terminated our agency agreements with Video International in respect of our network sales and sales from regional advertising placed by Moscow-based clients, and have developed a new structure for the sale of our advertising. Effective January 1st, 2011, our own sales house serves as the exclusive advertising sales agent for all of our networks in Russia. The advertising is placed with advertisers and their agencies under direct sales arrangements with them. At the same time we agreed a new model of cooperation with Video International based on the licensing of specialized advertising software by Video International to our sales house, together with the provision by Video International of related software maintenance and analytical support and consulting services. Our sales house is primarily responsible for all of national and regional advertising sales, with the exception of

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advertising sales to local clients of regional stations, which continue to be made through Video International. See "—Television Advertising Sales", "—Our Agreements with Video International" above and "Item 1A. Risk Factors—Recent changes to the Russian law "On Advertising" fundamentally have changed the way in which we sell advertising, which could adversely affect our business, financial condition and results of operations."

Starting from January 1, 2011, following the change in our sales structure and our contractual relationship with Video International, we recognize our Russian advertising revenues, excluding regional advertising revenues from local clients, based on the gross amounts billed to the advertisers under direct sales arrangements. Compensation expenses payable to Video International for use of advertising software, related maintenance and analytical support and consulting services are included in selling, general and administrative expenses in our consolidated statement of income. Advertising sales to local clients of our regional stations under the agency agreements with Video International continue to be recognized net of agency commissions.

Payments received in advance for advertising and other revenue are recorded as deferred revenue until earned.

Accounts Receivable and Allowance for Doubtful Accounts—We establish an allowance for doubtful accounts receivable based on specific identification and our estimates of recoverability. In cases where we are aware of circumstances which may impair a receivable, we record a specific allowance against amounts due, and thereby reduce the net recognized receivable to the amount we believe will be collected. In addition to the allowance for specific doubtful accounts, we apply specific rates to overdue balances depending on the history of cash collections and future expectations of conditions that might impact the collectibility of accounts receivables.

Goodwill and Indefinite-Lived Intangible Assets Impairment tests

We evaluate goodwill and other intangible assets with indefinite lives for impairment annually or more frequently if events or changes in circumstances indicate that such carrying value may not be recoverable. Other than our annual review, factors we consider important that could trigger an impairment review are under-performance of operating segments or changes in projected results, changes in the manner of utilization of the asset, and negative market conditions or economic trends. Therefore, our judgment as to the future prospects of each business has a significant impact on our reported results and financial condition.

During the first quarter of 2011, the audience share of DTV channel was below the first quarter of 2010 and the forecasted audience share, as a result of increased competition and underperformance of certain programs. This relative underperformance resulted in a corresponding decrease in forecasted future revenues. In the first quarter of 2011, we performed impairment review for DTV Network reporting unit and DTV umbrella broadcasting license, which did not result in any impairment charges.

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calculations on its impairment analysis, we applied a hypothetical 10% decrease to the forecasted audience share of the DTV's channel. If the DTV's forecasted audience share were lower by 10%, we would have recognized impairment charge of its broadcasting umbrella license of approximately $22.3 million. See also "Item 1. Financial Statements—Note 2, Basis of Presentation and Summary of Significant Accounting Policies—Goodwill and Indefinite-Lived Intangible Assets Impairment tests."

We consider all current information in respect of determining the need for or calculating the amount of any impairment charge, however, future changes in events or circumstances, such as changes in the economy, transition to digital broadcasting, decreases in our audience shares or ratings, increased competition from cable providers, or changes in the audience measurement system, could result in decreases in the fair value of our intangible assets and require us to record additional impairment losses that could have a material adverse impact on our net income. See "Item 1A. Risk Factors—A significant portion of our total assets are intangibles assets with indefinite lives that we do not amortize. If events or changes in circumstances reduce the fair value of those assets, we may be required to record impairment losses that could materially adversely impact our net income."

Also, we believe our critical accounting policies relate to the following matters: foreign currency translation, programming rights, stock-based compensation expense, accounting for acquisitions, goodwill and other intangible assets, and accounting for income taxes. These critical accounting policies involve the more significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements and are described in detail in our Annual Report on Form 10-K.

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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:

			Three months ended March 31,

			2010			2011
REVENUES:
	Advertising			95.0	%		98.5	%
	Sublicensing			4.9			1.1
	Other revenue			0.1			0.4

		Total operating revenues		100.0			100.0

EXPENSES:
	Direct operating expenses (exclusive of amortization of programming rights and sublicensing rights, shown below, exclusive of depreciation and amortization and exclusive of stock-based compensation)			(8.0	)		(6.5	)
	Selling, general and administrative (exclusive of depreciation and amortization; exclusive of stock-based compensation)			(12.6	)		(22.8	)
	Stock-based compensation			(5.9	)		(3.8	)
	Amortization of programming rights			(40.2	)		(42.7	)
	Amortization of sublicensing rights and own production cost			(1.1	)		(0.2	)
	Depreciation and amortization (exclusive of amortization of programming rights and sublicensing rights)			(2.7	)		(2.4	)

		Total operating expenses		(70.6	)		(78.4	)

Operating income				29.4			21.7
Foreign currency gains (losses)				(0.2	)		0.7
Interest income				1.1			0.9
Interest expense				(0.6	)		(0.1	)
Other non-operating income, net				1.3			(0.0	)
Equity in income of investee companies				0.1			0.1

Income before income tax				31.2			23.3

Income tax expense				(10.0	)		(9.0	)

Consolidated net income				21.2			14.3

Income attributable to noncontrolling interest				(0.8	)		(0.5	)

	Net income attributable to CTC Media, Inc. stockholders			20.4	%		13.8	%

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Our advertising revenues for the first quarter of 2010 are presented net of agency commissions payable to Video International under the agency agreements that were in place prior to 2011. Effective 2011, following change in our sales structure and our contractual relationships with Video International, we no longer pay agency commissions to Video International in respect of national advertising and local advertising to Moscow-based clients. Under the terms of our new agreement we have a license to use Video International's proprietary advertising software package. In addition, the Video International group provides a number of support services related to maintenance of the software package, such as technical support and consulting along with integration of the software; as well as Russian advertising market analytical services including forecasts, market surveys and research. The compensation fees payable to Video international for use of advertising software, related maintenance and analytical support and consulting services are included in our selling, general and administrative expenses. See "—Critical accounting policies" above. The effect of such change in presentation of fees payable to Video International results in an increase in the amounts of both our advertising revenues and selling, general and administrative expense at our Networks and Station Groups as compared to previous periods. When comparing first quarters of 2010 and 2011, such increase amounted to $16.3 million, including $11.6 million, $1.8 million, $1.1 million, $1.5 million, $0.2 million and $0.1 million in CTC, Domasny and DTV Networks, and CTC, Domashny and DTV Station Groups, respectively.

Comparison of Unaudited Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2010 and 2011

Total operating revenues

		Three months ended March 31,

		2010			2011
		(in thousands, except percentages)
CTC Network		$	83,259		$	108,423
	Change period-to-period		—			30.2	%
Domashny Network			13,482			19,751
	Change period-to-period		—			46.5	%
DTV Network			9,895			12,671
	Change period-to-period		—			28.1	%
CTC Television Station Group			12,511			18,327
	Change period-to-period		—			46.5	%
Domashny Television Station Group			2,191			3,339
	Change period-to-period		—			52.4	%
DTV Television Group			683			1,437
	Change period-to-period		—			110.4	%
CIS Group			2,285			3,079
	Change period-to-period		—			34.7	%
Production Group			7, 617			2,235
	Change period-to-period		—			(70.7	)%
Eliminations and other			(8,723	)		(3,721	)

	Total	$	123,200		$	165,541

	Change period-to-period		—			34.4	%

Our advertising revenues for the three months ended March 31, 2010 are presented net of agency commissions paid to Video International. Effective 2011, due to the change in our sale structure and in our contractual relationships with Video International described above, we present our Russian advertising revenues, except for the regional advertising revenues from local clients, gross of

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compensation payable to Video International. See "—Critical accounting policies—Revenue recognition" above. When comparing the three months ended March 31, 2010 and 2011, our total operating revenues increased by 34.4%, of which an increase of 15.7% relates to the effect of reporting advertising revenues based on gross amounts billed to advertisers effective 2011, due to changes in our sales structure (discussed above). Net of this effect, our total operating revenues increased by 18.7% when comparing the three-month periods under review. Such increase primarily reflects the continued growth of the Russian television advertising market resulting in higher advertising rates.

Advertising revenues

		Three months ended March 31,

		2010			2011
		(in thousands, except percentages)
CTC Network		$	77,631		$	106,463
	Change period-to-period		—			37.1	%
Domashny Network			13,415			19,728
	Change period-to-period		—			47.1	%
DTV Network			9,360			12,652
	Change period-to-period		—			35.2	%
CTC Television Station Group			12,087			17,758
	Change period-to-period		—			46.9	%
Domashny Television Station Group			1,604			2,576
	Change period-to-period		—			60.6	%
DTV Television Group			672			1,052
	Change period-to-period		—			56.5	%
CIS Group			2,207			2,873
	Change period-to-period		—			30.2	%
Production Group			75			13
	Change period-to-period		—			(82.7	)%
Eliminations and other			(68	)		(10	)

	Total	$	116 983		$	163,105

	Change period-to-period		—			39.4	%

We recognize advertising revenues in the period that the corresponding advertising spots are broadcast. Our advertising revenue is recorded net of VAT. In 2010, our advertising revenues are presented net of agency commissions paid to Video International under the agreements that were in place prior to 2011. In 2011, due to the change in sales structure and in our contractual relationships with Video International, our advertising revenues are presented gross of compensations payable to Video International. See—"Critical accounting policies—Revenue recognition" above. Our advertising revenue increased by 39.4% when comparing the three-month periods under review, of which an increase of 17.1% relates to the effect of reporting advertising revenues based on gross amounts billed to advertisers effective 2011, due to changes in our sales structure (discussed above). Net of this effect, our advertising revenues increased by 22.3% when comparing the three-month periods under review.

Because advertisers often seek to reach particular demographic groups, including particular ages and genders, they will often base their advertising placement decisions on ratings among such groups, rather than among the overall population. We generally place the CTC Network's advertising on the basis of our ratings in CTC's target audience, the 6-54 year-old demographic; we generally place the Domashny Network's advertising on the basis of our ratings in Domashny's target audience, 25-60 year-old women; and we generally place the DTV Network's advertising on the basis of our

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ratings in DTV's target audience, 25-54 year-old viewers. The overall audience share among the entire viewing population (considered to be those age 4 and older, or "4+") is used to compare our ratings with those of other channels.

CTC Network. CTC Network's advertising revenue increased by 37.1% when comparing the three-month periods under review, of which an increase of 17.7% relates to the effect of reporting advertising revenues based on gross amounts billed to advertisers effective 2011, due to changes in our sales structure (discussed above). Net of this effect, CTC Network's advertising revenues increased by 19.4% when comparing the three-month periods under review, mainly due to increase in advertising prices, partially offset by decreased audience share. The average target audience share of the CTC Network was 12.6% and 11.2% in the first quarters of 2010 and 2011, respectively. The average overall audience share of the CTC Network was 9.1% and 7.9% in the first quarters of 2010 and 2011, respectively. The decrease in audience share was primarily the result of the later timing of the launch of the Network's main 2011 spring season premiers compared to 2010, and relative underperformance of certain of our programming.

Domashny Network. Domashny Network's advertising revenue increased by 47.1% when comparing the three-month periods under review, of which an increase of 17.7% relates to the effect of reporting advertising revenues based on gross amounts billed to advertisers effective 2011, due to changes in our sales structure (discussed above). Net of this effect, Domashny Network's advertising revenues increased by 29.4% when comparing the three-month periods under review, principally due to increase in advertising prices, partially offset by decreased audience share. The average target audience share of the Domashny Network was 3.0% and 2.8% in the first quarters of 2010 and 2011, respectively. The average overall audience share of the Domashny Network was 2.2% and 2.1% in the first quarters of 2010 and 2011, respectively. The decrease in audience share over the periods under review was the result of increased competition and relative underperformance of certain programming.

DTV Network. DTV Network's advertising revenue increased by 35.2% when comparing the three-month periods under review, of which an increase of 14.6% relates to the effect of reporting advertising revenues based on gross amounts billed to advertisers effective 2011, due to changes in our sales structure (discussed above). Net of this effect, DTV Network's advertising revenues increased by 20.6% when comparing the three-month periods under review, principally due to increase in advertising prices. The average target audience share of the DTV Network was 2.1% and 2.0% in the first quarters of 2010 and 2011, respectively. The average overall audience share of the DTV Network remained flat at 1.7% in the first quarters of 2010 and 2011. The decrease in the average target audience share over the periods under review was the result of increased competition, and relative underperformance of certain of our programming. If DTV's audience shares or ratings were to fall as a result, for example, of additional competitive pressures or the underperformance of key programs, this could result in a decrease in the fair value of the respective reporting units and/or broadcasting licenses. See "Risk Factors—A significant portion of our total assets are intangible assets with indefinite lives that we do not amortize. If events or changes in circumstances reduce the fair value of those assets, we may be required to record impairment losses that could materially adversely impact our net income", and "Item 1. Financial Statements—Note 2, Basis of Presentation and Summary of Significant Accounting Policies—Goodwill and Indefinite-Lived Intangible Assets Impairment tests."

We anticipate that the average prices at our Networks for 2011 as a whole will be higher than in 2010.

Television Station Groups. Advertising revenues of the CTC' Television Station Group increased by 46.9% when comparing the three-month periods under review, of which an increase of 16.3% relates to the effect of reporting advertising revenues based on gross amounts billed to advertisers effective 2011, due to changes in our sales structure (discussed above). Net of this effect, CTC Television Station

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Group's advertising revenues increased by 30.6% when comparing the three-month periods under review, primarily due to increases in advertising rates, partially offset by decrease in audience share.

Advertising revenues of the Domashny Television Station Group increased by 60.6% when comparing the three-month periods under review, of which an increase of 19.0% relates to the effect of reporting advertising revenues based on gross amounts billed to advertisers effective 2011, due to changes in our sales structure (discussed above). Net of this effect, Domashny Television Station Group's advertising revenues increased by 41.6% when comparing the three-month periods under review, principally due to increased advertising rates and increased sellout.

Advertising revenues of the DTV Television Station Group increased by 56.5% when comparing the three-month periods under review, of which an increase of 17.5% relates to the effect of reporting advertising revenues based on gross amounts billed to advertisers effective 2011, due to changes in our sales structure (discussed above). Net of this effect, DTV Television Station Group's advertising revenues increased by 39.0% when comparing the three-month periods under review, primarily due to increases in advertising prices, partially offset by decreased sellout.

CIS. The majority of the CIS Group's advertising revenues represented revenues of the Channel 31 Group. Advertising revenues of the CIS Group increased by 30.2% when comparing the three-month periods under review, primarily due to increase in advertising prices and in audience share of the Channel 31.

Sublicensing, own production and other revenues

		Three months ended March 31,

		2010			2011
		(in thousands, except percentages)
CTC Network		$	5,629		$	1,960
	Change period-to-period		—			(65.2	)%
Domashny Network			67			22
	Change period-to-period		—			(67.2	)%
DTC Network			536			19
	Change period-to-period		—			(96.5	)%
CTC Television Station Group			424			569
	Change period-to-period		—			34.2	%
Domashny Television Station Group			586			763
	Change period-to-period		—			30.2	%
DTV Television Group			11			385
	Change period-to-period		—			3400	%
CIS Group			78			206
	Change period-to-period		—			164.1	%
Production Group			7,542			2,222
	Change period-to-period		—			(70.5	)%
Eliminations and other		$	(8,656	)	$	(3,710	)

	Total	$	6,217		$	2,436

	Change period-to-period		—			(60.8	)%

Networks. Our sublicensing, own production and other revenues at CTC Network decreased by 65.2% when comparing the three-month periods under review, primarily due to decrease in sublicensing sales to Ukraine.

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Television Station Groups. Other revenues for the CTC and DTV Television Station Groups primarily represent fees received for transmission. 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. A significant portion of the Television Station Groups' other revenues are eliminated in consolidation.

Production Group. The substantial majority of own production revenues for the Production Group represent sales of in-house produced programming to our networks. These revenues are eliminated in consolidation.

Eliminations and other. We eliminate intercompany revenues from sublicensing, own production and other revenues. These intercompany revenues consist primarily of programming rights sold by our Production Group to our networks.

Total operating expenses

		Three months ended March 31,

		2010			2011
		(in thousands, except percentages)
CTC Network		$	(43,776	)	$	(75,387	)
	Change period-to-period		—			72.2	%
Domashny Network			(10,671	)		(16,593	)
	Change period-to-period		—			55.5	%
DTV Network			(9,612	)		(13,106	)
	Change period-to-period		—			36.4	%
CTC Television Station Group			(5,178	)		(7,611	)
	Change period-to-period		—			(47.0	)%
Domashny Television Station Group			(2,190	)		(2,901	)
	Change year-on-year		—			32.5	%
DTV Television Group			(2,143	)		(3,187	)
	Change period-to-period		—			48.7	%
CIS Group			(3,180	)		(3,438	)
	Change period-to-period		—			8.1	%
Production Group			(7,881	)		(2,788	)
	Change period-to-period		—			(64.6	)%
Eliminations and other			(2,293	)		(4,602	)

	Total	$	(86,924	)	$	(129,613	)

	Change period-to-period		—			49.1	%
	% of total operating revenues		70.6	%		78.3	%

In 2010, our advertising revenue is presented net of agency commissions paid to Video International under the agreements that were in place prior to 2011. In 2011, due to the change in sales structure, our advertising revenues are presented gross of compensations payable to Video International. Compensations payable to Video International are included within selling, general and administrative expenses for the three months ended March 31, 2011. Such compensation expenses include fees for use of advertising software, related maintenance and analytical support and consulting services. See "—Critical accounting policies—Revenue recognition" above.

Our total operating expenses increased by 49.1% when comparing the three-month periods under review, of which an increase of 23.5% relates to the effect of reporting advertising revenues based on gross amounts billed to advertisers and reporting compensations payable to Video International in

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selling, general and administrative expenses effective 2011, due to changes in our sales structure (discussed above). Net of this effect, our total operating expenses increased by 25.6% when comparing the three-month periods under review.

Total operating expenses as a percentage of total operating revenues were 70.6% and 78.3% during the three months ended March 31, 2010 and 2011, respectively. Net of the effect of reporting advertising revenues based on gross amounts billed to advertisers and reporting compensations payable to Video International in selling, general and administrative expenses effective 2011, due to changes in our sales structure (discussed above), total operating expenses as a percentage of total operating revenues increased from 74.0% to 78.3%, when comparing the three months ended March 31, 2010 and 2011. This increase was due to increases, as a percentage of operating revenues, amortization of programming rights, offset by decreases, as a percentage of operating revenues, in direct operating expenses, in amortization of sublicensing rights and own production cost, and in stock-based compensation expense.

Direct operating expenses

		Three months ended March 31,

		2010			2011
		(in thousands, except percentages)
CTC Network		$	(2,209	)	$	(3,002	)
	Change period-to-period		—			35.9	%
Domashny Network			(1,579	)		(1,875	)
	Change period-to-period		—			18.7	%
DTV Network			(1,196	)		(1,161	)
	Change period-to-period		—			(2.9	)%
CTC Television Station Group			(1,930	)		(2,159	)
	Change period-to-period		—			11.9	%
Domashny Television Station Group			(1,029	)		(1,215	)
	Change period-to-period		—			18.1	%
DTV Television Group			(917	)		(1,270	)
	Change period-to-period		—			38.5	%
CIS Group			(507	)		(466	)
	Change period-to-period		—			(8.1	)%
Production Group			(948	)		(573	)
	Change period-to-period		—			(39.6	)%
Eliminations and other			490			1,011

	Total	$	(9,825	)	$	(10,710	)

	Change period-to-period		—			9.0	%
	% of total operating revenues		8.0	%		6.5	%

Direct operating expenses as a percentage of total operating revenues were 8.0% and 6.5% during the three months ended March 31, 2010 and 2011, respectively. Net of the effect of reporting advertising revenues based on gross amounts billed to advertisers effective 2011, due to changes in our sales structure (discussed above), direct operating expenses as a percentage of total operating revenues decreased from 7.0% to 6.5%, when comparing the three months ended March 31, 2010 and 2011.

Networks. At the Network level, direct operating expenses are principally comprised of the salaries of our networks' engineering, programming and production staff and satellite transmission fees. Direct operating expenses at the CTC Network as a percentage of this segment's total operating

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revenues were 2.7% and 2.8% during the three months ended March 31, 2010 and 2011, respectively. Net of the effect of reporting advertising revenues based on gross amounts billed to advertisers effective 2011, due to changes in our sales structure (discussed above), direct operating expenses at the CTC Network as a percentage of this segment's total operating revenues increased from 2.3% to 2.8%, when comparing the three months ended March 31, 2010 and 2011. Such increase was mainly due to increase in salaries and benefits as a result of annual raises and transfers of some employees from other segments to CTC Network segment.

At the Domashny Network, direct operating expenses as a percentage of this segment's total operating revenues were 11.7% and 9.5% during the three months ended March 31, 2010 and 2011, respectively. Net of the effect of reporting advertising revenues based on gross amounts billed to advertisers effective 2011, due to changes in our sales structure (discussed above), direct operating expenses at the Domashny Network as a percentage of this segment's total operating revenues decreased from 10.3% to 9.5%, when comparing the three months ended March 31, 2010 and 2011. Such decrease was mainly due to increased revenues, partially offset by increase in network affiliation expenses.

At the DTV Network, direct operating expenses as a percentage of this segment's total operating revenues were 12.1% and 9.2% during the three months ended March 31, 2010 and 2011, respectively. Net of the effect of reporting advertising revenues based on gross amounts billed to advertisers effective 2011, due to changes in our sales structure (discussed above), direct operating expenses at the DTV Network as a percentage of this segment's total operating revenues decreased from 10.8% to 9.2%, when comparing the three months ended March 31, 2010 and 2011. Such decrease was mainly due to decrease in salaries and benefits.

Television Station Groups. At the Television Station Group level, direct operating expenses consist primarily 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.

At the CTC Television Station Group, direct operating expenses as a percentage of this segment's total operating revenues were 15.4% and 11.8% during the three months ended March 31, 2010 and 2011, respectively. Net of the effect of reporting advertising revenues based on gross amounts billed to advertisers effective 2011, due to changes in our sales structure (discussed above), direct operating expenses at the CTC Television Station Group as a percentage of this segment's total operating revenues decreased from 13.8% to 11.8%, when comparing the three months ended March 31, 2010 and 2011. Such decrease was mainly due to increased revenues, partially offset by the increase in transmission costs.

At the Domashny Television Station Group, direct operating expenses as a percentage of this segment's total operating revenues were 47.0% and 36.4% during the three months ended March 31, 2010 and 2011, respectively. Net of the effect of reporting advertising revenues based on gross amounts billed to advertisers effective 2011, due to changes in our sales structure (discussed above), direct operating expenses at the Domashny Television Station Group as a percentage of this segment's total operating revenues decreased from 42.8% to 36.4%, when comparing the three months ended March 31, 2010 and 2011. Such decrease was mainly due to increased revenues, partially offset by the increase in transmission costs.

At the DTV Television Station Group, direct operating expenses as a percentage of this segment's total operating revenues were 134.3% and 88.4% during the three months ended March 31, 2010 and 2011, respectively. Net of the effect of reporting advertising revenues based on gross amounts billed to advertisers effective 2011, due to changes in our sales structure (discussed above), direct operating expenses at the DTV Television Station Group as a percentage of this segment's total operating

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revenues decreased from 119.4% to 88.4%, when comparing the three months ended March 31, 2010 and 2011. Such decrease was mainly due to increased revenues, partially offset by the increase in transmission costs.

In 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 our networks, carry certain broadcasters' signals over their systems. As a result of this request, some of our cable television operators, including Mostelecom (which is the primary carrier of our networks' 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 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. While discussions continue on resolving this matter, to date, no such resolution has been reached. If we were required to pay transmission fees to these cable operators, our direct operating expenses would be increased, possibly materially.

CIS Group. For the CIS Group, direct operating expenses principally consist of transmission and maintenance costs and payroll expenses for technical, programming, production and distribution staff of the Channel 31 Group. Direct operating expenses as a percentage of that segment's total operating revenues decreased from 22.2% to 15.1% when comparing three months ended March 31, 2010 and 2011, respectively, mainly due to increased revenues.

Production Group. For the Production Group, direct operating expenses principally comprise general production overhead.

Eliminations and other. We eliminate intercompany expenses from direct operating expenses. These intercompany expenses consist primarily of service fees charged to our Networks by our Television Station Groups for the operation and maintenance of repeater transmitters.

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Selling, general and administrative expenses

		Three months ended March 31,

		2010			2011
		(in thousands, except percentages)
CTC Network		$	(3,617	)	$	(18,778	)
	Change period-to-period		—			419.2	%
Domashny Network			(2,032	)		(4,572	)
	Change period-to-period		—			125.0	%
DTV Network			(1,490	)		(3,087	)
	Change period-to-period		—			107.2	%
CTC Television Station Group			(2,596	)		(4,816	)
	Change period-to-period		—			85.5	%
Domashny Television Station Group			(788	)		(1,259	)
	Change period-to-period		—			59.8	%
DTV Television Group			(254	)		(752	)
	Change period-to-period		—			196.1	%
CIS Group			(957	)		(970	)
	Change period-to-period		—			1.4	%
Production Group			(568	)		(442	)
	Change period-to-period		—			(22.2	)%
Eliminations and other			(3,274	)		(3,020	)

	Total	$	(15,576	)	$	(37,696	)

	Change period-to-period		—			142.0	%
	% of total operating revenues		12.6	%		22.8	%

Our selling, general and administrative expenses principally consist of advertising and promotion expenses; salaries and benefits; rent and utilities; audit, legal and other consulting fees; travel expenses; insurance costs; and non-income taxes. In addition, starting from January 1, 2011, our selling, general and administrative expenses include compensation expenses payable to Video International for use of advertising software, related maintenance and analytical support and consulting services (See "—Critical accounting policies—Revenue recognition" and "—Our agreements with Video International"). When comparing the periods under review, our selling, general and administrative expenses increased by 142.0% of which an increase of 123.7% relates to the effect of reporting advertising revenues based on gross amounts billed to advertisers and reporting compensations payable to Video International in selling, general and administrative expenses effective 2011, due to changes in our sales structure (discussed above). Net of this effect, selling, general and administrative expenses increased by 18.3% when comparing the three-month periods under review.

Our selling, general and administrative expenses as a percentage of total operating revenues were 12.6% and 22.8% during the three months ended March 31, 2010 and 2011, respectively. Net of the effect of reporting advertising revenues based on gross amounts billed to advertisers and reporting compensations payable to Video International in selling, general and administrative expenses effective 2011, due to changes in our sales structure (discussed above), selling, general and administrative expenses as a percentage of total operating revenues decreased from 22.9% to 22.8%, when comparing the three months ended March 31, 2010 and 2011.

On December 30, 2010, we entered into two definitive lease agreements for new facilities in Moscow, pursuant to which we are leasing approximately 7,000 square meters of office space in an office building in central Moscow. These leases have retroactive effect from November 17, 2010. The

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leases are for a 10-year initial term and we have a right to extend the term for an additional 10 years, at the then current market rate. See "—New Lease Agreements." We recognized rental expense related to these leases of approximately $0.9 million in the first quarter and expect to recognize approximately $3.6 million annually for 2011-2020 (at the US dollar/ruble exchange rate as of March 31, 2010). In addition to the lease payments described above, we are also required to pay technical costs arising from maintenance of the premises and some supplementary municipal services.

Networks. Selling, general and administrative expenses of the CTC Network as a percentage of this segment's total operating revenues were 4.3% and 17.3% during the three months ended March 31, 2010 and 2011, respectively. Net of the effect of reporting advertising revenues based on gross amounts billed to advertisers and reporting compensations payable to Video International in selling, general and administrative expenses effective 2011, due to changes in our sales structure (discussed above), selling, general and administrative expenses as a percentage of this segment's total operating revenues increased from 16.0% to 17.3%, when comparing the three months ended March 31, 2010 and 2011, respectively, mainly due to increased salaries and benefits, increased advertising and promotion expenses and increase in rental expense. The increase in salaries and benefits was due to annual raises, transfers of some employees from other segments to CTC Network segment, and increase in headcount in our sales function.

Selling, general and administrative expenses of the Domashny Network as a percentage of this segment's total operating revenues were 15.1% and 23.1% during the three months ended March 31, 2010 and 2011, respectively. Net of the effect of reporting advertising revenues based on gross amounts billed to advertisers and reporting compensations payable to Video International in selling, general and administrative expenses effective 2011, due to changes in our sales structure (discussed above), selling, general and administrative expenses as a percentage of this segment's total operating revenues decreased from 25.2% to 23.1%, when comparing the three months ended March 31, 2010 and 2011, respectively, primarily due to increased revenues.

Selling, general and administrative expenses of the DTV Network as a percentage of this segment's total operating revenue were 15.1% and 24.4% during the three months ended March 31, 2010 and 2011, respectively. Net of the effect of reporting advertising revenues based on gross amounts billed to advertisers and reporting compensations payable to Video International in selling, general and administrative expenses effective 2011, due to changes in our sales structure (discussed above), selling, general and administrative expenses as a percentage of this segment's total operating revenues increased from 23.8% to 24.4%, when comparing the three months ended March 31, 2010 and 2011, primarily due to increase in rent expenses.

Television Station Groups. Selling, general and administrative expenses of the CTC Television Station Group as a percentage of this segment's total operating revenues were 20.7% and 26.3% during the three months ended March 31, 2010 and 2011, respectively. Net of the effect of reporting advertising revenues based on gross amounts billed to advertisers and reporting compensations payable to Video International in selling, general and administrative expenses effective 2011, due to changes in our sales structure (discussed above), selling, general and administrative expenses as a percentage of this segment's total operating revenues decreased from 29.3% to 26.3%, when comparing the three months ended March 31, 2010 and 2011, primarily due to increased revenues, partially offset by the increase in advertising and promotion expenses, and by the increase in salaries and benefits due to increased headcount in our sales function.

Selling, general and administrative expenses of the Domashny Television Station Group as a percentage of this segment's total operating revenues were 36.0% and 37.7% during the three months ended March 31, 2010 and 2011, respectively. Net of the effect of reporting advertising revenues based on gross amounts billed to advertisers and reporting compensations payable to Video International in selling, general and administrative expenses effective 2011, due to changes in our sales structure

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(discussed above), selling, general and administrative expenses as a percentage of this segment's total operating revenues decreased from 41.7% to 37.7%, when comparing the three months ended March 31, 2010 and 2011, primarily due to increased revenues.

Selling, general and administrative expenses of the DTV Television Station Group as a percentage of this segment's total operating revenues were 37.2% and 52.3% during the three months ended March 31, 2010 and 2011, respectively. Net of the effect of reporting advertising revenues based on gross amounts billed to advertisers and reporting compensations payable to Video International in selling, general and administrative expenses effective 2011, due to changes in our sales structure (discussed above), selling, general and administrative expenses as a percentage of this segment's total operating revenues increased from 44.1% to 52.3%, when comparing the three months ended March 31, 2010 and 2011, primarily due to the increase in advertising and promotion expenses, and due to the accrual of provision for VAT on purchases that were determined as not recoverable.

CIS Group. Selling, general and administrative expenses of our CIS Group consist primarily of payroll expenses related to sales, marketing, finance and administrative personnel, marketing expenses, consultancy and outside service expenses, office space rent expenses and utilities expenses of the Channel 31 Group. As a percentage of this segment's operating revenues, selling, general and administrative expenses decreased from 41.9% to 31.5% when comparing the three months ended March 31, 2010 and 2011, mainly due to increase in segment revenue.

Production Group. Selling, general and administrative expenses of the Production Group consist primarily of payroll expenses related to sales, marketing, finance and administrative personnel, office space rent expenses and utilities expenses of our production companies. As a percentage of this segment's operating revenues, selling, general and administrative expenses increased from 7.5% to 19.8% when comparing the three months ended March 31, 2010 and 2011, mainly due to the decreased revenues.

Eliminations and other. Other selling, general and administrative expenses consist principally of the general and administrative expenses of our corporate headquarters, as well as intercompany eliminations.

Stock-based compensation expenses

	Three months ended March 31,

	(In thousands, except for percentages)
	2010			2011
Stock-based compensation expenses	$	(7,330	)	$	(6,219	)

The decrease in stock-based compensation expense was principally due to expense related to modifications made to the stock options of our CEO in the first quarter of 2010, and the fact that some options granted in 2007 to our employees became fully vested.

We expect to recognize stock-based compensation expense related to all of our currently outstanding stock options and equity-based incentive awards of approximately $22.2 million for 2011, $8.0 million for 2012, $6.6 million for 2013 and $1.0 million for 2014. For more details on our stock-based compensation transactions, see "Financial Statements—Note 9, Stock-Based Compensation."

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Amortization of programming rights

		Three months ended March 31,

		2010			2011
		(in thousands, except percentages)
CTC Network		$	(36,602	)	$	(52,611	)
	Change period-to-period		—			43.7	%
Domashny Network			(6,822	)		(9,914	)
	Change period-to-period		—			45.3	%
DTV Network			(6,031	)		(8,114	)
	Change period-to-period		—			34.5	%
CIS Group			(1 565	)		(1,850	)
	Change period-to-period		—			18.2	%
Eliminations and other			1,559			1,751

	Total	$	(49,461	)	$	(70,738	)

	Change period-to-period		—			43.0	%
	% of total operating revenues		40.1	%		42.7	%

The amortization of programming rights as a percentage of total operating revenues was 40.1% and 42.7% during the three months ended March 31, 2010 and 2011, respectively. Net of the effect of reporting advertising revenues based on gross amounts billed to advertisers effective 2011, due to changes in our sales structure (discussed above), amortization of programming rights as a percentage of total operating revenues increased from 35.5% to 42.7%, when comparing the three months ended March 31, 2010 and 2011.

Networks. The amortization of programming rights is our most significant expense at the Networks level. Amortization of programming rights for the CTC Network segment, as a percentage of its total operating revenues was 44.0% and 48.5% during the three months ended March 31, 2010 and 2011, respectively. Net of the effect of reporting advertising revenues based on gross amounts billed to advertisers effective 2011, due to changes in our sales structure (discussed above), amortization of programming rights as a percentage of this segment's total operating revenues increased from 38.6% to 48.5%, when comparing the three months ended March 31, 2010 and 2011, respectively.

Amortization of programming rights for the Domashny Network segment, as a percentage of its total operating revenues was 50.6% and 50.2% during the three months ended March 31, 2010 and 2011, respectively. Net of the effect of reporting advertising revenues based on gross amounts billed to advertisers effective 2011, due to changes in our sales structure (discussed above), amortization of programming rights as a percentage of this segment's total operating revenues increased from 44.6% to 50.2%, when comparing the three months ended March 31, 2010 and 2011, respectively.

Amortization of programming rights for the DTV Network segment, as a percentage of its operating revenues increased from 60.9% to 64.0% when comparing the three months ended March 31, 2010 and 2011. Net of the effect of reporting advertising revenues based on gross amounts billed to advertisers effective 2011, due to changes in our sales structure (discussed above), amortization of programming rights as a percentage of this segment's total operating revenues increased from 54.7% to 64.0%, when comparing the three months ended March 31, 2010 and 2011, respectively.

The increases in amortization of programming rights at Network level when comparing the three-month periods under review were primarily due to the relatively more expensive programming mix and higher impairment charges in CTC and Domashny in the first quarter of 2011.

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Impairment charges at CTC Network were $1.5 million and $7.3 million, respectively, in the three months ended March 31, 2010 and 2011. Impairment charges at Domashny Network were $0.1 million and $1.2 million, respectively, in the three months ended March 31, 2010 and 2011. Impairment charges at DTV Network were $1.5 million and $0.1 million, respectively, in the three months ended March 31, 2010 and 2011. The increase in impairment charges in CTC and Domashny Networks was due to the change in programming schedule in 2011, and relative underperformance of certain programming.

CIS Group. The amortization of programming rights for the CIS Group primarily consists of the amortization of in-house programming and acquired programming rights by the Channel 31 Group, including content provided by CTC Network. Amortization of programming rights for the CIS Group segment, as a percentage of the segment's total operating revenues, decreased from 68.5% to 60.1% when comparing the three months ended March 31, 2010 and 2011, due to the relatively more expensive programming mix.

Amortization of sublicensing rights and own production cost

		Three months ended March 31,

		2010			2011
		(in thousands, except percentages)
CTC Network		$	(1,065	)	$	(426	)
	Change period-to-period		—			(60.0	)%
DTV Network			(203	)		—
	Change period-to-period		—			100,0	%
Production Group			(6,326	)		(1,748	)
	Change period-to-period		—			(72.4	)%
Eliminations and other			6,239			1,860

	Total	$	(1,355	)	$	(314	)

	Change period-to-period		—			(76.8	)%
	% of total operating revenues		1,1	%		0.2	%

Own production cost represents the cost of internally produced programming licensed to third parties as well as sold to other segments in our group.

Networks. The decrease in the amortization of sublicensing rights and own production cost at the CTC Network level when comparing the three-month periods under review was primarily due to decreased cost of internally produced series and sitcoms sold to Ukraine.

Production Group. Direct production costs for the Production Group, which consists mainly of production staff salaries, compensation to actors and other direct costs associated with programming sold to our Networks, are classified within amortization of sublicensing rights and own production cost. These expenses are eliminated in consolidation.

Eliminations and other. Inter-company expenses consist primarily of programming rights sold by our Production Group to our Networks.

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Depreciation and amortization expense (exclusive of amortization of programming rights, sublicensing rights and own production cost)

		Three months ended March 31,

		2010			2011
		(in thousands, except percentages)
CTC Network		$	(285	)	$	(571	)
	Change period-to-period		—			100.4	%
Domashny Network			(207	)		(224	)
	Change period-to-period		—			8.2	%
DTV Network			(692	)		(744	)
	Change period-to-period		—			7.5	%
CTC Television Station Group			(574	)		(551	)
	Change period-to-period		—			(4.0	)%
Domashny Television Station Group			(371	)		(427	)
	Change period-to-period		—			15.1	%
DTV Television Group			(971	)		(1,164	)
	Change period-to-period		—			19.9	%
CIS Group			(151	)		(152	)
	Change period-to-period		—			0.7	%
Production Group			(39	)		(23	)
	Change period-to-period		—			(41.0	)%
Eliminations and other			(87	)		(80	)

	Total	$	(3,377	)	$	(3,936	)

	Change period-to-period		—			16.6	%
	% of total operating revenues		2.7	%		2.4	%

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, sublicensing rights and own production cost, principally network affiliation agreements and cable network connections.

Networks. At the Network level, the depreciation of broadcasting equipment, network affiliation agreements, computer hardware and office furniture represents the principal component of this expense.

Television Station Groups. We have entered into contracts with Mostelecom to secure the right of the CTC, Domashny and DTV Moscow stations to be connected by cable to additional households in Moscow. These contracts do not, however, grant us the right to be connected to all households in Moscow for all of our Networks. We continue to evaluate, from a cost-benefit analysis, whether to enter into additional contracts with Mostelecom regarding other households. Based on our analysis of the terms of these agreements with Mostelecom, we will amortize these cable network connections through December 2015.

CIS Group. Depreciation and amortization expense of the CIS Group mainly consisted of depreciation of broadcasting, studio and office equipment and amortization of office software.

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Foreign currency gains (losses)

	Three months ended March 31,

	2010			2011
	(in thousands, except percentages)
Foreign currency gains (losses)	$	(273	)	$	1,133

The functional currency of our Russian subsidiaries is the ruble. The Russian ruble appreciated approximately 3.0% and 7.0% against the US dollar during the first quarter of 2010 and 2011, respectively.

In the three months ended March 31, 2010, our foreign currency loss primarily represents the impact of ruble appreciation on our dollar-denominated assets and loss on our forward contract, partially offset by the impact of ruble appreciation on our dollar-denominated liabilities. In the three months ended March 31, 2011, our foreign currency gain primarily represents the impact of ruble appreciation on our dollar-denominated liabilities, partially offset by the impact of ruble appreciation on our dollar-denominated assets.

In October 2008, we entered into a foreign exchange forward contract to reduce a portion of our foreign exchange risk related to the Credit Facility Agreement, which was denominated in US dollars. On June 15, 2010 we purchased the last $15 million under this forward contract at a rate of RUR 28.84 for each $1.00. In addition, from time to time we enter into foreign exchange hedging arrangements in relation to a portion of our programming commitments denominated in US dollars.

Interest income

	Three months ended March 31,

	2010		2011
	(in thousands, except percentages)
Interest income	$	1,359	$	1,486

Interest income for the three-month periods under review primarily represents interest earned on our cash balances.

Interest expense

	Three months ended March 31,

	2010			2011
	(in thousands, except percentages)
Interest expense	$	(692	)	$	(100	)

Our interest expense decreased over the periods under review primarily due to repayments of the total amount under the Credit Facility Agreement during the first quarter of 2010.

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Other non-operating income (loss), net

	Three months ended March 31,

	2010		2011
	(in thousands, except percentages)
Other non-operating income (loss)	$	1,623	$	(27	)

In January 2010, we sold our interest in a radio station in Kazakhstan for total consideration of $2.0 million and recognized a $2.0 million gain on the sale.

Equity in income of investee companies

	Three months ended March 31,

	2010		2011
	(in thousands, except percentages)
Equity in income of investee companies	$	94	$	177

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 its results with our results of operations, reflecting a portion of net income commensurate with our ownership stake in it.

Income tax expense

	Three months ended March 31,

	2010			2011
	(in thousands, except percentages)
Income tax expense	$	(12,260	)	$	(14,903	)

Our effective tax rate was 32% and 39% for the three months ended March 31, 2010 and March 31, 2011, respectively. The increase in our effective tax rate when comparing the periods under review was primarily due to an increase in deferred tax liabilities on unremitted earnings of our Russian subsidiaries that we do not plan to reinvest.

Income attributable to noncontrolling interest

	Three months ended March 31,

	2010			2011
	(in thousands, except percentages)
Income attributable to noncontrolling interest	$	(928	)	$	(902	)

In the three months ended March 31, 2010 and 2011, income attributable to noncontrolling interest mostly relates to our consolidated owned-and-operated stations in the CTC Television Station Group.

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Other comprehensive income attributable to controlling interest

The functional currency of our Russian-domiciled subsidiaries is the Russian ruble and the functional currency of our Channel 31 Group is the Kazakh tenge. As a result, the financial statements of these subsidiaries were translated into US dollars using the current rate method. Other comprehensive income in the periods under review reflects results of these translations, and resulted from the appreciation of the Russian ruble against the US dollar during these periods. The ruble appreciated approximately 3.0% and 7.0% against the US dollar during the first quarter of 2010 and 2011, respectively. See "—Foreign currency gains (losses)".

Consolidated Financial Position—Significant Changes in our Unaudited Condensed Consolidated Balance Sheets at March 31, 2011 compared to December 31, 2010

Short-term investments

As of December 31, 2010 and March 31, 2011, short-term investments represent cash deposits with maturity in the range from three to six months placed in Russian banks.

Short-term and long-term prepayments

Prepayments increased from December 31, 2010 to March 31, 2011 by $5.0 million primarily due to increases in advances made for Russian and foreign programming.

Short-term and long-term programming rights

The increase in programming rights from December 31, 2010 to March 31, 2011 by $14.8 million was primarily due to the acquisition of Russian shows and foreign movies and series during the first quarter of 2011, which will be used during the remainder of 2011 and thereafter.

Goodwill and Intangible assets

Goodwill and Intangible assets increased from December 31, 2010 to March 31, 2011 by $17.1 million and $19.6 million, respectively, primarily due to the appreciation of the Russian ruble against the US dollar.

Taxes payable

Taxes payable decreased from December 31, 2010 to March 31, 2011 by $16.2 million primarily due to a decrease in VAT payable as a result of seasonally lower revenues in the first quarter of 2011 compared with the fourth quarter of 2010.

Liquidity and Capital Resources

At March 31, 2011, we had $81.5 million in cash and cash equivalents, of which approximately 23% was held in US dollar-denominated accounts. In addition, at March 31, 2011, we had $82.1 million in deposits with maturities ranging from three to six months, of which approximately 14% were held in US dollar-denominated accounts. We do not have in place a readily available line of credit or other alternative source of financing.

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.

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Cash flows

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

	Three months ended March 31,

	2010			2011
	(in thousands)
Net cash provided by operating activities:	$	5,052		$	12,280
Net cash (used in)/provided by investing activities:		(26,421	)		26,840
Net cash used in financing activities:		(38,371	)		(21,400	)

Substantially all of our cash flows from operating activities throughout the periods under review derived from advertising revenues. Changes in our cash flows from operating activities primarily reflect changes in our advertising revenues over these periods. Our advertising revenue increased from $117.0 million to $163.1 million when comparing the three-month periods under review, of which an increase of $16.3 million relates to the effect of reporting advertising revenues based on gross amounts billed to advertisers effective 2011, due to changes in our sales structure (discussed above). Net of this effect, our advertising revenues increased by $29.8 million, when comparing the three-month periods under review.

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 $63.5 million and $77.4 million, respectively, during the three months ended March 31, 2010 and 2011. The increase in cash paid for programming rights in the first quarter of 2011 was primarily due to advance payments for some Russian-produced and foreign programming during the first quarter of 2011, that will be used in 2011 and thereafter.

Amortization of programming rights, sublicensing rights and own production cost amounted to $50.8 million and $71.1 million, during the three months ended March 31, 2010 and 2011, respectively.

In first quarter of 2010, we paid $12.8 million in 2009 earnouts related to our acquisitions of Costafilm and Soho Media. In addition, in the first quarter of 2010, we made net cash deposits of $11.2 million in Russian banks. In the three-month period ended March 31, 2011, our cash provided by investing activities primarily represents net cash received from deposits in the amount of $38.6 million. Also, in the first quarter of 2011, we paid $3.2 million in 2010 earnouts related to our acquisitions of Costafilm, and $4.5 million related to our acquisition of regional station in Tomsk.

In 2011, we expect capital expenditures to reach up to $25 million as we continue to work on our technology complex and move our internal sales house into our Moscow headquarters facility.

In the three-month period ended March 31, 2010, cash used in financing activities includes repayment of all amounts outstanding under the Credit Facility Agreement of $28.3 million. In addition, during the first quarter of 2010, we paid dividends in the amount of $10.0 million, to our stockholders. In the three-month period ended March 31, 2011, cash used in financing activities includes payment of dividends in the amount of $25.1 million, to our stockholders. Also, in the first quarter 2010 we received $3.9 million in proceeds from the exercise stock options. See "Item 1. Financial Statements—Note 8, Stockholders' Equity".

On April 28, 2011, our Board declared a dividend of $0.22 per outstanding share of common stock, or approximately $35 million in total, which will be paid on or about June 30, 2011 to shareholders of record as of June 1, 2011. Our Board currently intends to pay further dividends in each of the following quarters of 2011. Although it is the Board's current intention to declare and pay further dividends in the remaining quarters of 2011, there can be no assurance that such additional

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dividends will in fact be declared and paid. Any such declaration is at the discretion of the Board and will depend upon factors such as our earnings, financial position and cash requirements.

Off-balance sheet transactions

From time to time, we issue guarantees in favor of banks that make loans to production companies that produce Russian programming for us. Currently, there are no such guarantees in place.

Contractual obligations

The table below summarizes the principal categories of our contractual obligations as of March 31, 2011:

		Payments Due by Period

		Total		Through 2011		2012 through 2013		2014 through 2015		Thereafter
		(in thousands)
Acquisition of programming rights		$	235,729	$	136,262	$	99,467		—		—
Transmission and satellite fees		$	88,291	$	11,801	$	35,307	$	41,183		—
Leasehold obligations		$	56,102	$	3,804	$	10,465	$	10,905	$	30,928
Cable connections		$	11,502	$	3,232	$	3,424	$	4,846		—
Acquisition of format rights		$	1,123	$	1,123		—		—		—

	Total(1)	$	392,747	$	156,222	$	148,663	$	56,934	$	30,928

(1): Accrued liabilities related to income taxes in the amount of $5.3 million are excluded from this table because we cannot make a reasonably reliable estimate of the period of cash settlement with the taxing authorities.

In December 2010, we entered into two definitive lease agreements for new headquarters facilities in Moscow. See "—New Lease Agreements." We recognized rental expense related to these leases of approximately $0.9 million in the first quarter of 2011 and expect to recognize approximately $3.6 million annually for 2011-2020 (at the US dollar/ruble exchange rate as of March 31, 2011). In addition to the lease payments described above, we are also required to pay technical costs arising from maintenance of the premises and some supplementary municipal services.

We also are in the process of negotiating leases for additional space of approximately 2,300 square meters in this office facility.

In addition, in October 2010 we signed an agreement to upgrade our broadcasting equipment at a cost of $16.3 million, of which the outstanding amount to be paid in 2011 amounts to $3.8 million.

Recently Issued Accounting Pronouncements

We have considered all recently issued accounting pronouncements and disclosed the ones that could be material to our financial statements in the notes to our consolidated financial statements. See "Financial Statements—Note 2, Basis of Presentation and Summary of Significant Accounting Policies."

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign currency exchange risk

Because our reporting currency is the US dollar and the functional currency of our principal operating subsidiaries is the Russian ruble, our reported results of operations are impacted by fluctuations in the exchange rate between the US dollar and the Russian ruble. Additionally, given that substantially all of our revenues are generated in rubles, we face exchange rate risk relating to operating expenses that we incur in currencies other than the ruble, primarily US dollar payments for

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non-Russian produced programming. For the three months ended March 31, 2011, if the value of the ruble compared to the US dollar had been, on average, 10% lower than it actually was, we would have reported decreases in total operating revenues and total operating expenses of approximately $14.6 million and $8.2 million, respectively. The total operating expenses we reported would have decreased in this hypothetical scenario because most of our operating expenses are ruble-denominated although our reporting currency is the US dollar.

The prevailing exchange rate as of March 31, 2011 was RUR 28.43 to $1.00. We do not use hedging arrangements for trading or speculative purposes.

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 March 31, 2011. 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 as of March 31 2011, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective.

Changes in internal control over financial reporting.

During the three months ended March 31, 2011, there was a change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, as described below.

Prior to 2011, substantially all of our advertising was placed through Video International. Effective 2011, our own sales house serves as the exclusive advertising sales agent for all of our networks in Russia. The advertising is placed with advertisers under direct arrangements with them or with their advertising agencies. Our sales house is primarily responsible for all of our national and regional advertising sales, with the exception of advertising sales to local clients of our regional stations, which continue to be made through Video International. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations—Our Television Advertising Sales".

In response to change in our sale structure, in addition to internal controls that were in place prior to 2011, we designed and implemented controls over sales transactions under the new direct arrangements with advertizers and their agencies to ensure that transactions are recorded as necessary to permit preparation of the financial statements in accordance with US GAAP. Such controls include controls over the authorization of sales terms, cash collections and evaluation of creditworthness of customers. This initiative was not in response to any identified deficiency or weakness in our internal control over financial reporting.

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PART II. Other Information

Item 1. Legal Proceedings

We are not currently party to any legal proceedings, the outcome of which would reasonably be expected to 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, 2011 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. There may be risks that a particular investor views differently from us, and our analysis of the risks we face might be wrong. If any of the risks that we face actually occur, our business, financial condition and operating results could be materially adversely affected and could differ materially from any possible results suggested by any forward-looking statements that we have made or might make. In such case, the trading price of our common stock could decline, and you could lose some or all of your investment. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Risks relating to our business and industry

Changes to the Russian law "On Advertising" have fundamentally changed the way in which we sell advertising, which could adversely affect our business, financial condition and results of operations.

In December 2009, the Federal Law "On Advertising" was amended (effective January 2011) to prohibit TV broadcasters from signing agency agreements with media sales houses that hold a TV advertising market share greater than 35%. The Russian Federal Anti-monopoly Service has the authority to seek the termination of agreements that allegedly violate these provisions. Video International, the media sales house that historically sold all of our national advertising and substantially all of our regional advertising, in previous years controlled more than 35% of the Russian TV advertising market. As a result of this amendment, the structure of the Russian TV advertising market has changed.

In response to these developments, in September 2010 we established our own sales house, Closed Joint Stock Company "EvereST-S", a wholly owned subsidiary of CTC Network. Our sales house now acts as the exclusive advertising sales agent for all of our Russian networks and Television Station Groups in respect of Moscow-based clients, effective January 1, 2011.

In order to benefit from our long-term cooperation with Video International and to successfully support our own advertising sales, in November 2010, we entered into a new agreement with Video International to govern our cooperation, effective January 1, 2011. Under the terms of the agreement, our sales house received a license to use Video International group's proprietary advertising software package (including modules such as Automated System for the Placement of Television Advertising, Automated Document Management System, and Media Calculator). In addition, the Video International group provides a number of support services related to maintenance of the software package, such as technical support and consulting along with integration of the software; as well as Russian advertising market analytical services including forecasts, market surveys and research. In particular, Video International group provides detailed analysis of the Russian television market, including audience share and advertising market dynamics.

Under the terms of this agreement, we pay Video International both fixed license fees for the use of the software package and variable service fees, which depend on the amount of services rendered.

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The aggregate amount of compensation payable is calculated on the basis of our Russian channels' television advertising revenues (including network revenues and revenues from regional advertising placed by Moscow-based clients, but excluding revenues from social advertising and some sponsorship revenues, as well as placement by Video International of national advertising by certain of its subsidiaries). Under these arrangements, we expect that the overall compensation payable to Video International annually will be in the range of 10% to 12% of our Russian channels' advertising revenues. The parties have also agreed that the compensation payable to Video International under the new agreement may be decreased by the mutual consent of the parties on an annual basis.

In addition to the agreement between our sales house and Video International described above, a number of our owned-and-operated regional stations have also signed definitive agency agreements with local subsidiaries of Video International with respect to advertising sales to local clients. Under the terms of such agreements, we pay Video International a commission fee set as a percentage of the actual gross revenues received from advertising sales by the relevant local station. The aggregate headline commission payable to Video International under such agreements is 12% of the regional station's total annual gross advertising revenues, including VAT. It has also been agreed by the parties that the commission payable to Video International under those agreements may be subject to reduction upon mutual consent of the parties on an annual basis.

We do not have extensive experience in making direct sales of national television advertising ourselves. In order to support this function, we have substantially increased the size of our internal sales force, and have implemented a range of new functions and systems with which we have had limited experience to date. We may be unsuccessful in maintaining these functions, and may be unable to generate the same advertising volumes and revenues or margins under this new model of advertising sales as we did in the past. If we encounter difficulties in maintaining our sales house function, our advertising sales and revenues could suffer, and as a consequence our business, financial condition and results of operations could be materially adversely affected. See "Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations—Our Agreements with Video International."

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 shares and ratings. If our audience shares 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 decrease in our advertising revenues, which could be material. 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. Moreover, because we continue to rely on third-party production companies for a large portion of our programming and our programming library is not as extensive as those of some of our competitors, we may be unable to quickly substitute new programming for underperforming programming. 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.

We derive almost all of our revenues from the sale of advertising, which is sensitive to broader economic conditions. Our revenues may substantially decrease if the economic environment deteriorates in Russia or other CIS countries in which we operate.

We generate substantially all of our revenues from advertising. In general, expenditures by advertisers tend to be cyclical, reflecting overall economic conditions and buying patterns. Since the introduction of commercial television advertising in Russia following the fall of the Soviet Union,

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advertising spending has fluctuated substantially, generally increasing during periods of economic growth and decreasing during downturns.

Beginning in the second half of 2008, Russia, like many other countries, experienced economic instability, characterized by a steep decline in the value of shares traded on its stock exchanges, devaluation of its currency, capital flight and a decline in gross domestic product. Additionally, because Russia produces and exports large amounts of oil, its economy is particularly vulnerable to fluctuations in the price of oil on the world market and recent decreases in international oil prices have adversely affected and may continue to adversely affect its economy. Total television advertising spending in Russia was adversely affected by this economic instability and, as a result, our operating results for 2009 were materially adversely affected. Like Russia, Kazakhstan has also experienced economic instability.

Although conditions improved in 2010 and in the first quarter of 2011, if such conditions are not sustainable or if economic instability resumes, it may have a further material negative impact on Russian advertising spending which, in turn, may adversely affect our operating results.

Changes in the method of measuring television audiences have at times in the past resulted, and may again in the future result, in decreases in our audience share and ratings.

The system of audience measurement in Russia, currently run by TNS Russia, has evolved as the advertising market has matured and in response to changing Russian demographics.

Starting from July 2009, TNS Russia weights the panel of measured cities based on broadcasters' technical penetration in a group of 125 cities. Our audience share could be negatively affected if we were to lose an affiliate in one of that group of cities, or if our technical penetration in that group of cities were to be lower than our average technical penetration.

In 2010, the size of the panel itself was increased from 65 to 72 cities. In addition, in 2010 TNS Russia made changes to the relative weighting of the cities in the panel, which became effective starting from January 1, 2011. Based on our analysis, this re-weighting may result in a decrease in the audience share of our channels, which may have a negative effect our consolidated revenues. This re-weighting also resulted in the impairment of some of our affected broadcasting licenses on a stand-alone basis, recognized in 2009. See "—A significant portion of our total assets are intangibles assets with indefinite lives that we do not amortize. If events or changes in circumstances reduce the fair value of those assets, we may be required to record impairment losses that could materially adversely impact our net income."

When changes to the system of audience measurement occur, we attempt to take steps when possible in respect of our programming and distribution to counteract the effects of such changes. We cannot ensure you that these steps will be adequate or effective, or that any further changes in the measurement system will not result in further decreases in our audience shares and therefore a material decrease in our advertising revenues.

We may face additional expenditures and increased competition in connection with the planned transition from analog to digital broadcasting in Russia.

In late 2009, the Russian government announced plans to introduce digital broadcasting throughout Russia by 2015. The specific terms of the transition are not yet fully known.

Depending on the terms of the transition, we may face competition from other parties for digital frequencies or other access, and we may also face additional costs in connection with requirements for new equipment and added staffing. We may also face increased competition from other broadcasters that may make the transition to digital broadcasting more quickly or efficiently than we do, or that are more successful in taking advantage of the new digital platform to introduce a better programming offering.

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A significant portion of our total assets are intangible assets with indefinite lives that we do not amortize. If events or changes in circumstances reduce the fair value of those assets, we may be required to record impairment losses that could materially adversely impact our net income.

We have intangible assets recorded on our consolidated balance sheet, such as broadcasting licenses, trade names and goodwill, that have indefinite lives and represent a significant portion of our total assets. Because these assets have indefinite lives, we do not amortize them but instead perform impairment tests on them annually or when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. If we determine that our estimate of the current value of an asset is below the recorded value of that asset on our balance sheet, we record an impairment loss for the difference.

As a result of the economic instability that arose in the second half of 2008, we recorded noncash impairment charges that had a net effect on our 2008 net income of $153.7 million. These losses related to intangible assets and goodwill that we acquired in connection with acquisitions completed in 2008, including broadcasting licenses of DTV Television Station Group, trade names of DTV Network, broadcasting licenses and goodwill of Channel 31 in Kazakhstan, and the broadcasting license of our broadcasting group in Moldova.

In addition, a change in the weighting given by TNS Russia to cities in the audience measurement panel required us to re-assess the carrying value of our broadcasting licenses in certain panel cities and, as a result, we recorded impairment charges that had a net effect on our net income of $15.0 million in 2009.

We performed our annual impairment review in the fourth quarter of 2010 and an interim impairment review in the first quarter of 2011, which did not result in any further impairment charges. We consider all current information in respect of determining the need for or calculating any impairment charge, however, future changes in events or circumstances, such as changes in the economy, decreases in our audience shares or ratings, increased competition from cable providers, or changes in the audience measurement system, could result in decreases in the fair value of our intangible assets and require us to record additional impairment losses that could have a material adverse impact on our net income. See "Financial Statements—Note 2, Basis of Presentation and Summary of Significant Accounting Policies—Goodwill and Indefinite-Lived Intangible Assets Impairment Tests". In addition, the Russian government has announced plans to introduce digital broadcasting in various stages throughout Russia. The specific terms of the transition are not yet fully determined. When these terms are determined, the transition to digital broadcasting also could adversely impact our operations or the value of our broadcasting licenses and goodwill.

Competition for quality programming in Russia is intense and any failure to secure a steady supply of popular programming may negatively affect our audience shares, which in turn could have a material adverse affect on our 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 relatively limited supply of Russian-produced programming and strong competition among Russian networks and channels for such programming, as well as for popular foreign programming.

If we are unable to produce or 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 shares could be negatively affected, which would adversely affect our advertising revenues. Moreover, if any of the programming we produce, commission or license 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, and we could be forced to broadcast more expensive programming

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to maintain audience share, either of which could have a material adverse impact on our results of operations.

Recent declines in the value of the Russian ruble against the US dollar have negatively impacted our reported revenues and operating results. If the ruble depreciates further against the US dollar, our revenues and our operating results, both as reported in US dollars, will be adversely affected.

Although our reporting currency is the US dollar, we generate almost all of our revenues through the sale of advertising, which in Russia is sold primarily in rubles. The ruble is also the functional currency of our principal operating subsidiaries. As a result, our reported revenues and results of operations are impacted by fluctuations in the exchange rate between the US dollar and the Russian ruble. Additionally, given that substantially all of our revenues are generated in rubles, we face exchange rate risk relating to payments that we must make in currencies other than the ruble. We generally pay for non-Russian produced programming in US dollars. The Russian ruble depreciated against the US dollar approximately 16.5%, 2.9% and 0.8%, respectively, in 2008, 2009 and 2010. In the first quarter of 2011, the Russian ruble appreciated against the US Dollar approximately 7%. If the ruble depreciates further against the US dollar, our revenues and operating results for 2011 or future periods, as reported in US dollars, will be adversely affected.

Restrictions on direct or indirect foreign ownership of Russian television companies could limit our ability to grow our business through acquisitions.

In May 2008, the law "On foreign investments in economic entities that have strategic importance for defense and security of the state" (the "Ownership Law") came into effect in Russia. The Ownership Law imposes restrictions on direct or indirect non-Russian ownership in "strategically important" industries, including television broadcasters that broadcast to more than 50% of the population of a relevant constituent entity of the Russian Federation. Among other things, the Ownership Law requires prior approval from the Commission for Control Over Foreign Investments, and potentially from the Federal Security Bureau, for the acquisition by a non-Russian entity of an interest above a certain ownership threshold in a company operating in a strategically significant sector. It is anticipated that such approval will generally require at least six months.

The Ownership Law contains a "grandfather" provision with respect to pre-existing holdings in affected companies that requires notification of such pre-existing holdings but no approval requirement. We therefore believe that neither CTC Media's pre-existing ownership of its Russian operating subsidiaries, nor the pre-existing ownership of shares of CTC Media by non-Russian stockholders, violates the Ownership Law or requires any approval. We do believe, however, that we will be required to obtain approval under the Ownership Law for any acquisition of an affiliate television station that broadcasts to more than 50% of the population of a relevant constituent entity of the Russian Federation, or any acquisition of another Russian network. Such approval process is likely to be time-consuming and may, in any event, ultimately result in a rejection of a proposed transaction. As a result, we may lose out on acquisition opportunities to competitors, and our ability to grow our business through acquisitions in Russia may be limited. Even if the authorities approve such a transaction, they may do so subject to conditions regarding the operation of the company—including, for example, the composition of its management—that may limit our effective control and operational flexibility.

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.

In addition to the Ownership Law discussed above, the law "On Mass Media" (the "Mass Media Law") also restricts direct (but not indirect) foreign involvement in Russian television businesses.

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Following adoption of these provisions in 2002, we implemented a restructuring plan pursuant to which we created a holding company structure and reduced CTC Media's direct ownership in the CTC Network and each of our owned-and-operated stations below 50%. CTC Media's direct ownership of Domashny and the DTV Group, which were acquired subsequent to the adoption of these restrictions, is also below 50%. This restructuring was completed prior to the August 2002 deadline with respect to all entities in our group, other than our CTC-Moscow station; the restructuring of the ownership of that station was completed in December 2002. 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 deadline. 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" for purposes of the Mass Media Law, and that CTC Media does not violate the foreign involvement restrictions of that law.

The Mass Media Law could in the future be interpreted by Russian governmental authorities or a court to extend to, and to prohibit, indirect foreign ownership of or control over Russian broadcasters of television or video programs. In addition, the Ownership Law described above could be implemented or interpreted to apply in some respects to foreign holdings existing at the time of adoption of the law. In either case, it is possible that Russian governmental authorities could suspend or revoke broadcasting licenses or permits held by our networks and our owned-and-operated stations, or fail to renew any such licenses. If any law were to be adopted or interpreted to restrict indirect foreign ownership and control of Russian television broadcasters, and did not contain a "grandfather" clause with respect to existing holdings, CTC Media could be obliged to restructure its group in order to comply with such requirements, including by divesting a controlling stake in our networks and our owned-and-operated stations. If we failed to comply in a timely manner, the authorities could suspend, revoke or fail to renew broadcasting licenses or permits held by our networks or our owned-and-operated stations, or could take other actions against us that could limit our ability to operate.

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

The Mass Media Law in Kazakhstan restricts direct and indirect foreign ownership of any Kazakh television broadcaster to no more than 20%. In 2008, we acquired a 20% interest in the Kazakh television broadcast company Channel 31, and established two subsidiaries that provide the programming content and advertising sales functions to Channel 31 on an exclusive basis (together, the "Channel 31 Group"). Together, these interests provide us with a 60% economic interest in the Channel 31 Group as a whole. If the existing 20% limit were to be interpreted to restrict effective or economic control, rather than just direct ownership, or if the law were to be changed or interpreted to impose further restrictions or limitations on foreign ownership of Kazakh television broadcasters, we could be obliged to restructure this group in order to comply with such requirements or could be required to divest all or a portion of our interest in the Channel 31 Group. If we failed to comply in a timely manner, the authorities could suspend or revoke Channel 31's broadcasting licenses or could take other actions that could limit our ability to operate the Channel 31 Group. The book value of Channel 31's broadcasting license as of March 31, 2011 was $12.7 million.

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We have completed several significant acquisitions, and continue to seek opportunities to acquire other stations, networks, production companies and other complementary media businesses. We may encounter difficulties integrating acquired businesses, and if we fail to identify additional suitable targets our growth may be impeded.

We completed several significant acquisitions in 2008, including our third national Russian network, DTV; a majority economic interest in the Kazakh network Channel 31; a majority economic interest in a broadcasting group in Moldova; and two Russian production companies. In addition, in 2009, 2010 and in the first quarter of 2011, we acquired several regional stations. While acquisitions represent an important component of our growth strategy, the integration of new businesses poses significant risks to our existing operations, including:

•: additional and significant 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;
•: significant initial cash expenditures to acquire and integrate new businesses;
•: contingent liabilities associated with acquired businesses; and
•: incurrence of debt to finance acquisitions and high debt service costs related thereto.

Additionally, the integration of new businesses 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.

As part of our growth strategy, we intend to continue to evaluate potential acquisitions that we believe are commercially attractive in light of the current economic environment. 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.

A change in Russian law further limiting the amount of advertising time permitted on television could materially adversely affect our results of operations.

Current Russian law limits the amount of time that a broadcaster may devote to advertising to no more than 15% of any broadcasting hour. From time to time, there are discussions in the Russian government regarding imposing additional restrictions on television advertising, such as limiting the types of products that may be advertised, limiting product placements in programming, limiting the number of advertising breaks allowed in certain programs or requiring channels to devote more broadcast time to public service announcements. If legislation were introduced to further limit our ability to broadcast paid advertising or product placements, we cannot guarantee that increases in advertising prices, if any, or any other steps we would be able to take to mitigate the impact of such further limitation would be sufficient to compensate for the loss of advertising time.

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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 television advertising in Russia, which constituted approximately half of all advertising expenditures in Russia in 2010, 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 our networks' target demographics. Continued decline in the appeal of television generally and, in particular, in 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.

The loss of licenses, or the failure to comply with the terms of licenses, could have an adverse affect on our business.

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.

A broadcaster must conform its programming to the programming concept outlined in the broadcasting license. In particular, the broadcaster is obliged to ensure compliance of their programming with the declared genres of the channel and to sustain necessary balance in a volume-genre ratio of a broadcasted materials both prescribed in the license. Until recently, the broadcasting licenses of our affiliate stations also contained various restrictions, including requirements with respect to the minimum amount of locally produced programming that must be broadcast.

The broadcasting license of Channel 31 in Kazakhstan contains various restrictions and obligations. Recently, the Kazakh government enacted a law that requires that broadcasters broadcast at least 50% of their programming in the Kazakh language during every six-hour slot.

We may not always be in full compliance with these requirements. Also, 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 complied with, or if we violate applicable 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 broadcasting license, or the failure to obtain a broadcasting license in a new market, 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.

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The loss of independent affiliates could result in a loss of audience shares.

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 or 90 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. If an independent affiliate in a larger market, particularly in a city where audiences are measured and in which we do not own and operate a station, were to terminate its agreement with us, sell itself to a competing network or lose the ability to broadcast our signal, it could result in a decrease in our audience share.

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

Although we produce an increasing percentage of our original programming in-house, we continue to rely on third-party production houses to produce a portion of 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, for example, 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.

We have entered into contracts with Mostelecom to secure the right of our CTC and Domashny Moscow stations to be connected by cable to additional households in Moscow. DTV also has a number of agreements with Mostelecom for cable connections to households in Moscow. These contracts do not, however, grant us the right to be connected to all households in Moscow for all of our networks. We continue to evaluate, from a cost benefit analysis, whether to enter into additional contracts with Mostelecom regarding other households. A second cable operator carries our networks' signals to approximately 15% of the Moscow households covered by our networks' signals. We pay this cable operator an annual fee for transmission to these households. A cable system similar to that provided by Mostelecom is in place in St. Petersburg and is operated by the local provider; there 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 our networks, carry certain broadcasters' signals over their systems.

As a result of this request, some of our cable television operators, including Mostelecom, which is the primary carrier of our networks' 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

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television operators should try to resolve this issue independently, without involvement of the Russian Ministry of Telecommunications, by the end of 2007. While discussions continue on resolving this matter, to date, no resolution has been reached and no further actions have been taken.

If we were to be denied continued access to the cable systems that carry our networks' signals in Moscow or St. Petersburg, our technical penetration would be materially adversely affected which would, in turn, have a material adverse effect on our audience shares. Moreover, if we were required to pay transmission fees to these cable operators, our operating costs would be increased, possibly materially.

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. Our networks 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 TNT and REN-TV (owned by National Media Group). Domashny and DTV compete for advertising revenues primarily with other smaller channels such as TV-3 and TVC, although they also compete with the national broadcast networks and channels for viewers within their target demographic groups. On a local level, our owned-and-operated stations compete with other stations for local advertising.

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), 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 energy company, also has a broader coverage than our networks, and we believe also benefits from free signal transmission. During the first quarter of 2011, Channel One had an average audience share of 16.8%, while Rossiya's was 16.7% and NTV's was 14.6%. CTC's average audience share during the first quarter of 2011 was 7.9%. We believe that the strong audience shares of Channel One, Rossiya and NTV may give these broadcasters added leverage in negotiations with advertisers, advertising agencies and sales houses.

Moreover, 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. As a percentage of the overall viewing market, the pay-television market in Russia is currently smaller than in the United States and Western European countries. Audience share for Russian pay-television is, however, increasing. 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

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networks and channels. 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 March 31, 2011 we had contractual commitments for the acquisition of approximately $136.3 million in programming rights through 2011 and $99.5 million in 2012-2013. 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.

More than half of our owned-and-operated stations are 100% owned by CTC Media. Other investors own between less than 1% and 50% of each of the remaining 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. 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 these 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, 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.

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 attract and retain highly skilled senior management, production talent and finance personnel. In 2009

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and 2010 we lost several key personnel, including several important content production, legal and finance personnel. In addition, we believe that certain competitors continue to aggressively court some of our personnel. The competition is intense in Russia for qualified personnel who are familiar with the Russian television industry and/or who are knowledgeable about US accounting and legal practices. Although we have found replacements for the personnel we lost, we cannot assure you that we will be able to retain qualified personnel, or hire appropriate replacements on reasonable terms or at all.

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.

Our networks' signals originate in Moscow and are uplinked to multiple separate satellite systems that transmit our signals to our affiliate stations and unmanned repeater transmitters. Despite our back-up systems, from time to time we experience signal failures. Prolonged or repeated disruptions in our signals 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 our ability to transmit our signals, even though such an event could have a significant negative impact on our business.

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 less developed in Russia than in other developed countries, 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.

One of our principal stockholders owns a 50% interest in a Russian pay television network, and its interests may conflict with ours.

One of our principal stockholders, MTG Russia AB, an affiliate of the publicly listed Modern Times Group MTG AB ("MTG"), holds a 50% interest in Raduga Holdings. Raduga is the sole owner of LCC DalGeoCom, which operates Raduga TV, a nationwide Russian digital satellite pay-TV platform. Hans-Holger Albrecht, the President and CEO of MTG, is a Co-Chairman of our board of directors; Mathias Hermansson, Chief Financial Officer of MTG, and Irina Gofman, Chief Executive Officer of MTG Russia AB, are members of our board of directors.

Although we do not currently operate in the pay-TV market, and do not currently compete with or have any commercial relationship with Raduga TV, MTG's interest in another Russian television business may result in conflicts of interest among MTG, our company 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.

Risks relating to doing business and investing in Russia

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

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internationally accepted norms. Furthermore, Russian bank deposits made by corporate entities generally are not insured.

The disruption in the world credit markets in 2008 and 2009 also negatively impacted the banking sector in Russia. 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. We generally hold a large majority of our cash balance in Russian banks (such as Alfa Bank, which is an affiliate of one of our principal stockholders), including the Russian subsidiaries of foreign banks. Of that balance, a significant portion is held in ruble-denominated accounts. There are few, if any, safe ruble-denominated instruments in which we may invest our excess ruble cash. A 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.

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 past 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. NTV, TV-6 and TVS have all experienced what could be characterized 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 some of our independent affiliates, as well as one of our owned-and-operated CTC stations, broadcast local political news, generally with the approval of our local partners and the local authorities. Any politically motivated action against us, our networks, 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.

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

The legal framework to support a market economy remains new and in flux in Russia and, as a result, the Russian legal system can be characterized by:

•: inconsistencies between and among laws 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 relatively new commercial legislation;
•: a lack of judicial independence from political, social and commercial forces;

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•: 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.

As is true of civil law systems, 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 amendment to the Law on Advertising and the Ownership Law (both discussed above), have only recently been enacted or have been subject to only limited interpretation to date. The untested nature of much of recent Russian legislation and the rapid evolution of the Russian legal system in ways that may not always coincide with market developments may result in ambiguities, inconsistencies and anomalies in the Russian legal system.

In December 2010, a new draft federal law "On regulation of production and distribution of ethanol, alcohol and drinks containing alcohol" was submitted to State Duma, the Russian parliament. This draft law would give the status of alcoholic drinks to beer and all drinks containing beer, which in turn would prohibit advertising of such drinks on television. If such law is enacted, we will not be able to broadcast ads for beer and drinks containing beer on our channels, which may result in a reduction in our revenues.

In addition, the State Duma has approved a new law "On protection of children from harmful information," which came into force on December 31, 2010. This law makes it illegal to provide any information that maybe harmful to children, such as scenes of violence, abusive language, pornography, scenes encouraging children to consume alcohol, drugs and tobacco. All information must be labeled into five categories: (1) information appropriate for children under 6 years, (2) information appropriate for children 6 years and older, (3) information appropriate for children 12 years and older, (4) information appropriate for children 16 years and older, and (5) information prohibited for children. This law does not contain any detailed regulation as to how information is to be categorized into these five groups, what kind of experts are to label such information, or how this law will be implemented. This law is ambiguous and there is no practice of implementation of such law in Russia, which may lead to a high degree of discretion of governmental authorities in its implementation, as well as abuse of this law.

We do not know how such new laws will be implemented, and therefore can not determine how these laws will affect our business, if at all.

Such uncertainties in the Russian legal system 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.

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 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. Selective or arbitrary actions have included withdrawal of licenses, sudden and unexpected tax audits, criminal

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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. Selective 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 fines or administrative sanctions and could require the divestiture of such company or other assets.

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

Certain of our regional subsidiaries have had, and continue to have, negative equity as reported in their respective Russian statutory financial statements. None of these companies has applied for voluntary liquidation. We are currently taking steps to remedy the negative net asset value of these subsidiaries, but we have not 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.

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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 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.

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 in certain circumstances.

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 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 CTC Media's position as an effective parent, it could be liable in some cases for the debts of its effective subsidiaries. Although the total indebtedness of CTC Media's effective subsidiaries is currently immaterial, it is possible that CTC Media 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

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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. From time to time, we also identify tax contingencies 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 maintain 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, penalties and enforcement measures despite our best efforts at compliance, which 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 that may be obtained 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 essentially no operations in the United States, most 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 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 doing business elsewhere in the CIS

We face similar risks in other countries of the CIS.

In addition to Russia, we currently have operations in other countries in the CIS, including Kazakhstan and Moldova. We may acquire additional operations in other countries of the CIS. In many respects, the risks inherent in transacting business in these countries are similar to those in Russia, especially those risks set out above in "—Risks relating to doing business and investing in Russia".

Emerging markets such as Russia and other CIS countries are subject to greater risks than more developed markets, including legal, economic and political risks.

Investors in emerging markets such as Russia and other CIS countries should be aware that these markets are subject to greater risk than more developed markets, including in some cases legal, economic and political risks. Investors should also note that emerging economies, such as the economies of Russia and Kazakhstan, are subject to rapid change and that the information set out herein may become outdated relatively quickly. Furthermore, in doing business in various countries of

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the CIS, we face risks similar to (and sometimes greater than) those that we face in Russia. Accordingly, investors should exercise care in evaluating the risks involved and must decide for themselves whether, in light of those risks, their investment is appropriate. Generally, investment in emerging markets is only suitable for sophisticated investors who fully appreciate the significance of the risks involved and investors are urged to consult with their own legal and financial advisors before making an investment in our shares.

Risks relating to our stock

The price of our common stock has experienced significant volatility in the past and may be volatile in the future.

Our stock price has experienced significant volatility in the past and is likely to be volatile in the future. The stock market in general and, in particular, the market for companies whose operations are in emerging markets, like Russia, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. This volatility has been more pronounced in recent periods due to the turmoil in world financial markets. As a result of this volatility, investors may not be able to sell their shares of our common stock at or above the price at which they purchase it. The market price for our common stock may be influenced by many factors, including:

•: fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
•: changes in estimates of our financial results or recommendations by securities analysts;
•: changes in market valuations of similar companies;
•: changes in general economic, political and market conditions in Russia and globally;
•: changes in the audience shares of our networks;
•: changes in the structure of advertising sales in Russia;
•: public announcements by industry experts regarding trends in advertising spending in Russia and globally; and
•: announcements regarding our acquisition activities, if any.

Moreover, only a relatively small number of shares of our common stock are currently actively traded in the public market. As of April 28, 2011, approximately 37% of our outstanding common stock was held by parties other than our directors, executive officers and principal stockholders and their respective affiliates. The limited liquidity of our common stock may have a material adverse effect on the price of our common stock.

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.

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

As of April 28, 2011, our directors, executive officers and principal stockholders, and their respective affiliates, beneficially owned, in the aggregate, approximately 63% 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 currently no more than three of our nine 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. Our board of directors 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 approximately 63% 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 6. Exhibits

The Exhibit index is hereby incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities 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/ BORIS PODOLSKY Boris Podolsky Chief Financial Officer Date: May 5, 2011
		CTC MEDIA, INC.
		By:		/s/ YULIA SHTYROVA Yulia Shtyrova Acting Chief Accounting Officer Date: May 5, 2011

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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

CTC Media, Inc. - FORM 10-Q - May 5, 2011

Attached files

CTC Media, Inc. Reports