**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

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**Form 20-F**

| **o**      | **Registration Statement pursuant to  Section 12(b) or (g) of the Securities Exchange Act of 1934**                                    |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | **or**                                                                                                                                                |
| **x**      | **Annual report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 for the fiscal year ended  December 31, 2005** |
| ** ** | **or**                                                                                                                                                |
| **o**      | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**                                               |
| ** ** | **or**                                                                                                                                                |
| **o**      | **Shell company report pursuant to Section 13  or 15(d) of the Securities Exchange Act of 1934**                                            |

 

**Commission file number: 1-31232**

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**WIMM-BILL-DANNFOODS OJSC**

(Exact name of Registrantas specified in its charter)

**RUSSIAN FEDERATION**

(Jurisdiction ofincorporation or organization)

**16 Yauzsky Boulevard,Moscow 109028, Russian Federation**

(Address of principalexecutive offices)

Securities registered or tobe registered pursuant to Section 12(b) of the Act:

| Title of Each Class                         | ** ** | **Name of Each Exchange on Which Registered** |
|---------------------------------------------|------------|-----------------------------------------------|
| **AMERICAN  DEPOSITARY SHARES, EACH**       | ** ** | **NEW YORK  STOCK EXCHANGE**                  |
| **REPRESENTING  ONE SHARE OF COMMON STOCK** | ** ** | ** **                                    |
| **COMMON STOCK, PAR VALUE**                 | ** ** | **NEW YORK STOCK EXCHANGE(1)**                |
| **20  RUSSIAN RUBLES PER SHARE**            | ** ** | ** **                                    |

 

Securities registered or to be registered pursuant to Section 12(g) ofthe Act:

**NONE**

(Title of Class)

Securities for which there is a reporting obligationpursuant to Section 15(d) of the Act:

**NONE**

(Title of Class)

Indicate the number of outstanding shares of each ofthe issuer’s classes of capital or common stock as of the close of the periodcovered by the annual report.

44,000,000 shares of common stock, par value20 Russian rubles each, as of December 31, 2005.

14,405,337 American Depositary Shares, eachrepresenting one share of common stock, as of December 31, 2005.

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.

| Yes: o | No: x |
|--------|-------|

 

If this report is an annualor transition report, indicate by check mark if the registrant is not requiredto file reports pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934.

| Yes: o | No: x |
|--------|-------|

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.

| Yes: x | No: o |
|--------|-------|

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

 

Indicate by check markwhich financial statement item the registrant has elected to follow:

| Item 17 o |   | Item 18 x |
|-----------|--------|-----------|

 

If this is an annualreport, indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

| Yes: o | No: x |
|--------|-------|

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(1)           Listed, not for trading or quotationpurposes, but only in connection with the registration of ADSs pursuant to therequirements of the Securities and Exchange Commission

 

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**Tableof Contents**

| CAUTIONARY STATEMENT  REGARDING FORWARD-LOOKING STATEMENTS |   | iii                                                                                 |
|------------------------------------------------------------|--------|-------------------------------------------------------------------------------------|
| *Item 1.*                                                  |   | Identity of Directors, Senior Management and Advisors                               |   | 1 |
| *Item 2.*                                                  |   | Offer Statistics and Expected Timetable                                             |   | 1 |
| *Item 3.*                                                  |   | Key  Information                                                                    |   | 1 |
|                                                       |   | A.     Selected Financial Data                                  |   | 1 |
|                                                       |   | B.     Capitalization  and Indebtedness                         |   | 3 |
|                                                       |   | C.     Reasons  for the Offer and Use of Proceeds               |   | 3 |
|                                                       |   | D.     Risk Factors                                             |   | 3 |
| *Item 4.*                                                  |   | Information on Our Company                                                          |   | 37 |
|                                                       |   | A.     History and Development                                  |   | 37 |
|                                                       |   | B.     Business Overview                                        |   | 39 |
|                                                       |   | C.     Organizational Structure                                 |   | 72 |
|                                                       |   | D.     Property,  Plants and Equipment                          |   | 73 |
| *Item 4A.*                                                 |   | Unresolved Staff Comments                                                           |   | 75 |
| *Item 5.*                                                  |   | Operating and Financial Review and Prospects                                        |   | 75 |
|                                                       |   | A.     Operating Results                                        |   | 75 |
|                                                       |   | B.     Liquidity  and Capital Resources                         |   | 88 |
|                                                       |   | C.     Research  and Development, Patents and Licenses, etc.    |   | 97 |
|                                                       |   | D.     Trend Information                                        |   | 97 |
|                                                       |   | E.     Off-balance  Sheet Arrangements                          |   | 99 |
|                                                       |   | F.     Contractual Obligations                                  |   | 100 |
| *Item 6.*                                                  |   | Directors, Senior Management and Employees                                          |   | 101 |
|                                                       |   | A.     Directors  and Senior Management                         |   | 101 |
|                                                       |   | B.     Compensation  of Directors and Senior Management         |   | 105 |
|                                                       |   | C.     Board Practices                                          |   | 105 |
|                                                       |   | D.     Employees                                                |   | 108 |
|                                                       |   | E.     Share Ownership                                          |   | 108 |
| *Item 7.*                                                  |   | Major Shareholders and Related Party Transactions                                   |   | 109 |
|                                                       |   | A.     Major Shareholders                                       |   | 109 |
|                                                       |   | B.     Related Party Transactions                               |   | 110 |
|                                                       |   | C.     Interests  of Experts and Counsel                        |   | 110 |
| *Item 8.*                                                  |   | Financial  Information                                                              |   | 111 |
|                                                       |   | A.     Consolidated  Statements and Other Financial Information |   | 111 |
|                                                       |   | B.     Significant Changes                                      |   | 112 |
| *Item 9.*                                                  |   | Offer and Listing Details                                                           |   | 112 |
|                                                       |   | A.     Market Price Information                                 |   | 113 |
|                                                       |   | C.     Markets                                                  |   | 113 |
| *Item 10.*                                                 |   | Additional Information                                                              |   | 113 |
|                                                       |   | A.     Share Capital                                            |   | 113 |
|                                                       |   | B.     Charter  and Certain Requirements of Russian Legislation |   | 113 |
|                                                       |   | C.     Material Contracts                                       |   | 127 |
|                                                       |   | D.     Exchange Controls                                        |   | 129 |
|                                                       |   | E.     Taxation                                                 |   | 131 |
|                                                       |   | F.     Dividends and Paying Agents                              |   | 136 |
|                                                       |   | G.    Statement by Experts                                           |   | 136 |
|                                                       |   | H.    Documents on Display                                           |   | 136 |
|                                                       |   | I.      Subsidiary Information                             |   | 137 |
| *Item 11.*                                                 |   | Quantitative and Qualitative Disclosures about Market  Risk                         |   | 137 |

i

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| *Item 12.*  |   | Description of Securities Other than Equity Securities                        |   | 139 |
|-------------|--------|-------------------------------------------------------------------------------|--------|-----|
| *Item 13.*  |   | Defaults, Dividend Arrearages and Delinquencies                               |   | 140 |
| *Item 14.*  |   | Material Modifications to the Rights of Security  Holders and Use of Proceeds |   | 140 |
| *Item 15.*  |   | Controls and Procedures                                                       |   | 140 |
| *Item 16A.* |   | Audit Committee Financial Expert                                              |   | 142 |
| *Item 16B.* |   | Code  of Ethics                                                               |   | 143 |
| *Item 16C.* |   | Principal Accountant Fees and Services                                        |   | 143 |
| *Item 16D.* |   | Exemption from the Listing Standards for Audit  Committees                    |   | 144 |
| *Item 16E.* |   | Purchases of Equity Securities by the Issuer and  Affiliated Purchasers       |   | 144 |
| *Item 17.*  |   | Financial  Statements                                                         |   | 145 |
| *Item 18.*  |   | Financial  Statements                                                         |   | 145 |
| *Item 19.*  |   | Exhibits                                                                      |   | 146 |

 

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Unless the context otherwise requires, references to “WBD,”“Company,” “we,” “us,” or “our” refer to Wimm-Bill-Dann Foods OJSC and itssubsidiaries.

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In this annual report, references to “U.S. dollars” or“$” are to the currency of the United States, references to “rubles” or “RUR”are to the currency of the Russian Federation, and references to “€”or “euro” are to the lawful currency of the member states of the European Unionthat adopted a single currency in accordance with the Treaty of Romeestablishing the European Economic Community, as amended by the treaty on theEuropean Union, signed at Maastricht on February 7, 1992.

ii

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**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

Matters discussed in this document may constituteforward-looking statements. The Private Securities Litigation Reform Actof 1995 provides safe harbor protections for forward-looking statementsin order to encourage companies to provide prospective information about theirbusinesses. Forward-looking statements include statements concerningplans, objectives, goals, strategies, future events or performance, andunderlying assumptions and other statements, which are other than statements ofhistorical facts.

We desire to take advantage of the safe harborprovisions of the Private Securities Litigation Reform Act of 1995 and areincluding this cautionary statement in connection with this safe harbor legislationand other relevant laws. This document and any other written or oral statementsmade by us or on our behalf may include forward-looking statements, whichreflect our current views with respect to future events and financialperformance. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,”“forecast,” “project” and similar expressions identify forward-lookingstatements. Forward-looking statements appear in a number of placesincluding, without limitation, “Item 3. Key Information—D. Risk Factors,” “Item4. Information on Our Company” and “Item 5. Operating and Financial Review andProspects,” and include statements regarding: strategies, outlook and growthprospects; future plans and potential for future growth; liquidity, capitalresources and capital expenditures; growth in demand for our services; economicoutlook and industry trends; developments of our markets; the impact ofregulatory initiatives; and the strength of our competitors.

The forward-looking statements in this documentare based upon various assumptions, many of which are based, in turn, uponfurther assumptions, including without limitation, management’s examination ofhistorical operating trends, data contained in our records and other dataavailable from third parties. Although we believe that these assumptions werereasonable when made, because these assumptions are inherently subject tosignificant uncertainties and contingencies which are difficult or impossibleto predict and are beyond our control, we may not achieve or accomplish theseexpectations, beliefs or projections. In addition to these important factorsand matters discussed elsewhere herein and in the documents incorporated byreference herein, important factors that, in our view, could cause actual resultsto differ materially from those discussed in the forward-lookingstatements including the achievement of the anticipated levels ofprofitability, growth, cost and synergy of our recent acquisitions, the timelydevelopment and acceptance of new products, the impact of competitive pricing,the ability to obtain necessary regulatory approvals, the impact of generalbusiness and global economic conditions and other important factors describedfrom time to time in the reports filed by us with the Securities and ExchangeCommission.

Except to the extent required by law, neither we, norany of our respective agents, employees or advisors intend or have any duty orobligation to supplement, amend, update or revise any of the forward-lookingstatements contained or incorporated by reference in this document.

iii

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**PART I**

***Item 1*.**                          Identityof Directors, Senior Management and Advisors

Not applicable.

***Item 2.****                         *OfferStatistics and Expected Timetable

Not applicable.

***Item 3.****                         *KeyInformation

**A.   SelectedFinancial Data**

Theselected consolidated and combined financial data set forth below at December 31,2005, 2004, 2003, 2002 and 2001 and for the years then ended have been derivedfrom our audited financial statements prepared in accordance with U.S. GAAP.The selected consolidated and combined financial data should be read inconjunction with our Consolidated Financial Statements as of December 31,2005 and 2004 and for the years ended December 31, 2005, 2004, and 2003included under “Item 18. Financial Statements” and “Item 5. Operatingand Financial Review and Prospects.”
|                                                                 | ** ** | **For the years ended December 31,**                                                                                       | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                                                                                                                                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                      | ** ** | **(Dollar amounts in thousands, except share,  dividends per share and earnings per share)** | ** ** |
| **Statement of Operations Data:**                               |       |                                                                                                                                                |       |   |   |   |   |   |   |   |   |
| Sales                                                           |       | 1,399,289                                                                                                                                           |       | 1,189,291 |   | 938,459 |   | 824,734 |   | 674,616 |   |
| Cost of sales                                                   |       | (1,002,246                                                                                                                                          | )          | (861,661 | ) | (665,104 | ) | (579,707 | ) | (492,990 | ) |
| Gross profit                                                    |       | 397,043                                                                                                                                             |       | 327,630 |   | 273,355 |   | 245,027 |   | 181,626 |   |
| Selling and  distribution expenses                              |       | (191,990                                                                                                                                            | )          | (173,433 | ) | (140,746 | ) | (109,527 | ) | (62,213 | ) |
| General and  administrative expenses                            |       | (109,642                                                                                                                                            | )          | (92,816 | ) | (75,973 | ) | (62,955 | ) | (54,461 | ) |
| Other operating  expenses                                       |       | (7,916                                                                                                                                              | )          | (8,458 | ) | (7,481 | ) | (6,497 | ) | (4,498 | ) |
| Operating income                                                |       | 87,495                                                                                                                                              |       | 52,923 |   | 49,155 |   | 66,048 |   | 60,454 |   |
| Financial income  and expenses, net                             |       | (22,868                                                                                                                                             | )          | (14,618 | ) | (15,273 | ) | (14,131 | ) | (10,581 | ) |
| Income before provision for income taxes and minority  interest |       | 64,627                                                                                                                                              |       | 38,305 |   | 33,882 |   | 51,917 |   | 49,873 |   |
| Provision for  income taxes(1)                                  |       | 30,712                                                                                                                                              |       | (12,170 | ) | (10,717 | ) | (14,249 | ) | (14,166 | ) |
| Minority interest                                               |       | (3,649                                                                                                                                              | )          | (3,161 | ) | (2,012 | ) | (1,922 | ) | (3,962 | ) |
| Income from  continuing operations                              |       | 30,266                                                                                                                                              |       | 22,974 |   | 21,153 |   | 35,746 |   | 31,745 |   |
| Income from  discontinued operations(2)                         |       | —                                                                                                                                              |       | — |   | — |   | — |   | 103 |   |
| Net income                                                      |       | 30,266                                                                                                                                              |       | 22,974 |   | 21,153 |   | 35,746 |   | 31,848 |   |
| Earnings per share—basic  and diluted:                     |       |                                                                                                                                                |       |   |   |   |   |   |   |   |   |
| Income from continuing operations                               |       | 0.69                                                                                                                                                |       | 0.52 |   | 0.48 |   | 0.83 |   | 0.91 |   |
| Income from discontinued operations                             |       | —                                                                                                                                              |       | — |   | — |   | — |   | — |   |
| Net income                                                      |       | 0.69                                                                                                                                                |       | 0.52 |   | 0.48 |   | 0.83 |   | 0.91 |   |
| Dividends per  share                                            |       | —                                                                                                                                              |       | — |   | — |   | — |   | — |   |
| Weighted average number  of shares outstanding                  |       | 44,000,000                                                                                                                                          |       | 44,000,000 |   | 44,000,000 |   | 43,063,014 |   | 34,888,000 |   |
| **Other Data from Continuing  Operations:**                     |       |                                                                                                                                                |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                           |       | 75,110                                                                                                                                              |       | 72,639 |   | 107,186 |   | 136,100 |   | 57,653 |   |
| Cash provided by  (used in) operating activities                |       | 113,937                                                                                                                                             |       | 71,720 |   | 29,940 |   | (6,863 | ) | 12,591 |   |
| Cash used in  investing activities                              |       | (125,157                                                                                                                                            | )          | (73,808 | ) | (95,142 | ) | (122,677 | ) | (55,486 | ) |
| Cash (used in) provided  by financing activities                |       | (82,619                                                                                                                                             | )          | (16,159 | ) | 73,399 |   | 152,600 |   | 44,613 |   |

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(1)           Provision for income taxes includes the tax benefit inour juice business relating to the small enterprise tax legislation.

(2)           Discontinued operations consist of bankingand brewery businesses, which were disposed of in April 2001.

1

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|                                                  | ** ** | **At December 31,** | ** ** |
|--------------------------------------------------|------------|-------------------------------|------------|
| ** **                                       | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **Balance Sheet Data:**                          |       |                          |       |   |   |   |   |   |   |   |   |
| Total assets                                     |       | 920,557                       |       | 796,088 |   | 743,885 |   | 589,093 |   | 352,717 |   |
| Total net assets                                 |       | 387,043                       |       | 370,916 |   | 324,618 |   | 282,884 |   | 85,011 |   |
| Total debt(1)                                    |       | 371,625                       |       | 283,168 |   | 283,442 |   | 186,039 |   | 122,022 |   |
| Total liabilities                                |       | 508,895                       |       | 407,845 |   | 398,099 |   | 284,660 |   | 244,330 |   |
| Total liabilities and  shareholders’ equity |       | 920,557                       |       | 796,088 |   | 743,885 |   | 589,093 |   | 352,717 |   |

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(1)          Totaldebt represents long-term and short-term loans, including the current portionof long-term loans, notes payable and vendor financing obligations.

**Exchange Rates andInflation**

Thefollowing tables show, for the periods indicated, certain information regardingthe exchange rate between the ruble and the U.S. dollar, based on datapublished by the Central Bank of Russia. These rates may differ from the actualrates used in the preparation of our financial statements and other financialinformation appearing herein.
|                                  | ** ** | **Rubles per U.S. dollar** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| ** **                       | ** ** | **High**                                  | ** ** | **Low** | ** ** | **Average**(1) | ** ** | **Period  End** | ** ** |
| **Year ended December 31,** |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| 2005                             |       | 29.00                                     |       | 27.46 |   |   | 28.31 |   |   |   | 28.78 |   |   |
| 2004                             |       | 29.45                                     |       | 27.75 |   |   | 28.73 |   |   |   | 27.75 |   |   |
| 2003                             |       | 31.88                                     |       | 29.25 |   |   | 30.61 |   |   |   | 29.45 |   |   |
| 2002                             |       | 31.86                                     |       | 30.14 |   |   | 31.39 |   |   |   | 31.78 |   |   |
| 2001                             |       | 30.30                                     |       | 28.16 |   |   | 29.22 |   |   |   | 30.14 |   |   |

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(1)          Theaverage of the exchange rates on the last business day of each full monthduring the relevant period.
|                    | ** ** | **Rubles per U.S. dollar** | ** ** |
|--------------------|------------|-------------------------------------------|------------|
| ** **         | ** ** | **High**                                  | ** ** | **Low** | ** ** |
| May 2006      |       | 27.24                                     |       | 26.92 |   |
| April 2006    |       | 27.77                                     |       | 27.27 |   |
| March 2006    |       | 28.12                                     |       | 27.66 |   |
| February 2006 |       | 28.26                                     |       | 28.10 |   |
| January 2006  |       | 28.48                                     |       | 28.02 |   |
| December 2005 |       | 29.00                                     |       | 28.64 |   |

 

On June 14, 2006, the exchange rate between theruble and the U.S. dollar was 27.09 rubles per $1.00.

Thefollowing table shows the rates of inflation in Russia for the years indicated:
|                                  | ** ** | **Inflation rate** | ** ** |
|----------------------------------|------------|-------------------------|------------|
| **Year ended December 31,** |       |                    |       |   |   |
| 2005                             |       |                    | 10.9       | % |   |
| 2004                             |       |                    | 11.7       | % |   |
| 2003                             |       |                    | 12.0       | % |   |
| 2002                             |       |                    | 15.1       | % |   |
| 2001                             |       |                    | 18.6       | % |   |

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Source: Rosstat.

2

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Effective from January 1, 2003, Russia no longermet the criteria for a highly inflationary economy. Therefore, commencingJanuary 1, 2003, our Russian subsidiaries changed their functionalcurrency from the U.S. dollar to the ruble. See Note 3 to our ConsolidatedFinancial Statements included under “Item 18. Financial Statements.”

Ourresults of operations are affected by the relationship between the rate ofinflation and the nominal rate of devaluation/appreciation of the ruble againstthe U.S. dollar (*i.e.,* by thereal appreciation or depreciation of the ruble against the U.S. dollar). In2005, 2004 and 2003, the ruble appreciated in real terms against the U.S.dollar.
|                                                                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Inflation(1)                                                                        |       | 10.9     | %          | 11.7     | %          | 12.0     | %          |
| Nominal  appreciation/(depreciation) of the ruble relative to the U.S. dollar(2)(3) |       | 1.9      | %          | 6.5      | %          | 2.2      | %          |
| Real appreciation of the  ruble relative to the U.S. dollar(2)                      |       | 10.8     | %          | 15.1     | %          | 13.6     | %          |

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(1)          Source: Rosstat.

(2)          Source: Central Bank ofRussia.

(3)          Forpurposes of calculating the interest rate of our U.S. dollar-denominated notes,we used the Russian ruble/U.S. dollar exchange rates at December 31, 2005,2004 and 2003, which appreciated/(depreciated) at the rates of (3.7)%, 6.1% and7.9%, respectively.

**B.   Capitalizationand Indebtedness**

Notapplicable.

**C.   Reasonsfor the Offer and Use of Proceeds**

Notapplicable.

**D.   RiskFactors**

*An investment inour shares and ADSs involves a high degree of risk. You should carefullyconsider the following information about these risks, together with theinformation contained in this document, before you decide to buy our shares orADSs. If any of the following risks actually occurs, our business, financialcondition, results of operations or prospects could be materially adverselyaffected. In that case, the value of our shares and ADSs could also decline andyou could lose all or part of your investment.*

*We have described the risks and uncertainties that ourmanagement believes are material, but these risks and uncertainties may not bethe only ones we face. Additional risks and uncertainties, including those wecurrently are not aware of or deem immaterial, may also result in decreasedoperating revenues, increased operating expenses or other events that couldresult in a decline in the value of our ADSs.*

**Risks Relating toBusiness Operations in Emerging Markets**

***Emerging markets such as the Russian Federation aresubject to greater risks than more developed markets, including significantlegal, economic and political risks.***

Investors in emerging markets such as the RussianFederation should be aware that these markets are subject to greater risks thanmore developed markets, including in some cases significant legal, economic andpolitical risks. Investors should also note that emerging economies, such asthe economy of the Russian Federation, are subject to rapid change and that theinformation set out herein may become outdated relatively quickly. Accordingly,investors should exercise particular care in evaluating the risks involved andmust decide for themselves whether, in light of those risks, their investmentis appropriate. 

3

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Generally, investment inemerging markets is only suitable for sophisticated investors who fullyappreciate the significance of the risks involved and investors are urged toconsult their own legal and financial advisors before making an investment inour securities.

**Risks Relating toOur Business and Industry**

***Economic downturns could hurt our turnover andmaterially adversely affect our strategy to increase our sales of premiumbrands.***

Demand for dairy andcertain beverage products depends primarily on demographic factors and consumerpreferences, as well as factors relating to discretionary consumer spending,including the general condition of the economy and general levels of consumerconfidence. The willingness of consumers to purchase branded food and beverageproducts depends, in part, on local economic conditions. In periods of economicuncertainty, consumers tend to purchase more economy brands and, to the extentthat our business strategy depends on the expansion of the sales of premiumbrands and value-added products, our results of operations could suffer.Reduced consumption of our products in any of our key markets could reduce ourturnover and profitability.

***The failure of our geographic expansion strategy couldhamper our continued growth and profitability.***

Our expansion strategy depends, in part, on fundinggrowth in additional markets, on our ability to identify attractiveopportunities in markets that will grow and on our ability to manage theoperations of acquired or newly established businesses. Should growth declinein our existing markets, not increase as anticipated in markets in which wehave recently acquired or established businesses, or not increase in marketsinto which we subsequently expand, our geographic expansion strategy may not besuccessful and our business and profitability may suffer. We describe ourgeographic expansion strategy under “Item 4. Information on OurCompany—B. Business Overview—Business Strategy.”

In addition, we currently have production facilitiesin Ukraine, Kyrgyzstan and Uzbekistan and trade operations in Kazakhstan, andour strategy contemplates the acquisition of additional operations in thecountries of the Commonwealth of Independent States, or the CIS. As withRussia, these countries are emerging markets subject to greater political,economic, social and legal risks than more developed markets. In many respects,the risks inherent in transacting business in these countries are similar tothose in Russia, especially those risks set out below in “—Risks Relating tothe Russian Federation.”

Moreover, these countriesrepresent new operating environments for us, which are located, in manyinstances, a great distance from our Russian operations and across multipleinternational borders. We thus expect to have less control over theiractivities. In addition, we may face more uncertainties with respect to theoperational and financial needs of these businesses. These factors may hurt theprofitability of our current and future operations in these countries.

***Our growth strategy relies on acquisitions andestablishing new businesses, and our future growth, results of operations andmarket share would be adversely affected if we fail to identify suitabletargets, outbid competing bidders or finance acquisitions on acceptable terms.***

Our strategy depends on usbeing a large manufacturer in the dairy and juice sectors so that we canbenefit from economies of scale, better satisfy customer needs and competeeffectively against other producers. Our growth will suffer if we are unable toimplement our acquisition strategy, whether because we fail to identifysuitable targets, outbid competing bidders or finance acquisitions onacceptable terms or for any other reason. Furthermore, any acquisitions orsimilar arrangements may harm our business if we are unsuccessful in ourintegration process or fail to achieve the synergies and savings we expect. Wedescribe our acquisition strategy under “Item 4. Information on OurCompany—B. Business Overview—Business Strategy.”

4

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***We cannot assure you of the successful integration ofexisting or newly acquired businesses. If we fail to integrate our businessessuccessfully, our rate of expansion could slow and our results of operationsand financial condition could be materially adversely affected.***

We have grown through numerous acquisitions and are inthe process of integrating and restructuring some of our businesses. We maymake additional acquisitions in the future. Achieving the benefits of ouracquisitions and our restructuring efforts will depend, in part, on integratingour businesses in an efficient manner. We cannot assure you that suchintegration will happen or that it will happen in a timely manner.

The integration of ourbusinesses, as well as of any businesses we may acquire in the future, requiressignificant time and effort from our senior management, who are alsoresponsible for managing our existing operations. The integration of newbusinesses may be difficult for a variety of reasons, including differingculture, management styles and systems and infrastructure and poor records orinternal controls. In addition, integrating new acquisitions may requiresignificant initial cash investments. Furthermore, even if we are successful inintegrating our existing and new businesses, expected synergies and costsavings may not materialize, resulting in lower than expected profit margins.We cannot assure you that we will be successful in realizing any of theanticipated benefits of the companies that we are now in the process ofintegrating or that we may acquire in the future. If we do not realize thesebenefits, our financial condition, results of operations and prospects could bematerially adversely affected.

***Rapid growth and expansion may cause us difficulty inobtaining adequate managerial and operational resources, restricting ourability to expand successfully our operations.***

We have experienced substantial growth and developmentin a relatively short period of time, and we believe that our businesses willcontinue to grow for the foreseeable future. The operating complexity of ourbusiness, as well as the responsibilities of management, have increased as aresult of this growth, placing significant strain on our managerial andoperational resources. Our future operating results depend, in significantpart, upon the continued contributions of our management and technicalpersonnel.

We will need tocontinue to improve our operational and financial systems and managerialcontrols and procedures to keep pace with our growth. We will also have tomaintain close coordination among our logistical, technical, accounting,finance, marketing and sales personnel. Management of growth will require,among other things:

·       theability to integrate new acquisitions into our operations;

·       continueddevelopment of financial and management controls and IT systems and theirimplementation in newly acquired businesses;

·       increasedmarketing activities;

·       hiringand training of new personnel; and

·       theability to adapt to changes in the markets in which we operate, includingincreased competition and demand for our services.

Our inability tosuccessfully manage our growth could have a material adverse effect on ourbusiness, financial condition and results of operations.

***There are material weaknesses in our internal controlover financial reporting and we may not be able to remedy these materialweaknesses or prevent future material weaknesses. If we fail to do so there isa more than remote likelihood that a material misstatement of the annual orinterim statements will not be prevented or detected.***

In connection withthe audit of our consolidated financial statements for the year ended December 31,2005, management and our independent registered public accounting firm haveidentified material 

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weaknessesin our internal control over financial reporting as defined in the standardsestablished by the Public Company Accounting Oversight Board’s Auditing StandardNo. 2 that affected our financial statements for the year ended December 31,2005. The material weaknesses in our internal control over financial reportingare summarized below:

·       Ourfinancial statement closing process and the transformation of our statutoryfinancial statements into U.S. GAAP consolidated financial statements has notreduced to an acceptably low level the risk that material errors may occur andmay not be detected on a timely basis by management in the normal course ofbusiness;

·       Inadequateaccounting resources and expertise in respect of the preparation ofconsolidated financial statements in accordance with U.S. GAAP; and

·       Inadequateinterpretation and implementation of Statement of Financial AccountingStandards No. 109, *Accounting forIncome Taxes*.

Notwithstanding the stepswe have taken and continue to take that are designed to remediate each materialweakness identified above, we may not be successful in remediating thesematerial weaknesses in the near or long term and we may not be able to preventother material weaknesses in the future. Any failure to maintain or implementrequired new or improved internal control over financial reporting, or anydifficulties we encounter in their implementation, could result in significantdeficiencies or material weaknesses, cause us to fail to meet our periodicreporting obligations or result in material misstatements in our financialstatements. Any such failure could also adversely affect the results ofperiodic management evaluations and annual auditor attestation reportsregarding the effectiveness of our internal control over financial reportingthat will be required when the SEC’s rules under Section 404 of theSarbanes-Oxley Act of 2002 become applicable to us beginning with ourannual report for the year ending December 31, 2006, to be filed in 2007.The existence of a material weakness could result in errors in our financialstatements that could result in a restatement of financial statements, cause usto fail to meet our reporting obligations and cause investors to loseconfidence in our reported financial information, leading to a decline in theprice of our shares and ADSs. See “Item 15. Controls and Procedures” foradditional information.

***To comply with the requirements of Section 404 ofthe Sarbanes-Oxley Act of 2002, we have incurred and will continue to incursignificant c***ostsand resources, including senior management time, from our operating businesses,which could materially adversely affect our business, results ofoperations and prospects.

Section 404 of the Sarbanes-Oxley Act and the SEC’sand the PCAOB’s regulations thereunder will become applicable to us for thefiscal year ending December 31, 2006. These regulations include arequirement that our management evaluate the effectiveness of our internalcontrol over financial reporting on an annual basis and disclose any materialweaknesses in our internal control over financial reporting. Our independentregistered public accounting firm will be required to audit management’sevaluation as well as our internal control over financial reporting. We havealready incurred and will continue to incur costs and resources, including timeof senior management, to design, maintain and evaluate internal control overfinancial reporting under these rules. Senior management time will necessarilybe diverted from running our business. These costs are especially high for usprimarily due to the diversity and geographic location of our businesses. Forthese reasons, the costs involved in attempting to achieve Section 404compliance could have a material adverse effect on our business, financialcondition, results of operation and prospects.

We are taking steps torefine our internal control over financial reporting directed to correct thematerial weaknesses pursuant to Section 404 of the Sarbanes-Oxley Act, andthe efficacy of the steps we have taken to date and the steps we are still inthe process of completing is subject to continued management review supportedby confirmation and testing by management and by our internal auditors, as wellas audit committee oversight. As a result, additional changes will be made toour internal control over 

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financialreporting. Since 2003, we have hired 4 accounting personnel who are in theprocess of receiving or have received ACCA-qualification with experience atother NYSE-listed Russian companies and at Big Four accounting firms in orderto improve our U.S. GAAP capabilities. In****addition,in****2004, we established a newdepartment devoted to developing our systems of internal control over financialreporting in an effort to comply with Section 404 of the Sarbanes-OxleyAct of 2002. The department is comprised of four full-time employees who aretasked with identifying and evaluating our business processes and implementing,where necessary, new or modified internal control procedures over financialreporting. We engaged external consultants to help us correct the materialweaknesses and improve our internal control over financial reporting. Theseconsultants are providing assistance in preparation by us of documentation ofcertain specific internal controls that are currently in place over financialreporting.

***Increased competition among juice producers in Russiahas caused our sales volumes in our beverage segment to decline, which hasadversely affected and may continue to adversely affect our results ofoperations.***

Although juice consumptionin Russia continues to increase, our juice product sales volume decreased in2004 and 2005 due to vigorous market competition from other domestic producersand increased activity by foreign producers. Continued and/or increasedcompetition among juice producers in Russia may cause a continued decline inthe sales volumes of our juice products, as well as affect our juice prices andprofit margins and, consequently, may materially adversely affect our resultsof operations. See “Item 4. Information on Our Company—B. Business Overview—Beverageproducts and brands—Market trends and competition” for additional informationregarding our competitors.

***Consumer preference for low-price juice products andthe volatility of certain raw materials required for juice production may causeour profit margins to decline and have a material adverse affect on our resultsof operations.***

Consumer preference forlow-price juice products, primarily in the regions outside of Moscow and St.Petersburg where per capita household incomes are generally lower, put pressureon juice prices in 2003, 2004 and 2005. In addition, raw materials required forjuice production, such as juice concentrate and sugar, are internationalcommodities and are subject to international price fluctuations, and we haveexperienced significant increases in the cost of these commodities in 2005. Thecost of sugar has not stabilized thus far in 2006 and the price for juiceconcentrate, especially orange, has increased significantly in 2006 and weexpect it to continue to increase for the foreseeable future. A continuation ofthese trends may cause a decline in our juice product profit margins and,consequently, materially adversely affect our results of operations.

***Increasing tariffs and restructuring in the transportsector could have a materially adverse effect on our business.***

Railway transportation is one of our principal meansof transporting supplies and juice and water products to our facilities andcustomers, accounting for approximately 62% of our juice transportationexpenses in 2005. Currently, the Russian government sets rail tariffs and mayfurther increase these tariffs as it did in 2003, 2004 and 2005. Railroadtariffs increased by approximately 40%, 32% and 18% in ruble terms in 2003,2004 and 2005.

In 2003, legislation wasenacted which sets out the framework for the reorganization of the RussianRailways Ministry into OAO Russian Railroads, a joint-stock company, tobe followed by the eventual privatization of certain of its functions by 2007.It is currently unclear whether this reorganization and privatization will becompleted in accordance with the timetable contemplated in the legislation orat all. If the privatization of Russian Railroads or other factors result inincreased railway transport costs, thereby decreasing our profit margins, ourresults of operations could be materially adversely affected.

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***Our inability to develop and maintain awareness of newbrands, products and product categories could significantly inhibit our futuregrowth and profitability.***

Our business strategy contemplates our entry into newproduct categories, development of new products and marketing new brands inexisting product lines. This strategy is designed to increase our market shareand revenues by increasing consumer demand in our existing markets and enteringinto new market segments. The success of this strategy depends, in part, on ourability to anticipate the tastes and dietary habits of consumers and tointroduce and offer products that appeal to their preferences. Our failure toanticipate, identify or react to changes in consumer preferences and consequentfailure to successfully develop new brands, products and product categoriescould negatively affect our expansion strategy and could significantly inhibit our future growthand profitability.

In addition, developingand maintaining brand awareness of our brands in a cost effective manner iscritical to informing and educating the public about our current and futureproduct offerings and is an important element in attracting new consumers. Successfulpromotion of our brands will depend largely on the effectiveness of ourmarketing efforts and on our ability to provide reliable and useful productsand services at competitive prices. Brand promotion activities may not yieldincreased operating revenues, and even if they do, such operating revenues maynot offset the operating expenses we incur in building our brands. Furthermore,our ability to attract new consumers and retain existing consumers depends, inpart, on our ability to maintain what we believe to be our favorable brandimage. Our failure to successfully and efficiently promote and maintain ourbrands may limit our ability to attract new consumers and retain our existingconsumers and materially adversely affect our business, financial condition,results of operations and prospects.

***If we do not continue to be an efficient producer in ahighly competitive environment, particularly in relation to purchases of ourpackaging and raw materials, or an effective advertiser in a highlyinflationary media environment, our results of operations will suffer.***

Our success depends, in part, on our continued abilityto be an efficient producer in a highly competitive industry. If we cannotcontinue to control costs through productivity gains or by eliminatingredundant costs resulting from acquisitions, our results of operations willsuffer. In particular, price increases and shortages of packaging and rawmaterials could have a material adverse effect on our results of operations.For example, our results of operations may be affected by the availability andpricing of packaging materials, principally cardboard and plastic containers,and raw materials, principally raw milk and juice concentrate. We aresubstantially dependent upon one supplier of packaging materials, Tetra Pak,which may make us more vulnerable to changes in global supply and demand andtheir effect on price and availability of these materials. Additionally,weather conditions and other factors beyond our control significantly influencethe price and availability of our raw materials. A number of our raw materials,such as juice concentrate and sugar, are international commodities and aresubject to international price fluctuations, and we experienced significantincreases in raw milk prices during 2003, 2004 and 2005.

Our success also dependson our continued ability to be an effective advertiser in a market where mediainflation on leading national television channels exceeded 25% in 2005. Asubstantial increase in the prices of any of the foregoing, which we may not beable to pass on to customers through price increases, or a protractedinterruption in supply with respect to packaging or raw materials, could have amaterial adverse effect on our financial condition and results of operations.See “Item 4. Information on Our Company—B. Business Overview.”

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***We may be unable to continue to add products andgreater production capacity in faster growing and more profitable categories.***

The food industry’s growthpotential is constrained by population growth, which has been falling inRussia, and growth in personal income. Our success depends, in part, on ourability to expand our business faster than populations are growing in themarkets that we serve, or notwithstanding declines in the populations in thosemarkets. One way to achieve that growth is to enhance our portfolio by addingproducts and greater production capacity in faster growing and more profitablecategories. In the past, we have experienced delays in the installation of newproduction equipment due to internal technical integration issues as well asdelays by vendors and other third-party suppliers in installing andtesting new production lines. Future delays in new equipment installation couldinhibit our ability to add products and expand our production capacity, causeour output volume to suffer and, consequently, have a material adverse effecton our results of operations.

***Our inability to address the seasonal differencebetween the demand for dairy products and the supply of raw milk and theincreasing prices of raw milk could result in a significant increase in ourproduction costs, reducing our profitability.***

The demand for our dairy products is significantlyhigher during the winter months, when Russian raw milk production is at itslowest. Conversely, during the summer months we generally experience depresseddemand for dairy products in many markets, while raw milk production is at itspeak. If we are unable to mitigate this inverse relationship successfully,either through the purchase of raw milk during the winter at commerciallycompetitive prices or through the use of powder milk, our production costs willincrease significantly in the winter, reducing our profitability.

In addition, the averageweighted raw milk purchase price increased for us in ruble terms byapproximately 11% in 2003, 17% in 2004 and 14% in 2005. The price increases aredue, in part, to the raw milk shortages caused by the ongoing decline of dairycattle in Russia. These increases adversely affected our dairy product profitmargins in 2003, 2004 and 2005, and continued increases in raw milk pricescould further reduce our profitability. The shortage of high quality raw milk,coupled with the raw milk price increases, may also limit our ability to expandour production of high margin value-added dairy products. See “Item 5.Operating and Financial Review and Prospects—D. Trend Information” foradditional information.

***In the event that the Moscow City Government were toreduce significantly the prices or the amount of products it purchases from ourbaby food business, then our revenues and profits from this business could bereduced.***

In 2005, the Moscow CityGovernment purchased approximately 56% of the volume of baby food products weproduced, and the proceeds of the baby food products sold to the Moscow CityGovernment comprised approximately 31% of the total sales of our baby foodsegment and approximately 2% of the total sales of our group. We supply theseproducts to the Moscow City Government pursuant to a tender held on a yearlybasis. In the event that we were to lose a tender, or the Moscow CityGovernment was to reduce significantly the prices or the amount of products itpurchases from our baby food business, and we were unable to find alternativepurchasers, then our revenues and profits from this business could be reduced,which could have a material adverse effect on our financial condition andresults of operations. We discuss the sale and distribution of productsproduced at the Moscow Baby Food Plant in “Item 4. Information on OurCompany—B. Business Overview—Current Operations—Sales and Distribution—Distribution.”

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***Our substantial reliance on independent retailers andindependent distributors for the distribution of our products could lower ourturnover and reduce our competitiveness.***

We sell our products either directly to retailers,including supermarkets, grocery shops and restaurants, or to independentdistributors for resale to retail outlets. We expect sales to retailers andindependent distributors to continue to represent a significant portion of ourrevenues. Our operations and distribution costs could be affected by theincreasing consolidation of these entities, particularly as these customersbecome more sophisticated and attempt to force lower pricing and increasedpromotional programs. For example, in the spring of 2001, several Russiansupermarket chains formed a loose alliance which publicly announced itsintention not to purchase our products. Although these supermarket chains nowpurchase our products, they may not continue to do so, and they or othersupermarket chains may attempt a similar consolidation of market power in thefuture. In addition, we expect the merger of two of Russia’s largestsupermarket chains, Perekryostok and Pyatyorochka, announced in April 2006,to further strengthen the negotiating leverage of supermarket chains in theirdealings with us. A number of large Western retailers, such as the Turkishretailer Ramenka, the German retailer Metro and the French retailer Auchan,have also opened stores in the Moscow region, and we expect that the presenceof these retailers will increase price competition.

We also compete with otherbrands for shelf space in retail stores and marketing focus by our independentdistributors and retailers, and our independent distributors and retailersoffer other products, sometimes including their own brands, that competedirectly with our products. In addition, retailers in Russia typically chargefood and beverage producers, including us and our competitors, for shelf space.If independent distributors and retailers give higher priority to other brands,purchase less of, or even refuse to buy, our products, seek substantialdiscounts, charge unreasonable prices for shelf space, fail to offer sufficientshelf space, or devote inadequate promotional support to our brands, it couldlower our turnover and reduce our competitiveness and profitability.

***Independent distributors may export our products tocountries where such products do not meet the requirements of applicablelegislation. The consequent recalls of our products and the associated negativepublicity may adversely affect our reputation in the Russian Federation, theCIS and abroad, and materially adversely affect our results of operations.***

In exporting our products, we attempt to meet thestandards and requirements of applicable legislation governing the import offood products into the importing country. Independent distributors have, insome cases, attempted to export our products to countries where such productsdid not meet the requirements of applicable legislation.

For instance, one of ourindependent dairy distributors exported our Darling Mila milk to the UnitedStates in January 2003. This milk was subsequently recalled from stores inFebruary 2003, when food inspectors discovered that the milk containedsulfonamide. Whereas Russian legislation does not explicitly prohibitsulfonamide in milk, United States legislation does prohibit it. The recall,which was publicized in the Russian press, and any similar events that mayoccur in the future could negatively affect our reputation in the RussianFederation, the CIS and abroad, and materially adversely affect our results ofoperations.

***We do not carry the types of insurance coveragecustomary in more economically developed countries for a business of our sizeand nature, and a significant event could result in substantial property lossand inability to rebuild in a timely manner or at all.***

We maintain insurance against some, but not all,potential risks and losses affecting our operations. We cannot assure you thatour insurance will be adequate to cover all of our losses or liabilities. We alsocan provide no assurance that insurance will continue to be available to us oncommercially reasonable 

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terms. In the event that asignificant event were to affect one of our facilities, we could experiencesubstantial property loss and significant disruptions in production, for whichwe would not be compensated. Additionally, depending on the severity of theproperty damage, we may not be able to rebuild damaged property in a timelymanner or at all. We do not maintain separate funds or otherwise set asidereserves for these types of events. Any such loss or third party claim fordamages may have a material adverse effect on our business, results ofoperations and financial condition.

We are also exposed toproduct liability claims in the event that consumption of our products resultsin illness, injury or death, and we cannot assure you that we will notexperience any material product liability losses in the future. Although wemaintain insurance coverage for product liability, such coverage may be insufficientin the event of a claim. Moreover, certain of our production facilities arecurrently not covered by product liability insurance. In addition, if any ofthe products we have produced are determined to be unsuitable for consumption,we may be required to participate in a recall involving such products. For amore detailed discussion of our insurance coverage see “Item 4. Information onOur Company—B. Business Overview—Insurance.”

***If transactions of members of our group of companiesand their predecessors-in-interest were to be challenged on the basis ofnon-compliance with applicable legal requirements, the remedies in the event ofany successful challenge could include the invalidation of such transactions orthe imposition of other liabilities on such group members.***

Members of our group, ortheir predecessors-in-interest at different times, took a variety of actionsrelating to share issuances, share disposals and acquisitions, mandatorybuy-out offers, valuation of property, interested party transactions, majortransactions, meetings of the group members’ governing bodies, other corporatematters and anti-monopoly issues that, if successfully challenged on the basisof non-compliance with applicable legal requirements by competent stateauthorities, counterparties in such transactions or shareholders of therelevant group members or their predecessors-in-interest, could result in theinvalidation of such transactions and our corporate decisions, restrictions onvoting control or the imposition of other liabilities. Because applicableprovisions of Russian law are subject to many different interpretations, we maynot be able to defend successfully any challenge brought against suchtransactions, and the invalidation of any such transactions or imposition ofany such liability may, individually or in the aggregate, have a materialadverse effect on our business, financial condition and results of operations.

***Our management information system may be inadequate tosupport our future growth.***

Our management informationsystem is less developed in certain respects than those of food producers inmore developed markets and may not provide our management with as much or asaccurate information as those in more developed markets. In addition, we mayencounter difficulties in the ongoing process of implementing and enhancing ourmanagement information system. Our inability to maintain an adequate managementinformation system may have a material adverse effect on our business.

***Our competitive position and future prospects dependon our senior managers and other key personnel.***

Our ability to maintainour competitive position and to implement our business strategy is dependent toa large degree on the services of our senior management team and other keypersonnel. Moreover, competition in Russia for personnel with relevantexpertise is intense due to the small number of qualified individuals and, as aresult, we attempt to structure our compensation packages in a manner consistentwith the evolving standards of the Russian labor market. We are not insuredagainst the detrimental effects to our business resulting from the loss ordismissal of our key personnel. The loss or decline in the services of membersof our senior management team or an inability to attract, retain and motivatequalified key personnel could have a material adverse effect on our business,financial condition and results of operations.

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***We may not be able to protect our intellectualproperty rights adequately, resulting in material harm to our financial resultsand ability to develop our business.***

Given the importance ofbrand recognition to our business, we have invested considerable effort inprotecting our portfolio of intellectual property rights, including trademarkregistration. However, the steps we have taken may not be sufficient and thirdparties may infringe or misappropriate our proprietary rights. Moreover, Russiaand the other countries of the CIS in which we operate generally offer lessintellectual property protection than in Western Europe or North America. If weare unable to protect our proprietary rights against infringement ormisappropriation, it could materially harm our future financial results and ourability to develop our business. We describe our patents and trademarks under “Item4. Information on Our Company—B. Business Overview—Current Operations—Trademarksand Patents.”

***Failure of several of our brand names and images, forwhich trademarks are currently being sought, to be awarded trademark protectioncould negatively affect our marketing plans, resulting in increased advertisingexpenses and a material adverse effect on our financial results.***

As of June 1, 2006,we had 72 pending trademark applications in Russia and 7 pending trademarkapplications abroad. We are also in the process of contesting the rejections ofa number of our trademarks in countries outside of Russia. If our pendingapplications are not granted trademark status, we will have limited ability todefend these brand names or images from use by others, significantly reducingthe value of any advertising using these brand names or images. This willnegatively affect our marketing plans for the products that utilize these brandnames or images, and may require us to develop a different marketing approachfor these products, resulting in increased advertising expenses and adverselyaffecting our financial results. We further discuss our patents and trademarksunder “Item 4. Information on Our Company—B. Business Overview—CurrentOperations—Trademarks and Patents.”

***If we are unable to obtain adequate funding, we mayhave to limit our operations substantially, which could have a material adverseeffect on our business, prospects and results of operations.***

We continue to makesignificant capital expenditures, particularly in connection with the expansionof our existing operations, upgrades of existing facilities, enhancing ourinfrastructure, including building new warehouses and acquisitions of newcompanies. For the fulfillment of our capital spending plans, excludingexpenditures for acquisitions, we spent approximately $107.2 million in2003, $72.6 million in 2004 and $75.1 million in 2005. We spent approximately$9.9 million in 2003, $5.3 million in 2004 and $24.3 million in 2005for acquisitions. However, we may not be able to meet our planned capitalspending needs in the future in the event of the following potentialdevelopments:

·       alack of external financing sources;

·       changesin the terms of existing financing arrangements;

·       pursuitof new business opportunities or investment in existing businesses that requiresignificant investment;

·       slowerthan anticipated growth in demand for our products;

·       slowerthan anticipated revenue growth;

·       regulatorydevelopments; or

·       adeterioration in the Russian economy.

To meet our financingrequirements, we may need to attract additional equity or debt financing.Russian companies are limited in their ability to issue shares in the form ofADSs or other depositary receipts due to Russian securities regulations, which,until 2005, generally provided that no more than 40% 

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of aRussian company’s shares may be circulated abroad through depositary receiptprograms. This limitation was subsequently decreased to 35%. Our ADS and GDSprograms together account for 40% of our outstanding shares (which amount wasapproved by the Russian securities regulator based on the prior limit and isnot required to be reduced to 35%). As a result, we are currently unable toraise additional equity financing through the issuance of depositary receipts.The Russian government or its agencies may also impose other restrictions oninternational securities offerings by Russian issuers. Any of the foregoingfactors may limit the amount of capital available to meet our operatingrequirements. If we cannot obtain adequate funds to satisfy our capitalrequirements, we may need to limit our operations significantly, which couldhave a material adverse effect on our business, results of operations andprospects.

***We are controlled by a group of shareholders whoseinterests could conflict with those of the holders of our securities.***

As of May 15, 2006, to our knowledge,approximately 58.38% of our outstanding common stock is owned by the group ofshareholders that owned us prior to our IPO. This group has acted in concertsince our establishment and, since 1997, pursuant to a Partnership andCooperation Agreement, amended and restated January 16, 2002, whichrequires the parties to vote the same way. This group continues and willcontinue to be bound by this agreement to vote as a block until any member ofthe group elects to withdraw from the agreement. This agreement gives themcontrol over us and the ability to elect a majority of the directors, appointmanagement and approve certain actions requiring the approval of a majority ofour shareholders.

If not otherwise required by law, resolutions at ashareholders’ meeting will be adopted by a simple majority in a meeting atwhich shareholders holding more than half of the issued share capital arepresent or represented. Accordingly, as long as the group continues to hold,directly or indirectly, the majority of our shares and act in concert pursuant tothe Partnership and Cooperation Agreement, they will have the power to controlthe outcome of most matters to be decided by vote at a shareholders’ meetingand the appointment of the majority of directors and removal of directors. Thegroup will also be able to control or significantly influence the outcome ofany vote on, among other things, any proposed amendment to our charter,reorganization proposal, proposed substantial sale of assets or other majorcorporate transactions. Thus, the group can take actions that may conflict withthe interest of holders of our ADSs.

Members of our controllinggroup of shareholders also have interests in other companies, some of whichconduct business with us. Related party transactions with these companies maypotentially result in the conclusion of transactions on terms less favorablethan could be obtained in arm’s-length transactions.

***Recently adopted changes in Russian law will limit theamount of advertising time permitted on television, which could increase our advertisingexpenses and have a material adverse effect on our sales and results ofoperations.***

Russian law currently limits the amount of time that abroadcaster may devote to advertising to 20% of total broadcasting time perday, although within that overall limit, it does not restrict the amount ofadvertising in any given hour. A newly-adopted law will further limit thepermitted amount of advertising time to 15% of daily broadcasting time, as wellas limit advertising to no more than 20% in any hour from July 1, 2006through December 31, 2007. From January 1, 2008, advertising will befurther limited to no more than 15% per hour of broadcasting time.

As a result of this new law, the amount of availableadvertising time will decrease. In turn, the reduction in available advertisingtime will likely lead to increased costs to advertisers for purchasingadvertising time due to an increased demand for available time slots and adrive by media outlets to recover their loses from the decreased volume ofadvertising time they are permitted to sell. We expect the greatest priceincreases to affect television advertising, particularly during primetime.

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The new law also imposes certain restrictions onadvertising that may require us to adjust some of our advertising campaigns.

We are among the largestadvertisers in Russia. According to Gallup, we were the second largestadvertiser in Russia in 2003, the third largest advertiser in 2004 and theninth largest advertiser in 2005. In 2005, over 50% of our advertising expendituresrelated to television advertisements. At the same time, media inflation inRussia has been significant in recent years, exceeding 34% in 2004 and 28% in2005. Imposition of the new law, coupled with overall media inflation inRussia, will likely increase our advertising expenses. The increased cost ofadvertising, along with the decreased availability of advertising time slots,may also lead to a decrease in our television advertising which, consequently,may have a material adverse effect on our sales and results of operations.

***In the event that our equipment rental arrangementswere deemed to be subject to licensing requirements, our subsidiaries engagingin these arrangements could be subject to liquidation or face the invalidationof the rental contracts.***

A number of oursubsidiaries purchase equipment which they then, in turn, lease to raw milkproducers. Prior to February 11, 2002, when the new Federal Law onLicensing of Certain Types of Activities became effective, Russian legislationrequired a license for financial leasing activities, but it is unclear whetherthis requirement extended to our leasing activities. Although leasingactivities are no longer subject to licensing, in the event that the relevantgovernmental authorities were to successfully claim that a license was requiredfor our past leasing activities, we would be subject to significant adverseconsequences such as the potential liquidation of the leasing entity andinvalidation of the relevant contracts.

***One or more of our subsidiaries could be forced intoliquidation on the basis of formal non-compliance with certain requirements ofRussian law, which could materially adversely affect our business, financialcondition, results of operations and prospects.***

Certain provisions of Russian law may allow a court toorder liquidation of a Russian legal entity on the basis of its formalnon-compliance with certain requirements during formation, reorganization orduring its operation. There have been cases in the past in which formaldeficiencies in the establishment process of a Russian legal entity ornon-compliance with provisions of Russian law have been used by Russian courtsas a basis for liquidation of a legal entity. For example, in Russian corporatelaw, negative net assets calculated on the basis of Russian accountingstandards as at the end of the second or any subsequent year of a company’soperation, can serve as a basis for a court to order the liquidation of thecompany, upon a claim by governmental authorities. Many Russian companies havenegative net assets due to very low historical asset values reflected on theirRussian accounting standards balance sheets; however, their solvency, *i.e*., their ability to pay debts as theycome due, is not otherwise adversely affected by such negative net assets.

Twenty-two of oursubsidiaries have negative net assets. These subsidiaries, taken together, arematerial to our operations. We believe that, as long as these subsidiariescontinue to fulfill their obligations, the risk of their liquidation is minimal.However, we have taken and continue to take certain steps to remedy thissituation and reduce the number of subsidiaries with negative net assets. Weare also in the process of integrating the newly acquired businesses andrestructuring our subsidiaries, which we expect will reduce the number ofsubsidiaries with negative net assets. While we understand that a Moscow courtliquidated a company with negative net assets in 2002, we are not aware of anysituation where a Russian company has been liquidated pursuant to thislegislation if it has met all of its obligations, as each of these subsidiarieshas. Therefore, we believe that this risk is remote and have not included it asa contingency in the notes to our financial statements which appear elsewherein this document. However, weaknesses in the Russian legal system create anuncertain legal environment, which makes the decisions 

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of aRussian court or a governmental authority difficult, if not impossible, topredict. If involuntary liquidation were to occur, then we may be forced toreorganize the operations we currently conduct through the affectedsubsidiaries. Any such liquidation could lead to additional costs, which couldmaterially adversely affect our business, financial condition, results ofoperations and prospects.

***In the event that deficiencies or ambiguities inprivatization legislation are successfully exploited to challenge our ownershipin our privatized subsidiaries and we are unable to defeat these challenges, werisk losing our ownership interest in the subsidiaries or their assets, whichcould materially adversely affect our business, financial condition, results ofoperations and prospects.***

Our business includes a number of privatized companiesin Russia and other countries of the former Soviet Union, and our acquisitionstrategy will likely involve the acquisition of additional privatizedcompanies. To the extent that privatization legislation is vague, inconsistentor in conflict with other legislation, including conflicts between federal andlocal privatization legislation, many privatizations are vulnerable tochallenge, including selective challenges. For instance, a series ofpresidential decrees issued in 1991 and 1992 that granted to the Moscow CityGovernment the right to adopt its own privatization procedures weresubsequently held to be invalid by the Constitutional Court of the Russian Federation,which ruled, in part, that the presidential decrees addressed issues that werethe subject of federal law. While this court ruling, in theory, did not requireany implementing actions, the presidential decrees were not officially annulledby another presidential decree until 2000. In the event that any title to, orour ownership stakes in, the privatized companies acquired by us, are subjectto challenge as having been improperly privatized and we are unable to defeatthis claim, we risk losing our ownership interest in the company or its assets,which could materially affect our business and results of operations. Inparticular, as we own a substantial number of our other subsidiaries throughthe Lianozovo Dairy Plant, and as the Lianozovo Dairy Plant constitutes themajority of our production capacity, its loss would materially adversely affectour prospects, business and results of operations.

Additionally, of the 98.02% of the Lianozovo DairyPlant and 98.91% of the Tsaritsino Dairy Plant which we own, 15% of each wereacquired in separate investment tenders held by the Department of State andMunicipal Property of the Moscow City Government. Under the legislationgoverning such tenders, a tender is not valid unless at least two participantssubmit bids. In the investment tenders for the Lianozovo Dairy Plant and theTsaritsino Dairy Plant, the only two participants were entities which wereunder common control, an arguable violation of this requirement. In the eventthat the Russian government authorities were successfully to maintain thatthese tenders were not duly held since the participants were under commoncontrol, we could lose 15% of our stakes in the Lianozovo Dairy Plant and theTsaritsino Dairy Plant, materially adversely affecting our results ofoperations.

In addition, under Russianlaw, transactions in shares may be invalidated on many grounds, including asale of shares by a person without the right to dispose of such shares, breachof interested party and/or major transactions rules and failure toregister the share transfer in the securities register. As a result, defects inearlier transactions in shares of our subsidiaries (where such shares wereacquired from third parties) may cause our title to such shares to be subjectto challenge.

***In the event that companies which, as a result of ourcorporate reorganization for our initial public offering, were transferred byus but continue to be associated in the public mind with the “Wimm-Bill-Dann”name give rise to shareholder liability or reputational issues, our results ofoperations or reputation could suffer.***

As part of our corporatereorganization for our initial public offering, we transferred our interests ina bank, Expobank, and four breweries to certain of our shareholders. These shareholders,in turn, have disposed of their interests in the bank and the breweries. In theevent that these companies, which are no longer owned by us but may continue tobe associated with the “Wimm-Bill-Dann” name in the public mind, are subject tonegative publicity, our reputation could be affected. For example, there havebeen 

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pressreports about a dispute regarding the exclusion, in the fall of 2000, ofminority shareholders from a shareholders’ meeting of a beer company previouslyowned by us and our current shareholders, some of whom are also members of ourBoard of Directors. These press reports repeated allegations made by theexcluded minority shareholders as to the illegality of their exclusion,although their exclusion was upheld in court. Press speculation of a similarnature could raise concerns about how the holders of our securities andminority shareholders in our company will be treated, negatively affecting theprice of our securities. Additionally, we could be held responsible for any shareholderliability which arises in connection with these companies and their operationsduring the time which they were owned by our subsidiaries.

***We have engaged and may continue to engage intransactions with related parties that may present conflicts of interest,potentially resulting in the conclusion of transactions on less favorable termsthan could be obtained in arm’s-length transactions.***

We have engaged intransactions with affiliated parties and may continue to do so. For example, wehave engaged in transactions with certain of our shareholders, directors andexecutive officers and companies controlled by them, including equity purchases,supply contracts, loan arrangements, indemnification agreements and realproperty acquisitions. Conflicts of interest may arise between our affiliatesand us, potentially resulting in the conclusion of transactions on terms notdetermined by market forces.

***Allegations about certain of our shareholders ordirectors could adversely affect our reputation.***

Certain of ourshareholders and directors, including the Chairman of our Board of Directors,are together controlling shareholders in a group of related companies sometimesreferred to as “Trinity.” The Trinity group engages in agro business, securityservices, casinos and construction. We purchased Municipal Guard Agency, asecurity services company, from the Trinity group in 2001. Prior to and in thebeginning of 2002, we obtained security services from Trinity-Negus, andwe currently purchase milk from certain milk supply companies in the Trinitygroup. See “Item 7. Major Shareholders and Related Party Transactions—B.Related Party Transactions” for a description of these transactions. TheTrinity group has been the subject of speculation in the Russian press,including with respect to possible links with organized crime. However, nocharges have been brought by governmental authorities against any of ourshareholders or directors and, to the best of our knowledge, none has beenthreatened. In addition, our largest shareholder, who has been a member of ourBoard of Directors since June 14, 2005, was convicted of a violent crimein 1980 under the Soviet system and served nine years in a labor camp. Pressspeculation about these or other matters relating to our shareholders ordirectors could adversely affect our reputation and the value of oursecurities.

***Possible implementation of new federal or localgovernment policies, or selective application of existing policies, affectingthe food industry could substantially and negatively affect our turnover andoperating margin.***

Possible implementation of new federal or localgovernment policies, or selective application of existing policies, affectingthe food industry could have a significant impact on our business. For example,the federal and local governments have been known to implement trade barriers,subsidies and other policies favoring certain producers. Additionally, customsregulations in Russia are unclear, subject to frequent change and are appliedinconsistently. The imposition of higher customs duties on products we importwould increase the costs of our products and reduce our profits, while theimplementation of price controls on products we produce would reduce ouroperating margin. For example, federal customs regulations enacted during 2001subject juice concentrate imports to the highest level of customs dutiesallowed for that particular category of imports. In addition, federal customsregulations enacted during 2002 stipulate minimum declaration amounts forimported goods. As a result of such regulations, we may 

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be forced to declare ahigher value for imported goods than the amount actually paid and,consequently, pay a higher tariff on such goods.

Another example of a government regulation that hasaffected us is Government Regulation No. 988, which requires foodproducers intending to develop and offer a new food product to the public tofile an application for the product’s state registration and incorporation intothe State Register of Permitted Food Products. Failure to comply withRegulation No. 988 could cause delays in introducing new food and beverageproducts to the public, as well as the disallowance of certain tax benefitsotherwise available to producers of certain food products, such as baby food.The implementation of this regulation in June 2004 has caused delays inour introduction of certain new products and has increased production costs. Wemay continue to experience similar delays and increased costs in connectionwith Regulation No. 988 in the future.

In addition, the newSanitary Rules on Children’s Food Products, which became effective on June 1,2005, disallow certain tax benefits we formerly enjoyed in relation to some ofour baby food products.

***Increased domestic production by our foreigncompetitors could reduce our competitive advantages against them, which wouldhave a material adverse effect on our market share and results of operations.***

A number of our foreigncompetitors, such as Danone, Parmalat, Lactalis, Campina, Ehrmann, Onken andPascuale, have begun to invest in domestic production facilities, while others,such as Coca-Cola, have acquired domestic producers. These investments andacquisitions reduce the competitive advantages that we have over foreigncompetitors without domestic production capability. A continuation of thistrend may result in increased competition for qualified personnel and higherlabor costs, and would have a material adverse effect on our business andresults of operations. See “Item 4. Information on Our Company—B. BusinessOverview” for further description of the recent investments by some of ourforeign competitors in Russian production facilities.

***If the Federal Antimonopoly Service were to concludethat we acquired or created a new company in contravention of antimonopolylegislation, it could impose administrative sanctions and require the unwindingof such transactions, which could have a material adverse effect on ourbusiness and results of operations.***

Our business has grownsubstantially through the acquisition and founding of companies, many of whichrequired the prior approval or subsequent notification of the FederalAntimonopoly Service or its predecessor agencies. In part, relevant legislationrestricts the acquisition or founding of companies by groups of companies orindividuals acting in concert without this approval or notification. While webelieve that we have complied with the applicable legislation for ouracquisitions and founding of new companies, this legislation is sometimes vagueand subject to varying interpretations. Additionally, although the commonownership by our shareholders of a number of companies which are now oursubsidiaries was generally made known to the Federal Antimonopoly Service andits predecessors, the existence of the shareholders’ agreement among ourcurrent shareholders was not disclosed. If the Federal Antimonopoly Servicewere to conclude that an acquisition or creation of a new company was done incontravention of applicable legislation, it could impose administrativesanctions and require the divestiture of this company or other assets, whichcould have a material adverse effect on our business and results of operations.

***Further restrictions on our business which iscategorized as a monopoly, or the extension of monopoly status to other of ourbusinesses, could result in the regulation of our prices and restriction of ourcommercial activities, materially adversely affecting our results ofoperations.***

Under Russian legislation,the Federal Antimonopoly Service may categorize a company as a dominant forcein a market. Our baby food business is categorized as a monopoly in Moscow andthe Moscow region, placing restrictions on our ability to increase our profitmargins for that business. Any 

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ruling thatany of our other businesses is a monopoly could result in the regulation of ourprices and restrictions on our commercial activities. The imposition ofgovernment-determined prices could, in turn, result in competitivedisadvantages and a significant decline in revenues. Additionally, restrictionson expansion or government-mandated withdrawal from regions or marketswould adversely affect our plans for expansion and could reduce our marketshare.

***In the event that our minority shareholders orminority shareholders of our subsidiaries were to challenge successfully pastor future interested party transactions, or do not approve interested partytransactions or other matters in the future, the invalidation of suchtransactions or failure to approve such matters could have a material adverseeffect on our business, financial condition, results of operations or prospectsor the value of the shares and ADSs.***

We own less than 100% of the equity interests in someof our subsidiaries. In addition, certain of our wholly owned subsidiaries havehad other shareholders in the past. We and our subsidiaries in the past havecarried out, and continue to carry out, transactions which may be considered tobe “interested party transactions” under Russian law, requiring approval bydisinterested directors, disinterested independent directors or disinterestedshareholders depending on the nature of the transaction and parties involved.See “Item 10. Additional Information—B. Charter and Certain Requirements of Russian Legislation—InterestedParty Transactions.” The provisions of Russian law defining which transactionsmust be approved as “interested party transactions” are subject to differentinterpretations. We cannot assure you that our and our subsidiaries’applications of these concepts will not be subject to challenge by former andcurrent shareholders. Any such challenges, if successful, could result in theinvalidation of transactions, which could have a material adverse effect on ourbusiness, financial condition, results of operations or prospects and the valueof the shares and ADSs.

In addition, Russian law requires a three-quartersmajority vote of the holders of voting stock present at a shareholders’ meetingto approve certain transactions and other matters, including, for example,charter amendments, major transactions involving assets in excess of 50% of theassets of the company, repurchase by the company of shares and certain shareissuances. In some cases, minority shareholders may not approve interested partytransactions requiring their approval or other matters requiring approval ofminority shareholders or supermajority approval. In the event that theseminority shareholders were to challenge successfully past interested partytransactions, or do not approve interested party transactions or other mattersin the future, we could be limited in our operational flexibility and ourbusiness, financial condition, results of operations or prospects could bematerially adversely affected.

Over the past several years,we have sought and continue to seek to purchase minority stakes in oursubsidiaries with the aim of acquiring 100% interests in each of our keysubsidiaries. For example, in January 2005, we acquired a 10% stake in oursubsidiary Siberian Dairy Plant fromminority shareholders for a cash consideration of $1.1 million increasing ourbeneficial ownership to 87.1%. In March and April 2004, we acquired atotal of an additional 6.2% of our subsidiary Tsaritsino Dairy Plant from ourminority shareholders for a cash consideration of $3.4 million increasing ourbeneficial ownership to 97.6%. In addition, we acquired a 47.7% interest in oursubsidiary Ufa Dairy Plant in September 2003 from minority shareholdersfor a cash consideration of $3.1 million increasing our beneficial ownership to96.5%. In the future, minority shareholders may elect not to sell their sharesto us, and thereby impede our efforts in acquiring 100% ownership interests inour subsidiaries.

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**Risks Relating toOur Financial Condition**

***Inflation could increase our costs and decrease ouroperating margins.***

The Russian economy has been characterized by highrates of inflation. As we tend to experience inflation-driven increasesin certain of our costs, including salaries and rents, which are sensitive torises in the general price level in Russia, our costs in U.S. dollar terms willrise. In this situation, due to competitive pressures, we may not be able toraise the prices we charge for our products and services sufficiently topreserve operating margins. Accordingly, high rates of inflation in Russiacould increase our costs and decrease our operating margins.

***Servicing and refinancing our indebtedness willrequire a significant amount of cash. Our ability to generate cash or obtainfinancing depends on many factors beyond our control.***

We have a substantial amount of outstandingindebtedness, primarily consisting of the liabilities we have in connectionwith our $150 million loan participation notes due 2008, our ruble bonds,bank loans and obligations under equipment financing. As at December 31,2005, our consolidated total debt was approximately $371.6 million, ofwhich $37.9 million was secured by equipment or inventory.

Our ability to make payments on and to refinance ourindebtedness, and to fund planned capital expenditures and research anddevelopment efforts, will depend on our ability to generate cash in the future.This, to a certain extent, is subject to general economic, financial,competitive, legislative, regulatory and other factors that are beyond ourcontrol. If we are unable to generate sufficient cash flow or otherwise obtainfunds necessary to make required payments, we may default under the terms ofour indebtedness, thereby allowing the holders of our indebtedness toaccelerate the maturity of such indebtedness, and potentially causing cross-defaultsunder and acceleration of our other indebtedness.

We may not be able togenerate sufficient cash flow or access international capital markets or incuradditional indebtedness to enable us to service or repay our indebtedness or tofund our other liquidity needs. We may need to refinance all or a portion ofour indebtedness, including our $150 million loan participation notes due2008, on or before maturity, sell assets, reduce or delay capital expendituresor seek additional capital. Refinancing or additional financing may not beavailable on commercially reasonable terms, and we may not be able to sell ourassets or, if sold, the proceeds therefrom may not be sufficient to meet our debtservice obligations. Our inability to generate sufficient cash flow to satisfyour debt service obligations, or to refinance debt on commercially reasonableterms, would have a material adverse effect on our business, financialcondition, results of operations and prospects.

***Covenants in our debt agreements restrict our abilityto borrow, invest and engage in various activities, which could impair ourability to expand or finance our future operations.***

Our short-term andlong-term debt agreements, including the loan agreement relating to our$150 million loan participation notes due 2008, contain covenants thatimpose operating and financial restrictions on us and our subsidiaries. Theserestrictions significantly limit, and in some cases prohibit, among otherthings, our and certain of our subsidiaries’ ability to incur additional debt,provide guarantees, create liens on assets or enter into business combinations.See “Item 10. Additional Information—C. Material Contracts—Loan Agreementrelating to the Loan Participation Notes and Guarantee.” Failure to comply withthese restrictions would constitute a default under our debt agreements,including the loan agreement relating to our $150 million loanparticipation notes due 2008, and any of our other senior debt containing cross-defaultprovisions could become immediately due and payable, which would materiallyadversely affect our business, financial conditions and results of operations.In addition, some of our debt agreements contain provisions which permit ourlenders to require us to repay our debt to them in the event of a deteriorationin our financial condition.

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***We may not have the ability to raise the fundsnecessary to finance a prepayment of certain of our outstanding indebtedness incase of a change of control event.***

The terms of the loan agreement relating to our$150 million loan participation notes due 2008 and some of our other debtagreements require that we prepay the outstanding debt upon the occurrence ofcertain change of control events. A change of control event will generally betriggered at such time as any person acting alone or together with otherpersons (excluding several of our major shareholders acting individually or asa group): (i) is or becomes interested, directly or indirectly, in theaggregate of more than 50% of our capital stock with voting power, or (ii) hasor acquires the right to appoint or remove a majority of our Board ofDirectors, or (iii) has or acquires control of a majority of our votingrights, in each case, in circumstances where, solely as a result of any suchevent as specified by the relevant rating agencies, a rating decline (asfurther described in the loan agreement relating to our $150 million loanparticipation notes due 2008) would result.

If a change in controloccurs, and we are required to prepay our debt, such event could have amaterial adverse effect on our business, financial condition, results ofoperations and business prospects. It is also possible that we will not havesufficient funds at the time of the change of control to satisfy suchprepayment obligations, or to refinance the debt on commercially reasonableterms.

***Our inability to effect certain mergers within ourgroup of companies may prevent us from optimizing our tax rate and result in increasedtaxes.***

As Russian tax regulationsdo not allow Russian companies to pay taxes on a consolidated basis, *i.e.*, to offset the losses of one subsidiary against theprofits of another subsidiary, we are seeking to merge certain companies withineach of our segments in an effort to optimize the tax rates applicable to us. Ourability to effect such mergers depends, in each instance, upon our receipt ofcertain governmental and corporate approvals. Our inability or failure toconsummate the mergers may prevent us from optimizing our tax ratesand our effective tax rate may increase as our operations continue toexpand.

***Devaluation of the ruble against the U.S. dollar couldincrease our costs and reduce our operating revenues.***

A significant portion of our costs,expenditures and liabilities, including costs of packaging, juiceconcentrate and certain other raw materials, as well as capital expendituresand borrowings (including our $150 million loan participation notes due 2008),are either denominated in, or closely linked to, the U.S. dollar, while substantially all of our operatingrevenues are denominated in rubles. As a result, the devaluation of the rubleagainst the U.S. dollar can adversely affect us by increasing our costs inruble terms. Additionally, if the ruble declines against the U.S. dollar andprice increases cannot keep pace, we could have difficulty repaying orrefinancing our U.S. dollar-denominated indebtedness, including ournotes. The devaluation of the ruble also results in losses in the value ofruble-denominated assets, such as ruble deposits.

The decline in the valueof the ruble against the U.S. dollar also reduces the U.S. dollar value of taxsavings arising from the depreciation of our property, plant and equipment,since their basis for tax purposes is denominated in rubles at the time of theinvestment. Increased tax liability would increase total expenses.

***Restrictions on investments outside Russia or inhard-currency-denominated instruments in Russia expose our cash holdingsto devaluation.***

Currency regulationsestablished by the Central Bank of Russia restrict investments by Russiancompanies outside Russia and in most hard-currency-denominatedinstruments in Russia, and there are only a limited number of ruble-denominatedinstruments in which we may invest our excess cash. Additionally, subject tocertain exceptions, Russian companies must repatriate 100% of their offshoreforeign currency earnings to Russia. In 2005, Russian companies were requiredto convert 10% of those 

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earningsinto rubles within seven days of receipt. While this conversion requirement wasabolished by legislation that came into effect in May 2006, Russianlegislation allows the Central Bank of Russia to reinstate the conversionrequirement in any amount up to 30%. Any balances maintained in rubles willgive rise to losses if the ruble devalues against the U.S. dollar.

***Russian currency control regulations could hinder ourability to conduct our business.***

The Central Bank of Russia has from time to timeimposed various currency control regulations, and may take further actions inthe future. Furthermore, the government and the Central Bank of Russia mayimpose additional requirements on cash inflows and outflows into and out ofRussia or on the use of foreign currency in Russia, which could prevent us fromcarrying on necessary business transactions, or from successfully implementingour business strategy.

A framework law onexchange controls which took effect in June 2004 empowers the governmentand the Central Bank of Russia to further regulate and restrict currencycontrol matters, including operations involving foreign securities and foreigncurrency borrowings by Russian companies. While the new regulatory regimecontinues to be restrictive, the law contemplates that most restrictions oncurrency operations will be removed effective January 1, 2007.

***Some of our customers, debtors and suppliers may failto pay us or to comply with the terms of their agreements with us which couldadversely affect our results of operations.***

Russia’s inexperience with a market economy relativeto more developed economies poses numerous risks that could interfere with ourbusiness. For example, the failure to satisfy liabilities is widespread amongRussian businesses and the government. Furthermore, it is difficult for us togauge the creditworthiness of some of our customers, as there are no reliablemechanisms, such as reliable credit reports or credit databases, for evaluatingtheir financial condition. Consequently, we face the risk that some of ourcustomers or other debtors will fail to pay us or fail to comply with the termsof their agreements with us, which could adversely affect our results ofoperations.

In addition, we arelimited in our ability to control the conduct of our raw materials andequipment suppliers, including their adherence to contract delivery terms andtheir compliance with applicable legislation, such as currency, customs andenvironmental regulations and laws relating to the use of food additives and geneticallymodified food products. Failure of our suppliers to adhere to the terms of ourcontracts with them or the law may negatively affect our reputation and ourbusiness.

***Limitations on the conversion of rubles to foreigncurrencies in Russia could increase our costs when making payments in foreigncurrencies to suppliers and creditors and could cause us to default on ourobligations to them.***

Many of our major capital expenditures are denominatedand payable in various foreign currencies, including the U.S. dollar and euro.Russian legislation currently permits the conversion of ruble revenues intoforeign currency. Any delay or other difficulty in converting rubles into aforeign currency to make a payment or delay in or restriction on the transferof foreign currency could limit our ability to meet our payment and debtobligations, which could result in the loss of suppliers, acceleration of debtobligations and cross-defaults and, consequently, have a material adverseeffect on our business, financial condition and results of operations.

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***If the various initiatives we have used to reduce ourtax burden and/or our calculation of our VAT and profit tax liabilities aresuccessfully challenged by the Russian tax authorities, we will facesignificant losses associated with the assessed amount of tax underpaid andrelated interest and penalties, which would have a material impact on ourfinancial condition and results of operations.***

We have used various initiatives to reduce our taxburden. As described below, several of our tax initiatives have recently beenchallenged by the Russian tax authorities. There have also been press reportsof instances in which the Russian tax authorities have successfully challengedstructures similar to those we have used. If any of our initiatives aresuccessfully challenged by the Russian tax authorities, we would facesignificant losses associated with the assessed amount of tax underpaid andrelated interest and penalties. These losses could have a material impact onour financial condition and results of operations. See Note 29 to ourConsolidated Financial Statements included under “Item 18. FinancialStatements.”

In addition, the Russian tax authorities audited theTsaritsino Dairy Plant for the period covering 2000 through 2003. This auditresulted in a tax assessment of approximately $3.7 million relating to theplant’s calculation of its profit tax and value-added tax, or VAT, liabilityand a reduction in the amount of VAT refundable to the Tsaritsino Dairy Plantby approximately $1.0 million. The Tsaritsino Dairy Plant filed a claimwith the Moscow Arbitration Court challenging these decisions in December 2004.In February 2005, the Moscow Arbitration Court ruled in our favor, exceptfor the profit tax exemption in the amount of approximately $0.1 millionpaid by the Tsaritsino Dairy Plant as a charity donation. The court’s decisionwas thereafter affirmed, and the appeal by the Russian tax authorities wasdismissed by the Appellate Arbitration Court.

In November 2004, Fruit Rivers was assessedapproximately $3.0 million relating to its calculation of VAT. FruitRivers challenged this assessment and the Moscow Arbitration Court voided theassessment in April 2005. The tax authorities did not appeal the decisionand the period for appeal has expired.

As court decisions inRussia do not constitute precedent for subsequent cases, the court decisionsdescribed above do not prevent the Russian tax authorities from filing similarclaims against us or our subsidiaries or preclude the possibility that courtswould rule in their favor on such claims. Thus, while we believe that oursubsidiaries have complied and continue to comply with their profit tax and VATobligations, the Russian tax authorities may in the future make claims againstother of our subsidiaries for additional profit tax or VAT amounts with respectto sales of their products. These claims could be significantly larger than theclaims described above, and our ability to recover VAT owed by the Russian taxauthorities could also be jeopardized. The resulting losses could have amaterial adverse impact on our financial condition and results of operations.

***The elimination of a tax privilege from which wecurrently benefit and/or a successful challenge by the tax authorities of ouruse of this tax privilege would materially adversely affect our results ofoperations.***

Our juice producing subsidiaries have benefited fromsmall enterprise tax legislation. If we had not taken advantage of this benefitin 2003, 2004 and 2005, our tax expenses would have increased by $3.0 million,$1.2 million and $0.3 million, respectively. This tax benefit waseliminated as of January 1, 2002. However, under the amended legislation,our small enterprises that were formed prior to January 1, 2002 were ableto continue and did continue to use this benefit for two years from the date onwhich they were formed, and in the third and fourth years after they wereformed, income tax was levied at a rate of 25% and 50% of the income tax rate,respectively. Although none of our subsidiaries currently takes advantage ofthe small enterprise tax benefits, we cannot guarantee that the tax authoritiesmay not retroactively challenge previous tax benefits enjoyed by oursubsidiaries pursuant to small enterprise tax legislation. Such challenges, ifsuccessful, could materially adversely affect our results of operations. See “Item5. Operating and Financial Review and Prospects—A. Operating Results—Provisionfor Income Taxes.”

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In addition, our use of the small enterprise taxexemption has been subject to challenge by the Russian tax authorities.

In January 2005, our Novosibirsk subsidiary,Nectarin, was assessed approximately $0.9 million (including requiredprofit tax advance payments and penalties) by the local tax authorities. Theassessment related to Nectarin’s use of the small enterprise tax exemption incalculating its profit tax liability during 2004. Nectarin filed a claim withthe Moscow Arbitration Court challenging this assessment, and the assessmentwas subsequently declared invalid by the court, which decision was thereafteraffirmed on appeal.

In September 2004, our subsidiary, Fruit Rivers,was assessed approximately $12.5 million (including penalties) by thelocal tax authorities relating to its use of the small enterprise tax exemptionin calculating its profit tax liability during 2001. Fruit Rivers challengedthis tax assessment with a higher tax authority, which cancelled theassessment.

While we believe that oursubsidiaries have complied and continue to comply with the rules relatingto the small enterprise tax exemption, the Russian tax authorities may in thefuture make additional claims against our subsidiaries challenging their use ofthis exemption. These claims could be significantly larger than the claimsdescribed above, and the resulting losses could have a material adverse effecton our financial condition and results of operations.

***We are only able to conduct banking transactions witha limited number of creditworthy Russian banks, as the Russian banking systemremains underdeveloped, and another banking crisis could place severe liquidityconstraints on our business, materially adversely affecting our business,financial position and results of operations.***

Russia’s banking and other financial systems are notwell developed or regulated, and Russian legislation relating to banks and bankaccounts is subject to varying interpretations and inconsistent application.The August 1998 financial crisis resulted in the bankruptcy andliquidation of many Russian banks and almost entirely eliminated the developingmarket for commercial bank loans. Although the Central Bank of Russia has themandate and authority to suspend banking licenses of insolvent banks, manyinsolvent banks still operate. Most Russian banks also do not meet internationalbanking standards, and the transparency of the Russian banking sector stilllags far behind internationally accepted norms. The weak banking infrastructurein Russia also exposes us to an increased risk of unauthorized transactions orcharges on our accounts due to bank error or actions by computer hackers.

The serious deficiencies in the Russian bankingsector, combined with the deterioration in the credit profile of the loanportfolios of Russian banks, may result in the banking sector being more susceptibleto market downturns or economic slowdowns. In addition, the Central Bank ofRussia has recently revoked the licenses of certain Russian banks, whichresulted in market rumors about additional bank closures and many depositorswithdrawing their savings. If a banking crisis were to occur, Russian companieswould be subject to severe liquidity constraints due to the limited supply ofdomestic funding sources and the withdrawal of foreign funding sources thatwould occur during such a crisis. In addition, another banking crisis or thebankruptcy or insolvency of the banks from which we receive or with which wehold our funds could result in the loss of our deposits or affect our abilityto complete banking transactions in Russia, which could have a material adverseeffect on our business, financial conditions and results of operations.Similarly, our customers may be adversely affected by another banking crisis orthe bankruptcy or insolvency of the banks from which they receive or with whichthey hold their funds creating a situation in which they would be unable to payus in full or at all, which could also result in a material adverse effect onour business, financial condition and results of operations.

We have also experienced problems with transmittingtax payments through certain Russian banks and, as a result, are experiencingdifficulties with the Russian tax authorities. For example, in 2004 and 

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2005, our subsidiariesWimm-Bill-Dann Purchaser, Ramenskoe Moloko and Tsaritsino Dairy Plant each receiveda tax assessment from the Russian tax authorities for tax arrears totalingapproximately $100,000, $100,000 and $750,000, respectively. Each of these taxassessments resulted from the failure of the subsidiaries’ banks to transfertax payments to the state budget upon receiving the relevant payment orders. Wechallenged these assessments and, in each instance, the assessments weredeclared invalid by Russian Arbitration Courts. Nevertheless, in May 2005,the tax authorities issued a new tax assessment in the amount of $750,000against the Tsaritsino Dairy Plant relating to the tax payment that was thesubject of their prior $750,000 assessment. The tax authorities subsequentlyfiled a tax claim in the Moscow Arbitration Court, though they reduced the amountof the claim to $510,000. The Moscow Arbitration Court ruled in our favor withrespect to this claim, a decision which was thereafter upheld on appeal in theNinth Arbitration Appeals Court, as well as on appeal in the Moscow DistrictArbitration Court. In addition, in April and May 2006 several of oursubsidiaries received demands from the tax authorities seeking to recognizesuch subsidiaries as acting in bad faith for the failure of their banks totransfer tax payments to the state budget upon receiving the relevant paymentorders. The total amount of the demands from the tax authorities is $3,690,190.In response, we have filed claims seeking the invalidation of these tax demandsand assessments with the Moscow Arbitration Court, in some cases, and directlywith the tax authorities in others. All the cases are currently pending. In June 2006,Lianozovo Dairy Plant received a new assessment from the Russian tax authoritiesfor approximately $90,000, and we are currently in the process of challengingthis assessment with the Moscow Arbitration Court.

While the Russian Tax Code provides that a taxpayer isdeemed to have paid a tax when the corresponding payment order is received bythe taxpayer’s bank, recent press reports have indicated that the Russian taxauthorities have been actively and often successfully challenging such paymentsif the tax is not in fact received due to the failure of the bank to transfersuch tax payment. Russian courts often rule in favor of the Russian taxauthorities in such cases.

Our management believesthat our subsidiaries have complied with their tax payment obligations, and weintend to challenge any further appeals by the tax authorities of the foregoingassessments or any additional similar assessments in the courts. However, if acourt was to rule in the Russian tax authorities’ favor, thesesubsidiaries and/or other of our subsidiaries that have faced similar problemswould be liable for the amount of the assessments and potentially for interestand penalties on such amounts, and could potentially be liable for significantadditional amounts.

***Vaguely drafted Russian transfer pricing rules andlack of reliable pricing information may impact our business results ofoperations.***

Russian transfer pricing rules enteredinto force in 1999, giving Russian tax authorities the right to control pricesfor transactions between related entities and certain other types oftransactions between independent parties, such as foreign trade transactions ortransactions with significant price fluctuations. The Russian transfer pricing rules arevaguely drafted, leaving wide scope for interpretation by Russian taxauthorities and arbitration courts and their use in politically motivatedinvestigations and prosecutions. We believe that the prices used by our groupare market prices and, therefore, comply with the requirements of Russian taxlaw on transfer pricing. However, due to the uncertainties in interpretation oftransfer pricing legislation, the tax authorities may challenge our prices andpropose adjustments. If such price adjustments are upheld by the Russianarbitration courts and implemented, our results of operations could bematerially adversely affected. In addition, we could face significant lossesassociated with the assessed amount of prior tax underpaid and related interestand penalties, which would have a material adverse effect on our financialcondition and results of operations.

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**Risks Relating toour Shares and ADSs and the Trading Market**

***Because the depositary may be considered thebeneficial holder of the shares underlying the ADSs, these shares may bearrested or seized in legal proceedings in Russia against the depositary.***

Because Russian law may not recognize ADS holders asbeneficial owners of the underlying shares, it is possible that ADS holderscould lose all their rights to those shares if the depositary’s assets inRussia are seized or arrested. In that case, ADS holders would lose all themoney they have invested.

Russian law might treat the depositary as thebeneficial owner of the shares underlying the ADSs. This is different from theway other jurisdictions treat ADSs. In the United States, although shares maybe held in the depositary’s name or to its order, making it a “legal” owner ofthe shares, the ADS holders are the “beneficial,” or real owners. In U.S.courts, an action against the depositary, the legal owner of the shares, wouldnot result in the beneficial owners losing their shares. Russian law may notmake the same distinction between legal and beneficial ownership, and it mayonly recognize the rights of the depositary in whose name the shares are held,not the rights of ADS holders, to the underlying shares.

Thus, in proceedingsbrought against a depositary, whether or not related to shares underlying ADSs,Russian courts may treat those underlying shares as the assets of thedepositary, open to seizure or arrest. In the past, a lawsuit has been filedagainst a depositary bank, other than our depositary, seeking the seizure ofvarious Russian companies’ shares represented by ADSs issued by thatdepositary. In the event that this type of suit were to be successful in thefuture, and the shares were to be seized or arrested, the ADS holders involvedwould lose their rights to the underlying shares.

***Voting rights with respect to the shares representedby our ADSs are limited by the terms of the deposit agreement for the ADSs andrelevant requirements of Russian law.***

ADS holders will have no direct voting rights withrespect to the shares represented by the ADSs. They will be able to exercisevoting rights with respect to the shares represented by ADSs only in accordancewith the provisions of the deposit agreement relating to the ADSs and relevantrequirements of Russian law. Therefore, there are practical limitations uponthe ability of ADS holders to exercise their voting rights due to theadditional procedural steps involved in communicating with them. For example, theFederal Law on Joint Stock Companies and our charter require us to notifyshareholders no less than 30 days prior to the date of any meeting and atleast 50 days prior to the date of an extraordinary meeting to elect ourBoard of Directors. Our ordinary shareholders will receive notice directly fromus and will be able to exercise their voting rights by either attending themeeting in person or voting by power of attorney.

An ADS holder, by comparison, will not receive noticedirectly from us. Rather, in accordance with the deposit agreement, we willprovide the notice to the depositary. The depositary has undertaken in turn, assoon as practicable thereafter, to mail to the ADS holders the notice of suchmeeting, voting instruction forms and a statement as to the manner in whichinstructions may be given by holders. To exercise its voting rights, the ADSholder must then instruct the depositary how to vote its shares. Because ofthis extra procedural step involving the depositary, the process for exercisingvoting rights may take longer for an ADS holder than for holders of shares.ADSs for which the depositary does not receive timely voting instructions willnot be voted at any meeting.

In addition, althoughsecurities regulations expressly permit the depositary to split the votes withrespect to the shares underlying the ADSs in accordance with instructions fromADS holders, there is little court or regulatory guidance on the application ofsuch regulations, and the depositary may choose to refrain from voting at allunless it receives instructions from all ADS holders to vote the shares in thesame manner. ADS holders may thus have significant difficulty in exercisingvoting rights with respect to the shares underlying the ADSs. There can be noassurance that holders and beneficial owners of ADSs will (i) receivenotice of shareholder meetings to enable the timely return of votinginstructions to the 

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depositary,(ii) receive notice to enable the timely cancellation of ADSs in respectof shareholder actions or (iii) be given the benefit of dissenting orminority shareholders’ rights in respect of an event or action in which theholder or beneficial owner has voted against, abstained from voting or notgiven voting instructions.

***The price of our shares and ADSs may be highlyvolatile.***

The liquidity of asecurities market is often a function of the volume of the underlying sharesthat are publicly held by unrelated parties. Although our ADS holders areentitled to withdraw the equity shares underlying the ADSs from the depositaryat any time, there is a limited public market for our shares. This, in turn,may affect the liquidity of our ADSs and their trading price. The tradingprices of the shares and ADSs may also be subject to wide fluctuations inresponse to many factors, including:

·       variationsin our operating results and other food and beverage companies;

·       variationsin national and industry growth rates;

·       actualor anticipated announcements of technical innovations or new products orservices by us or our competitors;

·       changesin governmental legislation or regulation;

·       generaleconomic conditions within our business sector or in Russia; or

·       extremeprice and volume fluctuations on the Russian stock market.

In addition, no more than35% of a Russian company’s shares may be circulated abroad through depositaryreceipt programs, such as ADS and GDSs. Our ADS and GDS programs, however,together account for 40% of our outstanding shares (which amount was approvedby the Russian securities regulator based on the prior limit and is notrequired to be reduced to 35%). As a result, we are currently unable to raiseadditional equity financing through the issuance of depositary receipts. Thisrestriction may also limit the liquidity of our ADSs and their trading price.

***You may be unable to repatriate your earnings from ourADSs.***

We anticipate that anydividends we may pay in the future on the shares represented by the ADSs willbe declared and paid to the depositary in rubles and will be converted intoU.S. dollars by the depositary and distributed to holders of ADSs, net of thedepositary’s fees and expenses. The ability to convert rubles into U.S. dollarsis subject to the availability of U.S. dollars in Russia’s currency markets.Although there is an existing, albeit limited, market within Russia for theconversion of rubles into U.S. dollars, including the interbank currencyexchange and over-the-counter and currency futures markets, the furtherdevelopment of this market is uncertain. At present, there is no market for theconversion of rubles into foreign currencies outside of Russia and no viablemarket in which to hedge ruble and ruble-denominated investments.

***ADS holders may not be able to benefit from the UnitedStates-Russia income tax treaty.***

In accordance with Russianlegislation, dividends paid to a non-resident holder generally will be subjectto Russian withholding at a rate of 15% for legal entities and organizationsand at a rate of 30% for individuals. This tax may be reduced to 5% or 10% for legalentities and organizations and to 10% for individuals under the Conventionbetween the United States of America and the Russian Federation for theAvoidance of Double Taxation and the Prevention of Fiscal Evasion with respectto Taxes on Income and Capital (the “United States-Russia income taxtreaty”) for U.S. tax residents. However, the Russian tax rules applicableto ADS holders are characterized by significant uncertainties. In 2005, theMinistry of Finance expressed an opinion that ADS holders (rather than thedepositary) should be treated as the 

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beneficialowners of the underlying shares for the purposes of the double tax treatyprovisions applicable to taxation of dividend income from the underlyingshares, provided that tax residencies of the ADS holders are duly confirmed.However, in the absence of any specific provisions in the Russian taxlegislation with respect to the concept of beneficial ownership and taxation ofincome of beneficial owners, it is unclear how the Russian tax authorities andcourts will ultimately treat the ADS holders in this regard. Thus, we may beobliged to withhold tax at standard rates when paying out dividends, and U.S.ADS holders may be unable to benefit from these treaties. See “Item 10.Additional Information—E. Taxation—Russian Income and Withholding TaxConsiderations” for additional information.

***Capital gains from the sale of ADSs may be subject toRussian income tax.***

Under Russian tax legislation, gains realized bynon-resident legal entities or organizations from the disposition of Russianshares and securities, as well as financial instruments derived from suchshares, such as the ADSs, may be subject to Russian profits tax or withholdingincome tax if immovable property located in Russia constitutes more than 50% ofour assets. However, no procedural mechanism currently exists to withhold andremit this tax with respect to sales made to persons other than Russiancompanies and foreign companies with a registered permanent establishment inRussia. Gains arising from the disposition at foreign stock exchanges of theforegoing types of securities listed on these exchanges by foreign holders whoare legal entities or organizations are not subject to taxation in Russia.

Gains arising from thedisposition of the foregoing types of securities and derivatives outside ofRussia by U.S. holders who are individuals not resident in Russia for taxpurposes will not be considered Russian source income and will not be taxablein Russia. Gains arising from disposition of the foregoing types of securitiesand derivatives in Russia by U.S. holders who are individuals not resident inRussia for tax purposes may be subject to tax either at the source in Russia orbased on an annual tax return, which they may be required to submit with theRussian tax authorities.

***Future sales of common stock or ADSs may affect themarket price of our common stock and ADSs.***

Sales, or the possibilityof sales, of substantial numbers of shares of our common stock or ADSs in thepublic market, including the Russian stock market, could have an adverse effecton the market trading prices of the ADSs.

***Foreign judgments may not be enforceable against us.***

Our presence outside the United States may limit yourlegal recourse against us. We are incorporated under the laws of the RussianFederation. Substantially all of our directors and executive officers named inthis document reside outside the United States, principally in Russia. All or asubstantial portion of our assets and the assets of our officers and directorsare located outside the United States. As a result, you may not be able toeffect service of process within the United States on us or on our officers anddirectors. Similarly, you may not be able to obtain or enforce U.S. courtjudgments against us, our officers and directors, including actions based onthe civil liability provisions of the federal securities laws of the UnitedStates. In addition, it may be difficult for you to enforce, in originalactions brought in courts in jurisdictions outside the United States,liabilities predicated upon U.S. securities laws.

There is no treaty betweenthe United States and the Russian Federation providing for reciprocalrecognition and enforcement of foreign court judgments in civil and commercialmatters. These limitations may deprive you of effective legal recourse forclaims related to your investment in the ADSs. The deposit agreement providesfor actions brought by any party thereto against us to be settled byarbitration in accordance with the Commercial Arbitration Rules of theAmerican Arbitration Association, provided that any action under the U.S.federal securities laws or the rules or regulations promulgated thereundermay, but need not, be submitted to arbitration. The Russian Federation is aparty to the United Nations 

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(NewYork) Convention on the Recognition and Enforcement of Foreign Arbitral Awards,but it may be difficult to enforce arbitral awards in the Russian Federationdue to a number of factors, including the inexperience of Russian courts ininternational commercial transactions, official and unofficial politicalresistance to enforcement of awards against Russian companies in favor offoreign investors and Russian courts’ inability to enforce such orders andcorruption.

***The lack of a central and rigorously regulated shareregistration system in Russia may result in improper record ownership of ourshares, including the shares underlying the ADSs.***

Ownership of Russian joint stock company shares (or,if the shares are held through a nominee or custodian, then the holding of suchnominee or custodian) is determined by entries in a share register and isevidenced by extracts from that register. Currently, there is no centralregistration system in Russia. Share registers are maintained by the companiesthemselves or, if a company has more than 50 shareholders or so elects, bylicensed registrars located throughout Russia. Regulations have been issuedregarding the licensing conditions for such registrars, as well as theprocedures to be followed by both companies maintaining their own registers andlicensed registrars when performing the functions of registrar. In practice,however, these regulations have not been strictly enforced, and registrarsgenerally have relatively low levels of capitalization and inadequate insurancecoverage. Moreover, registrars are not necessarily subject to effectivegovernmental supervision. Due to the lack of a central and rigorously regulatedshare registration system in Russia, transactions in respect of a company’sshares could be improperly or inaccurately recorded, and share registrationcould be lost through fraud, negligence, official and unofficial governmentalactions or oversight by registrars incapable of compensating shareholders fortheir misconduct. This creates risks of loss not normally associated withinvestments in other securities markets.

**Risks Relating tothe Russian Federation**

**Economic Risks**

***The Russian economy is less stable than those of mostWestern countries and could adversely affect our business and the value of theshares and ADSs.***

Since thedissolution of the Soviet Union in the early 1990s, the Russian economy hasexperienced at various times:

·       significantdeclines in gross domestic product;

·       hyperinflation;

·       anunstable currency;

·       highgovernment budget deficit and government debt relative to gross domesticproduct;

·       aweak banking system providing limited liquidity to domestic enterprises;

·       highlevels of loss-making enterprises that continued to operate due to the lack ofeffective bankruptcy proceedings;

·       significantuse of barter transactions and illiquid promissory notes to settle commercialtransactions;

·       widespreadtax evasion;

·       growthof a black and gray market economy;

·       pervasivecapital flight;

·       highlevels of corruption and the penetration of organized crime into the economy;

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·       significantincreases in unemployment and underemployment; and

·       theimpoverishment of a large portion of the population.

Although Russia has benefited recently from theincrease in global commodity prices, providing an increase in disposable incomeand an increase in consumer spending, the Russian economy has been subject toabrupt downturns in the past. In particular, on August 17, 1998, in theface of a rapidly deteriorating economic situation, the Russian governmentdefaulted on its ruble-denominated securities, the Central Bank of Russiastopped its support of the ruble and a temporary moratorium was imposed oncertain foreign currency payments. These actions resulted in an immediate andsevere devaluation of the ruble and a sharp increase in the rate of inflation;a substantial decline in the prices of Russian debt and equity securities; andan inability of Russian issuers to raise funds in the international capitalmarkets. These problems were aggravated by a major banking crisis in theRussian banking sector after the events of August 17, 1998, as evidencedby the termination of the banking licenses of a number of major Russian banks.This further impaired the ability of the banking sector to act as a consistentsource of liquidity to Russian companies and resulted in the losses of bankdeposits in some cases.

Recently, the Russianeconomy has experienced positive trends, such as the increase in the grossdomestic product, a relatively stable ruble, strong domestic demand, risingreal wages and a reduced rate of inflation; however, these trends may notcontinue or may be abruptly reversed.

***The infrastructure in Russia is inadequate, whichcould disrupt normal business activity.***

The infrastructure in Russia largely dates back toSoviet times and has not been adequately funded and maintained over the pastdecade. Particularly affected are the rail and road networks, power generationand transmission systems, communication systems and building stock. InMay 2005, a fire and explosion in one of the Moscow power substationsbuilt in 1963 caused a major power outage in a large section of Moscow and somesurrounding regions. The blackout disrupted the ground electric transport,including the metro system, led to road traffic accidents and massive trafficcongestion, disrupted electricity and water supply in office and residentialbuildings and affected mobile communications. The trading on exchanges and theoperation of many banks, stores and markets were also halted.

The deterioration of theinfrastructure in Russia harms the national economy, disrupts thetransportation of goods and supplies, adds costs to doing business and caninterrupt business operations. The Russian government is actively consideringplans to reorganize the nation’s rail, electricity and communications systems.Any such reorganization may result in increased charges and tariffs whilefailing to generate the anticipated capital investment needed to repair,maintain and improve these systems. These factors could have a material adverseeffect on our business and results of operations.

***Fluctuations in the global economy could materiallyadversely affect the Russian economy and the value of the shares and ADSs.***

The Russian economy is vulnerableto market downturns and economic slowdowns elsewhere in the world. As hashappened in the past, financial problems or an increase in the perceived risksassociated with investing in emerging economies could dampen foreign investmentin Russia and Russian businesses could face severe liquidity constraints,further materially adversely affecting the Russian economy. Additionally,because Russia produces and exports large amounts of oil, the Russian economyis especially vulnerable to the price of oil on the world market and a declinein the price of oil could slow or disrupt the Russian economy or undermine thevalue of the ruble against foreign currencies. Recent military conflicts andinternational terrorist activity have also significantly impacted oil and gasprices, and pose additional risks to the Russian economy. Russia is also amajor producer and exporter of metal products and its economy is vulnerable tofluctuations in world commodity prices and the imposition of tariffs and/orantidumping measures by the United States, the European Union or by otherprincipal export markets.

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**Political andSocial Risks**

***Political and governmental instability couldmaterially adversely affect our business, financial condition, results ofoperations and prospects and the value of the shares and ADSs.***

Since 1991, Russia has sought to transform itself froma one-party state with a centrally-planned economy to a democracy with amarket economy. As a result of the sweeping nature of the reforms, and thefailure of some of them, the Russian political system remains vulnerable topopular dissatisfaction, including dissatisfaction with the results ofprivatizations in the 1990s, as well as to demands for autonomy from particularregional and ethnic groups.

Current and future changesin the government, major policy shifts or lack of consensus between variousbranches of the government and powerful economic groups could disrupt orreverse economic and regulatory reforms. In addition, the Russian presidentialelections scheduled for 2008 could bring more volatility to the market. Anydisruption or reversal of reform policies could lead to political orgovernmental instability or the occurrence of conflicts among powerful economicgroups, which could have a material adverse effect on our business, financialcondition, results of operations and prospects and the value of the shares andADSs.

***Conflict between central and regional authorities andother conflicts could create an uncertain operating environment, hindering ourlong-term planning ability.***

The Russian Federation is a federation of 88sub-federal political units, consisting of republics, territories, regions,cities of federal importance and autonomous regions and districts. Thedelineation of authority and jurisdiction among the members of the RussianFederation and the federal government is, in many instances, unclear andremains contested. Lack of consensus between the federal government and localor regional authorities often results in the enactment of conflictinglegislation at various levels and may lead to further political instability. Inparticular, conflicting laws have been enacted in the areas of privatization,land legislation and licensing. Some of these laws and governmental andadministrative decisions implementing them, as well as certain transactionsconsummated pursuant to them, have in the past been challenged in the courts,and such challenges may occur in the future. This lack of consensus hinders ourlong-term planning efforts and creates uncertainties in our operatingenvironment, both of which may prevent us from effectively and efficientlyimplementing our business strategy.

Additionally, ethnic,religious, historical and other divisions have, on occasion, given rise totensions and, in certain cases, military conflict, such as the continuingconflict in Chechnya, which has brought normal economic activity withinChechnya to a halt and disrupted the economies of neighboring regions. Variousarmed groups in Chechnya have regularly engaged in guerrilla attacks in thatarea. Violence and attacks relating to this conflict have spread to other partsof Russia, and several terrorist attacks have been carried out by Chechenterrorists in other parts of Russia, including in Moscow. The furtherintensification of violence, including terrorist attacks and suicide bombings,or its spread to other parts of Russia, could have significant politicalconsequences, including the imposition of a state of emergency in some or allof Russia. Moreover, any terrorist attacks and the resulting heightenedsecurity measures are likely to cause disruptions to domestic commerce andexports from Russia. These factors could materially adversely affect ourbusiness and the value of the shares and ADSs.

***Crime and corruption could disrupt our ability toconduct our business.***

The political and economicchanges in Russia in recent years have resulted in significant dislocations ofauthority. The local and international press have reported that significantorganized criminal activity has arisen, particularly in large metropolitancenters. Property crime in large cities has increased substantially. Inaddition, the local press and international press have reported high levels ofcorruption, including the bribing of officials for the purpose of initiatinginvestigations by government agencies. Press reports have 

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alsodescribed instances in which government officials engaged in selectiveinvestigations and prosecutions to further the commercial interests ofgovernment officials or certain individuals. Additionally, some members of theRussian media regularly publish disparaging articles in return for payment. Thedepredations of organized or other crime, demands of corrupt officials orclaims that we have been involved in official corruption could result innegative publicity, could disrupt our ability to conduct our business effectivelyand could thus materially adversely affect our financial condition and resultsof operations and the value of the shares and ADSs.

***Social instability could increase support for renewedcentralized authority, nationalism or violence and thus materially adverselyaffect our business, financial condition, results of operations and prospects.***

The failure of thegovernment and many private enterprises to pay full salaries on a regular basisand the failure of salaries and benefits generally to keep pace with therapidly increasing cost of living have led in the past, and could lead in thefuture, to labor and social unrest. Labor and social unrest may have political,social and economic consequences, such as increased support for a renewal ofcentralized authority, increased nationalism, including restrictions on foreigninvolvement in the economy of Russia, and increased violence. An occurrence ofany of the foregoing events could restrict our operations and lead to the lossof operating revenues, materially adversely affecting our business, financialcondition, results of operations and prospects.

**Legal Risks**

***Weaknesses relating to the legal system andlegislation create an uncertain environment for investment and for businessactivity in Russia.***

Russia is stilldeveloping the legal framework required to support a market economy. Thefollowing risks relating to the Russian legal system create uncertainties withrespect to the legal and business decisions that we make, many of which do notexist in countries with more developed market economies:

·       inconsistenciesbetween and among, the Constitution, federal and regional laws, Presidentialdecrees and governmental, ministerial and local orders, decisions, resolutionsand other acts;

·       conflictinglocal, regional and federal rules and regulations;

·       thelack of judicial and administrative guidance on interpreting legislation;

·       therelative inexperience of judges and courts in interpreting legislation;

·       lackof independent judiciary;

·       ahigh degree of discretion on the part of governmental authorities, which couldresult in arbitrary actions such as suspension or termination of our licenses;and

·       poorlydeveloped bankruptcy procedures that are subject to abuse.

Furthermore, severalfundamental laws have only recently become effective. The recent nature of muchof Russian legislation, the lack of consensus about the scope, content and paceof economic and political reform and the rapid evolution of the Russian legalsystem in ways that may not always coincide with market developments place theenforceability and underlying constitutionality of laws in doubt and results inambiguities, inconsistencies and anomalies. In addition, Russian legislationoften contemplates implementing regulations that have not yet been promulgated,leaving substantial gaps in the regulatory infrastructure. All of theseweaknesses could affect our ability to enforce our rights under our permits andunder our contracts, or to defend ourselves against claims by others. We cannotassure you that regulators, judicial authorities or third parties will notchallenge our internal procedures and by-laws or our compliance with applicablelaws, decrees and regulations.

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***Failure to comply with existing laws and regulationsor the findings of government inspections, or increased governmental regulationof our operations, could result in substantial additional compliance costs orvarious sanctions which could materially adversely affect our business,financial condition, results of operations and prospects.***

Our operations and properties are subject toregulation by various government entities and agencies, as well as to ongoingcompliance with existing laws, regulations and standards. As a producer of foodproducts, our operations are subject to quality, health and safety, production,packaging, labeling and distribution standards. The operations of ourproduction and distribution facilities are also subject to variousenvironmental laws and workplace regulations. Regulatory authorities exerciseconsiderable discretion in matters of enforcement and interpretation ofapplicable laws, regulations and standards, the issuance and renewal of permitsand in monitoring compliance with the terms thereof. Russian authorities havethe right to, and frequently do, conduct periodic inspections of operations andproperties of our group of companies throughout the year. Any such futureinspections may conclude that we or our subsidiaries have violated laws,decrees or regulations, and we may be unable to refute such conclusions orremedy the violations. Our failure to comply with existing laws and regulationsor the findings of government inspections may result in the imposition of finesor penalties or more severe sanctions including the suspension, amendment ortermination of our permits, or in requirements that we cease certain of ourbusiness activities, or in criminal and administrative penalties applicable toour officers. Any such decisions, requirements or sanctions, or any increase ingovernmental regulation of our operations, could increase our costs andmaterially adversely affect our business, financial condition, results ofoperations and prospects.

We believe that our current legal and environmentalcompliance programs adequately address these concerns and that we are insubstantial compliance with applicable laws and regulations, as well as thepractical enforcement of such laws and regulations. However, as the regulationsthat apply to our business are constantly changing, we are sometimes unable toimmediately comply with new regulations upon their implementation. Compliancewith, or any violation of, current and future laws or regulations could requirematerial expenditures by us or otherwise have a material adverse effect on ourbusiness or financial results. See “Item 4. Information on Our Company—B.Business Overview—Regulation” below.

Additionally, underrelevant Russian legislation, Russian regulatory agencies can impose varioussanctions for violations of environmental standards. These sanctions may includecivil and administrative penalties applicable to a company and criminal andadministrative penalties applicable to its officers. Also, in the course, or asa result, of an environmental investigation, regulatory authorities can issuean order halting part or all of the production at a plant which has violatedenvironmental standards. We have been, at various times, subject toadministrative sanctions for failure to comply with environmental regulationsrelating to effluent discharge and to minor administrative sanctions forviolations relating to waste disposal. In the event that production at one ofour facilities was partially or wholly prevented due to this type of sanction,our production capability would suffer significantly and our operating resultswould suffer.

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***Developing corporate and securities laws andregulations in Russia may limit our ability to attract future investment.***

The regulation andsupervision of the securities market, financial intermediaries and issuers areconsiderably less developed in Russia than in the United States and WesternEurope. Securities laws, including those relating to corporate governance,disclosure and reporting requirements, have only recently been adopted, whereaslaws relating to anti-fraud safeguards, insider trading restrictions andfiduciary duties are rudimentary. In addition, the Russian securities market isregulated by several different authorities, which are often in competition witheach other. These include:

·       theFederal Service for the Financial Markets, or FSFM;

·       theMinistry of Finance;

·       theFederal Antimonopoly Service;

·       theCentral Bank of Russia; and

·       variousprofessional self-regulatory organizations.

The regulations of these various authorities are notalways coordinated and may be contradictory.

In addition, Russiancorporate and securities rules and regulations can change rapidly, whichmay materially adversely affect our ability to conduct securities-relatedtransactions. While some important areas are subject to virtually no oversight,the regulatory requirements imposed on Russian issuers in other areas result indelays in conducting securities offerings and in accessing the capital markets.It is often unclear whether or how regulations, decisions and letters issued bythe various regulatory authorities apply to our company. As a result, we may besubject to fines or other enforcement measures despite our best efforts atcompliance.

***The judiciary’s lack of independence, overallinexperience, occasional abuse of discretion, the difficulty of enforcing courtdecisions and governmental discretion in enforcing claims could prevent us oryou from obtaining effective redress in a court proceeding.***

The independence of the judicial system and itsimmunity from economic, political and nationalistic influences in Russiaremains largely untested. The court system is understaffed and underfunded.Judges and courts are generally inexperienced in the area of business andcorporate law. Judicial precedents generally have no binding effect on subsequentdecisions. Not all Russian legislation and court decisions are readilyavailable to the public or organized in a manner that facilitatesunderstanding. The Russian judicial system can be slow or unjustifiably swift.Enforcement of court orders can in practice be very difficult in Russia.Additionally, court claims are often used in furtherance of political aims orinfighting. We may be subject to such claims and may not be able to receive afair hearing. Additionally, court orders are not always enforced or followed bylaw enforcement agencies, and the government may attempt to invalidate courtdecisions by backdating or retroactively applying relevant legislative changes.Judicial decisions in Russia can be unpredictable and may not provide effectiveredress.

These uncertainties alsoextend to property rights. During Russia’s transformation from a centrallyplanned economy to a market economy, legislation has been enacted to protectprivate property against expropriation and nationalization. However, it ispossible that due to the lack of experience in enforcing these provisions anddue to political factors, these protections would not be enforced in the eventof an attempted expropriation or nationalization. Expropriation ornationalization of any of our entities, their assets or portions thereof,potentially without adequate compensation, would have a material adverse effecton our business, financial condition, results of operations and prospects.

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***Selective or arbitrary government action could have amaterial adverse effect on our business, financial condition, results ofoperations and prospects and the value of the shares and ADSs.***

Governmental authorities in Russia have a high degreeof discretion and, at times, act selectively or arbitrarily, without hearing orprior notice, and sometimes in a manner that is inconsistent with legislationor influenced by political or commercial considerations. Selective or arbitrarygovernmental actions have reportedly included the denial or withdrawal oflicenses, sudden and unexpected tax audits and claims, criminal prosecutionsand civil actions. Federal and local government entities have also usedordinary defects in matters surrounding share issuances and registration aspretexts for court claims and other demands to invalidate such issuances andregistrations or to void transactions. Moreover, the government also has thepower in certain circumstances, by regulation or government act, to interferewith the performance of, nullify or terminate contracts. Standard & Poor’s,a provider of independent credit ratings, has expressed concerns that “Russiancompanies and their investors can be subjected to government pressure throughselective implementation of regulations and legislation that is eitherpolitically motivated or triggered by competing business groups.” In thisenvironment, our competitors may receive preferential treatment from thegovernment, potentially giving them a competitive advantage over us.

In addition, recently, theRussian tax authorities aggressively have brought tax evasion claims on thebasis of certain Russian companies’ use of tax-optimization schemes, and pressreports have speculated that these enforcement actions have been selective andpolitically motivated. Selective or arbitrary government action, if directed atus, could have a material adverse effect on our business, financial condition,results of operations and prospects, and the value of the shares and ADSs.

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

The Civil Code ofthe Russian Federation and the Federal Law on Joint Stock Companies generallyprovide that shareholders in a Russian joint stock company are not liable forthe obligations of the joint stock company and bear only the risk of loss oftheir investment. This may not be the case, however, when one person is capableof determining decisions made by another person or entity. The person or entitycapable of determining such decisions is deemed an “effective parent.” Theperson whose decisions are capable of being so determined is deemed an “effectivesubsidiary.” Under the Federal Law on Joint Stock Companies, effective parentbears joint and several responsibility for transactions concluded by the effectivesubsidiary in carrying out these decisions if:

·       thisdecision-making capability is provided for in the charter of theeffective subsidiary or in a contract between the companies; and

·       theeffective parent gives obligatory directions to the effective subsidiary.

In addition, an effectiveparent is secondarily liable for an effective subsidiary’s debts if aneffective subsidiary becomes insolvent or bankrupt resulting from the action orinaction of an effective parent. This is the case no matter how the effectiveparent’s ability to determine decisions of the effective subsidiary arises. Forexample, this liability could arise through ownership of voting securities orby contract. In these instances, other shareholders of the effective subsidiarymay claim compensation for the effective subsidiary’s losses from the effectiveparent which caused the effective subsidiary to take action or fail to takeaction knowing that such action or failure to take action would result inlosses. Accordingly, we could be liable in some cases for the debts of ourconsolidated subsidiaries. This liability could have a material adverse effecton our business, results of operations and financial condition.

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***Shareholder rights provisions under Russian law mayimpose additional costs on us, which could cause our financial results tosuffer.***

Russian lawprovides that shareholders that vote against or abstain from voting on certainmatters have the right to sell their shares to us at market value in accordancewith Russian law. The decisions that trigger this right to sell shares include:

·       areorganization;

·       theapproval by shareholders of a “major transaction,” which, in general terms, isa transaction involving property worth more than 50% of the gross book value ofour assets calculated according to the Russian accounting standards, regardlessof whether the transaction is actually consummated; and

·       theamendment of our charter in a manner that limits shareholder rights.

Our obligation to purchaseshares in these circumstances, which is limited to 10% of our net assetscalculated according to Russian accounting standards, at the time the matter atissue is voted upon, could have a material adverse effect on our business,financial condition, results of operations and prospects.

***Because there is little minority shareholderprotection in Russia, your ability to bring, or recover in, an action againstus will be limited.***

In general, minority shareholder protection underRussian law derives from supermajority shareholder approval requirements forcertain corporate actions, as well as from the ability of a shareholder todemand that the company purchase the shares held by that shareholder if thatshareholder voted against or did not participate in voting on certain types ofactions. Companies are also required by Russian law to obtain the approval ofdisinterested shareholders for certain transactions with interested parties.

The supermajority shareholder approval requirement ismet by a vote of 75% of all voting shares that are present at a shareholders’meeting. Thus, controlling shareholders owning slightly less than 75% ofoutstanding shares of a company may have a 75% or more voting power if certainminority shareholders are not present at the meeting. In situations wherecontrolling shareholders effectively have 75% or more of the voting power at ashareholders’ meeting, they are in a position to approve amendments to thecharter of the company or significant transactions including asset transfers,which could be prejudicial to the interests of minority shareholders. It ispossible that our controlling shareholders in the future may not act in thebest interests of minority shareholders, and this could materially andadversely affect the value of the shares and ADSs.

While the Federal Law onJoint Stock Companies provides that shareholders owning not less than 1% of thecompany’s stock may bring an action for damages on behalf of the company,Russian courts to date do not have much experience with such lawsuits. Russianlaw does not contemplate class action litigation. Accordingly, your ability topursue legal redress against us may be limited, reducing the protectionsavailable to you as a holder of our shares and ADSs.

***Characteristics of and changes in the Russian taxsystem could materially adversely affect our business, financial condition,results of operations and prospects and the value of the shares and ADSs.***

Generally, taxespayable by Russian companies are substantial and numerous. These taxes include,among others:

·       incometaxes;

·       VAT;

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·       unifiedsocial tax; and

·       propertytax.

The tax environment in Russia historically has beencomplicated by the fact that various authorities have often issuedcontradictory tax legislation. This uncertainty potentially exposes us tosignificant fines and penalties and enforcement measures despite our bestefforts at compliance, and could result in a greater than expected tax burdenand the suspension or termination of our licenses.

Recently, there have been significant changes to theRussian taxation system. Global tax reforms commenced in 1999 with theintroduction of Part One of the Tax Code of the Russian Federation, or theTax Code, which sets general taxation guidelines. Since then, Russia has beenin the process of replacing legislation regulating the application of majortaxes such as corporate income tax, VAT and property tax with new chapters ofthe Tax Code.

In practice, the Russian tax authorities generallyinterpret the tax laws in ways that rarely favor taxpayers, who often have toresort to court proceedings to defend their position against the taxauthorities. Recent events within the Russian Federation suggest that the taxauthorities may be taking a more assertive position in their interpretations ofthe legislation and assessments. Differing interpretations of tax regulationsexist both among and within government ministries and organizations at thefederal, regional and local levels, creating uncertainties and inconsistentenforcement. Tax declarations, together with related documentation such ascustoms declarations, are subject to review and investigation by a number ofauthorities, each of which may impose fines, penalties and interest charges.Generally, in an audit taxpayers are subject to inspection with respect to thethree calendar years which immediately proceeded the year in which the audit iscarried out. Previous audits do not completely exclude subsequent claimsrelating to the audited period because Russian tax law authorizes upper-leveltax inspectorates to review the results of tax audits conducted by subordinatetax inspectorates. In addition, in July 2005, the Russian ConstitutionalCourt issued a decision that allows the statute of limitations for taxliabilities to be extended beyond the three-year term set forth in the tax lawsif a court determines that a taxpayer has obstructed or hindered a tax audit.Because none of the relevant terms are defined, tax authorities may have broaddiscretion to argue that a taxpayer has “obstructed” or “hindered” an audit andultimately seek penalties beyond the three-year term. In some instances, newtax regulations have been given retroactive effect.

Moreover, financial results of Russian companiescannot be consolidated for tax purposes. Therefore, each of our Russian subsidiariespays its own Russian taxes and may not offset its profit or loss against theloss or profit of any of our other subsidiaries. In addition, intercompanydividends are subject to a withholding tax of 9%, if being distributed toRussian companies, and 15%, if being distributed to foreign companies. If thereceiving company itself pays a dividend, it may offset tax withheld againstits own withholding liability of the onward dividend although not against anywithholding made on a distribution to a foreign company. These tax requirementsimpose additional burdens and costs on our operations, including managementresources.

The foregoing conditionscreate tax risks in Russia that are more significant than typically found incountries with more developed tax systems, imposing additional burdens andcosts on our operations, including management resources. In addition to oursubstantial tax burden, these risks and uncertainties complicate our taxplanning and related business decisions, potentially exposing us to significantfines and penalties and enforcement measures despite our best efforts atcompliance. See also “—Risks Relating to the Russian Federation—Legal Risks andUncertainties—Selective or arbitrary government action could have a materialadverse effect on our business, financial condition, results of operations andprospects and the value of the shares and ADSs.”

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**Other Risks**

***We have not independently verified information we havesourced from third parties.***

We have sourced certaininformation contained in this document from third parties, including privatecompanies and Russian government agencies, and we have relied on the accuracyof this information without independent verification. The official datapublished by Russian federal, regional and local governments may besubstantially less complete or researched than those of Western countries.Official statistics may also be produced on different bases than those used inWestern countries. Any discussion of matters relating to Russia in thisdocument must, therefore, be subject to uncertainty due to concerns about thecompleteness or reliability of available official and public information. Inaddition, the veracity of some official data released by the Russian governmentmay be questionable. In 1998, the Director of the Russian State Committee onStatistics and a number of his subordinates were arrested and subsequentlysentenced by a court in 2004 in connection with their misuse of economic data.

***Item 4.****                         *Informationon Our Company

**A.   Historyand Development**

We trace our history back to 1992, when a group ofindividuals formed an enterprise which began leasing a production line at theLianozovo Dairy Plant and purchasing juice concentrates and packagingmaterials. On November 25, 1992, we produced the first carton of juicecarrying the Wimm-Bill-Dann brand name. We selected this brand name to attractconsumers who preferred products with foreign-sounding names due toperceived higher quality and novelty and, since its introduction, the “Wimm-Bill-Dann”name has become a brand name recognized in a substantial percentage of Russianhouseholds.

To take advantageof the opportunities arising from the privatization of Russian state-ownedassets, our current shareholders then began acquiring shares in the LianozovoDairy Plant in Moscow, and continued to expand their juice product enterprises.Following their acquisition of a majority stake in the Lianozovo Dairy Plant in1995, they added dairy products to their portfolio, thus becoming a dairy andjuice producer. Our growth has been accomplished, in part, through significantacquisitions, including the following:

·       In1995, we acquired majority control of the Lianozovo Dairy Plant;

·       In1996 and 1997, we acquired majority stakes in the Moscow Baby Food Plant, theTsaritsino Dairy Plant and the Ramenskiy Plant;

·       In1998 and 1999, we began to expand into regions outside Moscow, acquiring dairyplants in Novosibirsk, Nizhny Novgorod and Vladivostok;

·       In2000, 2001 and 2002, we acquired majority stakes in dairy plants in Ufa,Bashkortostan and the Krasnodar region in Russia, as well as dairy plants inKiev, Ukraine and Bishkek, Kyrgyzstan;

·       In2001, we acquired 100% interests in dairy plants in the Altaisky and Voronezhregions of Russia;

·       In2002, we acquired control of three dairy plants in the Krasnodar, Belgorod andSamara regions of Russia;

·       In2002, we acquired control of a dairy plant in Kharkov, Ukraine;

·       In2002, we acquired a 100% interest in the Roska Dairy Plant (renamed Baltic Milkin 2004) in St. Petersburg;

·       In2002, we acquired control of Depsona (since renamed Fruktopak) in Tula and alarge warehouse complex in the Moscow region;

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·       In2002, we acquired control of a dried milk plant in Buryn, Ukraine;

·       InJanuary 2003, we acquired a 100% interest in Siberian Cheese, arefrigeration and warehousing facility in Novosibirsk adjacent to our principalSiberian dairy production facility;

·       InAugust 2003, we acquired underground wells in the Essentuki area of Russiaand a water processing and bottling factory which produces “Essentuki” brandmineral water through our purchase of 100% interests in the companies Healing Springsand Geiser;

·       InDecember 2004, we acquired Atamanskoe farm, a raw milk production company;

·       InApril, July and September 2005, we acquired three raw milk productioncompanies, Plemzavod Za Mir i Trud, Zavety Ilyicha and Trud Farms;

·       InJuly 2005, we acquired control of the Obninsk Dairy Plant in the Kalugaregion;

·       InJuly 2005, we acquired a 100% interest in the Experimental Baby Food Plantin the Kursk region;

·       InOctober  2005, we acquired a 100% interest in the Essentuki Mineral WaterPlant at CMW (Caucasian Mineral Waters) in the town of Essentuki in theStavropol region;

·       InDecember 2005, we acquired a controlling stake in Nazarovskoe Milk in theKrasnoyarsk region;

·       InDecember 2005, we acquired a 100% interest in the Pervouralsk City DairyPlant in the Sverdlovsk region; and

·       InJanuary 2006, we increased our aggregate ownership in the Moscow Baby FoodPlant to 97.3%.

In the latter part of 2000, we began a corporate andorganizational restructuring to facilitate our initial public offering and ourfuture expansion, both within Russia and into other countries of the CIS. Aspart of this restructuring, we disposed of our interests in Expobank and fourbreweries. Since then, we have continued our restructuring efforts with the aimof enhancing our operating efficiency, reducing costs and creating synergiesbetween our existing businesses. For example, in 2005, we merged our juice andwater segments into a single beverage segment and created a separate baby foodsegment. Prior to 2005, baby food was part of our dairy segment. Hence, ouroperations are currently organized into three separately reported segments:dairy products, beverages and baby food, all operating under the umbrella ofour holding company, Wimm-Bill-Dann Foods OJSC, which was incorporated on May 31,2001.

In addition, in response to increasing raw milkprices, which have put strong pressure on our dairy margins and the overallprofitability of the dairy division in recent years, we created a separatelymanaged business unit called “Agro” at the end of 2004 for the purpose ofbuying and managing a select number of dairy farms in certain Russian regions.The aim of this new non-core business unit is to develop a guaranteed supply ofraw milk at stable prices for use by our dairy division. “Agro” is currentlyreported as part of our dairy division. Furthermore, we are in the process ofrestructuring our business with the aim to increase efficiency and optimize ourcurrent operations.

We completed our initial public offering on February 14,2002 and listed our shares of common stock, represented by American DepositaryShares, or ADSs, on the New York Stock Exchange under the symbol “WBD.” EachADS represents one underlying share of our common stock.

From 2003 to 2005, we spent a total of $254.9 millionin capital expenditures for projects in Russia, Ukraine, Kyrgyzstan andUzbekistan where we have production facilities. Specifically, we improved ourexisting dairy and cheese production and dairy warehouse facilities, as well asthe quality control procedures for the raw milk used in our production. Inaddition, we installed new production lines and other operating equipment atthe Ramenskiy Plant, modernized our recently acquired Experimental Baby FoodPlant and updated our IT infrastructure and software. As of March 31,2006, our capital 

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commitments amounted toapproximately $35 million primarily for construction projects at our productionsites and the purchase of farm-production equipment. We plan to finance thesecapital commitments from operating cash flow. For a further description of ourprincipal capital expenditures and divestitures since the beginning of our lastthree financial years to March 31, 2006, as well as those currently inprogress, see “Item 5. Operating and Financial Review and Prospects—B.Liquidity and Capital Resources.”

Our legal name isWimm-Bill-Dann Foods OJSC, and we are incorporated as an open joint stockcompany under the laws of the Russian Federation and registered with the MoscowInter-District Inspectorate No. 39 of the Russian Ministry of Taxesand Duties under the state registration number 1037700236738. We operate in theRussian Federation and the CIS under a number of different trademarks and brandnames, as more fully described below in “—B. Business Overview—CurrentOperations—Our products and brands.” Our business objectives, set forth in Article 4of our charter, include the production and sale of food products, includingmilk and sour milk products, mineral water, fruit and vegetable juices and beveragesand children’s food. Our head office is located at 16 Yauzsky Boulevard, Moscow109028, Russian Federation, and our telephone number is +7 495-733-9726.We maintain a website at http://www.wbd.com. The information on our website isnot a part of this report. We have appointed CT Corporation System, 111 EighthAvenue, New York, New York 10011, as our authorized agent for service ofprocess for any suit or proceeding arising out of or relating to our shares,ADSs, or the deposit agreement.

**B.   BusinessOverview**

We are one of the largest Russian manufacturers ofdairy and juice products. In 2005, approximately 72% of our net revenues werederived from the sale of dairy products, approximately 22% from the sale ofjuice and water products and approximately 6% from the sale of baby foodproducts.

Since our founding in 1992, we have become the marketleader in Russia in the dairy market and one of the market leaders in the juicemarket. In the dairy market, according to an AC Nielsen study of 24 majorcities located throughout Russia, including Moscow and St. Petersburg, we werethe market leader (with the exception of open-air markets) during 2005 with34.1% of the total market in all packaged dairy markets except for pasteurizedmilk. According to Rosstat, our total market shares in these markets was lowerthan the AC Nielsen study. Our market shares were 31.3% in traditional dairyproducts and 40.7% in yogurt and dessert dairy products in terms of value. Inthe Russian juice market, according to a Business Analytica survey of all ofRussia, we had a 21.7% market share in terms of value during 2005. We currentlyhave 30 manufacturing facilities in Russia and other countries of the CIS, aswell as distribution centers in 26 cities throughout Russia and the CIS.

Our goal is to offer our consumers quality food andbeverage products through the use of carefully selected raw materials, modernproduction technology and strict quality control. All of our products are madeaccording to our own recipes and reflect our understanding of consumer demand.

Our principal dairyproducts include:

·       Traditionalproducts, such as sterilized and pasteurized milk, butter and cream, as well astraditional sour-milk products such as kefir, cottage cheese, soft cottagecheese and sour cream;

·       Yogurtsand dairy desserts, such as traditional and drinking yogurt, mousse, fruit-flavoredmilk and kefir, puddings and flavored cottage cheese; and

·       Cheeseproducts, including hard yellow and processed cheese.

Our principalbeverage products include:

·       Juiceand nectars produced from juice concentrate;

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·       Enrichedjuice-based drinks;

·       Atraditional berry-juice-based drink made from natural berries; and

·       Bottlednatural mineral water.

Our baby foodproducts include:

·       Liquiddairy products for infants under the age of three;

·       Juicesfor infants under the age of three;

·       Meat,fish, chicken, fruit and dairy purees for infants under the age of three; and

·       Productsfor pregnant women and nursing mothers.

Our principal geographicmarket is Russia. In 2005, our dairy product sales were highest in the Centralregion of Russia, which includes Moscow, the South region, Siberia and the FarEast. Our juice sales were highest in the Central region, Siberia and the Volgaregion. Approximately 95% of our baby food sales were in Moscow and the Moscowregion. Each of our production and distribution facilities is owned by aseparate subsidiary of ours.

**Business Strategy**

We aim to retainour position as a leading nationwide producer of quality food and beverageproducts and to expand our production and sales in order to attain higherrevenues, cash flow and earnings. To achieve these objectives, we use thefollowing strategies:

·       Expandour geographic reach and production capacity.

·       Improveoperating efficiencies and reduce costs.

·       Brandbuilding and innovation.

·       Strengthenhuman resource capability.

**Expand our geographicreach and production capacity.****  **Since 2000, we have acquiredproduction units in various regions of Russia and the CIS. By establishinglarge production facilities in regions with high population density andavailable raw materials, we have been able to avoid high transportation costsand take advantage of lower cost labor and milk resources, which can be cheaperin the regions than in Moscow. While we believe that we have achieved nationalreach and anticipate fewer acquisitions in the future, the fragmented nature ofthe dairy industry in Russia and the CIS will continue to give rise toopportunities for strategic acquisitions, constructing new capacity andattracting new customers. In turn, we expect these combined factors, along withthe geographic expansion of our distribution network, to bring about anincrease in our geographic coverage. We intend to continue to implement thisstrategy through acquisition and construction of production capacity and newequipment, including the selective acquisition of plants, as follows:

·       *Dairy.*   We have developed and havebeen actively implementing since 2002 a regional expansion program whichcontemplates the acquisition of prominent dairy enterprises in Russia and theCIS, as well as significant investment, as necessary, into their modernization.We strive to ensure that our products are produced close to the markets wherethey are sold, reducing transportation costs and allowing us to respond morerapidly to changing consumption patterns. Following acquisitions, we review andoptimize the local product portfolios and replace their management systems withour own.

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·       *Beverages.*   Over the past threeyears, we have increased our juice production capacity at existing plants thatwe believe have the potential to become supply centers for those regions thatoffer substantial potential for sales growth. For example, we converted our RamenskiyPlant in Moscow into a juice-only production plant in 2004. We have also beenrevising our juice distribution network, aiming to make it more efficient witha wider geographical reach. We will consider carefully selected opportunitiesin the beverage segment should attractive opportunities arise.

·       *Baby Food*.   In line with our strategy to develop ourbaby food sales, we have been investing in the modernization of the Moscow BabyFood Plant and acquired the Experimental Baby Food Plant in Kursk, CentralRussia in order to diversify into other categories of baby food and to furtherexpand into the regions of Russia. We are currently undertaking a modernizationprogram for our new plant, and in March 2006, we launched our first lineproducing juice for babies.

**Improve operatingefficiencies and reduce costs.****  **We intend to maintain the highquality of our products, reduce our costs, increase our cash flow and improveemployee productivity through:

·       *Modernizing existing production facilities.*   Followingthe overhaul of several of our production facilities during 2003 and 2004, wewill continue to modernize our plants as required in order to reduce ourproduction, raw material and labor costs through higher operating efficienciesand lower raw material wastes.

·       *Controlling costs.*   We routinelyreview our cost base to identify costs that may be reduced by improvingtechnology, modernizing production assets, replacing high-cost suppliers,streamlining our management structure and reducing administrative expenses. Weintend to continue to increase gradually the share of our raw materialsacquired from local suppliers, which tend to be cheaper than importedmaterials. We also regularly review our workforce, particularly at newly-acquiredplants, to help ensure productivity. In Russia’s current macroeconomic climate,wage inflation has become a major cost factor, particularly as we have rapidlyexpanded overall headcount since 2000 with a large number of acquisitions. Wehave sought to maximize employee efficiency by reducing employee numbers whileincreasing production capacity through installing new equipment and changingproduction patterns to meet production needs on a local, regional and grouplevel.

·       *Supply chain system.*   We intend toimplement a nationwide supply chain system that will enable us to maintain ourproducts’ integrity, freshness and nutritional value, monitor deliverylogistics at all stages, and thereby optimize efficiency while minimizingdelivery costs.

·       *Improving working capital*.   We willcontinue our efforts aimed at decreasing our stocks of raw materials, packagingmaterials and finished goods at all of our production facilities whileendeavoring to negotiate the most favorable payment terms possible with oursuppliers.

·       *Increasing direct distribution to retail chains.*   Wewill continue our efforts to increase our direct distribution to retail chainswhile maintaining or reducing our relationships with independent distributors.Direct distribution can enable us to more efficiently monitor supply and demandand respond to market fluctuations with greater flexibility.

·       *Minimizing dairy distribution costs through localproduction*.   We intend to continue to pursue a strategy ofmanufacturing dairy products in the same region in which they are consumed,decreasing our distribution costs, while at the same time increasing our profitmargins for such products.

·       *Creating our own raw milk base*.   Tocounterbalance the general and seasonal increases in raw milk prices, we aretaking a number of steps, including the leasing of milking and refrigerationequipment to selected dairy farms, in order to ensure consistent quality andquantities of milk at pre-determined prices.

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**Brand building andinnovation.****  **In anincreasingly competitive marketplace, we believe effective brand management iskey to maintaining our leading positions in the market segments where weoperate. We have developed key brands in specific segments into umbrellabrands. This allows us to launch new products and enter new product niches withrecognized and trusted brands. At the same time, we have elevated some stronglocal brands into regional and national brands. Maintaining long-establishedregional brands allows us to fit our marketing approach to specific regionaltastes and leverage existing brand identities:

·       *Maintaining a leading market position through keycore brands*.   We believe that, as the Russian dairy andbeverages markets mature, only leading national and regional brands will beable to maintain their competitive positions, and that significantconsolidation is likely. We will continue to focus on our brands and productswith leading market shares in their respective segments. At the same time, wewill continue to develop and launch new products and occupy new product niches.

·       *Reviewing our brand portfolio and focusing ourmarketing efforts on key brands*.   We will continue to reviewour brand portfolio with a view towards maintaining only our best-known brands,brands with high operating margins and new brands with significant potential.We intend to build upon and strengthen our best-known brands by consolidatingthem under our various existing product groups. Our umbrella brands are alsoinstrumental in entering new markets and launching new products. As part ofthis process, we are shifting our branding focus from specific productcategories to specific consumer segments. For example, our Neo branded enrichedand juice-containing dairy products, launched in 2004, have established marketleadership in these value-added niches around a wider brand identity promotingfitness and a healthy diet.

·       *Increasing share of innovative, value-added products*.   Weintend to continue to invest in developing new value-added products and toincrease our marketing and new product development expenditures in order toincrease our production and sales volume of value-added products andbrands, as opposed to commodity products often associated with narroweroperating margins. In particular, we are seeking to increase our sales ofyogurt, premium cheese, juice-based products, mixed juices and new flavorjuice products as a percentage of our total sales volume through new productlaunches and management of our existing portfolio of brands and products.

·       *Leveraging local brands***.  **While we believe in consolidating and rationalizingthe product groups of businesses and eliminating poorly performing localbrands, we also maintain a small number of well-established local and regionalbrands that have a strong existing identity and appeal to local preferences andcultural identities. For example, our Kubanskaya burenka brand has a strongresonance in southern Russia where certain national brands such as Little Housein the Country have less cultural relevance.

**Strengthen human resource capability.****  **Operating in both maturing markets, such as Moscowand St. Petersburg, and emerging markets, such as Russia’s regions and CISmarkets, we are developing our human resource capability on the central groupand regional levels to attract and retain skilled management with globalconsumer industry experience. At the same time, we believe in promotingtalented people within the organization, moving people not only up the careerladder, but also into other parts of the business and other regions. In ourproduction facilities, we have sought to make our existing employees moreefficient through installation of new equipment and training.

·       *Attracting world-class management talent*.   In recentyears we have recruited both Russian and foreign managers with experienceworking at multinational consumer goods firms in order to bring internationalbest practices to the company. We have appointed a CEO with many yearsexperience running Coca-Cola bottling companies in the CIS, Western and EasternEurope.

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·       *Creating incentives for our employees.  *Wefully understand that the success of our business is a direct result of thework of our employees and we have had considerable success in fostering futuremanagement talent on the enterprise and group level. We have institutedsuccess-based incentives for managers on the regional and group level. At thesame time, we have worked with outside providers and our own team ofprofessional trainers, as well as coaches chosen from a pool of the mostexperienced managers to provide resources for continued educationalopportunities within the Corporate University. We aim to ensure that wecontinue to be seen as one of Russia’s most attractive employers for promisinggraduates while retaining talented employees.

·       *Maximizingefficient use of personnel*.   We are introducing a performanceappraisal system linked to the creation of individual development plans for allmanagement. We are currently starting work on putting in place managementassessment and succession planning throughout the company. We are also workingon developing an open and trusted environment that enables effectiveperformance.

**Current Operations**

**Dairy industry**

***Consumption.******  ***Russian dairyconsumption is relatively low compared to most European countries and ischaracterized by two primary trends—the comparatively stable development of themarket for traditional dairy products, and a more rapidly developing market foryogurt and dessert dairy products.

We estimate, based on combined data from Comcon, ACNielsen and Goskomstat, that per capita consumption of packaged dairy productsin Russia was 54.9, 58.3 and 60.6 liters per year in 2003, 2004 and 2005,respectively, levels that are relatively low compared to the majority ofEuropean countries. The demand for dairy products remained relatively stable inthe aftermath of the 1998 Russian financial crisis and the ensuing decline inper capita income, as dairy products are generally considered to be stapleconsumer goods. Additionally, increasing per capita income following 1998 haspositively affected dairy consumption, particularly of higher-pricedproducts such as yogurt and dessert dairy products.

According to our estimates, consumption of traditionalpackaged dairy products in Russia increased between 2004 and 2005 by 3% from47.8 to 49.2 liters per person. We believe that packaged dairy productconsumption levels will continue to increase at a moderate pace in Russia asthe consumption of bulk liquid milk decreases due to increasing per capitaincomes, the growing desire and demand for sterilized milk and the greaterconvenience of packaged products. Consumption of bulk liquid milk, whichgenerally consists of unpackaged milk sold in markets to consumers who bringtheir own packaging, is still relatively common in Russia.

Additionally, a number of packaged dairy products arerelative newcomers to the Russian market. For instance, yogurt is a relativelynew product for Russian consumers. Since its first widespread commercialappearance in Russia in the early 1990s, yogurt’s popularity has increased. Percapita consumption, however, remains low. According to our estimates, annualper capita consumption of yogurt and dairy desserts in Russia increased toabout 7.2 kilograms in 2005 from 6.7 kilograms in 2004, reflecting an increaseof 7.5%. Other new dairy products in Russia include dairy desserts, mousse,fruit-flavored traditional products, flavored milk, flavored yogurtdrinks and combined juice-dairy products.

According to our estimates, annual cheese consumption(yellow, white and processed) in Russia increased by 10.5% between 2004 and2005, from 3.8 kilograms per capita to 4.2 kilograms per capita, respectively.We believe that cheese consumption levels will continue to grow due toincreasing per capita incomes and the greater variety of cheese productsavailable to Russian consumers.

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***Production.******  ***Milk production and processing in Russia declined dramaticallyduring the 1990s due to the general state of the Russian economy, a lack of rawmaterials due, in part, to the slaughter of dairy cows necessitated by ashortage of feed, and a sharp increase in energy prices. Additionally, themajority of Russian milk producers, comprising individual farmers andcollective agricultural enterprises, operate with inefficient and outdatedfacilities and equipment and function under outdated management practices.

The result of this decline was a drop inprocessing volumes and an increased reliance upon imported dairy products.While the financial crisis of 1998 aided Russian producers to some extent, asit pushed imported foods out of the Russian market, it also caused difficultiesfor Russian companies that depended on imported materials for production. Ingeneral, producers that were able to limit their exposure to fluctuations inthe value of the ruble and to establish links with Russian suppliers survivedthe crisis and took leading positions in the marketplace. The milk processingsector, however, still remains fragmented, and currently includes over 1,500large, medium and small enterprises, according to IKAR (the Institute of theAgricultural Market). There is evidence, though, that the process ofconsolidation is continuing, with the less efficient producers going out ofbusiness or being acquired by larger companies. For example, in addition to ourdairy plant acquisitions in 2005, our competitor Unimilk acquired various dairyplants in the course of 2004, 2005 and thus far in 2006 throughout Russia. See “—Dairyproducts and brands—Market trends and competition” for a description of Unimilk’sacquisitions.

Additionally,foreign, particularly European, producers have recognized the potential forgrowth in the demand in Russia for milk, yogurt and dairy desserts and areinvesting in the Russian market. A number of European producers, such asDanone, Parmalat, Campina, Lactalis and Ehrmann, produce dairy products inRussia, principally in the Moscow region, and comprise our principalcompetition in the yogurt and dairy dessert segment of the dairy productmarket.

**Juiceand mineral water industries**

***Consumption.******  ***Before the early 1990s, consumption of juice products in Russia waslimited. Juice products manufactured in the Soviet Union included onlyvegetable juices and fruit juices made of locally grown fruits such as applesand pears. Most Russian households tried orange, pineapple, grapefruit andother exotic fruit juices for the first time in 1991 and 1992, following thedissolution of the Soviet Union. Russian juice consumption grew each year until1998, when it fell following the 1998 financial crisis, which led to areduction in Russian incomes and a significant increase in the cost of juiceproducts due to the increase in the ruble cost of imported juice packaging andingredients. While Russian juice consumption has recovered from the effects ofthe 1998 financial crisis, it is still relatively low compared to most Europeancountries. The following table shows annual per capita juice productconsumption in liters in Russia and selected European countries in 2004,according to the most current estimates available from Combibloc, one of oursuppliers of packaging materials:
| Country         | ** ** | ** ** | ** ** | **2004** | ** ** |
|-----------------|------------|------------|------------|----------|------------|
| Germany         |       |       | 58         |     |       |
| Poland          |       |       | 36         |     |       |
| Hungary         |       |       | 35         |     |       |
| Spain           |       |       | 27         |     |       |
| Czech  Republic |       |       | 25         |     |       |
| France          |       |       | 25         |     |       |
| Slovakia        |       |       | 18         |     |       |
| Italy           |       |       | 14         |     |       |
| Russia          |       |       | 14         |     |       |

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Source: Combibloc, 2004

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We estimate the annual per capita juice product consumption in Russiain 2005 and 2004 was approximately 16 liters and 14 liters, respectively.

The volume of bottled water consumption in Russia is now on par withthe consumption of juice products. In 2005, we estimate, based on data fromBusiness Analytica, that the average per capita consumption of bottled water inRussia was 16 liters per year. This figure is significantly lower thanconsumption levels elsewhere in Europe. For example, according to Euromonitor,the current per capita consumption of bottled water in the United Kingdom isclose to 30 liters per year, and over 140 liters per year in Italy and France.

***Production.******  ***Following the dissolution of the Soviet Union and the economicreforms that liberalized import procedures, foreign producers were able tocapture a significant share of the Russian juice market by importing theirproducts. However, the 1998 financial crisis caused a majority of the foreigncompanies to leave the market, and also forced a majority of Russian producersto decrease or discontinue juice production.

The juice product market began recovering in 1999, and since then, hasexperienced significant increases in sales volume, stimulated by rising Russianincomes and an increased interest in health issues, as well as by theadvertising efforts of juice producing companies.

Additionally, a number of Russian producers that survived the 1998financial crisis managed to restructure their production facilities usingWestern technologies and to strengthen their market positions. In 2005,according to a Business Analytica survey of 18 cities located throughoutRussia, referred to hereinafter as the Business Analytica survey, the fourlargest Russian producers had a market share of approximately 88% of the juiceproduct market. Russian producers often use cheaper domestic inputs and modernpackaging technologies, and they increasingly promote their brands on anational scale. The industry is now experiencing consolidation, as demonstratedby the increase in acquisition activity and the decrease in the number ofbrands on the market over the last few years. According to the BusinessAnalytica survey, during 2005, there were more than 100 brands of juiceproducts in the Russian juice market, though only 10 of these brands accountedfor 81% of the market.

The bottled water market in Russia is characterized by a large numberof brands, including local brands that are strong in the regions where they areproduced. In addition, the leading brands in Moscow differ from those withleading market shares in many of the regions outside of Moscow. According tothe Business Analytica survey, in 2005, the top ten bottled water producers inRussia had a 75% market share in Moscow and a 69% market share in the ten largestcities of Russia in terms of value for the first two months of 2006. Thisdifference is largely due to the prominence of local or regional producers incertain regions outside of Moscow whose water products are less expensive thanthose of national brands. The market shares in Moscow of the two largestinternational bottled water providers, Pepsi and Coca Cola, decreased from 34%in 2004 to 29% in 2005 in terms of value, according to the Business Analyticasurvey. In terms of market share, Pepsi remained the market leader in Moscow in2005 followed by domestic producer GG&MW Co N.V. and Coca Cola.

**Baby foodindustry**

***Consumption.***   The babyfood market in Russia is comprised of four main segments:

·       powdered formula and cereals;

·       liquid dairy products (milk, kefir, cottage cheese and curddesserts, yogurts, liquid formula);

·       supplemental infant food products (early solid foods, includingjuices, purees); and

·       other products (baby water, puddings, soups, biscuits, tea).

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According to our estimates, approximately75 - 80% of the dairy products consumed by children aged 0 - 3 years in Russiaare adult food products, with specialized baby foods comprising only 20 - 25%of the dairy products consumed in this age group.

From 2003 to 2005, the baby food market inRussia grew by 47%, according to our estimates. Three regions of Russiacurrently account for over 70% of nationwide baby food product sales, includingthe Central region (including Moscow), the Northwest region (including St.Petersburg) and the Volga region, according to our estimates. In 2005, theMoscow market accounted for approximately 34% of sales in the Russian baby foodmarket, according to our estimates, a 5 - 6% decline from 2003 due to dynamicgrowth in baby food sales in the regions. Among the markets exhibiting thefastest growth in baby food sales has been the Northwest region, mainly due toactive expansion by St. Petersburg-based Petmol, our competitor in the dairysegment and producer of liquid dairy products for infants, the increasedpresence of our baby food products in this market and active product promotionby leaders in the supplemental infant food segments.

Our baby fooddivision is primarily focused on the production and sale of liquid dairy products.According to our estimates, in 2005, sales of liquid dairy products forchildren up to 3 years of age in Russia increased by 17 - 18%.

***Production.***

The baby food market began in Russia in theearly 1990s with a government plan to build approximately 110 production sitesthroughout the country to develop baby food products such as meat, fruit,vegetable, grain and fish purees and various dairy products. Although only asmall number of these government-sponsored production sites were ever built,domestic and foreign producers of baby food started acquiring productionfacilities in Russia in the second half of the 1990s. Since 2000, the baby foodmarket has grown substantially with additional types of products beingintroduced and increased consumption due, in large part, to the populationgrowth of children aged three and under in Russia.

Today, both Russian and foreign producershave a presence in the baby food market in Russia, with foreign producersgenerally operating in each of the market’s four main product categories andRussian producers generally operating in individual categories.

In the individual product categories,foreign producers currently dominate the powdered formula and cereals market,while domestic producers hold leading positions in the liquid dairy productsand supplemental infant food market.

The marketshare of domestic producers has grown in recent years, with domestic productsaccounting for approximately 70% of the Russian baby food market by volume in2005, according to our estimates. In contrast, the market share of Westernbrands has generally been shrinking, and stood at approximately 30% by volumein 2005, according to our estimates. However, in terms of value, foreign brandscurrently have an approximately 50% market share, according to our estimatesdue to the higher average selling prices as compared with domestic products.Notwithstanding the declining market share for foreign baby food products, thesales volumes for these products have continued to increase in recent years dueto the continued overall annual growth of the baby food market in Russia.

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**Ourproducts and brands**

Our dairy,beverage and baby food products accounted for 72.0%, 21.7% and 6.3% of our netsales in 2005, respectively. Our principal geographic market is Russia, withthe Moscow market being among the most significant. The following table setsforth our annual consolidated net sales, the proportion of consolidated netsales accounted for by our main business lines, our reported annual productionvolume and the growth rate by production volume of our business lines:
|                                         | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Dairy products**                      |       |     |       |     |       |     |       |
| Sales (in  millions)                    |       | 1,007.7  |       | 822.9    |       | 616.3    |       |
| Annual sales  growth (% year on year)   |       | 22.5     | %          | 33.5     | %          | n/a      | (1)        |
| Percent of  total sales                 |       | 72.0     | %          | 69.2     | %          | 65.7     | %          |
| Sales volume  (in thousand metric tons) |       | 1,195.3  |       | 1,098.5  |       | 960.0    |       |
| Annual volume  growth (% year on year)  |       | 8.8      | %          | 14.4     | %          | n/a      | (1)        |
| **Beverage products**                   |       |     |       |     |       |     |       |
| Sales  (in millions)                    |       | 303.8    |       | 301.7    |       | 276.0    |       |
| Annual  sales growth (% year on year)   |       | 0.7      | %          | 9.3      | %          | n/a      | (1)        |
| Percent  of total sales                 |       | 21.7     | %          | 25.4     | %          | 29.4     | %          |
| Sales  volume (in million liters)       |       | 436.2    |       | 462.6    |       | 478.6    |       |
| Annual  volume growth (% year on year)  |       | (5.7     | )%         | (3.3     | )%         | n/a      | (1)        |
| **Baby food products**                  |       |     |       |     |       |     |       |
| Sales  (in millions)                    |       | 87.8     |       | 64.7     |       | 46.0     |       |
| Annual  sales growth (% year on year)   |       | 35.7     | %          | 40.7     | %          | n/a      | (1)        |
| Percent  of total sales                 |       | 6.3      | %          | 5.4      | %          | 4.9      | %          |
| Sales  volume (in million liters)       |       | 57.8     |       | 50.0     |       | 45.9     |       |
| Annual  volume growth (% year on year)  |       | 15.5     | %          | 8.9      | %          | n/a      | (1)        |
| **Total net sales (in millions)**       |       | 1,399.3  |       | 1,189.3  |       | 938.5    |       |

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(1)          Growthdata for 2002 based on new segmentation is unavailable.

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**Dairyproducts and brands**

Our principal dairy product lines, types of products, principal brands,and their approximate percentage of our total dairy revenue in 2005, 2004 and2003 are as follows:
| Product line               | ** ** | ** **                                                                                                                                         | ** ** | **Types of products**                                                                                                                                                                      | ** ** | **Main brands** | ** ** | **Approximate  percentage of  total dairy  revenue in  2005** | ** ** | **Approximate  percentage of  total dairy  revenue in  2004** | ** ** | **Approximate  percentage of  total dairy  revenue in  2003** |
|----------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|
| Traditional  products      |       | Sterilized  and pasteurized milk, butter, cream, traditional sour-milk products  such as kefir, cottage cheese, soft cottage cheese and sour cream |       | “Little House  in the Village,” “Happy Milkman,” “M,” “Kuban Cow,” “Zavetny Bidonchik,” “Bio-Max,”  and “Our Doctor” |       | 58.8%           |       | 57.4%                                                         |       | 58.2%                                                         |
| Yogurts and dairy desserts |       | Traditional  and drinking yogurt and dairy desserts, including mousse, fruit-flavored  milk and kefir, puddings and flavored cottage cheese        |       | “Bio-Max,”  “Neo,” “Happy Milkman,” “Chudo,” “Frugurt,” “Ginger Up” and “Lada”                                       |       | 38.9%           |       | 38.1%                                                         |       | 36.1%                                                         |
| Cheese                     |       | Traditional  cheese products                                                                                                                       |       | “Lamber,”  “Ginger Up” and “Happy Milkman”                                                                                                                   |       | 2.3%            |       | 4.5%                                                          |       | 5.7%                                                          |

 

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The Russian market for packaged dairy products has several defined marketsegments. The market can also be divided into non-branded and branded products,although non-branded products generally only cover the mass market segments.Our branding policy is designed to ensure that we reach customers in most ofthe segments with the right mix of brands, brand images, products and packagingformats. We support strong national brands, as well as local brands which arewell established in the regions. The following chart illustrates our estimatesof the current market segment positioning for our major brands, as well as ageneral description of the purchasers which each market segment covers:
| Segment                 | ** ** | ** **                                                                                               | ** ** | **Purchaser material  well-being scale**                                                      | ** ** | **Traditional  products**                 | ** ** | **Yogurts and dairy  desserts** | ** ** | **Health-oriented  enriched products** | ** ** | **Cheese Products** |
|-------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|---------------------------------|------------|----------------------------------------|------------|---------------------|
| Premium                 |       | Enough money  to buy major household appliances and higher, monthly income above $500 per  family member |       |                                                                                          |       |                                      |       | “NEO”                 |       |                                   |
| Upper-middle and middle |       | Enough  money to buy major household appliances and higher                                               |       | “Little  House in the Village”                                                      |       | “Ginger  Up,” “Chudo” |       | “Bio-Max”             |       | “Lamber”                     |
| Middle and lower-middle |       | Enough  money to buy food and clothing, but not enough to buy major household  appliances                |       | “Happy  Milkman,” “Slavyanochka,” “Kuban Cow” and “M” |       | “Frugurt,”  “Lada”    |       | “Our  Doctor”         |       | “Happy  Milkman”             |
| Mass                    |       | Enough money  for food only                                                                              |       | “Zavetny  Bidonchik”                                                                |       |                                      |       |                            |       |                                   |

 

In general, we seek to maintain at leastone brand within most dairy market segments, and we intend to develop newbrands to expand our coverage of attractive segments. For example, in 2002 wedeveloped the “Ginger Up” brand, which is targeted at children and includesdairy products, as well as juices, and in 2003 we launched the premium “NEO”brand and the mass-market “Zavetny Bidonchik.” We expanded our “NEO” brand in2004 and 2005 to offer a broader selection of products in the attractivepremium segment.

***Markettrends and competition.******  ***Overall, the Russian dairy market has been growing over the lastthree years. According to our estimates, the total market for packaged dairyproducts in Russia was 7.9 billion liters in 2003, 8.4 billion litersin 2004 and 8.7 billion liters in 2005. We believe that consumption maycontinue to increase at a more moderate pace, as rising household incomes inRussia may tend to bring about higher protein consumption and preferences forvalue-added products. In particular, Russian households have provenreceptive to yogurt, enriched dairy products and dessert dairy products. Giventhe existing low per capita consumption, we see this market segment asproviding an opportunity for growth. We also expect continued growth in theconsumption of products with long shelf lives, including sterilized milk.

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Though some measure of consolidation isoccurring in the Russian dairy industry, the milk processing sector in Russiaremains fragmented and currently includes over 1,500 large, medium and smallenterprises, according to IKAR. Due to the high degree of fragmentation, themarket is very price competitive. In 1999, we responded to this competitivechallenge by holding our prices constant in an inflationary environment. Inaddition, from 2000 to the present, we have expanded our distribution service,reduced our sales to wholesalers, increased our sales to retailers andincreased advertising. We also remain committed to our regional expansionstrategy and are constantly widening our regional product offerings as consumerspending is growing steadily in the regions. For example, in order to increaseour market share in regional markets for our new premium segment yogurts anddairy desserts, we began selling these products during 2004 in several regionsat introductory prices, making them more attractive both to distributors,retailers and final consumers. We believe that these strategies have increasedpublic awareness of our products and helped us to continue to expand our marketshare without aggressive pricing.

In thetraditional dairy product markets, we compete primarily with local producers,such as Unimilk and Ochakovo Dairy Plant, as well as with a number of smallerproducers in other regions of Russia. In the enriched dairy product market, wecompete primarily with Groupe Danone, the Ochakovo Dairy Plant and Petmol. Inthe yogurt and desserts market and, to some extent, in the children’s productmarket, we compete with foreign producers such as Danone, Campina, Onken andEhrmann who continue to invest in their businesses in Russia. We view thefollowing producers as our primary competitors:

·       *Groupe Danone*, a Frenchcompany which is the most active foreign producer in Russia and aggressivelypromotes its products. It has a dairy plant in the Volga region where itproduces yogurt, fruit yogurts and kefirs, as well as a dairy plant in theMoscow region. Its domestically produced and imported products are sold underthe Danone brand name across Russia through its own distribution network.According to the 24 city AC Nielsen study, in 2005, Danone had a 25.8% marketshare in yogurt and dessert dairy products and a 14.3% overall market share inthe Russian dairy product market in terms of value. Danone owns 9.9% of ouroutstanding shares in the form of ADSs.

·       *Unimilk*, the secondlargest dairy holding company in Russia, founded in 2002 as a dairy division ofPlaneta Holding, controlled by Millhouse Capital. Unimilk has 17 dairyproduction facilities in Russia and two in Ukraine. Its largest productionfacility, St. Petersburg-based Petmol, produces a wide range of dairy products.According to the 24 city AC Nielsen study, in 2005, Unimilk had a 8.9% marketshare in traditional dairy products, a 2.3% market share in yogurt and dessertdairy products and a 6.7% overall market share in the Russian dairy productmarket in terms of value.

·       *Ochakovsky Dairy Plant*, aMoscow based company and one of the largest dairy plants in Russia. It producestraditional dairy products and yogurts and desserts. According to the 24 cityAC Nielsen study, in 2005, the OchakovskyDairy Plant had a 6.0% market share in traditional dairy products, a 2.3%market share in yogurt and dessert dairy products and a 4.5% overall marketshare in the Russian dairy product market in terms of value.

·       *Ehrmann*, a German companyproducing yogurt products at its plant located in the Moscow region. Its brandnames Ehrmigurt, Yogurtovich, Fruktovich and Uslada were developed specificallyfor Russian consumers. According to the 24 city AC Nielsen study, Ehrmann hadan 8.2% market share by sales in yogurt and dessert dairy products in 2005 interms of value.

We believe that we generally have severaladvantages over other Russian producers, including a larger production capacityand higher quality products, as well as greater innovation, new productdevelopment, geographical coverage, centralized management and marketingcapabilities. However, many other domestic producers tend to benefit incomparison to us from lower cost bases, including lower advertising anddistribution costs, and, for certain consumers, a preferred image.

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Recent trends also indicate that industryconsolidation may lead to the appearance of larger domestic producers, whichcould become significant competitors. For example, in addition to our dairyplant acquisitions in 2005, our competitor Unimilk acquired various dairyplants in the course of 2004, 2005 and thus far in 2006, including the KostromaDairy Plant, Vladimir Dairy, Volgograd Dairy Plant No. 3 and Rosa(Smolensk) in central Russia; the Shadrinsky Dairy Plant in the Kurganskregion; and Tom-Mac (Tomsk), Novosibirsk City Dairy Factory and Solti(Kemerovo) in Siberia. In addition, in 2006, Unimilk acquired 55% ofPermmoloko, a dairy plant in Perm (Ural region). In 2005, Unimilk completed themain phase of upgrading its production capacities at the Petmol factory (St.Petersburg) at a cost of over $15 million. These acquisitions and investmentsby Unimilk have heightened its competitive position substantially in theRussian and CIS dairy product market.

Foreign dairy manufacturers generally havelarge promotional budgets and advanced production know-how, allowing them tooffer quality and innovative products, and strong distribution networks. Whileforeign manufacturers generally tended in the past to focus on niche markets,usually in the premium segment, they are now increasingly concentrating onproducing products for the average Russian consumer with an average income.Moreover, whereas our foreign competitors tended in the past to rely primarilyon imported products, which are more expensive, a number of these companies,such as Danone, Parmalat, Campina and Ehrmann, have invested and continue toinvest in domestic production facilities, reducing the competitive advantagesthat we have over foreign competitors without domestic production capability.See “Item 3. Key Information—D. Risk Factors—Risks Relating to OurBusiness and Industry—Increased domestic production by our foreign competitorscould reduce our competitive advantages against them, which would have amaterial adverse effect on our market share and results of operation.”

For example, Danone owns two plants inRussia and has introduced several of its yogurt brands into the Russian market,some of which were developed specifically for Russian consumers. In April 2005,Danone announced the opening of new production lines at its factory in Chekovin the Moscow region, which increased the factory’s capacity to 250,000 metrictons. Dutch company Campina also owns a dairy plant in Russia that producesfresh yogurts and yogurts with a long shelf life, and announced plans in 2005to expand its production of dairy beverages in the Moscow region, increasingCampina’s total investments in Russia to over $100 million. In addition, theGerman companies Ehrmann and Onken produce yogurt at Russian plants, and Onkenlaunched its own dairy production factory in Russia in 2003. Foreign cheese producersalso launched production facilities in 2003, including French company Laktalisand German company Hochland. In 2004, Lactalis acquired Foodmaster International,a company owning seven dairy factories in Kazakhstan, Moldova and Ukraine thatproduce milk, kefir, sour cream, yogurt and cheese. In Russia, Lactalis ownsLactalis Istra, a factory located near Moscow with capacity to produce up to6,000 metric tons of cheese annually, and in Ukraine it owns a dairy plant inNikolaev that produces various dairy products. Due to their increased domesticproduction of yogurt and dairy desserts, foreign producers have become our maincompetitors in these sectors, whereas we mainly compete with domestic producersin the traditional milk products sector.

We believe that we have several importantcompetitive advantages that will allow us to maintain a leading position in theRussian dairy market: strong and diversified brands, stable access to raw milk,a broad proprietary distribution network, new product development focus, modernproduction assets and technology, access to external capital and a strongmanagement team. We also benefit from our strong regional production base,while our foreign competitors must generally transport their yogurts andpremium segment desserts from Moscow to the regions, which is costly andlogistically complex.

We intend to take advantage of thesestrengths through our strategy of promoting brand awareness and loyalty with anemphasis on product quality, as well as by continuing our efforts to focus ondeveloping new products equal to or better in quality than those offered byWestern producers.

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**Beverage productsand brands**

Our beverage products consist of juice and bottledmineral water products. In 2005, approximately 98% of the net revenues of ourbeverage segment were derived from the sale of juice products and approximately2% from the sale of bottled mineral water products.

Our juices are produced primarily at the RamenskiyPlant and at Fruktopak, and we have also installed juice lines at our dairyproduction facilities in Vladivostok, Novosibirsk and at the Tsaritsino DairyPlant. Our mineral water is produced at our plant in the Novgorod region and atour two plants in the Essentuki area.

Ourprincipal beverage product lines and types of products and brands are asfollows:
| Product Line                                       | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | ** ** | **Brands and Types of Products** |
|----------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|
| Juice and nectars  produced from juice concentrate |       | ·  “J-7,” covering 12 kinds of fruit,  berry and vegetable juices and nectars

·  “Rio Grande,” covering 7 kinds of fruit and  berry juices and nectars

·  “100% Gold,” covering 8 kinds of fruit,  vegetable and berry juices and nectars 

·  “Lovely Garden,” covering 11 kinds of fruit,  vegetable and berry juices and nectars, 5 kinds of juices and nectars  enriched with vitamins and 3 kinds of traditional Russian berry drinks |
| Enriched juice-based  drinks                       |       | ·  “J-7  Idea,” an innovative juice-based drink with real fruit pieces

·  “J-7 Bio,” an innovative juice-based  drink enriched with prebiotics

·  “J-7 Exotic,” an exotic fruit juice  and nectar range                                                                                                                                                                                                                                                        |
| Traditional berry-juice-based  drinks              |       | ·  “Wonder Berry,” covering 7 kinds of berry-juice  based drinks and 2 kinds of berry compote                                                                                                                                                                                                                                                                                                                                                                                                            |
| Other juice-based  drinks                          |       | ·  “DJ,” covering 4 kinds of fruit and berry  drinks                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| Mineral water                                      |       | ·  “Essentuki,” covering 3 kinds of therapeutic  mineral water (Essentuki #4, #17 and #20)

·  “Sanctuary Valday,” covering 2 kinds of  mineral water rich with natural mineralization

·  “Sanctuary Beshtau,” covering 2 kinds of  mineral water rich with natural mineralization

·  “Novoessentukskaya,” covering 1 kind of  therapeutic mineral table water                                                                             |

 

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Productsin the juice market tend to be branded and, as with the dairy market, there areseveral defined segments. However, the market segmentation tends to fall alongdifferent lines than in the dairy market, primarily due to the tendency fordairy products to be considered food staples. We have positioned our portfolioof juice and nectar brands so that we have at least one of our brands in eachof the four juice market segments, with two or three brands in particularlycompetitive segments. The following chart illustrates our estimates of thecurrent market segment positioning for our major brands, as well as a generaldescription of the purchasers which each market segment covers:
| Segment      | ** ** | ** **                                                                                                                                                                        | ** ** | **General Purchaser  Characteristics** | ** ** | **Juice and  nectars  produced from  juice  concentrate** | ** ** | **Traditional  berry-  juice-based  drinks**                          | ** ** | **Other juice-  based drinks**                               | ** ** | **Mineral water** |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------|
| Premium      |       | ·  Aged  20-45

·  Mainly  working women with high incomes

·  Consumers  who appreciate and care about quality                                     |       | “Rio Grande”                 |       |                                                      |       |                                                                  |       |                                                         |
| Upper-middle |       | ·  Aged  20-45

·  Men  and women in the middle to upper-middle income bracket

·  Active,  optimistic and open-minded                              |       | “J-7”                        |       | “Wonder Berry”                                  |       | “J7 Bio,” “J7 Idea”  and “DJ” |       | “Essentuki”                                        |
| Middle       |       | ·  Aged  25-45

·  Primarily  married men and women with children in the middle income bracket

·  Self-confident,  rational, but not trend setters |       | “100% Gold”                  |       |                                                      |       |                                                                  |       | “Sanctuary Valday,”  “Sanctuary Beshtau” |
| Lower-middle |       | ·  Aged 25-45

·  Men and women  typically with children and below average incomes; family oriented

·  Optimistic                                  |       | “Lovely Garden”              |       | “Lovely Garden”                                 |       |                                                                  |       | “Novoessentukskaya”                                |

 

In 2003, we commenced the repositioning of our “LovelyGarden” and “J-7” brand products with new packaging and marketingapproaches. In 2004, we turned “J-7” into an umbrella brand and launched “J-7Idea” in PET bottles (plastic bottles), as well as “J-7 Exotic,” whichare marketed to appeal to people on the move with fast and healthy lifestyles.We also introduced new packaging and marketing approaches for “J-7” brandproducts, including a change from Tetra Brik and Tetra Slim packaging to TetraPrizma packaging and the launch of PET packaging. When launched, the new productswith PET bottle packaging were unique for the Russian market. We also launcheda new product under our “Lovely Garden” brand in 2004 called “Lovely Garden—10Vitamins.” In 2005, we released “J-7 Bio,” a prebiotic drink sold in PET 

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bottles. We also beganselling berry compotes under the “Wonder Berry” brand and at the end of 2005,and began producing 3 types of mors, a traditional Russian berry drink, underthe “Lovely Garden” brand. We also began producing “J7” and “100% Gold” juicesand nectars in 1.5 liter formats, and “Lovely Garden” juices and nectars in 2.0liter containers. In 2006, we added a new 0.425 liter container size to the “LovelyGarden” range, and began selling certain juices and nectars in PET bottles.

We launched our water operations in March 2003,when we began operations at our new water processing and bottling factory inthe Novgorod region, and extended our operations in August 2003 and October 2005with the acquisition of mineral water factories and underground wells in theEssentuki area of Russia. Our mineral water products are positioned in theupper-middle segment of the market and cater to consumers who preferbottled natural mineral water to purified or ordinary tap water. In 2005, wemerged our water and juice businesses into a single “beverage” business unit tofurther reduce costs and benefit from natural synergies.

In August 2003, we acquired underground wells anda factory that produces “Essentuki” mineral water and acquired an additionalEssentuki mineral water plant in October 2005. Essentuki brand water ismineral water from the Essentuki area of Russia, which is known for its mineralwaters and spas. Essentuki was a famous Soviet brand, and is still one ofRussia’s best known mineral water brands. It is produced and bottled by severalmanufacturers in the Essentuki area in recognizable 0.5 liter dark greenbottles long associated with the brand. We also produce Essentuki in 1.5 literplastic bottles. We remain committed to expanding our Essentuki productioncapacity.

We obtain natural mineral water from an undergroundsource near the Valdai National Preserve, which is bottled at our factory inthe town of Okulovka in the Novgorod region. This plant is capable ofprocessing up to 360,000 liters of bottled water per day. The still andsparkling natural drinking water bottled at our Okulovka plant becamecommercially available during May 2003 and is marketed nationally inRussia under the “Sanctuary Valdai” brand name. Our Sanctuary brand portfoliowas broadened in 2004 to include water from the Caucus region, sold under the “SanctuaryBeshtau” brand. “Sanctuary Beshtau” is sold in 0.5 liter and 0.33 liter glassbottles and in 5 liter plastic bottles for home consumption.

Although there is no significant history of consumptionof non-aerated bottled drinking water in Russia, the situation is changing dueto environmental factors. There is a rising interest in bottled drinking waterin Russia, especially in large cities such as Moscow. The mineral water marketis expanding not only in terms of production volumes, but also in terms of thenumber of brands. Moreover, the number of Russian premium brands is growing,while the share of imported brands is declining.

Our aim in entering the bottled water sector is tosatisfy the growing demand among Russian consumers for quality mineral waterusing ecologically pure Russian sources. We believe that consumers willeventually distinguish and value the superior quality spring and natural waterthat we offer them as opposed to purified water.

We believe that our primary competitors in this areaare Pepsi’s “Aqua Minerale” and Coca-Cola’s “BonAqua,” as well as Borzhomi,Narzan and Saint Springs, all of which are produced in the CIS. We havepositioned our brand in a more up-to-date style, accentuating the fact that itis naturally produced mineral water, and offer both still and carbonated watersin a variety of bottle sizes, giving consumers a wider selection.

***Market trends andcompetition.******  ***The Russian juice market grew steadilyfrom the time of the dissolution of the Soviet Union until the 1998 financialcrisis, following which there was a significant decrease in consumption fromwhich the market had substantially recovered by 2000. The total market forjuice products, defined as the total consumption of domestically produced andimported products, increased to 2,270 million liters in 2005, according toBusiness Analytica, from 2,030 million liters in 2004. We believe thatrising household incomes in Russia and the increasing preference for juice overfresh 

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fruits, which generallyaccompanies increased incomes, will encourage the consumption of vitamin-rich,value-added products with different tastes and nutritionalcharacteristics. For example, according to the Business Analytica survey, inMoscow, which enjoys higher average per capita incomes than most other parts ofRussia, the average consumption of juice in 2005 was approximately40 liters per capita, as opposed to national per capital consumption ofapproximately 16 liters per capita. The most dynamic growth in recentyears has been in the lower-middle price bracket, which we expect will continueto drive market growth in the foreseeable future.

The markets for juice products in Moscow, the Moscowregion and St. Petersburg are relatively mature compared to other regions ofRussia, and are expected to exhibit relatively modest growth rates in thefuture, with particular growth expected in the upper-middle productsegment. We believe that growth opportunities lie in the regions of Russia withlower fresh fruit availability or rising household income, where we expectparticular growth in the lower-middle product segment. We also believethat potential for growth lies in other CIS countries, which are relativelyundeveloped in terms of juice consumption, such as Ukraine and countries inCentral Asia. Given these market characteristics, we are pursuing a marketingstrategy aimed at promoting juice drinking habits by emphasizing the healthbenefits.

The operating environment has been challenging sincethe 1998 financial crisis. Competitive pressures have intensified because ofthe low purchasing power of households outside of Moscow and St. Petersburg andthe rising number of domestic producers. We initially responded to thiscompetitive challenge by holding our prices constant in an inflationaryenvironment, as well as by introducing two new brands, one targeted at themiddle-market price segment and the other at the mass-market pricesegment. In addition, we have been revising our juice distribution network,reducing the number of distributors we work with and maintaining relationshipswith distributors having direct distribution capabilities. We believe that,together with the launch of new products, the increased share of higher-pricedproducts in our product mix, increased advertising, new packaging and increasedproduction capacity, these strategies will increase public awareness of ourproducts and our sales, which will allow us to expand our market share atacceptable prices. At the same time, however, while our profit margins on ourbeverage products increased in 2003, 2004 and 2005, our sales volumes decreasedduring these periods due to vigorous market competition from domestic andforeign producers and our ongoing overhaul of our juice distribution network.See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business andIndustry—Increasedcompetition among juice producers in Russia has caused our sales volumes in ourbeverage segment to decline, which has adversely affected and may continue toadversely affect our results of operations” and “—Consumer preference forlow-price juice products and the volatility of certain raw materials requiredfor juice production may cause our profit margins to decline and have amaterial adverse affect on our results of operations.”

Our principalcompetitors in the Russian juice market include the following companies:

·       *Multon* is a St. Petersburg-basedcompany that, according to the Business Analytica survey, had a 23.3% marketshare in Russia during 2005. Its “Rich,” “Kind” and “Niko” brands entered theMoscow market in 1998 and since then have gained significant market sharesprimarily through aggressive pricing policies and advertising. Multon waspurchased by Coca-Cola in 2005.

·       *Lebedyansky* is based in the Lipetsk regionand, according to the Business Analytica survey, had a 27.6% market share inRussia during 2005. Its “Tone,” “I,” “Fruit Garden” and other brands havebecome well-known among Russian consumers. Lebedyansky recently acquired amajority stake in Progress, a juice concentrate producer. Lebedyansky raisedover $150 million in its initial public offering in Russia in 2005.

·       *Nidan* is a Novosibirsk-based Russiancompany that, according to the Business Analytica survey, had a 15.4% marketshare in Russia during 2005.

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Several foreign companiesinvested in domestic production facilities during 2001, including Coca-Cola,which purchased local producer Multon, one of our primary competitors, in 2005.During 2004, PepsiCo aggressively entered the Russian market with its “Tropicana”brand juices, which it produces domestically at the Nidan plant in theNovosibirsk region. Domestic production by foreign producers in Russia reducesthe competitive advantages that we have over foreign competitors withoutdomestic production capability. See “Item 3. Key Information—D. Risk Factors—RisksRelating to Our Business and Industry—Increased domestic production by ourforeign competitors could reduce our competitive advantages against them, whichwould have a material adverse effect on our market share and results ofoperation.”

However, we believe thatwe can compete successfully against foreign producers. We offer our customersquality juice products with a range of different tastes and nutritionalcharacteristics. Further, we have a quality brand portfolio which ranks highlyin almost all market segments, and we plan to continue to devote significantresources to advertising and marketing our leading brands.

The market for mineralwater is characterized by rising consumption, as well as many local brands thatare strong in their respective home regions. According to Business Analytica,the total market for bottled water in Russia increased to approximately 2,237million liters in 2005 from 2,033 million liters in 2004. Russian bottled waterproducers dominated the market, with a 68.5% market share in terms of value,while the share of the two market leaders, PepsiCo and Coca-Cola, accounted for31.5%, according to a Business Analytica survey of Russia’s 10 largest citiesin September through October 2005. According to the same survey, wewere among the top ten water producers in Russia, with a 3.2% market share byvalue. The market growth in recent years has been driven mainly by theincreased consumption of bottled water sold in large packaging, which isconsumed for drinking, as well as cooking purposes. We believe that this marketwill continue to expand in the coming years due to the growing income percapita in Russia and increasing concern among the population regarding food andwater quality.

**Baby food products and brands**

Our baby food productsconsist of products sold under the “Agusha” brand, including liquid dairy babyfood, juice, meat purees and products for pregnant and nursing women. Theseproducts are mainly produced at the Moscow Dairy Baby Food Plant and, startingin the Spring of 2006, the Experimental Baby Food Plant. In 2005, baby foodproducts comprised 6% of our total sales.

In 2005, we created aseparate baby food segment. Prior to 2005, baby food was part of our dairysegment.

We are currentlydeveloping our baby food division by focusing on the regional expansion of oursales and increased production, including through co-packing arrangements withcertain third-party facilities. We also plan to launch new products, as well asexpand the range of our existing products.

To further our developmentstrategy, we acquired the Experimental Baby Food Plant in the Kursk region in July 2005and are currently modernizing the facility. The plant sources certain of itsraw materials from its own fruit orchards, and our acquisition of the plantwill allow us to expand our baby food product range to include fruit andvegetable purees.

***Market trends and competition.***   Thebaby food market in Russia has been experiencing dynamic growth in recentyears, supported by improved market conditions, including rising averageincomes, more stringent government regulation of baby food production and theintroduction of various state-supported social programs aimed at improvingdomestic birth rates and providing maternity assistance. As a result of theseimproved conditions and increased consumer demand, domestic production of babyfood products has increased over the last few years, with certain of Russia’smajor juice and dairy producers increasing their production capacity andintroducing new baby food brands. Foreign producers are also active in themarket and, similar to the dairy and juice markets, several such producers havebegun to focus on establishing local production capacity in Russia. We believethat market consolidation is likely over the 

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next several years,with the largest foreign and domestic baby food producers acquiring smallerregional producers in order to increase their production capacity. In addtion,we believe continued market growth will lead to the emergence of product pricesegments similar to those in the juice and dairy markets.

Overall, the Russian babyfood market has been growing over the last three years. According to ourestimates, the total market for baby food products in Russia was 803,000 tonsin 2003, 842,000 tons in 2004 and 869,000 tons in 2005. Given the existing lowper capita consumption of products specifically produced for babies and thefact that spending on such products increases as family incomes grow, we seethis market segment as providing an opportunity for growth. Another factordriving the growth of the Russian baby food market is the increase in thenumber of infants aged four and under by 4% in 2005.

We were the market leaderin liquid dairy products for infants in Russia in 2005, with an approximately56% market share, followed by Unimilk with an approximately 14% market share.Nestlé and Nutricia were the market leaders for powdered formula and cereals,with approximately 50% and 25% market shares, respectively. The precedingmarket data, in each case, is according to MEMRB. Local producers of baby foodproducts are also active in regional markets, the largest of which are theZelenodolsk Baby Food Dairy Plant, Ekaterinburg Dairy No. 1, NovosibirskDairy and Ratmir Tver Dairy.

According to a consumerstudy conducted in August 2004 by GfK Rus, a marketing research institute,price is currently not the main factor considered by purchasers of baby foodproducts when it comes to choosing brands and forming brand loyalties. Rather,the main factors influencing consumer decisions are quality, brand image,product uniqueness, convenience, availability of desired flavors and producthypoallergenicity. In addition, as competitoin within the market has increased,factors such as flavor and product innovations, beneficial additives andpackage formats have also begun to influence consumer choice.

Among the leadingproducers of baby food products in Russia are foreign producers such as Nestlé,Nutricia, Heinz and Hipp, which generally operate in all of the main baby foodcategories, as well as domestic producers such as us, Azov KDP, MK Tikhoretskyand Lebedyansky, which generally operate in select baby food product categories.According to MEMRB, the foregoing producers held an approximately 78% marketshare in the Russian baby food market during 2004 in terms of value. Accordingto our estimates, the market share of foreign producers declined in 2004 and2005, while the market share of domestic producers increased. However, sales ofbaby food products in Russia increased during this period for both foreign anddomestic producers due to the overall growth in the market.

In addition to our “Agusha”brand, other brands competing in the infant liquid dairy products marketinclude baby food brands “Rastishka,” “Prince,” “Skeletony,” “Erelash” andothers, although our main competition in this category consists of adult dairyproducts. In the supplemental infant foods category, we compete with brandsincluding  “Azov,” “Vinni” and “FrutoNyanya.”In the cereals category, our main competitors consist of brands from foreignproducers, including Nutricia, Kolinska, Podravka and Heinz. The main producerof baby drinking water is Zelnogradsky Istochnik, producing under the “Malyshka”brand.

**New Product Development**

We invest significantfinancial and human resources in new product development, focusing on long-termstrategic development projects that are expected to create innovative productsand technologies. As of December 31, 2005, our product and technologiesdevelopment departments located at Lianozovo Dairy Plant had 46 employees andour juice product and quality department at the Ramenskiy Plant had 31employees. These departments often cooperate with third parties such as Russianresearch institutions, specialized research firms and suppliers.

Much of our new productdevelopment effort over the past three years has focused on higher-margin,value-added yogurt and dessert products to help ensure that we can offerproducts which match the quality and variety offered by our main foreigncompetitors in Russia. At present, we are focused on the 

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developmentof value-added dairy products oriented towards Russian consumers, takinginto consideration the general deficit of micro- and macro-nutrientsin the diets of the average Russian consumer. We attempt to link new productdevelopment with marketing and sales in an effort to create innovative productsand technologies.

We continued to activelydevelop our cheese products and enriched dairy products during 2005. Inparticular, we extended the “Imunele” sub-brand by introducing “Imunele-Forte,”a prebiotic drink enhanced with amino acids. We also expanded our cheeseproduction, introducing new brands and varieties. For example, we introduced awide selection of processed cheese products under our “Happy Milkman” brand, aswell as hard cheese products sold under the new “Lamber” brand, including acreamy hard yellow cheese product. In addition, in 2005, we launched a new lineof “5 Grain” yogurts and cottage cheese products, a low lactose milk under the “Bio-Max”brand, a fruit smoothie drink “La Fruit” and a new yogurt product sold with aplastic spoon to enable easy consumption anywhere both under the “Chudo” brand.In 2006, we launched a new kefir called “Effective” under the Bio-Max brand,and market it as a healthy consumer dairy product. In addition, in 2006, welaunched milk porridges under the “Happy Milkman’’ brand.

In the beverage segment,we launched a new product under our “Lovely Garden” brand called “Lovely Garden—10Vitamins” during 2005. In the same year, we also introduced new PET bottlepackaging for this brand.

In addition to new productdevelopment, recent technological innovations include the development of ourown stabilizers and bacteria cultures for the production of certain dairyproducts. The stabilizers and bacteria cultures, which we began using in 2004and 2005, respectively, allow us to partially replace some of the raw materialswe otherwise import.

**Advertising and Marketing**

Our advertising andpromotional strategies are prepared internally by our marketing and advertisingdepartments who work closely with advertising agencies and design studios. Ourgeneral policy and overall aim is to promote our brands nationally andstrengthen our image as a leading Russian producer of high quality products. Toimplement this policy, we create brand-oriented, national advertisingcampaigns for consumers throughout Russia. This advertising primarily consistsof television commercials, which allows us to reach the largest number ofRussian consumers.

Additionally, given thediversity of the regions in which we operate and in order to enhanceflexibility in responding to regional market trends, we supplement our nationaltelevision advertising campaigns with regional advertising and marketing,consisting primarily of advertisements on local TV, promotions, point-of-saledisplays, merchandising and billboards. To the extent that this regionaladvertising is based on national campaigns, our regional marketing managers areresponsible for adapting it to regional consumption patterns and needs.Regional campaigns can also be created by regional brand managers, subject tocentral coordination and approval.

Our advertising andmarketing expenditures of $43.8 million in 2003, $54.3 million in2004 and $57.9 million in 2005 constituted 4.7%, 4.6% and 4.1% of net sales,respectively. Though we are, in some instances, able to obtain volumediscounts, we expect these expenditures, as a percent of net sales, to increasedue to market competition and annual media inflation. According to Gallup, inRussia, we were the second largest advertiser in 2003, the third largestadvertiser in 2004 and the ninth largest advertiser in 2005.

A majority of our advertising expenditures are for thepromotion of our leading nationwide juice brands, such as “J-7” and “LovelyGarden.” We plan to continue to allocate the bulk of our advertising budget toa limited group of strategic brands which are highly ranked in their respectivemarkets. We also plan to continue our aggressive advertising and marketing ofselected new products.

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We continually seek fresh outlets for promoting ourbrands. For example, in 2001 and in 2003, we sponsored the television program “TheLast Hero” (the Russian version of “Survivor”), the first reality-basedseries on Russian television. In this connection, our “J-7” brandproducts were featured in virtually all public relations and marketing relatingto the show—on billboards, “J-7” packaging, television and printadvertisements, as well as on the show itself. We also sponsored two otherreality-based television programs using our “NEO” and “Zapovednik”brands. In 2005, we sponsored and promoted our “Lovely Garden” brand through apopular television sitcom, and in 2005 and 2006 we featured a popular Russianactress in our advertising, including in television commercials and printadvertisements. In cooperation with one of Russia’s national televisionchannels, we also sponsored a Russian cinema festival and related events in2005, through which our “Chudo” products were prominently featured intelevision commercials and at the festival itself. Another example ofinnovative marketing is our promotion of the “Ginger Up” brand, which istargeted at children, with a unique “Ginger Up” magazine for children.

Pursuant to turning “J-7” into an umbrellabrand, we launched new products, packaging and an advertising campaign aimed atpeople on the move with fast and healthy lifestyles. We also promoted our “LovelyGarden” brand by including a ticket on each package that could be cut out bythe purchaser to participate in a drawing for a cash prize.

We have also built brand awareness through charitablework and sponsored events. For example, in 2004, 2005 and 2006, we sponsoredthe “Tefi” National Television Awards program. For several years, we havesponsored International Charity Foundation events benefiting orphans throughits “Hope Around the World” program. We have also sponsored Internal Protectionof Children Day in Russia, as well as events of Ronald McDonald’s Sports andRecreation Center for Children, which helps mentally and physically disabledchildren. We also support several other charitable organizations and serve as atrustee of the Charity Foundation for Special Grants, which is headed by MstislavRostropovich, a prominent Russian musician.

**Sales andDistribution**

The broad distribution of our products is an importantelement in maintaining sales growth and providing services to our customers. Weattempt to meet the changing and increasing demands of our customers byplanning appropriate stock levels and reasonable delivery times consistent withachieving the optimal economics of distribution. In order to achieve theseobjectives, we have developed a proprietary network of 27 distribution centersand sales offices throughout Russia and other countries of the CIS.Specifically, we have 11 dairy distribution centers and 16 beveragedistribution centers that provide us with a broad national presence andfacilitate the sale of our products in populous regions and in certain regionswhere we do not own production facilities. These distribution centers functionas distribution points in their respective regions, and also coordinate certainlocal trade marketing. We also sell our products directly from our productionfacilities.

For the purposes of establishing pricing policies,coordinating interaction with local authorities, production and raw materialpurchase planning, we divide Russia into two sales and distribution areas:European Russia and Asian Russia.

**Distribution**

Due to different consumption patterns and productcharacteristics, our dairy and beverage businesses require differentdistribution strategies. We have therefore built two largely independentdistribution systems for our dairy and beverage products, although we use thesame marketing approach in each business and take advantage of synergiesbetween the systems to the extent possible. Distribution of our baby foodproducts is handled partially through our dairy distribution centers and partiallythrough independent distributors.

Given the limited shelf life of dairy products, theirdistribution tends to focus on local customers near the production facilities.Typically, key dairy sales personnel are located at the production plant andare responsible for regional sales activities mainly aimed at large retailoutlets, including facilitating orders, coordinating deliveries to chains andretail outlets, customer account management, marketing analysis and reportingto headquarters.

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Our infant dairy products produced by theMoscow Baby Food Plant are largely purchased by the Moscow City Government,which, in turn, distributes them through specialized milk kitchens locatedaround Moscow and the Moscow region. In 2003, 2004 and 2005, approximately 62%,61% and 56%, respectively, of our baby food product sales volumes weredistributed through these milk kitchens, with the remaining sales volumes soldthrough our distributors. The baby food product sales volume distributedthrough the milk kitchens has been decreasing while, at the same time, thevolume of commercial sales of our dairy products has increased. For adescription of the risk relating to our reliance on the Moscow City Governmentto purchase of our infant dairy products, see “Item 3. Key Information—D.Risk Factors—Risks Relating to Our Business and Industry—In the event that theMoscow City Government were to reduce significantly the prices or the amount ofproducts it purchases from our baby food business, then our revenues andprofits from this business could be reduced.”

Our beverageproducts have longer shelf lives than dairy products, which allows us todistribute these products to customers across the country. We have establisheda broad proprietary distribution network, with distribution centers in all keyRussian cities with populations of more than one million and representativeoffices and sales agents in smaller regions. Typically, a distribution centerincludes sales and marketing personnel dedicated to serving each customer groupseparately, and accounting and logistics personnel. Further, in order to buildstrong relationships with major customers, we have adopted a concept of keyaccount management which enables us to negotiate better trade terms with suchcustomers.

**Customerbase and pricing**

We distribute our products through avariety of channels, including independent distributors and wholesalers,supermarket chains, small- and medium-sized grocery stores,open-air markets and restaurants. As a percentage of total revenue during 2005,in terms of product value, approximately 66% of our dairy products, 81% of ourbeverage products and 43% of our baby food products were sold through independentdistributors and wholesalers; approximately 26% of our dairy products, 12% ofour beverage products and 18% of our baby food products were sold throughsupermarket chains by direct delivery; approximately 3% of our dairy products,2% of our beverage products and 3% of our baby food products were sold throughdirect delivery to retailers other than supermarket chains; and approximately5% of our dairy products, 5% of our beverage products and 36% of our baby foodproducts were sold through other channels, including hotels, restaurants,schools, airlines, milk kitchens (for baby food) and other establishments.

Our general distribution strategy for dairyproducts is to increase the share of direct distribution to retail chains suchas supermarket chains, grocery shops and restaurants while maintaining ourrelationships with independent distributors. Increased direct distribution toretailers allows for greater flexibility with short-lived dairy productsand should improve gross margins and increase our marketing potential, althoughdirect distribution will also result in higher transportation and sales costs.To this end, we have expanded our proprietary distribution network.

Our distribution strategy for beverageproducts is to sustain and enhance our relations with independent distributors,with whom we have generally developed long-standing, beneficial relationships.

Our distribution strategy for baby foodproducts is to actively develop our regional sales with a focus on Russia’slargest cities and population centers with relatively high income levels byincreasing sales through retail chains and independent producers. We are alsoseeking to actively develop sales to government-funded welfare programs, suchas milk kitchens that provide baby food products to families with infantsduring the child’s first two years of life.

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***Independent distributors.******  ***As a percentage of our total sales during 2005, in terms of productvalue, we sold approximately 66% of our dairy products, 81% of our beverageproducts and 43% of our baby food products through large networks ofindependent distributors, structured as follows:

·       As of December 31,2005, our dairy distribution network consisted of six large independentdistributors in Moscow and one independent distributor in the Moscow region.All of our dairy distributors in Moscow distribute only our products and do notdistribute the dairy products of our competitors. We also implemented asegmentation program among the six Moscow distributors whereby each distributorcontrols the distribution of a particular segment or segments of the dairyproduct market and distributes in accordance with our unified pricing scheme.In St. Petersburg and the surrounding areas, we have three large independentdistributors who purchase products from us in accordance with the segmentationprogram, and we plan to expand this structure and our distributors to cover theentire Northwest region. We believe that this strategy increases the qualityand efficiency of distribution while allowing distributors a larger financialstake and incentive to operate high-quality distribution channels. As of December 31,2005, we had approximately 240 independent dairy distributors throughoutRussia.

·       As of December 31,2005, our beverage product distribution network consisted of 16 affiliateoffices throughout Russia which, in turn, work with more than 160 independentdistributors throughout their respective territories. In Moscow, for example,our distribution affiliate office worked with four local independentdistributors. We have reduced the number of distributors we work with andbroadened the scope of sales made through the distributors to include sales tosub-distributors, wholesalers and small retailers. In Moscow, our independentdistributors act principally as logistical coordinators, as our salesrepresentatives work directly with retail outlets and other customers in makingsales but rely on the distributors to execute the orders through delivery andpayment collection. Outside of Moscow, we rely more heavily on our independentdistributors to make sales in addition to coordinating payment and deliverylogistics. Some of our beverage distributors have teams devoted exclusively tothe sale and distribution of our products, with such teams compensated by usand the relevant distributor.

·       As of December 31,2005, our baby food product distribution network consisted of eight independentdistributors in Moscow and the Moscow region and 27 distributors covering theCentral and Ural regions. In other regions we used distributors that work withour dairy division.

A number of independent distributors with whomwe work purchase both dairy and beverage products from us. We offer ourindependent distributors certain discounts off our base prices. A long-termtariff plan is developed with each independent distributor that provides theterms of the discount and deferred payment plans. The terms of these tariffplans may be adjusted from time to time based on the performance of adistributor.

Independent distributors purchase directlyfrom us and then resell our products through their own distribution centers.Given the importance of these customers, we process orders from independentdistributors relatively quickly. The Lianozovo Dairy Plant computer centerlaunched its Internet order system in January 2000, and all orders by ourdairy product distributors in Moscow and the Moscow region are now placedthrough the Internet. In 2001, we started to use an automated order system withall of our independent distributors who purchase our products in large volumes,and in 2002, we began using this automated order system with our smallerindependent distributors as well.

During 2004, we worked and invested withour independent distributors in Moscow to establish warehouses andtransportation capable of supporting a “cold supply chain” in order to maintainour products’ integrity, freshness and nutritional value.

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***Supermarketchains.******  ***As a percentageof total sales in 2005, in terms of product value, we sold approximately 26% ofour dairy products, 12% of our beverage products and 18% of our baby foodproducts to supermarket chains in Russia. We believe that the importance ofthese customers will continue to grow in the coming years. Our approach tosupermarket chains is to increase our share in this sector by becoming thesupplier of choice to the major retailers by developing key supplierrelationships and improving customer service standards. We also sell ourproducts to wholesaler Metro, whose customers are mainly small- andmedium-sized businesses that purchase our products in bulk for resale oreveryday business use. Similar to independent distributors, supermarket chainsreceive a discount based on the volumes they purchase during each month. We aimto maintain retail price control with supermarkets in the same manner as withindependent distributors.

We have several field sales managersthroughout Russia who personally monitor the inventory of our dairy products atsupermarket chains and work closely with stores’ dairy product mangers inplacing orders to ensure consistent inventory and allow us to execute ordersexpeditiously and efficiently.

While relationships with supermarket chainsare currently beneficial for us, we expect that the growth of certain chainsand consolidation of market power may increase the bargaining power of some ofthese customers. For example, some Russian supermarket chains have, from timeto time, created informal alliances in an attempt to obtain greater pricediscounts from manufacturers. We do not intend to seek or sustain inefficientsales volumes and may withdraw from unprofitable business relationships. See “Item3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—Oursubstantial reliance on independent retailers and independent distributors forthe distribution of our products could lower our turnover and reduce ourcompetitiveness.”

***Directsales.******  ***As a percentageof total sales in 2005, in terms of product value, we sold approximately 3% ofour dairy products, 2% of our beverage products and 3% of our baby foodproducts by direct sales to retailers other than supermarket chains. We have adedicated sales force whose responsibility includes managing our relationshipswith small- and medium-sized grocery stores and open-air marketretailers. These retailers are charged our base price for our products. Whilewe do not have any formal programs to monitor the retail prices charged bythese entities, we encourage them to follow our pricing guidelines.

***Other sales.******  ***We are a supplier of McDonald’s restaurants in Russia. Under ouragreements with McDonald’s, we supply sterilized milk in two liter packagingfor sale under the “McDonald’s” brand in their restaurants. We also sell ourjuice products directly to certain airlines, restaurants, schools, hotels andother establishments, while our baby food products are primarily sold to milkkitchens in Moscow pursuant to the terms of a Moscow City Government tender. Asa percentage of total sales in 2005, in terms of product value, we soldapproximately 3% of our dairy products, 5% of our beverage products and 36% ofour baby food products to these other customers.

**Transportation**

We sell fromour plant warehouses, distribution centers or through direct delivery. Wedeliver our products to customers directly using third-party truck andrailway delivery services and our own truck fleet. We do not charge ourcustomers a delivery fee for the shipment of products to our regionaldistribution centers, though a delivery fee may be assessed for the delivery toa customer from such distribution centers.

**Exportprogram**

We began exporting our juice products, inparticular our “Wonder Berry” brand traditional berry-juice drinks, toWestern markets in 1999, mainly focusing on Russian communities abroad. Weselected this product because of its distinctiveness and the opportunity itpresented to take advantage of the expansion of the red-berry juice market inEurope.

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We currently export our juice products tothe United States, Canada, Australia, Israel, Latvia and Lithuania. Our juiceproducts are distributed in these countries through independent distributorsand are sold in various national and multinational retail chains. Our productsare also exported and sold through various sales channels in CIS countries suchas Georgia, Armenia, Azerbaijan and Moldova, and we further developed ourdistribution channels, marketing efforts and sales in Belarus during 2005. Wealso export our “Essentuki” brand mineral water products, principally to theUnited States, Canada and Moldova. Our beverage export sales totaledapproximately $2.5 million in 2003, $2.6 million in 2004 and $3.0 millionin 2005.

We export dairy products to Germany,Belarus, Azerbaijan, Georgia, Moldova, Turkmenistan and Lithuania. Our dairyproducts are distributed in these countries through independent distributors,and our dairy export sales totaled approximately $2.1 million in 2003, $2.5million in 2004 and $4.2 million in 2005.

At the end of 2005, the Tsaritsino DairyPlant received a license to export dairy products to the EU. During thelicensing process, all of the plant’s equipment and production, technologicaland control processes were inspected to ensure compliance with internationalnorms and standards. The Lianozovo Dairy Plant received a similar license in2004 and currently exports dairy products to the Baltic States and Germany.

We routinely participate in trade shows inforeign countries and work with foreign distributors on promotional campaignsand product tastings. We also engage in market tests and market research in, aswell as one-off deliveries to, foreign countries in order to determine futurepotential markets. We are a three time recipient, most recently in 2005, of “TheBest Industry Sector Exporter” award from the Trade and Economic Council of theRussian Ministry of Economic Development.

In exportingour products to a country, we attempt to meet the applicable legislationgoverning the import of food products into the country. Independentdistributors have, in some cases, attempted to export products to othercountries that did not meet applicable legislation. For instance, anindependent distributor attempted to export several of our juice products intothe U.S. which did not conform to Federal Drug Administration requirements in October 2000.

**Productionand raw materials**

**Productionefficiency and quality**

In addition to compliance with the relevantRussian quality standards, we attempt to ensure that our products conform tothe quality standards of organizations such as the World Health Organization, l’AssociationFrancaise de Normalisation and the Food and Agricultural Organization, as wellas the regulations of the European Union. We are also a member of theInternational Federation of Fruit Juice Producers, the Russian Union of JuiceManufacturers and the Russian Dairy Union. Additionally, we assist relevantRussian government agencies in initiating and developing correspondingregulations for the Russian market.

In developing new types of products, wecooperate closely with the Institute of Nutrition of the Russian Academy ofMedical Sciences, Moscow State University of Food Production and theGFL-Laboratory in Berlin, Germany. This cooperation has provided our employeeswith scientific advice, solutions to technical problems and on-site training.We also work closely with several multinational raw material and additivesuppliers in order to benefit from their collective technical expertise inrelation to our new product development and evolving quality standards.

We have our own research laboratory with ateam of scientists and experts. Samples of all our primary ingredients andsamples of our final products undergo microbiological analysis and in-depthtesting. In addition, we have laboratories at all of our plants that performquality checks on our products at all stages, 

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includingquality checks on the raw milk supplied by dairies to us, the materials at ourproduction facilities and the finished products in our warehouses.

We have been upgrading and expanding ourfacilities with advanced technological engineering. Our significant investmentsin manufacturing have helped enable our products to compete with those ofleading domestic and international manufacturers. For example, at the Lianozovoand Tsaritsino Dairy Plants, we installed new equipment improving the qualityof raw milk used in production; at the Timashevsk Dairy Plant, we installed anautomatic system controlling production processes; and at the Vladivostok DairyPlant, we modernized the water purification system. Additionally, thereconstruction of the Moscow Baby Food Plant and installation of new productionlines there have allowed us to improve the quality of the products produced atthis plant. All the lines at the Moscow Baby Food Plant are now equipped withaseptic technology. The method of ultrafiltration we use at this plant alsoallows us to produce a children’s cheese paste which retains its mostbeneficial nutrient, serum protein, giving it a higher nutritional value thansimilar products manufactured at other dairy plants.

In 2003, we installed new yogurt, cottagecheese and dessert production and packaging systems at the Kharkov andTimashevsk Dairy Plants; high-speed ultra clean bottling lines for milk, kefirand drinking yogurts at the Lianozovo, Kiev and Timashevsk Dairy Plants;cottage cheese dessert packaging lines at the Lianozovo Dairy Plant; and newpackaging lines at the Tsaritsino Dairy Plant.

In 2004, we continued to modernize theLianozovo Dairy Plant and installed new aseptic Tetra Pak lines for packagingcream, chocolate and fruit milk, as well as a new line for packaging freshdairy products such as kefir, ryazhinka and drinking yogurts. We alsomodernized the production line for soft cottage cheese. At the Tsaritsino DairyPlant, we added 2 new lines for packaging sour cream, an aseptic line forproducing milk and a new line for bottling Imunele. At the Baltic Milk dairyplant in St. Petersburg, we installed a production line for glazed curds withbiscuits, and completed the installation of cheese production lines at the Ufa,Rubtsovsk and Timashevsk Dairy Plants. The latter was also equipped with a newTetra Fina machine. The Siberian Milk Dairy Plant was modernized with a newproduction line for glazed curds and a packaging line for Twist Cap packaging.We also installed a Procomac-brand juice line in order to make juice-containingdrinks with pieces of real fruit under the “J-7” brand bottled in PETbottles.

During 2005, we continued to modernize theLianozovo and Tsaritsino Dairy Plants by upgrading acceptance workshops,broadened our cheese production capacity at the Rubtsovsk Dairy Plant in orderto satisfy the growing demand for our hard cheese products and added a newproduction line for porridges and processed cheese at the Timashevsk DairyPlant. At the Tsaritsino Dairy Plant, we installed new production lines foryogurt in unique packaging with a spoon attached and a new production line fora smoothie beverage sold under our new “La Fruit” brand. At the Vladivostok DairyPlant, we installed three juice production lines to produce “Lovely Garden” and“J-7” juice products.

We have uniform quality standards for allour enterprises. When we enter regional markets, we seek to raise the standardsof consumption to a higher level by offering a wide range of quality productsat reasonable prices. We also aim to offer products in consumer-friendlyand innovative packaging across a range of market sectors.

We also seek tomake efficient use of our milk supply and handle surplus raw milk resultingfrom seasonal differences in supply by processing this milk into longer-lifeproducts such as milk powder and butter. Our ability to handle these imbalancesin supply is important for cost-effective purchasing of raw milk throughout theyear and maintaining our relationships with suppliers.

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**Food rawmaterials**

The mainraw materials we use in our production include the following:

·       raw milk,which we generally obtain from domestic farmers;

·       powdermilk, which we generally obtain from small domestic producers or import;

·       bacteriacultures, which we generally import, although we have begun to develop our owncultures;

·       flavoringsand sweeteners, which we generally import;

·       juiceconcentrate and juice puree, which we primarily import, but also purchasedomestically; and

·       otheringredients such as frozen fruits and stabilizers.

The prices of each of the foregoing rawmaterials are generally volatile.

Our purchasing policy is to increase theshare of locally produced food raw materials that satisfy our qualitystandards. We have focused on developing partnerships with established leadersin the field of local food production, including the leading Russian raw milk,powder milk, fruit and sugar producers. In each region where we require raw milk,we establish direct supply contracts with local individual farmers andcollective farms.

We have also begun entering into morepurchasing arrangements with Russian suppliers of raw materials in the juicesector, and in 2002, we acquired Depsona (since renamed Fruktopak), a fruitjuice and concentrate producer in Central Russia. We purchase substantially allof our raw materials directly and do not engage in a significant amount ofbarter transactions.

We also purchase certain raw materials suchas bacteria cultures, juice concentrates and flavors from foreign manufacturerswhen products of appropriate quality are not available locally. We use qualityraw materials supplied by producers from approximately 25 countries such asCargill (United States), Cutrale (Brazil), Danisco (Denmark), Chr. Hansen(Denmark), Givaudan (Germany), Hahn (Germany) and Firmenich (Switzerland). Ourflagship “J-7” juice line was created with consulting assistance fromCargill, the world’s largest supplier of juice concentrates.

With the aim of ensuring a stable supply ofraw milk at reasonable and forecasted prices, ensuring consistent quality ofmilk and balancing out seasonality, we are moving towards long-term milk supplycontracts, leasing milking and refrigeration equipment to local producers,providing selected local milk producers with working capital loans orguarantees, assisting with long-term subsidized bank financing arrangements,contracting directly with farmers and avoiding middlemen and working with thestate authorities that regulate this sector. We also created a separate “Agro”business unit in 2004 for the purpose of buying and managing a select number ofdairy farms in certain Russian regions with the aim of developing a guaranteedsupply of raw milk at stable prices for use by our dairy division.

***“MilkRivers” program.***   We havestrengthened our position in the dairy market by developing our own network ofraw material suppliers, in significant part through investments that supportagricultural producers. Our investment in these programs totaled approximately$1.9 million in 2005.

In the summer of 1999, we merged andformalized these programs under our “Milk Rivers” program (referred to as “DairyRivers” in the notes to our financial statements included elsewhere in thisdocument), through which we provide local dairies with trade loans, feed, andleased combines and milking and refrigeration equipment. In selecting dairiesto participate in this program, we choose only those that seek to increase thequality of their products and raise the productivity of their herds. We alsolook for producers that can help balance out the seasonality in raw milkproduction volumes.

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Under the Milk Rivers program, we haverented advanced German and Swedish milking, feed production, feed-chopping andrefrigeration equipment for periods from three to eight years to approximately90 agricultural enterprises located in the Moscow and nearby regions, includingthe Voronezh and Nizhny Novgorod regions. The lease receivables are offset withmilk supplies based on a predetermined schedule during the lease term. Thelease receivables are denominated in U.S. dollars and Russian rubles. Thelessees have the option to settle receivables through the delivery of milksupplies based on a predetermined schedule. The settlement is based on milkprices that are valued either in rubles or in U.S. dollars in the range of$0.19 to $0.29 per liter, depending upon the quality, which approximates theaverage cash prices at the inception of the lease, or is variable dependentupon prevailing market prices. Equipment leased out to farms includes milkingand refrigeration equipment for accelerated milk freezing and the temporarystorage of milk at farms, and mangers and other technical devices that increasethe productivity of farms. The type of equipment provided depends on the needsof each particular farm. We have also set up a service center to assist theparticipants in keeping the leased equipment in good repair.

Under the Milk Rivers program, we alsoprovide loans to Milk Rivers dairy producers for the purchase of dairy cattle.We have also offered seminars and lectures to our Milk Rivers programparticipants to help them improve the quality of the milk they produce.

We plan to eventually expand the scope ofthis program to other regions of Russia.

***Otherinitiatives.***   A key factorfor enhancing milk productivity of a herd and increasing milk quality is theavailability of a good feed base. This particular problem has been one of themost important in recent years and arose because of harvesting problemsderiving from a lack of modern harvesting machinery. For this reason, thesecond stage of the Milk Rivers program has entailed providing a number of theparticipating agricultural enterprises with new fodder-harvestingmachines. German company Doppstadt, through its joint-venture in St.Petersburg, has become our partner in this project.

We believe thatproviding dairies with wholesome, well-balanced compound animal fodder isessential for increasing the productivity of dairy herds, especially in thewinter. We have been working with select farms and fodder producers since 1999.As with the Milk Rivers program, payment for the fodder is made with milksupplies. The offset milk price is in a range which approximates average cashprices for milk.

**Seasonality**

The demand for our dairy products issignificantly higher during the winter months, when Russian raw milk productionis at its lowest. Conversely, during the summer months, we generally experiencedepressed demand for dairy products, while raw milk production is at its peak.To address these seasonal demands, we have commenced and expanded theproduction of powder milk at some of our dairy production facilities for use inproduction during the winter months, and currently produce powder milk at fiveof our plants: Buryn Powder Milk Plant, Karasuk Dairy Plant, Annino DairyPlant, Veidelevka Dairy Plant and Tuimazy Dairy Plant.

The demand for our juice productstraditionally peaks during April through May and in December. Webelieve that the high demand during April through May is related tothe public’s heightened desire for vitamin-rich food and drink products duringthe transition from winter to spring, and that the high demand in December isrelated to increased juice consumption during the holidays.

The demand for both dairy and juiceproducts in southern Russia rises in the summer due to an increase in thenumber of tourists.

Sales ofcertain baby food products are affected by seasonal factors. In particular,sales of juice and purees for babies are typically 10-15% higher duringthe summer months, while sales of liquid dairy baby 

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productsare typically 5-8% lower in the summer due, in part, to the fact thatmany Russians travel to the suburbs to vacation in the summer and are unable totransport such products, which have short shelf lives.

**Packaging**

Our principal packaging raw materialsinclude materials needed for packaging our dairy and juice products, consistingmainly of composed material, polymeric material and foil. Our principalsupplier of composed material for the production of milk and juice cartoncontainers is Tetra Pak, the world leader in manufacturing equipment andmaterials for aseptic packaging of liquid food products. Tetra Pak suppliedapproximately 58.6% of our total packaging materials in 2005 (including carton,plastic, foil and other materials), and we are substantially dependent uponthis packaging supplier to meet our requirements. As a major Russian consumerof Tetra Pak products, we have annual contracts with Tetra Pak, which suppliesus from its Russian plants as well as from its other European plants. SeeNote 27 to our Consolidated Financial Statements included under “Item 18.Financial Statements.”

We haveestablished similar relationships with companies such as SIG Combibloc andElopak. As part of our strategy to increase locally produced raw materials, weare developing relationships with Russian manufacturers of packaging materials,in particular with companies such as Stora Enso Pachaging, Arhbum, Polimer,Formoline, Formaplast, Eximpack, Crownpack and Lukoil-Neftekhim. We have begunusing more plastic packaging for our products, and installed new plastic milkbottling lines at the Lianozovo Dairy Plant and Moscow Baby Food Plant during2003 and at the Timashevsk, Kiev and Siberian Dairy Plants in early 2004.

**Trademarksand Patents**

We haveregistered brand names and trademarks throughout Russia and in other countries.We keep track of our intellectual property and monitor the protection of ourbrand names and instances of copyright infringement in Russia and the CIS. Theextent to which we seek protection of our trademarks outside of Russia and theCIS depends on the significance of the brand and jurisdiction concerned. Thebrand names listed above under “—Our products and brands—Dairy products andbrands” and “—Our products and brands—Beverage products and brands,” which wehave registered in Russia, are material to us. We also own several licenses,patents and proprietary recipes, know-how and technologies related to ourproducts and processes. See “Item 3. Key Information—D. Risk Factors—RisksRelating to Our Business and Industry—We may not be able to protect ourintellectual property rights adequately, resulting in material harm to ourfinancial results and ability to develop our business” for a description of therisks related to the protection of our trademarks.

**Insurance**

We maintainproperty insurance coverage for our 18 major facilities, including LianozovoDairy Plant, Tsaritsino Dairy Plant, Moscow Baby Food Plant, Ramenskiy Plant,Timashevsk Dairy Plant, Ufa Dairy Plant, Kiev Dairy Plant, Kharkov Dairy Plant,Bishkek Dairy Plant, Siberian Dairy Plant, Vladivostok Dairy Plant, Fruktopak,Nizhny Novgorod Dairy Plant, Rubtsovsk Dairy Plant, Healing Springs, ValdaiSprings Water Plant, Baltic Milk and our warehousing facility Roselectrocenter.The coverage is a standard “All Risks” insurance package covering the mostvaluable equipment at these facilities with total coverage of $364 million. Wehave insurance for business interruption at five major facilities with totalcoverage of $55 million. We had product liability insurance for 17 of ourfacilities with $1 million coverage per facility as of December 31, 2005.In January 2006, our product liability insurance was increased to cover 23facilities with cumulative coverage of $5 million. Until we obtain insurancecoverage for an amount exceeding the carrying value of our property, plant andequipment, there is a risk that the loss or destruction of certain assets couldhave a material adverse effect on our operations and financial position. See “Item3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—Wedo 

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notcarry the types of insurance coverage customary in other more economicallydeveloped countries for a business of our size and nature, and a significantevent could result in substantial property loss and inability to rebuild in atimely manner or at all.” See Note 29 to our Consolidated Financial Statementsincluded under “Item 18. Financial Statements.”

**Environmentaland Product Liability**

We are subject to the requirements ofenvironmental laws and regulations. While we devote resources designed tomaintain compliance with these requirements, we cannot assure you that weoperate at all times in complete compliance with all such requirements. Wecould be subject to potentially significant fines and penalties for anynoncompliance that may occur. See “Item 3. Key Information—D. Risk Factors—RisksRelating to Our Business and Industry—Failure to comply with existing laws andregulations or the findings of government inspections, or increasedgovernmental regulation of our operations, could result in substantialadditional compliance costs or various sanctions which could materiallyadversely affect our business, financial condition, results of operations andprospects.”

We also face aninherent business risk of exposure to product liability claims in the eventthat consumption of our products results in personal illness or death, and wecannot assure you that we will not experience any material product liabilitylosses in the future. In addition, if any of the products we have produced aredetermined to be unsuitable for consumption, we may be required to participatein a recall involving such products. We have not had any significant historicalexperience of such claims and are unaware of any potential unasserted claims.See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business andIndustry—Failure to comply with existing laws and regulations or the findings ofgovernment inspections, or increased governmental regulation of our operations,could result in substantial additional compliance costs or various sanctionswhich could materially adversely affect our business, financial condition,results of operations and prospects” and “Item 3. Key Information—D. RiskFactors—Risks Relating to Our Business and Industry—Independent distributorsmay export our products to countries where such products do not meet therequirements of applicable legislation. The consequent recalls of our productsand the associated negative publicity may adversely affect our reputation inthe Russian Federation, the CIS and abroad, and adversely affect our results ofoperations.”

**Regulation**

Production,sale and distribution of food and beverages in the Russian Federation isregulated by general civil legislation and by special legislation that includesquality standards and various safety and sanitary rules.

**GovernmentEntities Involved**

Aside from federal executive bodies andtheir structural subdivisions that have authority over general issues, such asdefense, internal affairs, security, border service, justice, tax enforcementand rail transport, there are a large number of government agencies directlyinvolved in regulating and supervising the quality and safety of food in theRussian Federation.

*The Ministry of Health Protection and Social Development.**  *ThisMinistry is authorized to issue regulations in various areas, including withrespect to sanitary and epidemiological safety and consumer rights protection.The Ministry supervises and coordinates its subordinates bodies, including,among others, the Federal Service for Supervision in the Area of Protection ofConsumer Rights and Human Welfare.

*The Federal Service for Supervision in the Area of Protection ofConsumer Rights and Human Welfare.**  *This Service isthe principal federal body authorized to supervise sanitary and epidemiologicalissues in the Russian Federation. The Service enforces sanitary-epidemiologicalrules (which include sanitary rules, 

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sanitarystandards and hygienic requirements), monitors the sanitary conditions ofproduction sites and equipment, fulfillment of sanitary standards for rawmaterial and finished product storage at manufacturing plants, compliance withsanitary standards for the storage and sale of food products, their quality andsafety at wholesale and retail outlets and businesses catering to the public.The Service also carries out inspections of sellers’ premises.

*The Federal Agency for Technical Regulation and Metrology.**  *ThisAgency manages government property in the sphere of technical regulation andmetrology. On a temporary basis, until such functions are transferred to otherfederal authorities, the Agency oversees compliance with obligatory general andindustrial standards. This Agency is subordinated to the Ministry of Industryand Energy.

*The FederalService for Veterinary and Fito-Sanitary Supervision.**  *ThisService supervises the sanitary safety of raw food materials used in theproduction of food products and beverages where such raw food materials arederived from animals.

**ApplicableFood and Health Legislation**

Russian legislation regulating quality andsafety of food and beverages includes the following acts:

*The Federal Law on Quality and Safety of Food Products* establishes a general framework for ensuring that food products andmaterials used in their production conform to certain quality, safety andsanitary requirements and provides for the state registration and certificationof food products once they so conform. It also establishes general requirementsfor the manufacturing, packaging, storage, transportation and sale of foodproducts and beverages, and for the destruction of poor-quality and unsafeproducts.

***The Federal Law on the SanitaryEpidemiological Well Being of****People* requires food products and beverages, and the raw materials used intheir production, to meet certain sanitary standards and health requirementsand to have no harmful effects. Products that do not conform to sanitary rules andhealth requirements and represent a danger to consumers must be withdrawnimmediately from production or sale. As a result, the fulfillment of sanitarystandards and health requirements is an obligatory condition for theproduction, import and sale of food and beverage products in the RussianFederation.

*The Federal Law on Technical Regulation* provides for the development, enactment, application andenforcement of obligatory technical requirements and the development ofvoluntarily standards relating to manufacturing processes, operations, storage,transportation, selling and utilization. Until such technical requirements aredeveloped and adopted, the existing standards are mandatory to the extent theyare necessary to secure the protection of safety and health, environmentalprotection and consumers’ rights.

*The Governmental Regulation on Monitoring of Quality and Safety of FoodProducts and Health of People*establishes a procedure for supervising andmonitoring the quality and safety of food products.

*The Government Regulation on State Registration of New Food Products,Materials and Goods*   providesfor the obligatory state registration of certain food products, includingmineral water, baby food and dairy products enriched with vitamins and/or othermicroelements. Food producers intending to develop and offer a new food productto the public are required to file an application for the product’s stateregistration and incorporation into the State Register of Permitted FoodProducts. Such applications are reviewed by the Federal Service for Supervisionin the Area of Protection of Consumer Rights and Human Welfare (together withthe Federal Service for Veterinary and Fito-Sanitary Supervision with respectto products derived from animals) within 40 days of their filing.

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*The Regulationfor the Conduct of Sanitary-Epidemiological Examinations of Products*establishes procedures for the sanitary-epidemiologicalexamination of products. Government bodies that monitor sanitary and healthissues conduct sanitary-epidemiological examinations of samples of eachproduct and issue a conclusion as to whether such product satisfies theprescribed requirements. Products that have not undergone a hygienic evaluationmay not be produced, shipped, used, sold or certified.

A number of other regulations also apply tofood products, including baby food products. For example, requirements for thestorage, production, labeling, transportation and sale of food and beveragesare established by state standards, sanitary rules, hygienic requirements andother regulations.

**RegistrationRequirements**

Certain food and beverage products (such as children’s products,dietary foods, milk products enriched by vitamins and/or other microelements,additives to food and food products manufactured using technologies that havenever been applied in the Russian Federation) must be registered with theRussian government if they are either manufactured in Russia or imported intoRussia for the first time. The regulation makes it illegal to manufacture,import or circulate products that are subject to state registration but havenot been registered.

The product registration process includes:

·       An examination of documents provided by the manufacturer or supplierof the product describing the product, its safety and evidencing its conformitywith applicable rules;

·       Toxicological, hygienic, veterinary and other types of tests ofproducts and, with respect to products manufactured in Russia, an examinationof the manufacturing conditions of such products;

·       Registration of the product, its manufacturer and supplier with theState Register of Food Products maintained by the Federal Agency for HealthProtection and Social Development; and

·       Issuance of a certificate of state registration permitting theproduct to be manufactured, imported or distributed in the Russian Federation.

The state registration of products iscarried out by the Federal Service for Supervision in the Area of Protection ofConsumer Rights and Human Welfare (together with the Federal Service forVeterinary and Fito- Sanitary Supervision with respect to products derived fromanimals).

**Certification**

The certification of products and servicesis currently regulated by the Federal Law on Technical Regulation. Productcertification is a procedure whereby an agency authorized by the governmentconfirms that a product complies with technical regulations, standards andrequirements. Milk products, juice, certain water products and other beveragesare subject to mandatory certification. Conformity symbols evidencing that themanufacturer has undergone certification procedures are required to be printedon a product’s packaging. Failure to mark a product with a required conformitysymbol carries possible administrative sanctions.

**Bulk Purchaseof Raw Milk**

A supplier of raw milk must provide acertificate stating that the farm from which it originated has passed a healthinspection. Milk bought in bulk must also conform to requirements with respectto temperature, color, sedimentation, content of neutralizers, heavy metals,density, protein content, fat content, alcohol content and othercharacteristics.

**Production andTransportation**

Laboratory employees and technical specialists must verify that thecondition of equipment, implements, raw materials and packaging conform tosanitary requirements. For example, in the course of 

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manufacturing, microbiological tests mustbe conducted of samples of raw materials, packaging and products. Products aretested for their content of chemical pollutants, toxins, medicinal and hormonalpreparations, radionuclides and pathogenic microorganisms. They are also testedto identify bacteria, yeast and mold content, and to determine their sterilityand the effectiveness of the pasteurization process. Products are also examinedto determine the amounts of certain nutrients they contain, including protein,fat, vitamins and carbohydrates. In addition, the cleanliness of the factory,storage conditions and employees must be monitored.

Food products and beverages must betransported in specially equipped vehicles, for which sanitary registrationdocuments must have been issued.

**PackagingMaterial and Labeling Requirements**

Manufacturers and suppliers of all types of packaging materials used inthe production of dairy and juice products must provide certificates ofconformity and sanitary-epidemiological certificates for packagingmaterials showing that the packaging materials are permitted and safe forcontact with the food products.

The Law on the Protection of Consumers’Rights and the Law on Quality and Safety of Food Products determine the scopeand format of the information that should be made available to consumers.According to these laws and other applicable national standards, the packagingof finished products must contain the following information: the name of theproduct, information regarding its certification, conditions of use (ifnecessary), contraindications (if any), preservatives and food additives, netmass or volume, ingredients, nutritional value, conditions of storage, shelf life,name and address of the manufacturer and other information. The law alsoauthorizes a wide range of government and public agencies to monitor producers’compliance with the requirements of the law and imposes sanctions and penaltiesif such requirements are not met.

**SpecialRequirements for Children’s Dairy Products**

The Law on the Quality and Safety of Food Products defines children’sfood products as food products specially designed for children under 14 thatmeet certain nutritional requirements. Such products are subject to morestringent sanitary-epidemiological standards. For example, certainingredients and components are prohibited for use in children’s food products,and the procedures for monitoring raw materials and ingredients used inmanufacturing, technological processes and sanitary conditions of productionare stricter for children’s dairy products than for other dairy products.Laboratory analyses and tests must be conducted for a broader list ofmicrobiological indicators. Packaging materials for children’s dairy productsmust be certified for use with children’s products. Children’s dairy productsare also subject to special labeling requirements. For example, packaging ofchildren’s dairy products must bear information on the purpose and conditionsof use of such products.

Under the new Sanitary Rules onChildren’s Food Products, which became effective on June 1, 2005, thevolume of liquid food product packaging for children under three years oldcannot exceed 0.35 liter. In addition, such products may be produced only byseparate specialized factories or manufacturing lines that are subject tospecial certification.

**Competition andPricing**

The Federal Antimonopoly Service is thegovernmental agency that regulates the prevention and limitation ofmonopolistic activity and the support of competition in the market. The RussianLaw on Competition and Restriction of Antimonopoly Activity on CommodityMarkets prohibits the abuse of a dominant position to limit competition. Oursubsidiary, the Moscow Baby Food Plant, has been included in the register ofentities holding a significant share of the market, as the plant controlsapproximately 96% of the market for milk products for babies in Moscow and theMoscow region in volume terms and 56% of the total baby food market in Moscowand the Moscow region in volume terms. Inclusion in this register 

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does not imposeadditional reporting or other requirements on us; however, because of oursignificant position, the Federal Antimonopoly Service monitors our activitiesand we are required to notify the Federal Antimonopoly Service and/or apply forits prior approval for the acquisition of other companies.

***C.   Organizational Structure***

The following table sets out our primary production subsidiaries, theircountries of incorporation and our aggregate beneficial ownership interest andvoting interest in each subsidiary as of June 1, 2006.
| Plant                                                            | ** ** | ** ** | ** ** | **Beneficial  Ownership** | ** ** | **Voting  Interest** | ** ** | **Country of  Incorporation** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|---------------------------|------------|----------------------|------------|------------------------------------|------------|
| Lianozovo  Dairy Plant                                           |       |       | 98.02      | %                         |       | 98.31                | %          | Russian  Federation                |       |
| Annino  Dairy Plant                                              |       |       | 99.58      | %                         |       | 100.00               | %          | Russian  Federation                |       |
| Tsaritsino  Dairy Plant                                          |       |       | 97.64      | %                         |       | 98.91                | %          | Russian  Federation                |       |
| Vladivostok  Dairy Plant                                         |       |       | 99.78      | %                         |       | 99.83                | %          | Russian  Federation                |       |
| Karasuk  Dairy Plant                                             |       |       | 92.69      | %                         |       | 93.80                | %          | Russian  Federation                |       |
| Ufa  Dairy Plant                                                 |       |       | 96.47      | %                         |       | 97.82                | %          | Russian  Federation                |       |
| Siberian  Dairy Plant                                            |       |       | 87.14      | %                         |       | 88.90                | %          | Russian  Federation                |       |
| Nizhny  Novgorod Dairy Plant                                     |       |       | 96.40      | %                         |       | 97.43                | %          | Russian  Federation                |       |
| Rubtsovsk  Dairy Plant                                           |       |       | 98.02      | %                         |       | 100.00               | %          | Russian  Federation                |       |
| Kiev  Dairy Plant                                                |       |       | 98.43      | %                         |       | 98.50                | %          | Ukraine                            |       |
| Timashevsk  Dairy Plant                                          |       |       | 98.83      | %                         |       | 99.40                | %          | Russian  Federation                |       |
| Moloko  Veidelevki                                               |       |       | 98.02      | %                         |       | 100.00               | %          | Russian  Federation                |       |
| Novokuibyshevsk  Milk                                            |       |       | 85.40      | %                         |       | 87.13                | %          | Russian  Federation                |       |
| Buryn  Powder Milk Plant                                         |       |       | 76.00      | %                         |       | 76.00                | %          | Ukraine                            |       |
| Tuymazinskiy  Dairy Plant                                        |       |       | 85.00      | %                         |       | 85.00                | %          | Russian  Federation                |       |
| Bishkek  Dairy Plant                                             |       |       | 96.09      | %                         |       | 96.09                | %          | Kyrgyz  Republic                   |       |
| Baltic  Milk (formerly Roska)                                    |       |       | 100.00     | %                         |       | 100.00               | %          | Russian  Federation                |       |
| Gulkevichy  Dairy Plant                                          |       |       | 52.27      | %                         |       | 52.27                | %          | Russian  Federation                |       |
| Kharkov  Dairy Plant                                             |       |       | 99.94      | %                         |       | 99.94                | %          | Ukraine                            |       |
| WBD  Tashkent                                                    |       |       | 100.00     | %                         |       | 100.00               | %          | Republic of  Uzbekistan            |       |
| Nazarovskoe  Milk                                                |       |       | 63.53      | %                         |       | 63.53                | %          | Russian  Federation                |       |
| Obninsk  Dairy Plant                                             |       |       | 66.33      | %                         |       | 66.33                | %          | Russian  Federation                |       |
| Pervouralsk  City Dairy Plant                                    |       |       | 96.47      | %                         |       | 100                  | %          | Russian  Federation                |       |
| **Baby Food plants**                                             |       |       |       |                      |       |                 |       |                               |       |
| Moscow  Baby Food Plant                                          |       |       | 97.34      | %                         |       | 97.34                | %          | Russian  Federation                |       |
| Experimental  Baby Food Plant                                    |       |       | 100.00     | %                         |       | 100.00               | %          | Russian  Federation                |       |
| **Beverage plants**                                              |       |       |       |                      |       |                 |       |                               |       |
| Ramenskiy  Plant(1)                                              |       |       | 94.77      | %                         |       | 96.68                | %          | Russian  Federation                |       |
| Valdai  Springs Water Plant                                      |       |       | 100.00     | %                         |       | 100.00               | %          | Russian  Federation                |       |
| Healing  Springs Water Plant                                     |       |       | 100.00     | %                         |       | 100.00               | %          | Russian  Federation                |       |
| Essentuki  Mineral Water Plant at CMW (Caucasian Mineral Waters) |       |       | 100.00     | %                         |       | 100.00               | %          | Russian  Federation                |       |
| **Farms**                                                        |       |       |       |                      |       |                 |       |                               |       |
| Trud  OJSC                                                       |       |       | 67.95      | %                         |       | 67.95                | %          | Russian  Federation                |       |
| Atamanskoe  Farm                                                 |       |       | 98.21      | %                         |       | 99.38                | %          | Russian  Federation                |       |
| Plemzavod  Za Mir and Trud                                       |       |       | 98.65      | %                         |       | 100.00               | %          | Russian  Federation                |       |
| Zavety  Ilyicha                                                  |       |       | 98.18      | %                         |       | 99.34                | %          | Russian Federation                 |       |

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(1)          Fruktopak merged into Ramenskiy Plant in 2006.

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***D.   Property, Plants and Equipment***

**Productionfacilities**

We currently manufacture our products at 30production facilities, including 23 plants that principally produce dairyproducts, two baby food plants, two plants that produce exclusively juiceproducts and three water production plants. We have made substantialinvestments to maintain and enhance quality, lower costs and increaseproductivity. Over 2003, 2004 and 2005, we invested approximately$284.2 million in the modernization of our existing production facilitiesand acquisitions of new production assets. Our main production plants arecapable of managing the production of a diverse and evolving product range,enabling us to adapt quickly to changes in consumer demand on a seasonal basisor otherwise. We have completed the main phase of our extensive modernizationprogram and have begun cost cutting programs at all of our plants.

We also review our production headcountwith the aim of enhancing productivity. Sales per employee, calculated on thebasis of our total headcount (excluding employees of our “Agro” businessdivision, as its sales and expenses are reported as other operating income andexpenses), which is a common measure of productivity used in the food industry,was $51,192 per employee in 2003, $67,157 per employee in 2004 and $80,304 peremployee in 2005.

In 2003, we worked with an internationalmanagement consulting firm on a training, cost cutting and management programat the Nizhny Novgorod Dairy Plant in an effort to increase revenue peremployee and tons of product produced per production employee per day. We alsoinitiated a restructuring program with the aim of reducing and optimizing ouremployee headcount. As a result, we were able to reduce our employee headcountat our plants during 2005 other than with respect to operations we acquiredduring the second half of 2005, where we are still in the process ofimplementing our restructuring program. We expect to continue to optimize ouroverall employee headcount during 2006.

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The following table contains data regarding our main productionfacilities. It should be noted that raw milk throughput capacity and productionoutput are not identical measures, as different dairy products requiredifferent amounts of raw milk for their production. Product output of a planttherefore depends on the types of products being produced there.
|                                                                           | ** ** | ** **                       | ** ** | ** **      | ** ** | **Production in  2003**                                                               | ** ** | **Production in  2004** | ** ** | **Production in  2005** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------|------------|--------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                | ** ** | ** **                       | ** ** | ** **      | ** ** | **(Amounts in thousands of tons, except for  beverages which are in thousands of liters)** | ** ** |
| ** **                                                                | ** ** | **Year of  Acquisition**(1) | ** ** | **Year  Built** | ** ** | **Dairy**                                                                                  | ** ** | **Beverages**(2)             | ** ** | **Baby  Food**               | ** ** | **Dairy** | ** ** | **Beverages**(3) | ** ** | **Baby  Food** | ** ** | **Dairy** | ** ** | **Beverages**(3) | ** ** | **Baby  Food** | ** ** |
| **Moscow  and Moscow region**                                             |       |                             |       |            |       |                                                                                       |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lianozovo Dairy Plant                                                     |       |                             | 1995       |            |       | 1989                                                                                       |       | 401.5                        |       |                         | 166.7      |   |   |   | — |   |   | 399.3 |   |   | 104.5 |   |   |   | — |   |   | 398.5 |   |   | 43.6 |   |   |   | — |   |   |
| Tsaritsino Dairy Plant                                                    |       |                             | 1996       |            |       | 1975                                                                                       |       | 179.2                        |       |                         | 67.7       |   |   |   | — |   |   | 197.4 |   |   | 57.4 |   |   |   | — |   |   | 210.8 |   |   | 67.3 |   |   |   | — |   |   |
| Moscow Baby Food Plant                                                    |       |                             | 1996       |            |       | 1982                                                                                       |       | 2.3                          |       |                         | —     |   |   |   | 44.4 |   |   | 6.0 |   |   | — |   |   |   | 48.0 |   |   | 3.6 |   |   | — |   |   |   | 52.8 |   |   |
| Ramenskiy Plant                                                           |       |                             | 1997       |            |       | 1982                                                                                       |       | —                       |       |                         | 140.5      |   |   |   | — |   |   | — |   |   | 201.1 |   |   |   |   |   |   |   |   |   | 352.1 |   |   |   |   |   |   |
| **Central Russia (excluding Moscow)**                                     |       |                             |       |            |       |                                                                                       |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Nizhny Novgorod Dairy Plant                                               |       |                             | 1998       |            |       | 1984                                                                                       |       | 51.9                         |       |                         | 0.3        |   |   |   | — |   |   | 58.6 |   |   | — |   |   |   | — |   |   | 64.7 |   |   | — |   |   |   | — |   |   |
| Timashevsk Dairy Plant                                                    |       |                             | 2000       |            |       | 1990                                                                                       |       | 95.1                         |       |                         | —     |   |   |   | — |   |   | 122.1 |   |   | — |   |   |   | — |   |   | 136.6 |   |   | — |   |   |   | — |   |   |
| Ufa Dairy Plant                                                           |       |                             | 2001       |            |       | 1971                                                                                       |       | 50.4                         |       |                         | —     |   |   |   | — |   |   | 68.7 |   |   | — |   |   |   | — |   |   | 69.1 |   |   | — |   |   |   | — |   |   |
| Annino Dairy Plant                                                        |       |                             | 2001       |            |       | 1978                                                                                       |       | 19.1                         |       |                         | —     |   |   |   | — |   |   | 47.4 |   |   | — |   |   |   | — |   |   | 62.0 |   |   | — |   |   |   | — |   |   |
| Novokuybishevsk Milk                                                      |       |                             | 2002       |            |       | 1975                                                                                       |       | 5.5                          |       |                         | —     |   |   |   | — |   |   | 8.5 |   |   | — |   |   |   | — |   |   | 7.1 |   |   | — |   |   |   | — |   |   |
| Baltic Milk (former Roska)                                                |       |                             | 2002       |            |       | 1987                                                                                       |       | 8.7                          |       |                         | —     |   |   |   | — |   |   | 30.4 |   |   | — |   |   |   | — |   |   | 48.9 |   |   | — |   |   |   | — |   |   |
| Fruktopak (formerly Depsona)                                              |       |                             | 2002       |            |       | 1996                                                                                       |       | —                       |       |                         | 20.7       |   |   |   | — |   |   | — |   |   | 41.3 |   |   |   | — |   |   |   |   |   | 8.2 |   |   |   | — |   |   |
| Siberian Dairy Plant                                                      |       |                             | 1998       |            |       | 1961                                                                                       |       | 64.8                         |       |                         | 33.3       |   |   |   | — |   |   | 63.6 |   |   | 22.9 |   |   |   | — |   |   | 65.3 |   |   | 21.9 |   |   |   | — |   |   |
| Gulkevichy Dairy Plant                                                    |       |                             | 2002       |            |       | 1928                                                                                       |       | 2.1                          |       |                         | —     |   |   |   | — |   |   | 1.4 |   |   | — |   |   |   | — |   |   | 0.2 |   |   | — |   |   |   | — |   |   |
| Tuimazy Dairy Plant                                                       |       |                             | 2002       |            |       | 1958                                                                                       |       | 7.8                          |       |                         | —     |   |   |   | — |   |   | 4.9 |   |   | — |   |   |   | — |   |   | 8.3 |   |   | — |   |   |   | — |   |   |
| Valdai Springs Water Plant                                                |       |                             | N/A        |            |       | 2003                                                                                       |       | —                       |       |                         | 5.8        |   |   |   | — |   |   | — |   |   | 3.2 |   |   |   | — |   |   | — | ** ** | ** ** | 3.2 | (3) |   |   | — |   |   |
| Healing Springs Water Plant                                               |       |                             | 2003       |            |       | 1999                                                                                       |       | —                       |       |                         | 0.1        |   |   |   | — |   |   | — |   |   | 5.3 |   |   |   | — |   |   | — | ** ** | ** ** | 8.9 | (3) |   |   | — |   |   |
| Essentuki Mineral water Plant at the  CMW (Caucasian Mineral Waters) |       |                             | 2005       |            |       | 2001                                                                                       |       | —                       |       |                         | —     |   |   |   | — |   |   | — |   |   | — |   |   |   | — |   |   | — |   |   | 4.0 |   |   |   | — |   |   |
| Obninsk Dairy Plant OJSC                                                  |       |                             | 2005       |            |       | 1982                                                                                       |       | —                       |       |                         | —     |   |   |   | — |   |   | — |   |   | — |   |   |   | — |   |   | 12.7 |   |   | — |   |   |   | — |   |   |
| **Asian Russia**                                                          |       |                             |       |            |       |                                                                                       |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Karasuk Dairy Plant                                                       |       |                             | 1999       |            |       | 1952                                                                                       |       | 11.4                         |       |                         | —     |   |   |   | — |   |   | 3.4 |   |   | — |   |   |   | — |   |   | 4.5 |   |   | — |   |   |   | — |   |   |
| Vladivostok Dairy Plant                                                   |       |                             | 1998       |            |       | 1947                                                                                       |       | 13.8                         |       |                         | 7.7        |   |   |   | — |   |   | 13.8 |   |   | 10.5 |   |   |   | — |   |   | 14.5 |   |   | 16.0 |   |   |   | — |   |   |
| Rubtsovsk Dairy Plant                                                     |       |                             | 2001       |            |       | 1954                                                                                       |       | 5.6                          |       |                         | —     |   |   |   | — |   |   | 10.4 |   |   | — |   |   |   | — |   |   | 14.9 |   |   | — |   |   |   | — |   |   |
| **Other CIS countries**                                                   |       |                             |       |            |       |                                                                                       |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Kiev Dairy Plant                                                          |       |                             | 2001       |            |       | 1973                                                                                       |       | 26.1                         |       |                         | 9.8        |   |   |   | — |   |   | 50.5 |   |   | 11.9 |   |   |   | — |   |   | 40.0 |   |   | 1.6 |   |   |   | — |   |   |
| Kharkov Dairy Plant                                                       |       |                             | 2002       |            |       | 1973                                                                                       |       | 32.4                         |       |                         | —     |   |   |   | — |   |   | 46.1 |   |   | — |   |   |   | — |   |   | 53.1 |   |   | — |   |   |   | — |   |   |
| Bishkek Dairy Plant                                                       |       |                             | 2000       |            |       | 1990                                                                                       |       | 14.6                         |       |                         | —     |   |   |   | — |   |   | 20.0 |   |   | 0.2 |   |   |   | — |   |   | 17.3 |   |   | — |   |   |   | — |   |   |
| Buryn Powder Milk Plant                                                   |       |                             | 2002       |            |       | 1974                                                                                       |       | 11.9                         |       |                         | —     |   |   |   | — |   |   | 5.0 |   |   | — |   |   |   | — |   |   | 4.9 |   |   | — |   |   |   | — |   |   |
| Total                                                                     |       |                             |       |            |       |                                                                                       |       | 1004.2                       |       |                         | 452.6      |   |   |   | 44.4 |   |   | 1157.5 |   |   | 458.3 |   |   |   | 48.0 |   |   | 1,237.0 |   |   | 526.8 |   |   |   | 52.8 |   |   |

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(1)          “Acquisition” means the purchase of more than 50% of the issuedshare capital. Only plants acquired by us as of December 31, 2005 areincluded in this table.

(2)          Sales volumes of our juice products exceeded our total juiceproduction volumes in 2003 due to certain co-packing arrangements we had withthird-party juice producers, and in 2004 due to warehouse stock producedin 2003 that was sold in 2004. We purchased 43,432 tons of juice from third-partyjuice producers pursuant to co-packing arrangements in 2003.

(3)          We purchased 2,079 tons and 3,572 tons of water pursuant to certainco-packing arrangements in 2004 and 2005, respectively.

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At December 31,2005, certain of our assets served as collateral for loans from InternationalMoscow Bank, ING-Bank (Eurasia) and Sberbank, as well as for vendor financingobligations, including:

·       Inventory in the amount of $3.4 million; and

·       Property, plant and equipment with a net book value of$49.7 million ($40.4 million of which was collateral related tovendor financing obligations).

***Item 4A.****                 *Unresolved Staff Comments

None.

***Item 5.****                         *Operating and Financial Review and Prospects

*The following discussion of our financialcondition and results of operations should be read in conjunction with ourConsolidated Financial Statements and the related notes included under “Item 18.Financial Statements” and other information in this document. This Item 5contains forward-looking statements that involve risks and uncertainties.Our actual results may differ materially from those discussed in forward-lookingstatements as a result of various factors, including the risks described in “Item 3.Key Information—D. Risk Factors” and under the caption “Cautionary StatementRegarding Forward-Looking Statements.” Our Consolidated FinancialStatements are expressed in U.S. dollars and prepared in accordance with accountingprinciples generally accepted in the United States (“U.S. GAAP”).*

**A.   OperatingResults**

**Overview**

We are one of the largest Russianmanufacturers of dairy and juice products, with sales of $1,399.3 million,$1,189.3 million and $938.5 million in 2005, 2004 and 2003,respectively. Our reportable business segments in 2005 were dairy products,beverage products and baby food products. In 2005, the dairy segment accountedfor 72.0% of our sales, the beverage segment, which includes juice and bottledmineral water products, accounted for 21.7% of our sales and the baby foodsegment accounted for 6.3% of our sales. In 2004, the dairy segment accountedfor 69.2% of our sales, the beverage segment accounted for 25.4% of our salesand the baby food segment accounted for 5.4% of our sales. Our principalgeographic market is Russia, which approximately accounted for 92%, 94% and 94%of our sales in 2005, 2004 and 2003, respectively. However, we also haveproduction facilities in certain CIS countries, including Ukraine, Kyrgyzstanand Uzbekistan.

In 2005, our net income increased to $30.3million from $23.0 million in 2004, an increase of 31.7%, and salesincreased by 17.7%, including sales increases of 22.4%, 0.7% and 35.9% in thedairy, beverage and baby food segments, respectively. By volume, dairy segmentsales were higher by 8.8%, beverage segment sales decreased by 5.7% and babyfood sales increased by 15.5%. In the dairy segment, our gross margin in 2005improved primarily due to a moderate increase in the cost of raw milk comparedto prior years and higher average selling prices due to general price increasesand ruble appreciation. Gross margin was higher in the beverage segment mainlydue to cost control measures, general price increases and ruble appreciationagainst the euro, which had a favorable impact on raw material costsdenominated in euros. Gross margin was higher in the baby food segment due to amoderate increase in the cost of raw milk compared to prior years, higheraverage selling prices as a result of general price increases and a shift inour product mix to include more value-added products. Our selling anddistribution expenses increased in 2005 as compared to 2004 in absolute termsbut decreased as a percentage of sales, from 14.6% to 13.7%. In particular, ourtransportation, personnel and advertising costs were higher in 2005 as a resultof our regional expansion program.

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Over the past three years, we have beenconstructing new capacity, modernizing existing capacity and making strategicacquisitions. Our capital expenditures (excluding acquisitions) in 2005, 2004and 2003 were $75.1 million, $72.6 million and $107.2 million,respectively. Expenditures for acquisitions of subsidiaries in 2005, 2004 and2003 totaled $24.3 million (exclusive of advances made in 2005 for acquisitionscompleted in 2006 but including advances made in 2004 for acquisitions made in2005), $5.3 million (exclusive of advances made in 2004 for acquisitionscompleted in 2005) and $9.9 million, respectively.

At December 31,2005, we had a total of $371.6 million in indebtedness (consisting ofnotes, vendor financings for property, plant and equipment and loans). Of ourtotal indebtedness at December 31, 2005, 52.7% was denominated in U.S.dollars and euros and 47.3% was denominated in rubles.

**OperationalHighlights for 2005**

In 2005, we continued the integration ofour operations, which have grown rapidly in the last few years. In thisconnection, we reorganized our business segments to create a separate baby foodsegment in order to develop our high-margin baby food business whileconsolidating our juice and water business segments to improve the efficiencyof the distribution and administrative functions of our water business. Inaddition to the optimization of our business model and modernization of ourproduction facilities and warehouses, we focused on new and innovative productdevelopment.

Below is a summary of our operational highlights for 2005 and 2006:
| **2005**                        | ** ** | ** **                                                                                                                                                                                                                                     |
|---------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| February                        |       | Completed a modernization project at Kiev City Dairy  Plant No. 3, one of the largest Ukrainian milk processing plants.  As part of this project, a new dietetic products line and compressor  station were put into operation. |
| April,  July and September |       | We acquired the raw milk production companies  Plemzavod Za Mir i Trud, Zavety Ilyicha and Trud Farms in the  Southern and Northwest regions to guarantee a stable supply of raw milk in  these regions.                             |
| July                            |       | We increased our ownership stake in the Obninsk  Dairy Plant in the Central region from  11.6% to 66.3%. The plant produces traditional dairy products.                                                                              |
| July                            |       | We acquired a 100% stake in the Experimental  Baby Food Plant in the Kursk region to increase our baby food production  capacity.                                                                                               |
| October                         |       | We acquired a 100% stake in the Essentuki  Mineral Water plant at CMW (Caucasian Mineral Waters) in the town  of Essentuki in the Stavropol region to increase our mineral water  production capacity.                          |
| December                        |       | Tsaritsino Dairy Plant received a certification to sell  dairy products in the European Union.                                                                                                                                  |
| December                        |       | We acquired a 63.5% stake in Nazarovskoe Milk OJSC in the Krasnoyarsk region to increase  our traditional dairy products production capabilities in the region.                                                                           |
| December                        |       | We acquired a 100% stake in the Pervouralsk City Dairy Plant in the Sverdlovsk region to  explore new dairy markets, increase sales in the region and optimize logistic  expenses.                                                             |
| **2006**                        | ** ** | ** **                                                                                                                                                                                                                                     |
| January                         |       | We increased our aggregate ownership in the Moscow  Baby Food Plant to 97.3%.                                                                                                                                                                  |

 

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**Results ofOperations**

Thefollowing table summarizes the results of our operations for the years ended December 31,2005, 2004 and 2003:
|                                      | ** ** | **2005**                | ** ** | **% of  sales** | ** ** | **2004**                | ** ** | **% of  sales** | ** ** | **2003**                | ** ** | **% of  sales** | ** ** |
|--------------------------------------|------------|-------------------------|------------|----------------------|------------|-------------------------|------------|----------------------|------------|-------------------------|------------|----------------------|------------|
| ** **                           | ** ** | **(in thousands)** | ** ** | ** **           | ** ** | **(in thousands)** | ** ** | ** **           | ** ** | **(in thousands)** | ** ** | ** **           | ** ** |
| Sales                                |       |                    | $          | 1,399,289            |       |                    | 100.0      |                 |       | $                       | 1,189,292  |                 |       | 100.0 |   |   | $ | 938,459 |   |   | 100.0 |   |
| of which:                            |       |                    |       |                 |       |                    |       |                 |       |                    |       |                 |       |   |   |   |   |   |   |
| Dairy                                |       |                    | 1,007,650  |                 |       | 72.0                    |       |                 | 822,908    |                    |       | 69.2                 |       |   | 616,347 |   |   | 65.7 |   |
| Beverage                             |       |                    | 303,797    |                 |       | 21.7                    |       |                 | 301,701    |                    |       | 25.4                 |       |   | 276,025 |   |   | 29.4 |   |
| Baby Food                            |       |                    | 87,839     |                 |       | 6.3                     |       |                 | 64,657     |                    |       | 5.4                  |       |   | 45,956 |   |   | 4.9 |   |
| Cost of sales                        |       |                    | (1,002,246 | )                    |       | 71.6                    |       |                 | (861,662   | )                       |       | 72.5                 |       |   | (665,104 | ) |   | 70.9 |   |
| Gross profit                         |       |                    | 397,043    |                 |       | 28.4                    |       |                 | 327,630    |                    |       | 27.5                 |       |   | 273,355 |   |   | 29.1 |   |
| Selling and  distribution expenses   |       |                    | (191,990   | )                    |       | 13.7                    |       |                 | (173,433   | )                       |       | 14.6                 |       |   | (140,746 | ) |   | 15.0 |   |
| General and  administrative expenses |       |                    | (109,642   | )                    |       | 7.8                     |       |                 | (92,816    | )                       |       | 7.8                  |       |   | (75,973 | ) |   | 8.1 |   |
| Other operating expenses             |       |                    | (7,916     | )                    |       | 0.6                     |       |                 | (8,458     | )                       |       | 0.7                  |       |   | (7,481 | ) |   | 0.8 |   |
| Operating income                     |       |                    | 87,495     |                 |       | 6.3                     |       |                 | 52,923     |                    |       | 4.4                  |       |   | 49,155 |   |   | 5.2 |   |
| Financial income  and expenses, net  |       |                    | (22,868    | )                    |       | 1.6                     |       |                 | (14,618    | )                       |       | 1.2                  |       |   | (15,273 | ) |   | 1.6 |   |
| Provision for  income taxes          |       |                    | (30,712    | )                    |       | 2.2                     |       |                 | (12,170    | )                       |       | 1.0                  |       |   | (10,717 | ) |   | 1.1 |   |
| Minority interest                    |       |                    | (3,649     | )                    |       | 0.3                     |       |                 | (3,161     | )                       |       | 0.3                  |       |   | (2,012 | ) |   | 0.2 |   |
| Net Income                           |       |                    | $          | 30,266               |       |                    | 2.2        |                 |       | $                       | 22,974     |                 |       | 1.9 |   |   | $ | 21,153 |   |   | 2.3 |   |
| Volume                               |       |                    |       |                 |       |                    |       |                 |       |                    |       |                 |       |   |   |   |   |   |   |
| Dairy (thnd. tons)                   |       |                    | 1,195      |                 |       |                    |       |                 | 1 099      |                    |       |                 |       |   | 960 |   |   |   |   |
| Beverage (thnd. liters)              |       |                    | 436        |                 |       |                    |       |                 | 463        |                    |       |                 |       |   | 479 |   |   |   |   |
| Baby Food (thnd.  tons)              |       |                    | 58         |                 |       |                    |       |                 | 50         |                    |       |                 |       |   | 46 |   |   |   |   |

 

**Year Ended December 31,2005 Compared to Year Ended December 31, 2004**

**Sales**

Salesincreased by 17.7% to $1,399.3 million in 2005 from $1,189.3 millionin 2004. The dairy segment was our largest business segment, representing 72.0%of sales in 2005 compared to 69.2% in 2004.
|                   | ** ** | **Year ended December 31,** | ** ** |
|-------------------|------------|--------------------------------------------|------------|
| ** **        | ** ** | **2005**                                   | ** ** | **% of  sales** | ** ** | **2004** | ** ** | **% of  sales** | ** ** |
| ** **        | ** ** | **(in thousands)**                    | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Dairy products    |       |                                       | $          | 1,007,650 |   |   | 72.0 |   |   | $ | 822,908 |   |   | 69.2 |   |
| Beverage products |       |                                       | 303,797    |   |   | 21.7 |   |   | 301,701 |   |   | 25.4 |   |
| Baby food         |       |                                       | 87,839     |   |   | 6.3 |   |   | 64,657 |   |   | 5.4 |   |
| Other             |       |                                       | 3          |   |   | 0.0 |   |   | 27 |   |   | 0.0 |   |
|              |       |                                       | $          | 1,399,289 |   |   | 100.0 |   |   | $ | 1,189,292 |   |   | 100.0 |   |

 

Salesin our dairy segment increased by 22.4% to $1,007.7 million in 2005 from$822.9 million in 2004. The sales growth was made up of selling priceincreases of 12.5% in U.S. dollar terms and sales volume growth of 8.8%. Wesold 1,195.3 thousand tons of dairy products in 2005 and1,098.5 thousand tons of dairy products in 2004. The average selling priceincreased by 12.5% from $0.749 per kilogram in 2004 to $0.843 per kilogram in2005 driven by incremental ruble price increases and ruble appreciation. Ourimproved dairy sales were driven by our increasing presence in the regions ofRussia and the CIS, especially in southern and northwest Russia, the additionof new products to our product portfolio and 

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further optimization of our product portfolio, thelaunch of new product lines and increased marketing activities.

Salesin our beverage segment increased by 0.7% to $303.8 million in 2005 from$301.8 million in 2004. We sold 436.2 million liters of juice andwater in 2005 and 462.6 million liters of juice and water in 2004. Thesales volume decrease of 5.7% was due to a highly competitive environment. Theaverage selling price increased from $0.652 per liter in 2004 to $0.696 perliter in 2005, primarily due to incremental ruble price increases and rubleappreciation, partially offset by continuing changes in our product mix infavor of lower priced brands.

Salesin our baby food segment increased by 35.9% to $87.8 million in 2005 from $64.7million in 2004. The sales growth was made up of selling price increases of17.6% in U.S. dollar terms and sales volume growth of 15.5%. We sold 57.8thousand tons of baby food products in 2005 and 50.1 thousand tons in 2004. Theaverage selling price increased by 17.6% from $1.293 per kilogram in 2004 to$1.521 per kilogram in 2005 driven by incremental ruble price increases, rubleappreciation and a change in our product mix favoring value-added products. Ourimproved baby food product sales were driven mainly by expanding our presencein the Moscow region.

In 2005 and 2004, approximately 62% of our revenuescame from sales in the regions of Russia and the CIS. By segment, regionalsales represented 66%, 63% and 19% of dairy, beverage and baby food segmentrevenues in 2005, respectively. Over the last two years, we have focused onsales growth in the regions through the expansion of our distribution andproduction capabilities in various regions, as well as certain CIS countries.

**Cost of Sales**

Cost of sales primarilyconsists of expenses relating to raw materials (raw milk for dairy and babyfood products, concentrates for juices and packaging materials for allproducts), which accounted for 84.7% and 85.4% of our total cost of sales in2005 and 2004, respectively. The table below sets forth these costs for both2005 and 2004:
|                                | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                   | ** ** | **%** | ** ** | **2004** | ** ** | **%** | ** ** |
| ** **                     | ** ** | **(in thousands)**                    | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Raw materials                  |       |                                       | $          | 849,089 |   |   | 84.7 |   |   | $ | 736,229 |   |   | 85.4 |   |
| Personnel                      |       |                                       | 50,040     |   |   | 5.0 |   |   | 44,293 |   |   | 5.1 |   |
| Depreciation and  amortization |       |                                       | 43,183     |   |   | 4.3 |   |   | 35,865 |   |   | 4.2 |   |
| Utilities                      |       |                                       | 22,583     |   |   | 2.3 |   |   | 18,593 |   |   | 2.2 |   |
| Goods for resale               |       |                                       | 16,724     |   |   | 1.7 |   |   | 6,675 |   |   | 0.8 |   |
| Other                          |       |                                       | 20,627     |   |   | 2.1 |   |   | 20,006 |   |   | 2.3 |   |
| Total cost of sales            |       |                                       | $          | 1,002,246 |   |   | 100.0 |   |   | $ | 861,661 |   |   | 100 |   |

 

Rawmaterial costs increased by 15.3% between 2005 and 2004 but decreased as apercentage of sales to 60.7% in 2005 from 61.9% in 2004, primarily due to theincrease in selling prices. Raw material costs as a percentage of dairy segmentsales were lower (63.5% in 2005 compared to 65.0% in 2004) because of theincreases in selling prices, which outpaced the increase in raw milk prices.Raw material costs as a percentage of baby food segment sales slightlydecreased from 45.3% to 45.1% for the same reason. Raw material costs as apercentage of beverage segment sales decreased to 55.9% in 2005 from 57.1% in2004 due to certain cost control measures undertaken in 2005, including morecost efficient purchasing.

Inthe dairy segment, approximately 78% of our raw material costs were ruble-denominatedand 22% were hard-currency-denominated in 2005, whereas approximately77.0% of these costs were ruble-denominated and 23.0% werehard-currency-denominated in 2004. In the baby food segment, approximately67.0% of our raw material costs were ruble-denominated and 33.0% werehard-

78

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currency-denominated in 2005, whereasapproximately 66.0% of these costs were ruble-denominated and 34.0% werehard-currency-denominated in 2004. In the beverage segment, substantially allof our raw material costs were hard-currency-denominated in 2005 and 2004.

Personnelexpenses increased in absolute terms by 13.0% in 2005 as compared to 2004. Theaverage number of production personnel increased to 9,766 in 2005 from 8,561 in2004 mainly from our acquisition of dairy farms in late 2004 and 2005.Production personnel costs per employee (excluding the dairy farm employees,which are reported as other operating expenses) increased to $5,849 in 2005from $5,174 in 2004 due to salary increases in line with the inflation rate inRussia.

Depreciationand amortization increased by 20.4% from $35.9 million in 2004 to$43.2 million in 2005, reflecting the significant capital expenditures we havebeen making to increase our production capacity by improving our facilities andoverall infrastructure.

Utilitycosts increased in absolute terms by 21.5% in 2005 due to larger production andwarehouse facilities, as well as an increase in production volume andelectricity and gas tariffs.

Goods for resale include various dairy products thatwe purchase from independent producers and resell.

**Gross Profit**

Ourgross profit increased by 21.2% to $397.0 million in 2005 from$327.6 million in 2004. Our gross margin increased to 28.4% in 2005 from27.5% in 2004.

Grossmargin in our dairy segment increased to 25.2% in 2005 from 24.5% in 2004 dueto the increase in selling prices, which was partially offset by furtherincreases in raw milk prices.

Grossmargin in our beverage segment increased to 36.0% in 2005 from 33.8% in 2004.This increase was primarily due to certain additional cost control measuresundertaken in 2005, such as the implementation of more cost efficientpurchasing, and economy of scales realized following the consolidation of ourjuice and water business units.

Gross margin in our baby food segment increased to38.0% in 2005 from 37.2% in 2004 mainly due to the increase in selling pricesand a shift in our product mix in favor of higher margin, value-added products.

**Selling andDistribution Expenses**

Sellingand distribution expenses increased by 10.7% between 2005 and 2004. As apercentage of sales, selling and distribution expenses decreased to 13.7% in2005 from 14.6% in 2004. Our selling and distribution expenses in 2005 and 2004were as follows:
|                                          | ** ** | **Year ended  December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                               | ** ** | **(in thousands)**                | ** ** |
| Advertising and  marketing               |       | $                                      | 57,936     |   | $ | 54,298 |   |
| Personnel                                |       | 47,665                                 |       | 43,831 |   |
| Transportation                           |       | 52,995                                 |       | 45,938 |   |
| Bad debt expense                         |       | 3,908                                  |       | 3,722 |   |
| Materials and  supplies                  |       | 10,466                                 |       | 8,447 |   |
| Warehouse                                |       | 9,525                                  |       | 8,937 |   |
| Other                                    |       | 9,495                                  |       | 8,260 |   |
| Total selling and  distribution expenses |       | $                                      | 191,990    |   | $ | 173,433 |   |

 

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Advertising and marketing expenses increased in 2005by $3.6 million, or 6.7% in absolute terms, and decreased by 0.5% inrelation to sales, to 4.1% in 2005 from 4.6% in 2004. The increase in expenseswas due to our continued investments into major brand promotions, mediainflation on Russia’s leading national television channels, which, in 2005,reached 28% and general increases in marketing costs. Despite this mediainflation, we were able to obtain volume discounts and manage the costincreases more effectively. In 2005 and 2004, television advertising expensesrepresented more than half of our advertising budget.

Personnel expenses increased in absolute terms by 8.7%in 2005 as compared to 2004. The average number of employees in our selling anddistribution department decreased to 5,713 in 2005 from 6,008 in 2004 as weoptimized our distribution network in the regions. Our payroll cost peremployee increased by 14.4% to $8,343 in 2005 from $7,295 in 2004 due toincreased bonuses paid to our sales personnel, as well as wage inflation. Ourpersonnel costs as a percentage of sales decreased to 3.4% in 2005 from 3.7% in2004.

Transportation costs, which primarily consist ofexternal transportation costs, increased by 15.4% in 2005 as compared to 2004.Our transportation expenses as a percentage of sales slightly decreased to 3.8%in 2005 from 3.9% in 2004. The increase in transportation costs was mainly dueto the expansion of our sales volumes in the regions and increasedtransportation tariffs. In particular, ruble tariffs for railwaytransportation, which accounted for more than half of the total beveragetransportation expenses, increased by 17.7%, which exceeded inflation by 1.8times. Our efforts to control costs and optimize routes resulted in a 0.1%decrease in transportation costs as a percentage of sales.

We continued to controlour bad debt expenses, which remained stable at 0.3% as a percentage of salesin 2005. See “B. Liquidity and Capital Resources—Critical Accounting Policiesand Estimates—Allowance for Doubtful Accounts” below.

**General andAdministrative Expenses**

Generaland administrative expenses increased by 18.1% in 2005 as compared to 2004, andremained unchanged as a percentage of sales at 7.8% in 2005 and 2004. Ourgeneral and administrative expenses in 2005 and 2004 were as follows:
|                                            | ** ** | **Year ended  December 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                | ** ** |
| Personnel                                  |       | $                                      | 61,830     |   | $ | 53,250 |   |
| Taxes other than  income tax               |       | 13,194                                 |       | 11,782 |   |
| Audit, consulting  and legal fees          |       | 5,567                                  |       | 4,655 |   |
| Depreciation                               |       | 5,711                                  |       | 4,576 |   |
| Materials and  supplies                    |       | 3,268                                  |       | 3,226 |   |
| Communication  costs                       |       | 2,880                                  |       | 2,331 |   |
| Rent                                       |       | 2,177                                  |       | 2,268 |   |
| Other                                      |       | 15,015                                 |       | 10,728 |   |
| Total general and  administrative expenses |       | $                                      | 109,642    |   | $ | 92,816 |   |

 

Personnel expenses increased by 16.1%, while theaverage number of employees increased to 3,478 in 2005 compared with 3,140 in2004. Our average cost per employee increased by 4.8% to $17,778 in 2005 fromabout $16,960 in 2004, which is slight when taking into account wage inflationthroughout Russia and especially in Moscow, where our head office is located.

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Taxes, other than income tax, include property tax,which is levied on our property, advertising tax, which is levied on ouradvertising expenses and miscellaneous local taxes. The increase in these taxesof 12.0% in 2005 compared to 2004 was mainly due to our increased property,plant and equipment following our substantial capital expenditures.

Our expenses for audit, consulting and legal servicesincreased by 19.6% in 2005 compared to 2004, primarily due to the costsassociated with improving our internal control functions and general increasesin audit-related fees.

Depreciation expenseincreased by 24.8% from $4.6 million to $5.7 million, reflectingcapital expenditures made to support our expansion into the regions of Russiaand the CIS.

**Operating Income**

Operating income increasedby 65.3% to $87.5 million in 2005 from $52.9 million in 2004. As apercentage of sales, operating income increased to 6.3% in 2005 from 4.4% in2004. As discussed above, the increase in operating income was primarily due tothe improvement in the gross margin as a result of cost control procedures. Thefarm operations also contributed to the improvement of our operating income.

**Financial Incomeand Expenses**

Financialincome and expenses comprised the following:
|                                          | ** ** | **Year ended  December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                               | ** ** | **(in thousands)**                | ** ** |
| Interest expense                         |       | $                                      | 23,388     |   | $ | 22,348 |   |
| Interest income                          |       | (1,569                                 | )          | (1,421 | ) |
| Currency  remeasurement gains            |       | (1,231                                 | )          | (7,673 | ) |
| Bank charges                             |       | 1,983                                  |       | 1,857 |   |
| Other financial  expense (income)        |       | 297                                    |       | (493 | ) |
| Total financial income  and expense, net |       | $                                      | 22,868     |   | $ | 14,618 |   |

 

Interest expense increased by 4.7% in 2005 compared to2004. This was mainly due to the increased interest rate payable on ourvariable rate 1,500,000non-convertible ruble notes issued in April 2003, as well as anoverall increase in our debt.

We received interest income of $1.6 million fromthe placement of temporary free funds in 2005 compared to $1.4 million in2004.

In 2005, we incurred totalcurrency remeasurement gains of $1.2 million, which comprised of gains andlosses from euro- and U.S. dollar-denominated obligations, respectively, aswell as remeasurement gains from our operations in Ukraine. For purposes ofaccounting for our U.S. dollar-denominated notes, we used the exchange rate asof December 31, 2005, which depreciated nominally by 3.7% against the December 31,2004 exchange rate resulting in a currency remeasurement loss. On the otherhand, as the value of the ruble increased against the euro, our euro-denominatedobligations resulted in currency remeasurement gains. With respect toruble-denominated liabilities of our Ukrainian subsidiary, we incurred currencyremeasurement gains due to the depreciation of the ruble against the Ukrainianhryvna.

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**Provision forIncome Taxes**

Ourprovision for income taxes for the years ended December 31, 2005 and 2004was as follows:
|                                       | ** ** | **Year ended  December 31,** | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|
| ** **                            | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                            | ** ** | **(in thousands)**                | ** ** |
| Current provision                     |       | $                                      | 27,385     |   | $ | 18,189 |   |
| Deferred income  tax charge/(benefit) |       | 3,327                                  |       | (6,019 | ) |
| Total provision for  income taxes     |       | $                                      | 30,712     |   | $ | 12,170 |   |

 

Provision for income taxes amounted to$30.7 million in 2005 and $12.2 million in 2004. These provisionscomprise current income tax charges of $27.4 million in 2005 and$18.2 million in 2004, and a deferred tax expense of $3.3 million in2005 and a benefit of $6.0 million in 2004. Deferred tax benefits and chargesarise on temporary differences between the bases of computing income underdomestic tax principles and U.S. GAAP.

In 2005, our effectiveincome tax rate was 47.5% compared to the Russian statutory income tax rate of24.0% and, in 2004, our effective income tax rate was 31.8% compared to theRussian statutory income tax rate of 24.0%. This increase in 2005 of oureffective income tax rate is primarily due to the increase of taxable losses incertain of our subsidiaries, which were fully provided for deferred taxpurposes and which we were unable to offset against our profits since taxescannot be paid on a consolidated basis under Russian tax law. In addition, ournon-deductible expenses for Russian taxation purposes increased in 2005compared to 2004 and, furthermore, our tax privileges for small businessenterprises expired in 2005. In 2003 and, to a lesser extent, in 2004, webenefited from small enterprise tax legislation, which was used by companiesoperating in our juice segment. Under income tax legislation which was ineffect before January 1, 2002, small enterprises involved in certain activitieswere exempt from income taxes for the first two years of operations and, in thethird and fourth years, income taxes were levied at a rate of 25% and 50% ofthe income tax rate, respectively. Had we not taken advantage of the smallenterprise tax benefit, our income tax expense would have been higher by $1.3million in 2004 and by $0.3 million in 2005. The income tax benefit for smallenterprises was abolished from January 1, 2002, except that the benefitcontinues to be available to enterprises that were established before July 1,2001. See “Item 3. Key Information—D. Risk Factors—Risks Relating to OurFinancial Condition—The elimination of a tax privilege from which we currentlybenefit and/or a successful challenge by the tax authorities of our use of thistax privilege would materially adversely affect our results of operations.”

**Minority Interest**

The minority interestreflects the net income and losses of our subsidiaries that are attributable tothe minority shareholders in those subsidiaries. In 2005 and 2004, net profitsattributable to minority shareholders of our subsidiaries increased to$3.6 million from $3.2 million. Most of the minority expenses areattributable to the Moscow Baby Food Plant, which had minority interestexpenses of $3.6 million in 2005 and $2.9 million in 2004. The $0.7 millionincrease in 2005 was partially offset by the other minority interest on losses.

**Net Income**

Net income increased in2005 to $30.3 million (2.2% of sales) from $23.0 million (1.9% ofsales) in 2004, primarily as a result of the increase in operating incomeexplained above, which was partially offset by an increase in income taxexpense and financial expenses.

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**Year Ended December 31,2004 Compared to Year Ended December 31, 2003**

**Sales**

Salesincreased by 26.7% to $1,189.3 million in 2004 from $938.5 million in2003. The dairy segment was our largest business segment, representing 69.2% ofsales in 2004 compared to 65.7% in 2003.
|                   | ** ** | **Year ended December 31,** | ** ** |
|-------------------|------------|--------------------------------------------|------------|
| ** **        | ** ** | **2004**                                   | ** ** | **% of  sales** | ** ** | **2003** | ** ** | **% of  Sales** | ** ** |
| ** **        | ** ** | **(in thousands)**                    | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Dairy products    |       |                                       | $          | 822,908 |   |   | 69.2 |   |   | $ | 616,347 |   |   | 65.7 |   |
| Beverage products |       |                                       | 301,701    |   |   | 25.4 |   |   | 276,025 |   |   | 29.4 |   |
| Baby food         |       |                                       | 64,657     |   |   | 5.4 |   |   | 45,956 |   |   | 4.9 |   |
| Other             |       |                                       | 27         |   |   | 0.0 |   |   | 131 |   |   | 0.0 |   |
|              |       |                                       | $          | 1,189,292 |   |   | 100.0 |   |   | $ | 938,459 |   |   | 100.0 |   |

 

Sales in our dairy segment increased by 33.5% to$822.9 million in 2004 from $616.3 million in 2003. The sales growthwas made up of selling price increases of 16.7% in U.S. dollar terms and salesvolume growth of 14.4%. We sold 1,092.5 thousand tons of dairy products in2004 and 960.0 thousand tons of dairy products in 2003. The averageselling price increased by 16.7% from $0.642 per kilogram in 2003 to $0.749 perkilogram in 2004 driven by incremental ruble price increases, rubleappreciation and a change in the product mix favoring value-added products. Ourimproved dairy sales were driven by our increased presence in the regions, theaddition of new products to our product portfolio, the launch of new productlines and increased advertising and marketing activities.

Sales in our beverage segment increased by 9.3% to$301.7 million in 2004 from $276.0 million in 2003. We sold462.6 million liters of juice and water in 2004 and 478.6 millionliters of juice and water in 2003. Despite the sales volume decrease of 3.3%,we experienced an increase in sales due to selling price increases. The averageselling price increased from $0.576 per liter in 2003 to $0.652 per liter in2004, primarily due to incremental ruble price increases and ruble appreciationpartially offset by a change in the product mix in favor of lower pricedbrands. In addition, a highly competitive environment required us to revisitour own distribution system in 2003, and as a result, we have reduced thenumber of distributors we work with and are building partner relationships withour favored distributors for long-term cooperation.

Sales in our baby food segment increased by 40.7% to$64.7 million in 2004 from $46.0 million in 2003. Sales growth was made up ofselling price increases of 29.2% in U.S. dollar terms and sales volume growthof 8.9%. We sold 50.1 thousand tons of baby food products in 2004 and 45.9thousand tons in 2003. The average selling price increased by 29.2% from $1.001per kilogram in 2003 to $1.293 per kilogram in 2004 driven by incremental rubleprice increases, increases in the prices paid by the Moscow City Government forour baby food products under the terms of a tender, ruble appreciation and achange in the product mix favoring value-added products. Our improved baby foodproduct sales were driven mainly by expanding our presence in the Moscowregion.

In 2004, 62% of ourrevenues came from sales in the regions, as compared to 53% in 2003. Over thelast year, we have focused on sales growth in the regions through the expansionof our distribution network and advertising.

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**Cost of Sales**

Costof sales primarily consists of expenses relating to raw materials (raw milk fordairy and baby food products, concentrates for juices and packaging materialsfor all products), which accounted for 85.4% and 85.2% of our total cost ofsales in 2004 and 2003, respectively. The table below sets forth these costsfor both 2004 and 2003:
|                                | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|
| ** **                     | ** ** | **2004**                                   | ** ** | **%** | ** ** | **2003** | ** ** | **%** | ** ** |
| ** **                     | ** ** | **(in thousands)**                    | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Raw materials                  |       |                                       | $          | 736,229 |   |   | 85.4 |   |   | $ | 566,512 |   |   | 85.2 |   |
| Personnel                      |       |                                       | 44,293     |   |   | 5.1 |   |   | 33,040 |   |   | 5.0 |   |
| Depreciation and  amortization |       |                                       | 35,865     |   |   | 4.2 |   |   | 24,753 |   |   | 3.7 |   |
| Utilities                      |       |                                       | 18,593     |   |   | 2.2 |   |   | 15,646 |   |   | 2.4 |   |
| Goods for resale               |       |                                       | 6,675      |   |   | 0.8 |   |   | 13,640 |   |   | 2.1 |   |
| Other                          |       |                                       | 20,006     |   |   | 2.3 |   |   | 11,513 |   |   | 1.6 |   |
| Total cost of sales            |       |                                       | $          | 861,661 |   |   | 100.0 |   |   | $ | 665,104 |   |   | 100.0 |   |

 

Raw material costs increased by 30.0% between 2004 and2003 and increased as a percentage of sales to 61.9% in 2004 from 60.4% in2003, primarily due to the increase in raw milk prices by approximately 17% inruble terms, which is 24% in dollar terms. Raw material costs as a percentageof dairy sales were higher (65.0% in 2004 compared to 61.1% in 2003) because ofthe increases in raw milk prices and packaging material costs. Raw materialcosts as a percentage of baby food sales were lower (45.3% in 2004 compared to55.9% in 2003) due to substantial selling price increases in 2004, includingthe prices paid by the Moscow City Government for our baby products under theterms of a tender. Raw material costs as a percentage of beverage segment salesdecreased to 57.1% in 2004 from 59.6% in 2003 due to the higher prices of ourjuice products.

In the dairy segment, approximately 77.0% of our rawmaterial costs were ruble-denominated and 23.0% were hard-currency-denominatedin 2004, whereas approximately 70.0% of these costs were ruble-denominatedand 30.0% were hard-currency denominated in 2003. The increase in ruble-denominatedcosts resulted from our efforts to fix our expenses whenever possible in rublesin order to reduce exchange rate risks. In the baby food segment, approximately34.0% of raw material costs were hard-currency-denominated in 2004. In thebeverage segment, substantially all of our raw material costs werehard-currency-denominated.

Personnel costs increased by 34.1% between 2004 and2003, outpacing our sales growth. The average number of production personneldecreased to 8,561 in 2004 from 9,347 in 2003 as a result of a plannedreduction in production personnel in the dairy segment. Our annual payroll costper production employee increased by 48% to $5,174 in 2004 from $3,500 in 2003due to the reorganization and modernization of our operating processes and therelated expansion of production employees’ work-related responsibilities.

Depreciation and amortization increased by 44.9% from$24.8 million in 2003 to $35.9 million in 2004, reflecting thesignificant capital expenditures we have been making in the last few years toincrease capacity.

Utility costs increased in absolute terms by 18.8% in2004 due to larger production and warehouse facilities, as well as an increasein electricity and gas tariffs.

Goods for resale include various dairy products thatwe purchase from independent producers and resell.

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**Gross Profit**

Our gross profit increased by 19.9% to$327.6 million in 2004 from $273.4 million in 2003. Our gross margindecreased to 27.5% in 2004 from 29.1% in 2003.

Gross margin in our dairy segment decreased to 24.5%in 2004 from 26.8% in 2003 due to the increase in raw milk prices, additionaldepreciation of newly installed capacity and an increase in average salaries.

Gross margin in our baby food segment increased from31.2% in 2003 to 37.2% in 2004 despite the increase in raw milk prices due toincreased selling prices of our baby food products.

Gross margin in ourbeverage segment decreased to 33.8% in 2004 from 34.2% in 2003. This decreasewas primarily due to the additional depreciation of newly installed property,plant and equipment and an increase in average salaries.

**Selling andDistribution Expenses**

Sellingand distribution expenses increased by 23.2% between 2004 and 2003. As apercentage of sales, selling and distribution expenses decreased to 14.6% in2004 from 15.0% in 2003. Our selling and distribution expenses in 2004 and 2003were as follows:
|                                          | ** ** | **Year ended  December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| ** **                               | ** ** | **(in thousands)**                | ** ** |
| Advertising and  marketing               |       | $                                      | 54,298     |   | $ | 43,777 |   |
| Personnel                                |       | 43,831                                 |       | 36,562 |   |
| Transportation                           |       | 45,938                                 |       | 31,364 |   |
| Bad debt expense                         |       | 3,722                                  |       | 10,220 |   |
| Materials and  supplies                  |       | 8,447                                  |       | 7,446 |   |
| Warehouse                                |       | 8,937                                  |       | 4,978 |   |
| Other                                    |       | 8,260                                  |       | 6,399 |   |
| Total selling and  distribution expenses |       | $                                      | 173,433    |   | $ | 140,746 |   |

 

Advertising and marketing expenses increased in 2004by $10.5 million, or 24% in absolute terms, and decreased by 0.1% inrelation to sales, to 4.6% in 2004 from 4.7% in 2003. The increase in expenseswas due to our continued investments into major brand promotions and mediainflation on Russia’s leading national television channels which, in 2004,exceeded 37%. Despite this media inflation, we were able to obtain volumediscounts and manage the cost increases more effectively. In 2004 and 2003,television advertising expenses represented more than half of our advertisingbudget.

Personnel expenses increased in absolute terms by19.9% in 2004 as compared to 2003. This increase was due to the continuingincrease of our sales force as part of our regional expansion program. Theaverage number of employees in our selling and distribution departmentincreased to 6,008 in 2004 from 5,522 in 2003 as we continued the expansion ofour distribution network into the regions. Our payroll cost per employeeincreased by 11% to $7,295 in 2004 from approximately $6,600 in 2003 due to ourestablishment of a sales-related bonus program for our sales personneland also due to wage inflation. Our personnel costs as a percentage of salesdecreased to 3.7% in 2004 from 3.9% in 2003.

Transportation costs, which primarily consist ofexternal transportation costs, increased by 46.5% in 2004 as compared to 2003.Our transportation expenses as a percentage of sales increased to 3.9% in 2004from 3.3% in 2003. This increase was mainly due to the expansion of ourdistribution network into the regions, which allowed us to increase our salesvolumes in the regions, and increased transportation tariffs. 

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In particular, rubletariffs for railway transportation, which accounted for more than half of thetotal juice transportation expenses, increased by 32%, which exceeded inflationby 2.8 times.

The implementation ofadditional control procedures for debt collection and modification of ourdistribution system allowed us to reduce the bad debt expense as a percentageof sales from 1% in 2003 to 0.3% in 2004. See “B. Liquidity and CapitalResources—Critical Accounting Policies and Estimates—Allowance for DoubtfulAccounts” below.

**General andAdministrative Expenses**

Generaland administrative expenses increased by 22.2% in 2004 as compared to 2003, anddecreased as a percentage of sales to 7.8% in 2004 from 8.1% in 2003. Ourgeneral and administrative expenses in 2004 and 2003 were as follows:
|                                            | ** ** | **Year ended  December 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                | ** ** |
| Personnel                                  |       | $                                      | 53,250     |   | $ | 45,281 |   |
| Taxes other than  income tax               |       | 11,782                                 |       | 5,465 |   |
| Audit, consulting  and legal fees          |       | 4,655                                  |       | 7,307 |   |
| Depreciation                               |       | 4,576                                  |       | 3,674 |   |
| Materials and  supplies                    |       | 3,226                                  |       | 3,206 |   |
| Communication  costs                       |       | 2,331                                  |       | 2,105 |   |
| Rent                                       |       | 2,268                                  |       | 1,898 |   |
| Other                                      |       | 10,728                                 |       | 7,037 |   |
| Total general and  administrative expenses |       | $                                      | 92,816     |   | $ | 75,973 |   |

 

Personnel expenses increased by 17.6%, although theaverage number of employees decreased to 3,140 in 2004 from 3,463 in 2003 as aresult of our planned reduction of personnel carried out in connection with thechanges in our business model. Our average cost per employee increased by 30%to about $16,960 in 2004 from $13,000 in 2003 mainly due to wage inflationthroughout Russia and especially in Moscow, where the highest paid employeesare concentrated, and due to the necessity of recruiting higher-qualifiedpersonnel.

Taxes, other than income tax, include advertising tax,which is levied on our advertising expenses, property tax, which is levied onour property, and miscellaneous local taxes. The increase in these taxes of115.6% in 2004 compared to 2003 was partly due to changes in legislation inrelation to property tax.

Our expenses for audit, consulting and legal servicesdecreased by 36.3% in 2004 compared to 2003, primarily as a result of certain one-offcharges in 2003 related to our issuance of loan participation notes, expansionand operations enhancement initiatives.

Depreciation expenseincreased by 24.6% from $3.7 million to $4.6 million, reflecting thecapital expenditures we have been making in 2003 and 2004 to support ourexpansion into the regions.

**Operating Income**

Operating income increasedby 7.7% to $52.9 million in 2004 from $49.2 million in 2003. As apercentage of sales, operating income decreased to 4.4% in 2004 from 5.2% in2003. As discussed above, the decrease in operating income was primarily due tothe deterioration in the gross margin and changes in tax legislation.

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**Financial Incomeand Expenses**

Financialincome and expenses comprised the following:
|                                          | ** ** | **Year ended  December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| ** **                               | ** ** | **(in thousands)**                | ** ** |
| Interest expense                         |       | $                                      | 22,348     |   | $ | 20,903 |   |
| Interest income                          |       | (1,421                                 | )          | (2,921 | ) |
| Currency  remeasurement gains            |       | (7,673                                 | )          | (4,834 | ) |
| Bank charges                             |       | 1,857                                  |       | 1,971 |   |
| Other financial  expense (income)        |       | (493                                   | )          | 154 |   |
| Total financial income  and expense, net |       | $                                      | 14,618     |   | $ | 15,273 |   |

 

Interest expense increased by 6.9% in 2004 compared to2003. This mainly resulted from the fact the interest expense for our$150 million U.S. dollar loan participation notes issued in May 2003was accrued only for the remaining 7.5 months ending December 31,2003 rather than for the year ending December 31, 2004. The total amountof long-term borrowings remained relatively flat at $283.2 million at December 31,2004 compared to $283.4 million at December 31, 2003.

We received interest income of $1.4 million fromplacement of temporary free funds in 2004 compared to $2.9 million in2003. The income from temporary free funds placement in 2004 was less than in2003 due to several factors, including less free funds in 2004 because of ouractive investments in additional production capacity and new acquisitionsrelating to the regional expansion.

During 2004, the Russianruble appreciated against the U.S. dollar and depreciated against the euro. Asa result, we incurred currency remeasurement gains of $7.7 million. As thevalue of the ruble increased against the U.S. dollar in 2004, the U.S. dollar-denominatedliabilities resulted in currency remeasurement gains. Similarly, as the valueof the ruble decreased against the euro, the euro-denominated liabilitiesresulted in currency remeasurement losses. Our net monetary liabilitiesposition in the U.S. dollar (primarily due to our U.S. dollar-denominatedloan participation notes) and the euro resulted in a currency remeasurementgain. See also Note 4 to our Consolidated Financial Statements includedelsewhere herein.

**Provision forIncome Taxes**

Ourprovision for income taxes for the years ended December 31, 2004 and 2003was as follows:
|                                   | ** ** | **Year ended  December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|
| ** **                        | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| ** **                        | ** ** | **(in thousands)**                | ** ** |
| Current provision                 |       | $                                      | 18,189     |   | $ | 14,866 |   |
| Deferred benefit                  |       | (6,019                                 | )          | (4,149 | ) |
| Total provision for  income taxes |       | $                                      | 12,170     |   | $ | 10,717 |   |

 

Provision for income taxes amounted to $12.2 millionin 2004 and $10.7 million in 2003. These provisions comprise currentincome tax charges of $18.2 million in 2004 and $14.9 million in2003, and deferred tax benefits of $6.0 million in 2004 and$4.1 million in 2003. Deferred tax benefits and charges arise on temporarydifferences between the bases of computing income under domestic tax principlesand U.S. GAAP.

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In 2004, our effectiveincome tax rate was 31.8% compared to the Russian statutory income tax rate of24.0%. The difference in the tax rates was primarily due to non-deductibleexpenses for Russian statutory taxation purposes and changes in the valuationallowance for deferred tax assets and tax benefits for small enterprises. In2003, our effective income tax rate was 31.6% compared to the Russian statutoryincome tax rate of 24.0%. This increase of our effective tax rate is primarilydue to non-deductible expenses for Russian taxation purposes and the decreaseof income tax privileges for small business enterprises in 2004 as comparedwith 2003. In 2003 and, to a lesser extent, in 2004, we benefited from thesmall enterprise tax legislation, which was used by companies operating in ourjuice segment. Under income tax legislation which was in effect before January 1,2002, small enterprises involved in certain activities were exempt from incometaxes for the first two years of operations and, in the third and fourth years,income taxes were levied at a rate of 25% and 50% of the income tax rate,respectively. Had we not taken advantage of the small enterprise tax benefit in2004 and 2003, our income tax expense would have been higher by$1.3 million and $3.0 million, respectively. The income tax benefitfor small enterprises was abolished from January 1, 2002, except that thebenefit continues to be available to enterprises that were established before July 1,2001. See “Item 3. Key Information—D. Risk Factors—Risks Relating to OurFinancial Condition—The elimination of a tax privilege from which we currentlybenefit and/or a successful challenge by the tax authorities of our use of thistax privilege would materially adversely affect our results of operations.”

**Minority Interest**

The minority interestreflects the net income and losses of our subsidiaries that are attributable tothe minority shareholders in those subsidiaries. In 2004 and 2003, net profitson continuing operations attributable to minority shareholders of oursubsidiaries increased to $3.2 million from $2.0 million. Theincrease in the profits of the Moscow Baby Food Plant significantly reflectsthe minority interest expense increase in 2004 compared with the year ended December 31,2003. During 2004, we acquired an additional 6.2% of Tsaritsino Dairy Plant,25% of the Ramenskiy Plant and 4.56% of Fruktopak (formerly Depsona), thus alsoreducing the minority stakes in these plants, offset by profit at oursubsidiaries with minority shareholders.

**Net Income**

Net income increased in2004 to $23.0 million (1.9% of sales) from $21.1 million (2.3% ofsales) in 2003, primarily as a result of the increase in operating incomeexplained above, which was partially offset by an increase in income taxexpense.

***B.   Liquidity and Capital Resources***

**CapitalRequirements**

We need capital tofinance the following:

·       repaymentof debt;

·       capitalexpenditures, consisting of purchases of property, plant and equipment; and

·       acquisitions.

We anticipate that therepayment of long-term debt, capital expenditures and acquisitions willrepresent the most significant uses of funds for several years to come. In2005, we continued to purchase property, plant and equipment in order toincrease production capacity at our new and existing subsidiaries inanticipation of the expected further growth in the Russian economy and theattendant rising incomes.

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**CapitalExpenditures**

Our total capital expenditures in 2005, excludingacquisitions, amounted to $75.1 million, including cash spent and newvendor credits. Capital expenditures in our dairy segment amounted to $59.9million and related to the improvement of our existing dairy and cheeseproduction facilities, warehouses facilities and quality control for the rawmilk used in our production. Capital expenditures in our beverage segmentamounted to $12.9 million and related mainly to the installation of newproduction lines and other operating equipment at our production sites. Capitalexpenditures in our baby food segment amounted to $1.8 million and relatedmainly to the modernization of our recently acquired Experimental Baby FoodPlant. Our corporate and common capital expenditures, including those relatingto IT infrastructure and software, totaled $0.5 million.

Ourcapital expenditures, excluding acquisitions, for the period from 2003 to 2005are set forth in the following table:
|                                    | ** ** | **Year ended  December 31,** | ** ** | ** ** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2005**                               | ** ** | **2004**   | ** ** | **2003** | ** ** | **Total** | ** ** |
| ** **                         | ** ** | **(in millions)**                 | ** ** |
| Dairy segment                      |       | 59.9                                   |       | 57.1       |       | 70.5 |   | 189.7 |   |
| Beverage segment                   |       | 12.9                                   |       | 8.8        |       | 33.6 |   | 53.1 |   |
| Baby food segment                  |       | 1.8                                    |       | 5.1        |       | n/a |   | 6.9 |   |
| Corporate and  common expenditures |       | 0.5                                    |       | 1.6        |       | 3.1 |   | 5.2 |   |
| Total capital  expenditures        |       | 75.1                                   |       | 72.6       |       | 107.2 |   | 254.9 |   |

 

As of December 31,2005, our capital commitments amounted to $12 million mostly for constructionprojects. As of March 31, 2006, we had capital commitments ofapproximately $35 million primarily for construction projects at our productionsites and the purchase of farm-production equipment. We plan to finance ourcapital commitments through operating cash flow.

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**Acquisitions ofSubsidiaries and Purchase of Minority Stakes**

During2005, 2004 and 2003, we made a number of acquisitions for total considerationof $24.3 million, $5.3 million and $9.9 million, respectively. The goal ofthese acquisitions was to expand into new markets, strengthen our operationalpresence in the regions of Russia and the CIS and to purchase minority stakes.The following table summarizes our acquisitions in the last three years:
|                                                                          | ** ** | **Direct ownership  interest  acquired, %** | ** ** | **Cash cost of  investment  (in thousands)** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------|------------|
| **2005**                                                                 |       |                                             |       |                                                        |       |   |   |   |   |
| Essentuki Mineral  Water Plant at CMW (Caucasian Mineral Water) Ltd |       |                                             | 100        |                                                        |       |   | $ | 5,505 |   |   |
| Nazarovskoe Milk  OJSC                                                   |       |                                             | 63.5       |                                                        |       |   | 5,167 |   |   |
| Pervouralsk City  Dairy                                                  |       |                                             | 100        |                                                        |       |   | 119 |   |   |
| Plemzavod Za Mir  i Trud OJSC                                            |       |                                             | 100        |                                                        |       |   | 1,689 |   |   |
| Zavety Ilicha                                                            |       |                                             | 99.3       |                                                        |       |   | 344 |   |   |
| Trud                                                                     |       |                                             | 63.5       |                                                        |       |   | 420 |   |   |
| Experimental Baby  Food Plant LLC                                        |       |                                             | 100        |                                                        |       |   | 3,527 |   |   |
| Obninsk Dairy  Plant                                                     |       |                                             | 66.3       |                                                        |       |   | 6,365 |   |   |
| Siberian Dairy  Plant (purchase of minority stake)                       |       |                                             | 10         |                                                        |       |   | 1,050 |   |   |
| Other                                                                    |       |                                             | various    |                                                        |       |   | 120 |   |   |
| **Total**                                                                |       |                                             |       |                                                        | ** ** | ** ** | **$** | **24,306** |   |   |
| **2004**                                                                 |       |                                             |       |                                                        |       |   |   |   |   |
| Tsaritsino Dairy  Plant (purchase of minority stake)                     |       |                                             | 6          |                                                        |       |   | $ | 3,406 |   |   |
| Atamanskoe                                                               |       |                                             | 88         |                                                        |       |   | 904 |   |   |
| Ramenskiy Plant (purchase  of minority stake)                            |       |                                             | 25         |                                                        |       |   | 534 |   |   |
| Fruktopak  (formerly Depsona) (purchase of minority stake)               |       |                                             | 5          |                                                        |       |   | 129 |   |   |
| Other                                                                    |       |                                             | various    |                                                        |       |   | 344 |   |   |
| **Total**                                                                |       |                                             |       |                                                        | ** ** | ** ** | **$** | **5,317** |   |   |
| **2003**                                                                 |       |                                             |       |                                                        |       |   |   |   |   |
| Siberian Cheese  (warehouse)                                             |       |                                             | 100        |                                                        |       |   | $ | 2,633 |   |   |
| Essentuki                                                                |       |                                             | 100        |                                                        |       |   | 4,118 |   |   |
| Ufa Dairy Plant  (purchase of minority stake)                            |       |                                             | 48         |                                                        |       |   | 3,138 |   |   |
| Other                                                                    |       |                                             | various    |                                                        |       |   | 54 |   |   |
| **Total**                                                                |       |                                             |       |                                                        | ** ** | ** ** | **$** | **9,943** |   |   |

 

See “Item 4. Informationon Our Company” for more information on our acquired businesses and Note 4to our Consolidated Financial Statements included elsewhere herein. In additionto the acquisitions mentioned above, as of December 31, 2005, we alsoissued a cash advance for the further purchases of minority stakes in certainof our legal entities, which are not included in the summary table above.

**Capital Resources**

We generally rely on operatingcash flows and debt issuance to finance capital expenditures and acquisitions,and in 2005, we financed our capital expenditures and acquisitions exclusivelywith cash provided by operating activity. In addition, we finance a portion ofour equipment purchases through vendor financings. The availability of externalfinancing is influenced by many factors, including our financial position andmarket conditions. Under certain circumstances, we may be required to repaycertain indebtedness. See “Item 3. Key Information—D. Risk Factors—RisksRelating to Our Financial 

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Condition—Covenantsin our debt agreements restrict our ability to borrow, invest and engage invarious activities, which could impair our ability to expand or finance ourfuture operations.”

**Debt**

Ourdebt consists of notes, bank loans and vendor financing for property, plant andequipment, of which approximately 86% are at fixed rates. The following tablesummarizes our debt position at December 31, 2005 and 2004:
|                                            | ** ** | **At December 31,  2005** | ** ** | **At December 31,  2004** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                                 | ** ** | **(in thousands)**             | ** ** |
| Long-tem debt,  including current portion: |       |                                |       |                                |       |   |   |   |   |
| Notes                                      |       |                                | $          | 304,024                             |       |   |   | $ | 201,709 |   |   |
| Bank loans                                 |       |                                | $          | 5,647                               |       |   |   | $ | 8,056 |   |   |
| Vendor financing                           |       |                                | $          | 42,421                              |       |   |   | $ | 55,849 |   |   |
| Total                                      |       |                                | $          | 352,092                             |       |   |   | $ | 265,614 |   |   |
| Short-term  debt                           |       |                                | $          | 19,554                              |       |   |   | $ | 17,554 |   |   |
| Total debt(1)                              |       |                                | $          | 371,646                             |       |   |   | $ | 283,168 |   |   |
| **Denominated  in:**                       |       |                                |       |                                |       |   |   |   |   |
| U.S. dollars                               |       |                                | $          | 180,689                             |       |   |   | $ | 192,186 |   |   |
| Euro                                       |       |                                | $          | 15,081                              |       |   |   | $ | 21,462 |   |   |
| Rubles                                     |       |                                | $          | 175,876                             |       |   |   | $ | 69,520 |   |   |

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(1)     InDecember 2005, we raised approximately $104.2 million through the issuance ofnon-convertible ruble denominated notes partly in order to redeem in April 2006approximately $49.8 million of non-convertible ruble denominated notes issuedin April 2003.

Ourdebt matures as follows:
| Year                | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
|---------------------|------------|------------|------------|-------------------------|------------|
| 2006                |       |       | 88,940     |                    |       |
| 2007                |       |       | 13,520     |                    |       |
| 2008                |       |       | 158,053    |                    |       |
| 2009                |       |       | 6,172      |                    |       |
| 2010 and thereafter |       |       | 104,961    |                    |       |

 

**Notes**

***Wimm-Bill-DannRuble Notes***

On December 21, 2005,we issued five-year, 3,000,000 non-convertible ruble denominated notes at aface value of 1,000 rubles each. The offering raised a total of approximately$104.2 million at the exchange rate as of December 31, 2005. The notes areredeemable by us on December 15, 2010. The issue was priced at par with acoupon of 9%. Interest is payable semi-annually in arrears commencing on June 21,2006.

***Wimm-Bill-DannFoods U.S. Dollar Notes***

On May 21, 2003, UBS(Luxembourg) S.A. issued 8.5% Loan Participation Notes due 2008 for the solepurpose of funding a $150,000,000 loan (the “Loan”) to us. The Loan will matureon May 21, 2008 and bears interest at an annual rate of 8.5%, payablesemi-annually in arrears on May 21 and November 21 of each year. Tenof our subsidiaries unconditionally, irrevocably, jointly and severallyguarantee our obligation under the Loan. The loan agreement contains a numberof covenants including requirements to maintain certain financial ratios.

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***Wimm-Bill-Dann Foods Ruble Notes***

On April 15, 2003,Wimm-Bill-Dann Foods issued 1,500,000 non-convertible ruble denominated notesat a face value of 1,000 rubles each guaranteed by Vitafrukt, one of our juicesubsidiaries. The offering raised a total of 1,500,000 thousand rubles($52.1 million at the exchange rate as of December 31, 2005 of which $2.3million had been repaid as at December 31, 2005). Interest was payablesemi-annually in arrears commencing on October 14, 2003, and the interestrate for each coupon period was based on the Consumer Price Index, published byGoskomstat of the Russian Federation. The interest rates for the first, second,third, fourth, fifth and sixth coupon periods were 12.9%, 11.98%, 9.38%, 8.48%,10.78% and 11.24%, respectively. The notes were redeemable by Wimm-Bill-DannFoods on April 11, 2006 and we redeemed the remaining outstanding notes onthis date.

**Bank Loans**

Substantially all of ourlong-term bank loans at December 31, 2005 consisted of euro and U.S.dollar-denominated loans from International Moscow Bank, Sberbank and ING Bank(Eurasia), at interest rates ranging from 5.69% to 6.17%. Our short-term debtbalance at December 31, 2005 mainly consisted of ruble-denominated loansfrom Alfa-bank, the Moscow City Government and Sberbank at interest ratesranging from 3.67% to 9.33%.

**Vendor Finance**

We have agreements withsuppliers of equipment which provide financing for periods ranging from 1 to 9years. As of December 31, 2005 and 2004, our vendor financing obligationstotaled $29.7 million and $40.4 million, respectively; euro 10.1million and euro 10.7 million (equivalent to $11.9 million and $14.5 millionas of December 31, 2005 and 2004), respectively; and 23.2 million rublesand 26.3 million rubles (equivalent to $0.8 million and $1.0 million as ofDecember 31, 2005 and 2004), respectively. This financing is provided atinterest rates of LIBOR plus 1.5%, EURIBOR plus 1.5% and 16.0% for U.S. dollar,euro and ruble-denominated contracts, respectively. The majority of equipmentfinancing is provided by one supplier, Tetra Pak. At December 31, 2005 and2004, property, plant and equipment amounting to $40.4 million and $59.7million, respectively, served as collateral under these financing agreements.

 

**Cash Flows**

Asummary of our cash flows from continuing operations is as follows:
|                                                                   | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                        | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                        | ** ** | **(in thousands)**                    | ** ** |
| Cash provided by  operating activities                            |       | $                                          | 113,937    |   | $ | 71,720 |   | $ | 29,940 |   |
| Cash used in  investing activities                                |       | (125,157                                   | )          | (73,808 | ) | (95,142 | ) |
| Cash provided  (used in) by financing activities                  |       | 82,619                                     |       | (16,159 | ) | 73,399 |   |
| Impact of  exchange rate differences on cash and cash equivalents |       | (2,087                                     | )          | 1,774 |   | 2,727 |   |
| Net increase  (decrease) in cash                                  |       | 69,312                                     |       | (16,473 | ) | 10,924 |   |
| Cash paid for acquisition of property, plant and  equipment       |       | $                                          | (72,805    | ) | $ | (67,804 | ) | $ | (91,974 | ) |
| Cash paid for  acquisition of subsidiaries, net of cash acquired  |       | (24,964                                    | )          | (6,697 | ) | (7,002 | ) |
| Vendor financed  acquisitions of property, plant and equipment    |       | 5,709                                      |       | 7,336 |   | 12,899 |   |

 

In 2005, we financed our capital expenditures andacquisitions exclusively with operating cash flows.

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We spent $125.1 million on our investment activitiesin 2005, including acquisitions of property, plant and equipment of $72.8million, acquisitions of subsidiaries of $25.0 million, investments in directfinancing leases of $2.0 million and other investment activities of $0.1million, offset by $0.5 million proceeds from disposal of investments and $6.0million proceeds from disposal of property, plant and equipment. We alsoinvested temporary free cash proceeds from issued notes in short-term bankdeposits in the amount of $31.8 million.

Vendor financed acquisitions of property, plant andequipment totaled $5.7 million in 2005 compared to $7.3 million in 2004because of an overall reduction in our vendor financed capital expenditures,including the improvement of packaging facilities. Instead, we are shifting ourcapital expenditures towards construction and installation projects, which aretypically not vendor-financed.

Net cash provided byoperating activities in 2005 was $113.9 million, compared with$71.7 million in 2004. The increase in 2005 was due to profitable growthand better management of our working capital, including a reduction of taxreceivables balance.

**Working Capital**

Our short-term demands for liquidity, includingseasonal fluctuations in working capital requirements, are met by cash flowsfrom operations and short-term debt.

At December 31, 2005, our cash and cashequivalents balance was $93.1 million, of which $91.9 million wereruble-denominated and $1.2 million were euro and U.S. dollar-denominated. Ourworking capital balance was $199.9 million. Our working capital position at December 31,2005 increased compared to $164.0 million at December 31, 2004,primarily due to an increase in cash and cash equivalents and short-terminvestments which reflected the deposit of a portion of the proceeds from ourruble-denominated notes issued on December 12, 2005. We used cash to repayour ruble notes redeemable on April 11, 2006. We believe that our workingcapital is sufficient for our present requirements.

Taxes receivable decreased by $24.1 million to $61.5million as of December 31, 2005 from $85.6 million as of December 31,2004. Taxes receivable represents VAT due from the state budget. The decreaseat December 31, 2005 was primarily due to our recovery of certain VATreceivables from the state budget for previous years. Under existing taxlegislation, we are able to offset this VAT against income taxes and othertaxes payable to the state budget and to recover from the state budget. We aretaking all legally available steps, including filing litigation claims, tofacilitate the recovery of taxes receivable from the state budget. In 2005,$31.9 million in VAT tax was recovered from the state budget in cash and $5.3million was recovered by an offset. We also received $0.5 million from the taxauthorities as penalties.

Trade accounts payable increased to $65.8 million at December 31,2005 from $62.4 million at December 31, 2004. Trade payables turnoveraveraged 24 days as of December 31, 2005 and 27 days as of December 31,2004.

Trade receivables decreased from $62.2 million asof December 31, 2004 to $60.0 million as of December 31, 2005 afterthe allowance for bad debts of $5.1 million, as compared to $13.9 millionas of December 31, 2004. Trade receivables turnover averaged 16 days as ofDecember 31, 2005 and 19 days as of December 31, 2004.

Inventory increased from $102.0million as of December 31, 2004 to $130.6 million as of December 31,2005. Turnover of inventory in days as of December 31, 2005 amounted to 56days, as compared to 49 days as of December 31, 2004. The increase ininventory levels was partly due to an increase in our stock of raw milk held tobalance out seasonality.

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**Credit RatingDiscussion**

Our credit ratings impact our ability to obtain short-and long-term financing, and the cost of such financing. In determining ourcredit ratings, the rating agencies consider a number of factors, including ouroperating cash flows, total debt outstanding, commitments, interestrequirements, liquidity needs and availability of liquidity. Other factorsconsidered may include our business strategy, the condition of our industry andour position within the industry. Although we understand that these and otherfactors are among those considered by the rating agencies, each agency mightcalculate and weigh each factor differently.

Ourcredit ratings as of the date of this document are as follows:
| Rating Agency                  | ** ** | ** ** | ** ** | **Company’s rating** | ** ** | **Long-Term Debt Rating** | ** ** | **Outlook/Watch** | ** ** |
|-------------------------------------|------------|------------|------------|--------------------------------|------------|-------------------------------------|------------|-------------------|------------|
| Moody’s(1)                     |       |       | B1         |                           |       |                                | B2         |              |       |   | positive |   |   |
| Standard &  Poor’s(2) |       |       | B+         |                           |       |                                | B+         |              |       |   | stable |   |   |

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(1)          Rated on May 31,2006.

(2)          Rated on August 24,2005.

The loan agreementrelating to our $150 million loan participation notes due 2008 containsprovisions requiring, subject to certain conditions, our prepayment of the loanin full in the event that a change in control or merger results in a decline inour credit ratings.

**Critical AccountingPolicies and Estimates**

Critical accountingpolicies are those policies that require the application of management’s mostchallenging, subjective or complex judgments, often as a result of the need tomake estimates about the effect of matters that are inherently uncertain andmay change in subsequent periods. Critical accounting policies involvejudgments that are sufficiently sensitive to give materially different resultsunder different assumptions and conditions. We believe that our most criticalaccounting policies are those described below. For a detailed discussion ofthese and other accounting policies, see Note 3 to our ConsolidatedFinancial Statements included elsewhere herein.

**Estimates andassumptions**

The preparation of theconsolidated financial statements in conformity with U.S. GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the consolidated financial statementsand the reported amounts of revenues and expenses during the reporting period.Examples include estimates of provisions for bad and doubtful accounts,obsolete inventory, and valuation allowance for deferred tax assets. Actualresults could differ from those estimates.

**Allowance forDoubtful Accounts**

Allowance for doubtfulaccounts is established if there is objective evidence that we will not be ableto collect the amounts due according to original contractual terms and reducesreceivables to amounts expected to be collected. In estimating uncollectibleamounts, we consider factors such as current overall economic conditions,industry-specific economic conditions, historical customer performanceand anticipated customer performance. Our provisions cover individual balanceswhere there is evidence that losses are probable as at the balance sheet date.We use significant judgment in estimating uncollectible amounts. While webelieve our processes effectively address our exposure for doubtful accounts,changes in the economy, industry or specific customer conditions may requireadjustments to the allowance for doubtful accounts recorded in our ConsolidatedFinancial Statements.

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**Accounting forIncome Taxes**

We assess the temporarydifferences resulting from differential treatment of certain items for tax andaccounting purposes. These differences result in deferred tax assets andliabilities, which are recognized in our Consolidated Financial Statements. Weassess our deferred tax assets on an ongoing basis by assessing our valuationallowance and adjusting the valuation allowance appropriately. In calculatingour valuation allowance we consider the future taxable incomes and thefeasibility of tax planning initiatives. If we estimate that the deferred taxasset cannot be realized at the recorded value, a valuation allowance iscreated with a charge to the statement of income in the period in which suchassessment is made.

**Inventory Valuation**

We review our inventorybalances to determine if inventories can be sold at amounts equal to or greaterthan their carrying amounts. The review includes identification of slow movinginventories, obsolete inventories, expired inventories and discontinuedproducts or lines of products. The identification process includes historicalperformance of the inventory, current operational plans for the inventory, aswell as industry and customer specific trends. Obsolete items are provided orwritten off. If our actual results differ from our expectations with respect tothe selling of our inventories at amounts equal to or greater then theircarrying amounts, we would be required to adjust our inventories accordingly.

**Depreciationperiods for property, plant and equipment**

Depreciation periods ofproperty, plant and equipment are based on estimated useful lives of relatedassets. The adoption of depreciation periods requires judgment in determiningappropriate estimated useful lives over which the related assets will beutilized. In estimating useful lives, we consider factors such as our historicalexperience and the industry, manufacturers’ estimates, anticipated use and ourmaintenance policies. As these factors change, management estimates may changeand we could be required to reassess depreciation periods for property, plantand equipment and consider impairment.

**Impairment ofGoodwill and Long-Lived Assets**

When events and circumstances occur indicating thatthe carrying amount of a long-lived asset (group) may not be recoverable, weestimate the future undiscounted cash flows expected to derive from the use andeventual disposition of the asset (group). If the sum of the expected futurecash flows (undiscounted and without interest charges) is less than thecarrying amount of the long-lived asset (group), we would then calculate theimpairment as the excess of the carrying value of the asset (group) over theestimate of its recoverable amount, which is the higher of either fair marketvalue or value in use. We carry out the impairment test for property, plant andequipment and goodwill when indicators exist.

For purposes ofdetermining goodwill recognition, we perform a review for possible impairmentof goodwill at least on an annual basis at the reporting unit level. If thefair value of the reporting unit is less than the carrying amount of thereporting unit including goodwill, we would then calculate the impairment lossas the excess of the carrying value of the goodwill over its implied fairvalue, which is to be recognized in same manner as the amount of goodwill isrecognized in a business combination.

**AccountingPronouncements Issued But Not Yet Adopted**

In November 2004, the Financial AccountingStandards Board, or FASB, issued FASB Statement No. 151, “Inventory Costs,”an amendment of the Accounting Research Bulletin No. 43, Chapter 4. Theamendments made by Statement 151 clarify that abnormal amounts of idle facilityexpense, freight, handling costs and wasted materials (spoilage) should berecognized as current-period charges and require the allocation of fixedproduction overheads to inventory based on the normal capacity of theproduction facilities.

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The guidance is effective for inventory costs incurredduring fiscal years beginning after June 15, 2005. Earlier application ispermitted for inventory costs incurred during fiscal years beginning after November 23,2004. The adoption of the provisions of SFAS Statement No. 151 is notexpected to have an impact on our results of operations, financial position orcash flows.

In December 2004, the FASB issued SFAS No. 153,“Exchanges of Nonmonetary Assets.” SFAS No. 153 addresses the measurementof exchanges of nonmonetary assets. The guidance in APB Opinion No. 29, “Accountingfor Nonmonetary Transactions” (“APB No. 29”), is based on the principlethat exchanges of nonmonetary assets should be measured based on the fair valueof the assets exchanged. The guidance in APB No. 29, however, includedcertain exceptions to that principle. SFAS No. 153 amends APB No. 29to eliminate the exception for nonmonetary exchanges of similar productive assetsand replaces it with a general exception for exchanges of nonmonetary assetsthat do not have commercial substance. A nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. These provisions of SFAS No. 153are effective for financial statements for fiscal years beginning after June 15,2005. Earlier application is permitted for nonmonetary asset exchanges incurredduring fiscal years beginning after the date SFAS No. 153 was issued. Theadoption of the provisions of SFAS No. 153 is not expected to have amaterial impact on our results of operations or financial position.

In May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections, which is a replacement of APB OpinionNo. 20, Accounting Changes, and SFAS No. 3, Reporting Changes inInterim Financial Statements. SFAS No. 154 applies to all voluntarychanges in accounting principle and changes the accounting for and reporting ofa change in accounting principle. SFAS No. 154 requires retrospectiveapplication to prior periods’ financial statements of a voluntary change inaccounting principle unless it is impracticable. In addition, SFAS No. 154requires that a change in method of depreciation, amortization, or depletionfor long-lived, nonfinancial assets be accounted for as a change in accountingestimate that is effected by a change in accounting principle. SFAS No. 154is effective for accounting changes and corrections of errors made in fiscalyears beginning after December 15, 2005. The impact of the adoption of theprovisions of SFAS No. 154 is currently not known because no suchaccounting changes are anticipated.

In February 2006, the FASB issued SFAS No. 155“Accounting for Certain Hybrid Financial Instruments,” which amends FASBStatements No. 133, “Accounting for Derivative Instruments and HedgingActivities,” and No. 140, “Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities.” This Statement resolvesissues addressed in Statement 133 Implementation Issue No. D1, “Applicationof Statement 133 to Beneficial Interests in Securitized Financial Assets.”

SFAS No. 155 permitsfair value remeasurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation, clarifies whichinterest-only strips and principal-only strips are not subject to therequirements of Statement 133, establishes a requirement to evaluate interestsin securitized financial assets to identify interests that are freestandingderivatives or that are hybrid financial instruments that contain an embeddedderivative requiring bifurcation and clarifies that concentrations of creditrisk in the form of subordination are not embedded derivatives. SFAS No. 155amends Statement 140 to eliminate the prohibition on a qualifying specialpurpose entity from holding a derivative financial instrument that pertains toa beneficial interest other than another derivative financial instrument. Theseprovisions of SFAS No. 155 are effective for all financial instrumentsacquired or issued after the beginning of an entity’s first fiscal year thatbegins after September 15, 2006. The adoption of the provisions of SFAS No. 155is not expected to have an impact on our results of operations, financialposition or cash flows.

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**C.   Researchand Development, Patents and Licenses, etc.**

We invest significantfinancial and human resources in new product development, focusing on long-termstrategic development projects that are expected to create innovative productsand technologies. As of December 31, 2005, our product and technologiesdevelopment departments located at Lianozovo Dairy Plant had 41 employees andour new juice product and quality department at the Ramenskiy Plant had 31employees. These departments often cooperate with third parties such as Russianresearch institutions, specialized research firms and suppliers. In 2005, 2004and 2003, we spent approximately $1.3 million, $0.6 million and $1.2 million onactivities associated with new product development. For a more detaileddiscussion of new product development see “Item 4. Information on Our Company—B.Business Overview—New Product Development.”

***D.   Trend Information***

**Markets**

The Russian economy continues to experience growth,with gross domestic product growing at rates of 6.4%, 7.1% and 7.3% in 2005,2004 and 2003, respectively. Disposable income also continues to grow, althoughdisposable income levels in the regions will continue to lag behind Moscowlevels. We believe these macroeconomic improvements in Russia are supportingthe favorable industry trends we have seen. Dairy consumption is shiftingtowards packaged products whereas the share of unpackaged dairy products issteadily decreasing. In addition, consumers in Russia have, in recent years,been demanding more juice-containing, dessert and enriched products. Weexpect the increasing preference for juice over fresh fruit, which generallyaccompanies increased incomes, will result in the consumption of vitamin-richproducts with different tastes and nutritional characteristics, includingincreased demand for juice-containing beverages. However, both the dairyand juice markets will continue to become more competitive, with producersengaging in aggressive advertising and marketing strategies, as well as makingsubstantial investments in modernizing packaging and manufacturing equipment.The dairy industry is also seeing the stronger presence of small regionalproducers.

In 2005, demand for babyfood products increased significantly and, as a result, we created a separatebaby food segment. Prior to 2005, baby food was part of our dairy segment. Webelieve that the baby food market, which increased by 29% in terms of value in2005, will continue to grow in 2006 driven mainly by stronger sales in theregional markets. However, we also expect that the baby food market will becomemore competitive in the near future, which could negatively impact our profitmargins.

**Dairy Segment**

In 2005, raw milk prices increased by approximately14% in ruble terms, which is 12% in dollar terms. We expect the price for rawmilk to continue to increase albeit at a lower pace in ruble terms in 2006. Ifwe are unable to increase the selling prices of our dairy products, raw milkprices could negatively impact our profit margins. We believe the higher rawmilk prices are due to increasing demand for raw milk from national andregional dairy producers, coupled with the low levels of dairy cattle stock inRussia. However, we expect that the differences in seasonal prices of raw milkin 2006 will be lower than in previous years.

As in previous years, domestic dairy production inRussia suffered a year-on-year slump in 2005. The general decline was partlydue to the reduction of dairy cattle in Russia but, in the first quarter of2006, we witnessed an increase in the domestic production of raw milk comparedto the same period in 2005. As the number of dairy cattle in Russia increases,we expect domestic dairy production to stop declining or even increaseslightly.

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Although domestic raw milk production declined in2005, dairy product sales increased in 2005. The most significant growth wasseen in milk, kefir and curd dessert, as well as in the sale of cheese.Industry experts estimate that the Russian dairy market grew by 5.3% in 2005and will grow by 4.2% in 2006, and that, due to inflation, growth will behigher in monetary terms than in actual volumes.

The regional structure of Russia’s dairy marketcontinued to shift in 2005, with dairy product sales increasing in regionalmarkets at a more rapid rate than in Moscow and the Central region of Russia.We expect that the growth in regional dairy sales will continue to outpacegrowth in Moscow during 2006.

Milk and kefir continue tobe key drivers of the volume growth in our dairy segment. At the same timeyogurts, dairy desserts and juice containing dairy drinks grew at a lower pacethan we initially anticipated. However, we believe that the consumption ofthese higher margin products will continue to increase in 2006.

**Beverage Segment**

At the end of 2005, we witnessed price increases injuice concentrate and other ingredients resulting, in part, from bad harvestsand poor weather conditions in juice-concentrate producing regions. Weexpect substantial price increases for juice concentrate and other materialsduring 2006, which would have a negative impact on our profit margins in thebeverage segment. Also, as the ruble has appreciated against the euro in 2005and a significant part of our concentrate and packaging material prices aredenominated in euros, such costs of juice production were lower in 2005 than in2004.

Average selling prices of our juice products increasedduring 2005. We expect further increases in juice sales prices in rubles termsin 2006. In 2005, in order to increase our presence in the regions and tobolster market share among lower-middle income consumers, we successfullyre-launched the “Lovely Garden” brand. We sponsored and promoted the brandthrough television commercial and print advertisements, which resulted insteady sales growth of the “Lovely Garden” juices and nectars. Although weexpect further growth of juice sales to the lower-middle segment, whichcurrently comprise 60% of the total market share, we believe that averageselling prices in the regions will generally continue to be lower than averageselling prices in Moscow and St. Petersburg due to the consumer preferences inthe regions, where household incomes are typically lower, for lower priceproducts, which have a negative effect on our gross margin. For the Central regionof Russia where incomes are higher, we are focusing our efforts on providingbeverage products that appeal to the upper-middle and premium segment.

We entered the mineral water market in 2003. Weestimate that the mineral water market in Russia is growing at approximately10% in volume a year. Our water division, which merged with our juice segmentinto a new beverage segment, in part, to diversify our range of productofferings to include lower-priced brands catering to the mass market. However,we still bottle premium brand water under the “Essentuki” brand, which istraditionally known to be used for medical purposes.

The increase in cost ofraw material and packaging is predicted to be substantial in 2006. Theseincreased costs coupled with an increase in transportation and promotional andmarketing expenses could negatively impact our profit margins and operatingincome in the beverage segment.

**Baby Food Segment**

In 2005, we created a separate baby food segmentoffering products such as liquid baby dairy food, juices and meat, fish andchicken purees. Prior to 2005, baby food was part of our dairy segment. By theend of 2005, we had a leading market share of 56% for liquid baby dairyproducts. Nestlé and Nutricia led the powdered baby formula market with marketshares of 50% and 25%, respectively, while Lebedyansky is the largest seller ofbaby juices and purees in Russia.

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To increase our marketshare and expand our baby product offerings in the regions, we acquired andbegan upgrading the Experimental Baby Food Plant in the Kursk region in July 2005.We also entered into three new markets within the baby food segment in 2005:meat, fish and chicken purees, fruit and dairy purees and food products forpregnant and nursing women. In the future, we plan to launch new products aswell as expand the range of our existing products.

**Selling andDistribution Expenses**

Our selling anddistribution costs increased in 2005 as compared to 2004 in absolute terms, butdecreased as a percentage of sales. In particular, our transportation,personnel and advertising costs increased, in large part, as a result of ourregional expansion program. Advertising costs were also driven upwards byincreases in prices charged by the media. Similarly, increased transportationcosts were driven by increased transportation tariffs. We expect these trendsto continue and, to the extent that they do, such expenses may outpace oursales growth.

**Exchange Rates andInflation**

A significant part of our costs and expenditures, aswell as liabilities, are either denominated in or tightly linked to the U.S.dollar and the euro. These include capital expenditures and borrowings, as wellas costs of packaging materials, juice concentrates and certain other rawmaterials. As a result, a decline in the value of the ruble against the U.S.dollar or the euro can adversely affect us by increasing our costs in rubleterms. If we cannot increase our ruble selling prices in line with the ruble’sdecline in value due to competitive pressures, our margins will suffer.Additionally, if the ruble declines and prices cannot keep pace, we could havedifficulty covering our U.S. dollar-denominated or euro-denominated costsor repaying our U.S. dollar-denominated or euro-denominated indebtedness.In nominal terms, the ruble appreciated against the U.S. dollar in 2005 (1.9%),2004 (6.5%) and 2003 (2.2%), according to the Central Bank of Russia.

Certain of our costs, such as salaries and supplies,are also sensitive to rises in the general price level in Russia. Inflation inRussia for 2005 and 2004 was 10.9% and 11.7%, respectively. In the future, dueto competitive pressures, we may not be able to raise the prices for ourproducts sufficiently to preserve operating margins. Accordingly, high rates ofinflation could increase our costs and decrease our operating margins.

Real appreciation of theruble against the U.S. dollar positively affects our revenues. According to theCentral Bank of Russia, the ruble appreciated in real terms against the U.S.dollar by 10.8%, 15.1% and 13.6% in 2005, 2004 and 2003, respectively.

***E.   Off-balance Sheet Arrangements***

As of December 31,2005, we did not have any off-balance sheet arrangements.

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***F.   Contractual Obligations***

We have various contractual obligations and commercialcommitments to make future payments, including capital commitments, notespayable and vendor equipment financing obligations.

Thefollowing table summarizes our future obligations and commitments under thesecontracts due by the periods indicated as of December 31, 2005:
|                                     | ** ** | **Payments due by periods  At December 31, 2005** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **Contractual  Obligations**        | ** ** | ** **                                                                      | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After  5 years** | ** ** |
| ** **                          | ** ** | **(in thousands)**                                                         | ** ** |
| Notes payable                       |       | 304,024                                                                         |       |   | 49,794 |   |   | 150,000 |   | 104,230 |   |   | — |   |   |
| Vendor financing  obligations       |       | 42,421                                                                          |       |   | 15,769 |   |   | 20,192 |   | 6,298 |   |   | 162 |   |   |
| Long-term  loans                    |       | 5,647                                                                           |       |   | 3,823 |   |   | 1,381 |   | 443 |   |   | — |   |   |
| Unconditional  purchase obligations |       | 12,011                                                                          |       |   | 12,011 |   |   | — |   | — |   |   | — |   |   |
| Short-term  loans                   |       | 19,554                                                                          |       |   | 19,554 |   |   | — |   | — |   |   | — |   |   |
| Total                               |       | 383,657                                                                         |       |   | 100,951 |   |   | 171,573 |   | 110,971 |   |   | 162 |   |   |
|                                     |            |                                                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Interest payable for the futureperiods is not included. We do not have any contingent commitments as atDecember 31, 2005. For additional information, see “Item 11. Quantitativeand Qualitative Disclosures about Market Risk—Interest Rate Risk.”

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***Item 6.****                         *Directors, Senior Management and Employees

***A.   Directors and Senior Management***

Our directors and executive officers, and their respective ages andpositions as of the date of this annual report were as follows:
| Name                       | ** ** | ** ** | ** ** | **Year of Birth**                                                                  | ** ** | **Position** |
|----------------------------|------------|------------|------------|------------------------------------------------------------------------------------|------------|--------------|
| David  Iakobachvili(1)     |       | 1957       |       | Chairman                                                                           |
| Sergei A.  Plastinin(1)    |       | 1968       |       | Director                                                                           |
| Guy de  Selliers(2)        |       | 1952       |       | Director                                                                           |
| Mikhail V.  Dubinin(1)     |       | 1969       |       | Director                                                                           |
| Michael A.  O’Neil    |       | 1945       |       | Director                                                                           |
| Alexander S.  Orlov(1)     |       | 1948       |       | Director                                                                           |
| Vladimir N.  Sherbak(2)    |       | 1939       |       | Director                                                                           |
| Earnest  Linwood Tipton(2) |       | 1934       |       | Director                                                                           |
| Victor A.  Tutelyan        |       | 1942       |       | Director                                                                           |
| Evgeny G.  Yasin           |       | 1934       |       | Director                                                                           |
| Gavril A.  Yushvaev(1)     |       | 1957       |       | Director                                                                           |
| Tony D. Maher              |       | 1956       |       | Chairman of  the Management Board                                                  |
| Dmitry A.  Anisimov        |       | 1971       |       | Chief  Financial Officer, Management Board Member                                  |
| Vera V.  Eliseeva          |       | 1958       |       | Head of Human  Resources, Management Board Member                                  |
| Marina G.  Kagan           |       | 1968       |       | Head of  External Communications and Investor Relations, Management Board Member   |
| Gennady K.  Krainov        |       | 1951       |       | Director of  Information, Analysis and Control Department, Management Board Member |
| Oleg E.  Kuzmin            |       | 1969       |       | Head of Dairy  Business Unit, Management Board Member                              |
| Jamshid Yadegardjam        |       | 1965       |       | Head of Beverages Business Unit,  Management Board Member                          |

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(1)          Partyto the Amended and Restated Partnership and Cooperation Agreement. See“Item 7. Major Shareholders and Related Party Transactions—B. RelatedParty Transactions” and “Item 3. Key Information—D. Risk Factors—RisksRelating to Our Business and Industry—We are controlled by a group ofshareholders whose interests could conflict with those of the holders of oursecurities.”

(2)          Memberof the Audit Committee.

***David Iakobachvili***   has served as Chairman of our Board of Directors since May 2001.In addition, Mr. Iakobachvili serves on the boards of directors of anumber of our production facilities, including Lianozovo Dairy Plant,Tsaritsino Dairy Plant, Moscow Baby Food Plant, Ramenskiy Plant, NizhnyNovgorod Dairy Plant, Siberian Dairy Plant, Vladivostok Dairy Plant, TimashevskDairy Plant, Bishkek Dairy Plant, Gulkevichy Dairy Plant, Novokuybishevsk Milk,Ufa Dairy Plant and Kiev Dairy Plant. He also serves on the boards of directorsof ZAO RusAgroProject, ZAO Agricultural Complex Gorki-2 and ZAO PlemhozNaro-osanovsk. Mr. Iakobachvili is chairman of the board of directors ofZAO “Metelitza-Club,” a member of the board of directors of Shikhan OJSC andAirport Financial Services Limited. He also serves on the boards of a number ofnational and international organizations, associations and unions, includingnon-commercial partnership RusBrand, Russian Union of Industrialists andEntrepreneurs, Russian Chamber of Commerce and Industry, National CorporateGovernance Council, U.S.-Russia Business Council, Russian-AmericanBusiness Council, Russo-British Chamber of Commerce, Moscow 

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International Business Association, Senate of Economic Advisers of theEuropean Democracy Forum, World Economic Forum and Monaco World Summit. Mr. Iakobachviliowns 8.33% of our outstanding common stock in the form of shares and 1.79% inthe form of GDSs.

***Sergei A. Plastinin***   has served as a member of our Board of Directors since May 2001.He served as the Chairman of our Management Board, which is our chief executiveofficer position, from 2001 to April 3, 2006. Currently, Mr. Plastininserves as the chairman of the boards of directors of a number of oursubsidiaries, including Lianozovo Dairy Plant, Tsaritsino Dairy Plant,Ramenskiy Plant, Nizhny Novgorod Dairy Plant, Siberian Dairy Plant, VladivostokDairy Plant, Timashevsk Dairy Plant, Ufa Dairy Plant, Bishkek Dairy Plant,Novokuibyshevsk Milk, Karasuk Dairy Plant, Gulkevichy Dairy Plant and KievDairy Plant. He is also a member of the board of directors of PIK CENTER, areal estate company. In 1993, he served as General Director of UT Center LLC;from 1994 to 1995, he was General Director of NPP of Juices and Drinks JSC;from 1996 to 1998, he was Deputy Director of PK Lianfruct JSC; from 1996 to1998 he served as Deputy Director of Production of Foods CJSC; and from 1998 to1999, he was Deputy Director of the Lianozovo Dairy Plant. Since 1996, Mr. Plastininhas acted as Executive Director of PAG Rodnik CJSC. In 1998, Mr. Plastininserved as Deputy General Director of Production and Trade Group WBD CJSC. Allof these companies either currently are or formerly were a part of our group ofcompanies. Mr. Plastinin owns 9.30% of our outstanding common stock in theform of shares and 1.45% in the form of GDSs.

***Guy de Selliers***   has served as a member of our Board of Directors since December 2001.He received a degree in engineering in 1975 and in economics in 1977 at theUniversity of Lourain. Currently, Mr. de Selliers serves as a member ofthe board of directors and a Chairman of the Audit Committee at Norilsk NickelOJSC and a member of the boards of directors of Mebelnaya Fabrika Shatura OJSCand Allied Resources Inc. He is also a director and member of the AuditCommittee of Solvay S.A., a global group of pharmaceutical and chemicalcompanies, and Chairman of the boards of directors of HB Advisers (UK), acorporate finance consulting agency, and Partners in Hope, a charityorganization. During 2004 and 2005, Mr. de Selliers was a member of theinternational supervisory board at Fortis Group, an international financialservices provider and, from 2001 to 2003, he acted as Chairman of LeaderCapital, a project equity fund. During 1998 to 2000, he acted as Chairman, Headof Europe, of Fleming Investment Bank. Mr. de Selliers served as chiefexecutive officer of MC BBL investment bank from 1997 to 1998. He was also aDeputy Vice President of EBRD from 1991 to 1997.

***Mikhail V. Dubinin***   has served as a member of our Board of Directors since May 2001.He served as Deputy General Director of ISSA, one of the first companies of ourgroup, from 1992 to 1993. From 1993 to 1994, he was the General Director of UTCenter LLC; from 1994 to 1995, he was Executive Director of NPP of Juices andDrinks JSC; from 1995 to 1996, he was President of Trade Company WBD CJSC; from1996 to 1997, he was consultant at Trade Company WBD CJSC; from 1997 to 1998,he served as Deputy Director (Economic Affairs) of the Lianozovo Dairy Plant;from 1998 to 2002, he was Deputy General Director of Production and Trade GroupWBD. All of these companies either currently are or formerly were a part of ourgroup of companies. Currently, Mr. Dubinin serves on the boards of directorsof several companies unaffiliated with us, including OOO Istrinskie ruch’y, OOONadejny Fundament, OOO S-trading, OOO Cliff-nedvijimost, OOO Petri-trad andnon-commercial partnership Rezidentzia Benilux. Mr. Dubinin owns 5.71% ofour outstanding common stock in the form of shares and 0.81% in the form ofGDSs.

***Michael A. O’Neil***   has served as a member of our Board of Directors since December 2001.He received a degree in Industrial Engineering from the College of CommerceRathmines in 1967. Currently, Mr. O’Neil serves on the management board ofCoca-Cola Icecek in Turkey and is a member of the board of directors of EfesBreweries International. From 1989 to 1991, Mr. O’Neill was Deputy RegionManager of the Coca-Cola Company. From 1991 to 1997, he was the Region Managerof Eurasia of the Coca-Cola Company. From 1997 to 2000, Mr. O’Neill wasthe President of Nordic and Northern Eurasia Division of the Coca-Cola Company.

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***Alexander S. Orlov***   has served as a member of our Board of Directors since May 2001.He was director of the milk department of the Moscow Baby Food Plant from 1992to 1994; from 1994 to 1997, Mr. Orlov served as General Director of theMoscow Baby Food Plant; from 1997 to 1998, he was General Director of theLianozovo Dairy Plant. From May 1998 through December 2002, Mr. Orlovhas served as General Director of Production and Trade Group WBD. In addition,during 2001 to 2003, Mr. Orlov was a consultant to the Lianozovo Dairy Plantand Deputy Chairman (but not a member) of our Management Board. Mr. Orlovgraduated from the Moscow Technology Institute of Meat and Milk Industry in1975. Currently, Mr. Orlov serves on the boards of directors of oursubsidiaries Moscow Baby Food Plant, Kiev Dairy Plant and Buryn Dairy Plant,and on the board of directors of non-commercial partnership RezidentziaBenilux. Mr. Orlov owns 3.47% of our outstanding common stock in the formof shares and 0.52% in the form of GDSs.

***Vladimir N. Sherbak***   has served as a member of our Board of Directors since May 2001.He graduated from Krasnodar Polytechnic Institute in 1966 and from the Academyof Social Science of the Central Committee of the Communist Party in 1982.Currently, Mr. Sherbak serves as the Chairman of the board of directors ofJoint-Stock Commercial Bank Tusar. From 1996 to 1999, Mr. Sherbak wasDeputy Minister of Agriculture of the Russian Federation; from 1999 to 2000, hewas Deputy Prime Minister of the Russian Federation for Agriculture.

***Earnest Linwood Tipton***   has served as a member of our Board of Directors since May 2002.He has served on the International Dairy Food Association (IDFA) and itsorganizations for over 35 years in various posts, culminating with hisappointment to President and CEO in 1983. He is a respected resource onagricultural trade policy for Capitol Hill and federal agencies, and he hasserved as an advisor under both Republican and Democratic administrations,including his presidential appointment to the National Commission onAgricultural Trade and Export Policy in 1984. Mr. Tipton is a pastpresident and chairman of the board of the National Economists Club and theNational Economic Education Foundation. Prior to joining IDFA, he worked as aneconomist for a milk producers’ cooperative and as a dairy economic consultant.Mr. Tipton also served as an officer in the U.S. Army Finance Corp. andholds Bachelor’s and Master’s degrees from the University of Missouri.

***Victor A. Tutelyan***   has served as a member of our Board of Directors since December 2001.He graduated from the Moscow Medical Institute in 1965. He is an academician ofthe Russian Academy of Medical Science and has been the chief secretary of itsPresidium since 2000. Currently, Mr. Tutelyan is the head of the Instituteof Nutrition of the Russian Academy of Medical Science. From 1980 to 2000, Mr. Tutelyanwas the Deputy Director of the Institute of Nutrition of the Russian Academy ofMedical Science.

***Evgeny G. Yasin***   has served as a member of our Board of Directors since December 2001.He graduated from the Hydrotechnical Institute in 1957 with a degree inengineering and in 1963 from Moscow State University with a degree ineconomics. He has been a professor in the High School of Economy of the StateUniversity since July 1998. Currently, Mr. Yasin serves as a directorof Severstal Auto, Open Investments, Echo of Moscow, as well as the presidentof the non-state fund Expert Institute and as a scientific adviser at the StateUniversity—Higher School of Economics. From 2000 to 2002, he served as adirector of VimpelCom OJSC. From 1991 to 1994, Mr. Yasin was the Directorof Economic Policy for the Russian Society of Manufactures and Entrepreneurs.In 1994, he was the head of the Analytical Center of the Administration of theRussian President. From 1994 to 1998, Mr. Yasin was the Minister of theEconomy of Russia.

***Gavril A. Yushvaev***   has served as a member of our Board of Directors since June 2005.He also serves as the president and a member of the board of directors of ZAO “RusAgroProject,”and a member of the Board of Directors of ZAO “Agricultural Complex Gorki-2”and ZAO Plemhoz “Naro-osanovsky.” Mr. Yushvaev, who is our largestshareholder, owns 17.13% of our outstanding common stock in the form of sharesand 2.32% in the form of GDSs.

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***Tony D. Maher***   has served as the Chairman of our Management Board, which isour chief executive officer position, since April 2006. Mr. Maher isa 30-year veteran of the Coca-Cola system and, prior to his appointmentas Chairman of our Management Board, he served as regional managing director ofCoca-Cola Hellenic Bottling and Chairman of the Board of Directors of Multon.

***Dmitry A. Anisimov***   has served as our Chief Financial Officer since April 2005and also serves as a member of our Management Board. Mr. Anisimov also servesas a member of the boards of directors of Bishkek Dairy Plant, Kharkov DairyPlant and Tuymazinskiy Dairy Plant, as well as the Financial Director of theDairy Business Unit, a position he has held since May 2003. Prior tojoining us, he served as Regional Corporate Finance Manager for Motorola’soperations in Russia and the CIS from March 1999 to May 2003. Priorto that, he worked for Cadbury Confectionary and British Petroleum PLC. Mr. Anisimovhas a degree in economics from the Moscow State Institute of InternationalRelations.

***Vera V. Eliseeva***   has served as our Head of Human Resources since October 2004and also serves as a member of our Management Board. Prior to joining us, sheworked for PATHWAYS HR training & consultancy as a senior partner fromMay 2003 to October 2004. She served as the Director of HumanResources for Troika Dialog from November 1999 to April 2003 and,from September 1997 to November 1999, she worked as a compensationand benefits manager at Nestlé Food LLC. Ms. Eliseeva graduated fromMoscow State Institute of International Relations (MGIMO) and received a Master’sDegree in business economics from California State University, Hayward.

***Marina G. Kagan***   has served as the Head of our External Communications andInvestor Relations Department and a member of our Management Board since 2004.She graduated from Westminster University in London, England. From 1991 to1998, Ms. Kagan worked for BBC radio and TV, serving as a Moscowcorrespondent for the BBC World Service from 1995 to 1998. She joined GavinAnderson & Co, an international investor and public relationsconsultancy, in 1998, where she served on the Board of Directors until 2001.From 2001 to 2004, Ms. Kagan worked at Shared Value, a London-basedinternational financial public relations and investor relations firm, where shewas a partner.

***Gennady K. Krainov***   has served as Director of our Information, Analysis andControl Department since December 2003 and as a member of our ManagementBoard since June 2005. He also serves as a member of the Management Boardof Gulkevichy Dairy Plant, as well as on our Anti-crisis and InvestmentCommittees and as the Chairman of our Advisory Committee for ClassifiedCommercial Information. From 1975 until the end of 2003, Mr. Krainov heldmanagerial positions within national security bodies and the tax police, andalso worked for the Russian External Trade Ministry and Chamber of Commerce andIndustry. Mr. Krainov graduated from the Moscow Geological SurveyInstitute and from the Higher KGB School, where he received a legal degree.

***Oleg E. Kuzmin***   has served as the Head of our Dairy Business Unit since August 2004and also serves on our Management Board and as a member of the boards ofdirectors of Kharkov Dairy Plant, Kiev Dairy Plant, Lianozovo Dairy Plant,Tuymazinskiy Dairy Plant, Tsaritsino Dairy Plant, Siberian Dairy Plant, BishkekDairy Plant and Tashkent Dairy Plant. Mr. Kuzmin has worked for us since1995. From September 2003 to August 2004, he served as the Directorfor Operating Management of our Dairy Business Unit. Prior to that, he servedin various managerial positions, including as head of our cheese project,Director of the Nizhny Novgorod Dairy Plant, Strategy Director at the LianozovoDairy Plant and Marketing Director at Trade Company Wimm-Bill-Dann. Mr. Kuzmingraduated from Moscow State Technical University named after N.E. Bauman andfrom Moscow State University. He also received an MBA from the Academy ofNational Economy of the Government of Russian Federation.

***Jamshid Yadegardjam***   has served as the Head of our Beverages Business Unit since March 2005and also serves on our Management Board. He served as our Deputy ChiefFinancial Officer responsible for Investor Relations from 2002 until December 2003and as the Head of our former Mineral Water Business Unit from December 2003to March 2005. Prior to joining us, he held managerial positions withvarious companies in the consumer products, automotive, industrial and bankingindustries. Mr. Yadegardjam received a Bachelor’s degree and an MBA fromthe University of Ottawa.

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All of our directors were elected on June 14,2005 and, pursuant to Russian law, their terms will expire on the date of ournext annual shareholders’ meeting, which will take place on June 30, 2006.

***B.   Compensationof Directors and Senior Management***

In 2005, the aggregate amount ofcompensation paid to the directors and Management Board members ofWimm-Bill-Dann Foods OJSC as a group for services in all capacities was $2.9million. We do not have a stock option plan and no funds were set aside forpension, retirement and other similar benefits for the same directors andexecutive officers as of December 31, 2005.

We compensate each board member $50,000annually, plus transportation and lodging expenses incurred in connection withboard meeting attendance, and up to $2,000 per year for other expenses incurredin connection with board-related activities. The Chairman of the Board iscompensated $300,000 annually plus transportation and lodging expenses incurredin connection with board meeting attendance, and up to $2,000 per year forother expenses incurred in connection with board-related activities. Wealso compensate each member of the Personnel and Compensation Committee andeach member of the Investment and Strategic Planning Committee $3,000 and eachmember of the Audit Committee $5,000 for participation in each planned directCommittee meeting.

***C.   BoardPractices***

**Board ofDirectors**

Members of our Board of Directors areelected by a majority vote of shareholders at our annual general meeting usinga cumulative voting system. Each director is elected for a term that lastsuntil the next annual general meeting and may be re-elected an unlimited numberof times. Our Board of Directors currently consists of eleven members, six ofwhom are independent directors. The Board of Directors has the authority tomake overall management decisions for the Company, except those mattersreserved to the shareholders. See “Item 10. Additional Information—B. Charterand Certain Requirements of Russian Legislation—General Meetings of Shareholders”for more information regarding the competence of our shareholders’ meetings.The members of our Board of Directors serve pursuant to a contract. Thecontracts do not provide for benefits to the board members upon termination oftheir employment. We indemnify each member of our Board of Directors pursuantto agreements, under which we indemnify them against, among others, expensesand costs incurred by them in connection with any claims, suits or proceedingsarising out of or as a result of their service as a director, subject tocertain limitations. The agreements also limit the liability of the directorsto compensate us for any losses caused by them, as well as our ability to takeany action against them, subject to certain exclusions.

The business address for all of ourofficers and directors is 16 Yauzsky Boulevard, Moscow 109028, RussianFederation.

**ManagementBoard**

The size of our Management Board, whichconsists of our executive officers, is determined by the Board of Directors andcurrently consists of seven members: Tony D. Maher, Dmitry A. Anisimov, MarinaG. Kagan, Vera V. Eliseeva, Jamshid Yadegardjam, Oleg E. Kuzmin and Gennady K.Krainov. Members of the Management Board are nominated by the Chairman of theManagement Board and confirmed by our Board of Directors for a term of threeyears. The Management Board is the collective executive body of the Companyand, under the direction of the Chairman of the Management Board, isresponsible for our day-to-day management. We indemnify each member of ourManagement Board pursuant to agreements, under which we indemnify them against,among others, expenses and costs incurred by them in connection with anyclaims, suits or proceedings arising out of or as a result of their service asa Management Board member, subject to certain limitations. The agreements alsolimit the liability of the Management Board members to compensate us for anylosses caused by them, as well as our ability to take any action against them,subject to certain exclusions.

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**Chairmanof the Management Board**

In accordance with our current charter, theBoard of Directors appoints the Chairman of our Management Board, our chiefexecutive officer, for a term of three years, which term we intend to extend tofive years by amending our charter. We concluded an employment contract withthe current Chairman of our Management Board for a term of five years. Therights, obligations and the times and amounts of payment for the Chairman’sservices are determined pursuant to our charter and by contract. The Chairmanof the Management Board is responsible for day-to-day management of ouractivities.

**Board ofDirectors Committees**

**AuditCommittee**

The Audit Committee of our Board ofDirectors was established on April 24, 2003 by a decision of our Board ofDirectors and functions pursuant to bylaws approved by the Board. It iscurrently comprised of three independent directors, G. de Selliers,E. Linwood Tipton and V. Sherbak. Our Board of Directors hasdetermined that G. de Selliers is an “audit committee financialexpert” as defined in Item 16A of Form 20-F.

The goals andobjectives of the Audit Committee, as set forth in the bylaws, are to assistthe Board of Directors in carrying out its oversight responsibilities in theareas of:

·       ourfinancial statements and the processes of their preparation;

·       ourinternal accounting and financial control system;

·       work ofthe internal audit service and independent auditors;

·       qualificationsand independence of the independent auditors;

·       our compliancewith ethical principles; and

·       requirementsof legislative and normative acts.

According to the bylaws, the AuditCommittee shall meet, separately from the non-independent directors, at leastonce during each fiscal quarter and more frequently as the Committee deemsdesirable. To improve the effectiveness of the Audit Committee, a majorauditing firm (other than our independent auditor) has been hired to advise theAudit Committee.

**Investmentand Strategic Planning Committee**

The Investment and Strategic PlanningCommittee of our Board of Directors was formed on April 24, 2003 by adecision of our Board of Directors and functions pursuant to bylaws approved bythe Board. It is composed of M. O’Neil, an independent director who serves asthe Committee Chairman, S. Plastinin, M. Dubinin and V. Tutelyan. According toits bylaws, the Investments and Strategic Planning Committee is designed toassist the Board of Directors in approving and carrying out its oversightresponsibilities in relation to significant investment programs, mergers andacquisitions and strategic planning.

According to the bylaws, the Investment andStrategic Planning Committee shall meet not less than once during each fiscalquarter.

**Personneland Compensation Committee**

The Personneland Compensation Committee of our Board of Directors was formed on April 24,2003 by a decision of our Board of Directors and functions pursuant to bylawsapproved by the Board. It is composed of E. Yasin, an independent directorwho serves as Committee Chairman, G. Yushvaev and A. Orlov. According to thebylaws, the Personnel and Compensation Committee is tasked with assisting inthe selection of Board of Directors candidates. Its members also assist theManagement Board in formulating and implementing:

·       a uniformpersonnel policy for all of our subsidiaries;

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·       apersonnel appraisal, rotation, dismissal, education and training policy andadministrative accounting standards;

·       aremuneration and compensation policy, as well as other incentive programs(stock option and pension plans, social programs); and

·       acorporate ethics and communications policy.

According to the bylaws, the Personnel andCompensation Committee shall meet not less than once during each fiscalquarter.

**CompanyCommittees**

**DisclosureCommittee**

Our Disclosure Committee was formed on March 24,2003 by order of the Chairman of our Management Board. It is currently composedof our Chief Financial Officer, Head of Corporate Communications and InvestorRelations, Head of the Legal Department, Head of the Treasury, Head of InternalAudit, Head of the Dairy Unit, Head of the Beverages Unit, Financial Directorof the Beverages Unit, Head of the Baby Food Unit, Financial Director of theBaby Food Unit and the Head of the Reporting, Budgeting and AnalysisDepartment. The Committee’s activities are coordinated by a senior investorrelations manager.

The Disclosure Committee functions pursuantto bylaws and meets as determined by the Committee. It is directly supervisedby and reports to the Chairman of the Management Board and Chief FinancialOfficer.

According toits bylaws, the Disclosure Committee is tasked with:

·       overseeingthe gathering, evaluating and reporting of information relating to ourdisclosure obligations;

·       evaluatingour system of disclosure controls and procedures; and

·       preparingwritten confirmations relating to our observance of the information disclosure rules andprinciples.

As set forth in the bylaws, the DisclosureCommittee is also responsible for all aspects of information disclosure,including ensuring proper documentary execution, transmission, implementationand performance of our rules and principles of information disclosure, aswell as for coordinating the work of our legal department, external andinternal auditors and our other departments for the purpose of preparation of ourannual reports and other disclosure documents in accordance with applicablelaw. Furthermore, the head and financial director of each of our business unitshave reviewed this annual report on Form 20-F and to the best of his knowledgebelieves the disclosure herein is accurate and complete.

**AuditCommission (for financial reporting under Russian law)**

The Audit Commission verifies the accuracyof our financial reporting under Russian law and generally supervises ourfinancial activity. The members of our Audit Commission are nominated andelected by our shareholders for a term of one year. A Director may notsimultaneously be a member of the Audit Commission. Our Audit Commissioncurrently has six members: E.V. Bogutskaya, E.B. Kuznetsova, N.N. Kolesnikova,M.A. Naumova, N.V. Romanova and Yu.A. Chudina. Our Audit Commission operates inaccordance with terms set forth in specific guidelines. The terms of all of ourAudit Commission members expire on the date of our next annual shareholders’meeting, which will take place on June 30, 2006.

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**CorporateGovernance**

We are required under the New York StockExchange listing rules to disclose any significant differences between thecorporate governance practices that we follow under Russian law and applicablelisting standards and those followed by U.S. domestic companies under New YorkStock Exchange listing standards. This disclosure is posted on our websitehttp:/ /www.wbd.com/f*_*reports/corp*_*govern/.

***D.   Employees***

In 2005, we hadan average of 18,956 employees within Russia and the other countries of theCIS, including 9,765 production employees, 5,713 marketing and distributionemployees and 3,478 general and administrative employees. We do not employ a significantnumber of part-time employees. To date, we have experienced a low level ofdepartures, voluntary or otherwise. We have not experienced any work stoppages,and we consider our relations with employees to be strong. Some of ouremployees are unionized and are employed pursuant to collective laboragreements.
| Average for the year ended  December 31, | ** ** | ** ** | ** ** | **Production** | ** ** | **Marketing  and  Distribution** | ** ** | **General and  Administrative** | ** ** | **Percent  Increase  (Decrease) over  Prior Year** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|----------------|------------|----------------------------------|------------|--------------------------------------|------------|--------------------------------------------------------------|------------|
| 2005(1)                                                           |       |       | 9,765      |           |       |                             | 5,713      |                                 |       |                                                         | 3,478      |   |   |   | 7 | % |   |
| 2004                                                              |       |       | 8,561      |           |       |                             | 6,008      |                                 |       |                                                         | 3,140      |   |   |   | (3 | )% |   |
| 2003                                                              |       |       | 9,347      |           |       |                             | 5,522      |                                 |       |                                                         | 3,463      |   |   |   | 13 | % |   |

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(1)          Excluding employees of our “Agro” business division and ofbusinesses we acquired in 2005, we had an average of 8,401 production employees,5,554 marketing and distribution employees and 3,102 general and administrationemployees during 2005. We exclude employees of our “Agro” business divisionwhen calculating sales per employee, as revenue generated by “Agro” businessemployees is reported as other operating expenses and income.

Our personnel enjoy a relatively high levelof social benefits. We provide subsidies for meals, medical care and summervacations for employees and their children. Our employees have opportunities toupgrade their qualifications by participating in training sessions and takingcourses. Starting in 1998, leading managers of our subsidiaries have beeninvolved in programs to upgrade their professional skills through a program ofthe Russian government. We seek to maintain effective management teams at ourregional subsidiaries by recruiting qualified new employees, transferringexisting employees from our Moscow subsidiaries, as well as through customizedretraining programs and on-site training in our Moscow subsidiaries. Programsfor training local personnel have been or are being developed and implementedat each of our regional plants. In addition, in 2005, we created a corporateuniversity to educate and train our personnel, create an internal reserve ofmanagement talent and provide an opportunity for employees to share theirknowledge and experience with personnel located at our regional sites. We alsooffer training programs to management and sales personnel and thus far haveeducated approximately 500 employees at our leading training centers.

***E.   ShareOwnership***

Each ADS is the economic equivalent of oneshare of our common stock.

The aggregatebeneficial interest of our directors, senior management and employees as of May 15,2006 was as follows:
| Number of Shares of Common Stock | ** ** | **Number of GDSs** | ** ** | **% Capital Stock Outstanding** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|------------------------------------------------|------------|
| 19,337,336                                                |       | 3,029,997                    |       | 50.8348                                        |       |

 

For further description of the individual interest of our directors andsenior management, see “Item 7. Major Shareholders and Related PartyTransactions—A. Major Shareholders.”

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***Item 7.***                          MajorShareholders and Related Party Transactions

**A.   MajorShareholders**

Thefollowing table sets forth information regarding the beneficial ownership ofour common stock as of May 15, 2006:
| Name of Beneficial Owner | ** ** | **Number of  Shares  Owned** | ** ** | **Percentage  of Shares  Outstanding** | ** ** | **Number of  ADSs/GDSs  Owned** | ** ** | **Percentage  of Shares  Outstanding** | ** ** | **Total Number of  Shares Owned  (Shares +  ADSs/GDSs)** | ** ** | **Total Percentage  of Shares  Outstanding  (Shares +  ADSs/GDSs)** | ** ** |
|-----------------------------------------|------------|-----------------------------------|------------|---------------------------------------------|------------|--------------------------------------|------------|---------------------------------------------|------------|------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| Gavril A. Yushvaev(1)(2)           |       | 7,538,624                         |       |                                        | 17.1332    | %                                    |       |                                        | 1,020,894  |                                                                         |       |                                                                               | 2.3202     | % |   |   | 8,559,518 |   |   |   | 19.4535 | % |   |
| Sergei A.  Plastinin(1)(2)              |       | 4,094,096                         |       |                                        | 9.3048     | %                                    |       |                                        | 636,143    |                                                                         |       |                                                                               | 1.4458     | % |   |   | 4,730,239 |   |   |   | 10.7505 | % |   |
| David Iakobachvili(1)(2)                |       | 3,665,031                         |       |                                        | 8.3296     | %                                    |       |                                        | 786,039    |                                                                         |       |                                                                               | 1.7865     | % |   |   | 4,451,070 |   |   |   | 10.1161 | % |   |
| Mikhail V.   Dubinin(1)(2)              |       | 2,512,103                         |       |                                        | 5.7093     | %                                    |       |                                        | 357,233    |                                                                         |       |                                                                               | 0.8119     | % |   |   | 2,869,336 |   |   |   | 6.5212 | % |   |
| Parex Bank JSC(3)                       |       | 2,115,529                         |       |                                        | 4.8080     | %                                    |       |                                        | —     |                                                                         |       |                                                                               | —     |   |   |   | 2,115,529 |   |   |   | 4.8080 | % |   |
| Alexander S. Orlov(1)(2)           |       | 1,527,482                         |       |                                        | 3.4716     | %                                    |       |                                        | 229,688    |                                                                         |       |                                                                               | 0.5220     | % |   |   | 1,757,170 |   |   |   | 3.9936 | % |   |
| Mikhail I.   Vishnyakov(2)              |       | 901,029                           |       |                                        | 2.0478     | %                                    |       |                                        | 135,488    |                                                                         |       |                                                                               | 0.3079     | % |   |   | 1,036,517 |   |   |   | 2.3557 | % |   |
| Viktor E.   Evdokimov(2)                |       | 147,492                           |       |                                        | 0.3352     | %                                    |       |                                        | 22,178     |                                                                         |       |                                                                               | 0.0504     | % |   |   | 169,670 |   |   |   | 0.3856 | % |   |
| Other holders of ordinary shares        |       | 3,903,614                         |       |                                        | 8.8719     | %                                    |       |                                        | —     |                                                                         |       |                                                                               | —     |   |   |   | 3,903,614 |   |   |   | 8.8719 | % |   |
| Holders of American Shares(4)           |       | —                            |       |                                        | —     |                                 |       |                                        | 14,407,337 |                                                                         |       |                                                                               | 32.7439    | % |   |   | 14,407,337 |   |   |   | 32.7439 | % |   |
| Total                                   |       | 26,405,000                        |       |                                        | 60.0114    | %                                    |       |                                        | 17,595,000 |                                                                         |       |                                                                               | 39.9886    | % |   |   | 44,000,000 |   |   |   | 100.00 | % |   |

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(1)          Member of our Board ofDirectors.

(2)          Party to the Amended andRestated Partnership and Cooperation Agreement.

(3)          According to a pressrelease issued by I.M. Arteks Holdings Limited, or Arteks, dated June 7,2004, Arteks transferred 5.29% of our shares to Parex Bank JSC as security undera credit agreement, which amount was reduced to 4.92%. Arteks is a party to theAmended and Restated Partnership and Cooperation Agreement. On March 22,2005 Arteks disposed of 0.48% of our shares. Currently Arteks is believed toown 4.81% of our shares which are still held by Parex Bank JSC as securityunder a credit agreement.

(4)          According to its AnnualReport on Form 20-F for the year ended December 31, 2005 onfile at the U.S. Securities and Exchange Commission, Groupe Danone owns 9.9% ofour outstanding shares in the form of ADSs.

As of May 15, 2006, we had 44,000,000 shares ofcommon stock outstanding. The total number of ADSs outstanding was 14,407,337representing underlying ownership of 14,407,337 shares, or 32.7439% of ouroutstanding shares. The total number of GDSs outstanding was 3,187,663representing underlying ownership of 3,187,663 shares, or 7.2447% of ouroutstanding shares. 5,213,193 ADSs were held in the United States by 22holders, according to the data provided by Capital Bridge. The sharesunderlying the ADSs and GDSs are deposited with Deutsche Bank Trust CompanyAmericas and the local custodian is OOO Deutsche Bank. All shares of commonstock have the same voting rights.

Based on our share register, we believe we are notdirectly or indirectly owned or controlled by another corporation orgovernment, and that there are no arrangements the operation of which mayresult in a change of control. From the date of completion of our initialpublic offering, February 14, 2002, there 

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have not been anysignificant changes in the percentage ownership held by any major shareholdersexcept as described below.

In March 2003, our former shareholder, AleksandrsTimohins, sold 6.95% of our shares to United Burlington Investments Limited,which entity acceded to the Amended and Restated Partnership and CooperationAgreement. In February 2004, United Burlington Investments Limited sold6.30% of our shares to I.M. Arteks Holdings Limited, or Arteks, which entityacceded to the Amended and Restated Partnership and Cooperation Agreement.According to a press release issued by Arteks dated June 7, 2004, Artekstransferred 5.29% of our shares to Parex Bank JSC as security under a creditagreement, which amount was thereafter reduced to 4.92%. The press releaseindicated that Arteks intends to continue controlling its stake and to repaythe credit. It also stated that, in the event of Arteks’ default under thecredit agreement, members of the controlling group of shareholders will have aright of first refusal to purchase the shares proportionally. On March 22,2005, Arteks reportedly disposed of 0.48% of our shares. Currently Arteks isbelieved to own 4.81% of our shares which are still held by Parex Bank JSC assecurity under a credit agreement.

In May 2003, certain shareholders in ourcontrolling group of shareholders, some of whom are members of our Board ofDirectors, sold shares held by them amounting to approximately 4.0% of ourtotal outstanding shares in the form of global depositary shares, or GDSs. Inconnection with this sale, we entered into a deposit agreement for GDRs withDeutsche Bank Trust Company Americas. In February and March 2004,certain shareholders in our controlling group of shareholders, some of whom aremembers of our Board of Directors, sold 3,546,153 shares held by them amountingto 8.06% of our outstanding shares, of which 1,346,153 shares, or 3.06% of ouroutstanding shares, were acquired by Mr. Iakobachvili, the Chairman of ourBoard of Directors and a member of the controlling group of shareholders. In March 2005,certain shareholders in our controlling group of shareholders, some of whom aremembers of our Board of Directors, sold shares held by them amounting toapproximately 3.0% of our total outstanding shares. In February 2006, Mr. Iakobachviliand Gavril Yushvaev, a member of our Board of Directors and a member of thecontrolling group of shareholders, purchased all shares owned by EvgenyYaroslavsky, thereby increasing their respective ownership stakes to 10.12% and19.45%, respectively. Following the disposal of his ownership stake, Mr. Yaroslavskyceased to be a party to the Amended and Restated Partnership and CooperationAgreement. In addition, we were informed by our controlling group ofshareholders that some members of this group may consider selling some of theirshares in 2006. See “Item 3. Key Information—D. Risk Factors—We are controlledby a group of shareholders whose interests could conflict with those of theholders of our securities.”

According to its AnnualReport on Form 20-F for the year ended December 31, 2005,Groupe Danone, our competitor in the dairy market, owns ADSs representing 9.9%of our outstanding shares. During 2003, certain of our shareholders wereengaged in preliminary discussions relating to the possible acquisition of allor a majority of our shares by Groupe Danone. At the request of theseshareholders, we cooperated in such preliminary discussions. In November 2003,we were informed by the shareholders who were engaged in the discussions withGroupe Danone that such discussions had been amicably terminated.

**B.   RelatedParty Transactions**

See Note 28 (RelatedParties) to the Consolidated Financial Statements included elsewhere in thisdocument.

**C.   Interestsof Experts and Counsel**

Not applicable.

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***Item 8.****                         *FinancialInformation

**A.   ConsolidatedStatements and Other Financial Information**

**8.A.1-4**                     See“Item 18. Financial Statements.”

**8.A.5-6**                        Not applicable.

**8.A.7**                                   Litigation

Prior to January 1, 2003, we used certain taxoptimization initiatives, which resulted in tax savings of approximately $3.8million. Although we believe these tax optimization initiatives comply withRussian tax law, the tax authorities may nonetheless challenge such initiativesand attempt to recover the full amount of the savings, as well as seekpenalties. Starting January 1, 2003, we discontinued using these taxoptimization initiatives.

From 2002 to March 2005, certain of our juiceproducing subsidiaries benefited from small enterprise tax legislation. If wehad not taken advantage of this benefit, our tax expenses would have increasedby approximately $9.4 million during this period. Although none of oursubsidiaries currently takes advantage of the small enterprise tax benefits, wecannot guarantee that the tax authorities may not retroactively challenge theseprevious tax benefits enjoyed by our subsidiaries and seek to recover the fullamount of tax savings plus penalties. Such challenges, if successful, couldmaterially adversely affect our results of operations.

See also “Item 3. KeyInformation—D. Risk Factors—Risks Relating to Our Financial Condition—If thevarious initiatives we have used to reduce our tax burden and/or ourcalculation of our VAT and profit tax liabilities are successfully challengedby the Russian tax authorities, we will face significant losses associated withthe assessed amount of tax underpaid and related interest and penalties, whichwould have a material impact on our financial condition and results ofoperations,” “—The elimination of a tax privilege from which we currentlybenefit and/or a successful challenge by the tax authorities of our use of thistax privilege would materially adversely affect our results of operations” and “—Weare only able to conduct banking transactions with a limited number ofcreditworthy Russian banks, as the Russian banking system remainsunderdeveloped, and another banking crisis could place severe liquidityconstraints on our business, materially adversely affecting our business,financial position and results of operations.”

**8.A.8**                                   DividendDistribution Policy

Annual dividendpayments, if any, must be recommended by our board of directors and approved byour shareholders. In particular, dividends may be paid only out of net profitsfor the current year calculated under Russian accounting principles and as longas the following conditions have been met:

·       ourcharter capital has been paid in full;

·       thevalue of our net assets, minus the proposed dividend payment, is greater thanthe total of our charter capital and our reserve fund;

·       wehave repurchased all shares from shareholders having the right to demandrepurchase; and

·       weare not, and would not become as the result of payment of dividends, insolvent.

We anticipate that any dividends we may pay in thefuture on the shares represented by the ADSs will be declared and paid to thedepositary in rubles and will be converted into U.S. dollars by the depositaryand distributed to holders of ADSs, net of the depositary’s fees and expenses.Accordingly, the value of dividends received by holders of ADSs will be subjectto fluctuations in the exchange rate between the ruble and the U.S. dollar. Fora discussion of our policy on dividend distributions, see “Item 10. AdditionalInformation—B. Charter and Certain Requirements of Russian Legislation—Dividends.”

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We do not have a formal dividend policy and have not,since our incorporation on May 31, 2001, declared or paid any dividend onour common stock. On May 30, 2006, our Board of Directors has recommendedto the General Meeting of Shareholders scheduled for June 30, 2006 todeclare dividends for the financial years 2002, 2003 and 2004 in the amount ofRUR 4.60 (approximately $0.17) per share, as well as for the first quarter of2006 in the amount of RUR 2.27 (approximately $0.08) per share.

The Board of Directorsalso approved guidance on our dividend policy. Subject to a number of financialfactors, including sustainability, as well as capital requirements andresources, the Board of Directors expects to recommend our annual dividend forfiscal year 2006 to be within the range of $0.50-0.60 per share. TheBoard of Directors also expressed its intention to recommend dividends insimilar amounts to be paid in the future provided that we remain profitable.

**B.   SignificantChanges**

In January 2006, we acquired an additional 20%stake in the Moscow Baby Food Plant from minority shareholders for cashconsideration of $7.0 million. The fair value of net assets acquired in excessof the purchase price of $3.6 million will be recorded in our financialstatements as a reduction in the value of intangible assets and property, plantand equipment.

In April 2006, Tony D. Maher was appointed theChairman of our Management Board, our chief executive officer position. See “Item6. Directors, Senior Management and Employees—A. Directors and SeniorManagement” for additional information. Mr. Maher replaced Sergei A.Plastinin, who earlier announced his intent to step down as Chairman of theManagement Board but remain a shareholder and member of our Board of Directors.

***Item 9.****                         *Offerand Listing Details

(Only items 9.A.4 and 9.Care applicable.)

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**A.   MarketPrice Information**

Thefollowing table sets forth the monthly high and low market prices per ADS onthe New York Stock Exchange for each of the most recent six months; thequarterly high and low market prices per ADS for each quarter of 2004 and 2005and the first quarter of 2006; and the annual high and low market prices perADS during 2003, 2004 and 2005. Also set forth are the high and low marketprices for shares of our common stock on the RTS.
|                      | ** ** | **Shares of  Common Stock  High** | ** ** | **Shares of  Common Stock  Low** | ** ** | **ADS  High** | ** ** | **ADS  Low** | ** ** |
|----------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|---------------|------------|--------------|------------|
| May 2006        |       |                                        | $          | 37.50                                      |       |          |       | $            | 28.00      |   |   | $ | 38.90 |   | $ | 33.24 |   |
| April 2006      |       |                                        | $          | 35.00                                      |       |          |       | $            | 29.50      |   |   | $ | 37.75 |   | $ | 29.25 |   |
| March 2006      |       |                                        | $          | 26.80                                      |       |          |       | $            | 22.25      |   |   | $ | 28.36 |   | $ | 23.55 |   |
| February 2006   |       |                                        | $          | 22.50                                      |       |          |       | $            | 20.90      |   |   | $ | 24.42 |   | $ | 22.60 |   |
| January 2006    |       |                                        | $          | 22.00                                      |       |          |       | $            | 20.50      |   |   | $ | 26.73 |   | $ | 23.53 |   |
| December 2005   |       |                                        | $          | 18.40                                      |       |          |       | $            | 18.39      |   |   | $ | 24.10 |   | $ | 19.75 |   |
| First Quarter 2006   |       |                                        | $          | 26.80                                      |       |          |       | $            | 20.50      |   |   | $ | 28.36 |   | $ | 22.60 |   |
| Fourth Quarter  2005 |       |                                        | $          | 18.40                                      |       |          |       | $            | 17.00      |   |   | $ | 24.10 |   | $ | 17.84 |   |
| Third Quarter  2005  |       |                                        | $          | 16.90                                      |       |          |       | $            | 16.90      |   |   | $ | 19.20 |   | $ | 16.42 |   |
| Second Quarter  2005 |       |                                        | $          | 17.60                                      |       |          |       | $            | 16.50      |   |   | $ | 19.81 |   | $ | 16.12 |   |
| First Quarter  2005  |       |                                        | $          | 18.00                                      |       |          |       | $            | 15.50      |   |   | $ | 19.38 |   | $ | 14.42 |   |
| Fourth Quarter  2004 |       |                                        | $          | 14.95                                      |       |          |       | $            | 13.00      |   |   | $ | 15.27 |   | $ | 12.50 |   |
| Third Quarter  2004  |       |                                        | $          | 15.00                                      |       |          |       | $            | 12.85      |   |   | $ | 15.25 |   | $ | 12.49 |   |
| Second Quarter  2004 |       |                                        | $          | 18.28                                      |       |          |       | $            | 14.40      |   |   | $ | 19.98 |   | $ | 13.94 |   |
| First Quarter  2004  |       |                                        | $          | 17.94                                      |       |          |       | $            | 17.20      |   |   | $ | 19.45 |   | $ | 16.38 |   |
| 2005                 |       |                                        | $          | 19.25                                      |       |          |       | $            | 15.50      |   |   | $ | 24.10 |   | $ | 14.42 |   |
| 2004                 |       |                                        | $          | 18.28                                      |       |          |       | $            | 12.85      |   |   | $ | 19.98 |   | $ | 12.49 |   |
| 2003                 |       |                                        | $          | 20.45                                      |       |          |       | $            | 17.48      |   |   | $ | 21.90 |   | $ | 15.62 |   |
| 2002                 |       |                                        | $          | 18.28                                      |       |          |       | $            | 17.00      |   |   | $ | 24.95 |   | $ | 16.35 |   |

 

**C.   Markets**

In Russia, our common stock is listed on the RTS underthe symbol “WBDF,” and is admitted for trading on the Moscow Interbank CurrencyExchange (MICEX). American Depositary Receipts, each representing one share ofour common stock, have been listed on the New York Stock Exchange under thesymbol “WBD” since February 8, 2002. Our American Depositary Receipts arealso traded on the Frankfurt Stock Exchange pursuant to a broker-establishedunsponsored facility.

***Item 10.***                   AdditionalInformation

**A.   ShareCapital**

Not applicable.

**B.   Charterand Certain Requirements of Russian Legislation**

We describe below materialprovisions of our charter in effect on the date of this document and certainrequirements of Russian legislation. In addition to this description, we urgeyou to review our charter to learn its complete terms.

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**Our Purpose**

Article 4.1 of our charter provides that our maingoal is to provide the fullest and highest-quality satisfaction of theneeds of legal entities and individuals for the products and services we offer,as well as to generate profits.

We are registered with the Moscow Inter-DistrictInspectorate No. 39 of the Russian Ministry of Taxes and Duties under thestate registration number 1037700236738.

**General Matters**

Pursuant to our charter,we have the right to issue registered shares of common stock, shares ofpreferred stock and other securities provided for by legal acts of the RussianFederation with respect to securities. Our capital stock currently consists of44,000,000 common shares, each with a nominal value of 20 rubles, all of which arefully paid, issued and outstanding. Under Russian legislation, charter capitalrefers to the aggregate nominal value of the issued and outstanding shares. Weare also authorized to issue 44,000,000 common shares with a nominal value of20 rubles each. No preferred shares are authorized or outstanding. Preferredshares may only be issued if corresponding amendments have been made to ourcharter pursuant to a resolution of the general meeting of shareholders. Wehave issued only shares of common stock. The Federal Law on Joint StockCompanies requires us to dispose of any of our shares that we acquire withinone year of their acquisition or, failing that, reduce our charter capital. Werefer to such shares as treasury shares for the purposes hereof. Russian legislationdoes not allow for the voting of such treasury shares.

**Rights Attaching toShares**

Holders of ourcommon stock have the right to vote at all shareholders’ meetings. As requiredby the Federal Law on Joint Stock Companies and our charter, all shares of ourcommon stock have the same nominal value and grant identical rights to theirholders. Each fully paid share of common stock, except for treasury shares,gives its holder the right to:

·       freelytransfer the shares without consent of other shareholders;

·       receivedividends;

·       participatein shareholders’ meetings and vote on all matters within shareholders’competence;

·       transfervoting rights to its representative on the basis of a power of attorney;

·       participatein the election and dismissal of members for the board of directors and reviewcommission;

·       ifholding, alone or with other holders, 2% or more of the voting stock, within30 days after the end of our fiscal year, make proposals for the agendasof the annual shareholders’ meeting and nominate candidates to the board ofdirectors, management board, counting commission, review commission and for thegeneral director;

·       ifholding, alone or with other holders, 10% or more of the voting stock, demandfrom the board of directors the calling of an extraordinary shareholders’meeting or an unscheduled audit by the review commission or an independent auditor;

·       demand, under the followingcircumstances, the repurchase by us of all or some of the shares owned by it,as long as such holder voted against or did not participate in the voting onthe decision approving the following:

·        anyreorganization;

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·        theconclusion of a major transaction, as defined under Russian law; and

·        anyamendment of our charter or approval of a restated version of our charter in amanner that restricts the holder’s rights;

·       uponliquidation, receive a proportionate amount of our property after ourobligations are fulfilled;

·       haveaccess to certain company documents, receive copies for a reasonable fee and,if holding alone or with other holders, 25% or more of the voting stock, havefree access to accounting documents and minutes of the company’s managementboard meetings; and

·       exerciseother rights of a shareholder provided by our charter, Russian legislation anddecisions of shareholders’ meeting approved in accordance with its competence.

**Preemptive Rights**

The Federal Law on Joint Stock Companies and ourcharter provide existing shareholders with a preemptive right to purchaseshares or securities convertible into shares during an open subscription in theamount proportionate to their existing shareholdings. In addition, the FederalLaw on Joint Stock Companies provides shareholders with a preemptive right topurchase shares or securities convertible into shares, in an amount proportionateto their existing shareholdings, during a closed subscription if theshareholders voted against or did not participate in the voting on the decisionapproving such subscription. The preemptive right does not apply to a closedsubscription to existing shareholders provided that such shareholders may eachacquire a whole number of shares or securities convertible into shares beingplaced in an amount proportionate to their existing shareholdings. We mustprovide shareholders with written notice of the proposed sale of shares atleast 45 days prior to the offering, during which time shareholders mayexercise their preemptive rights.

**Dividends**

TheFederal Law on Joint Stock Companies and our charter set forth the procedurefor determining the quarterly and annual dividends that we may distribute toour shareholders. We may declare dividends based on our first quarter, sixmonth, nine month or annual results. Dividends are recommended to ashareholders’ meeting by a majority vote of the board of directors, andapproved by the shareholders’ meeting by a majority vote. A decision onquarterly, six month and nine month dividends must be taken within three monthsof the end of the respective quarter at the shareholders’ meeting; and adecision on annual dividends must be taken at the annual general shareholders’meeting. The dividend approved at the shareholders’ meeting may not be morethan the amount recommended by the board of directors. Dividends aredistributed to holders of our shares as of the record date for the shareholders’meeting approving the dividends. See “—General Meetings of Shareholders—Noticeand Participation.” Dividends are not paid on treasury shares.

The Federal Law on Joint Stock Companies allowsdividends to be declared only out of net profits calculated under Russianaccounting standards and as long as the following conditions have been met:

·       the charter capital of thecompany has been paid in full;

·       the value of the company’snet assets on the date of adoption of a decision to pay dividends is not less(and would not become less as a result of the proposed dividend payment) thanthe sum of the company’s charter capital, the company’s reserve fund and thedifference between the liquidation value and the par value of the issued and outstandingpreferred shares of the company;

·       the company has repurchasedall shares from shareholders having the right to demand repurchase; and

·       the company is not, andwould not become, insolvent as the result of the proposed dividend payment.

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**Distributions toShareholders on Liquidation**

Under Russianlegislation, liquidation of a company results in its termination without thetransfer of rights and obligations to other persons as legal successors. TheFederal Law on Joint Stock Companies and our charter allow us to be liquidated:

·       bya three-quarters majority vote of a shareholders’ meeting; or

·       bya court order.

Following a decision to liquidate us, the right tomanage our affairs would pass to a liquidation commission appointed by ashareholders’ meeting. In the event of an involuntary liquidation, the courtmay vest the duty to liquidate the company to its shareholders. Creditors mayfile claims within a period to be determined by the liquidation commission, butsuch period must not be less than two months from the date of publication ofnotice of liquidation by the liquidation commission.

The Civil Code ofthe Russian Federation gives creditors the following order of priority duringliquidation:

·       individualsowed compensation for injuries, deaths or moral damages;

·       employees;

·       federaland local governmental entities claiming taxes and similar payments to thefederal and local budgets and to non-budgetary funds; and

·       othercreditors in accordance with Russian legislation.

Claims of creditors in obligations secured by a pledgeof the company’s property (“secured claims”) are satisfied out of the proceedsof sale of the pledged property prior to claims of any other creditors exceptfor the creditors of the first and second priorities described above, providedthat claims of such creditors arose before the pledge agreements in respect ofthe company’s property were made. To the extent that the proceeds of sale ofthe pledged property are not sufficient to satisfy secured claims, the latterare satisfied simultaneously with claims of the fourth priority creditors asdescribed above.

The Federal Law on Insolvency (Bankruptcy), however,provides for a different order of priority for creditors’ claims in the eventof bankruptcy.

The remainingassets of a company are distributed among shareholders in the following orderof priority:

·       paymentsto repurchase shares from shareholders having the right to demand repurchase;

·       paymentsof declared but unpaid dividends on preferred shares and the liquidation valueof the preferred shares determined by the company’s charter, if any; and

·       payments to holders ofcommon and preferred shares.

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**Liability ofShareholders**

The Civil Code of the Russian Federation and theFederal Law on Joint Stock Companies generally provide that shareholders in aRussian joint stock company are not liable for the obligations of a joint stockcompany and bear only the risk of loss of their investments. This may not bethe case, however, when one person or entity is capable of determining decisionsmade by another person or entity. The person or entity capable of determiningsuch decisions is called an “effective parent.” The person or entity whosedecisions are capable of being so determined is called an “effectivesubsidiary.” The effective parent bears joint and several responsibility fortransactions concluded by the effective subsidiary in carrying out thesedecisions if:

·       thisdecision-making capability is provided for in the charter of theeffective subsidiary or in a contract between such persons; and

·       theeffective parent gives binding instructions to the effective subsidiary.

Thus, a shareholder of an effective parent is notitself liable for the debts of the effective parent’s effective subsidiary,unless that shareholder is itself an effective parent of the effective parent.Accordingly, a shareholder will not be personally liable for our debts or thoseof our effective subsidiaries unless such shareholder controls our business andthe conditions set forth above are met.

In addition, an effectiveparent is secondarily liable for an effective subsidiary’s debts if aneffective subsidiary becomes insolvent or bankrupt resulting from the action oromission of an effective parent only when the effective parent has used theright to give binding instructions knowing that they would result in insolvencyof the effective subsidiary. This is the case no matter how the effectiveparent’s capability to determine decisions of the effective subsidiary arises,such as through ownership of voting securities or by contract. In theseinstances, other shareholders of the effective subsidiary may claimcompensation for the effective subsidiary’s losses from the effective parentthat caused the effective subsidiary to take any action or fail to take any actionknowing that such action or failure to take action would result in losses.

**Alteration ofCapital**

**Charter CapitalIncrease**

We may increase ourcharter capital by:

·       issuingnew shares, or

·       increasingthe nominal value of previously issued shares.

A decision on any issuance of shares or securitiesconvertible into shares by closed subscription, or an issuance by opensubscription of common shares or securities convertible into common sharesconstituting 25% or more of the number of issued common shares, requires athree-quarters majority vote of a shareholders’ meeting. In addition, adecision to increase the charter capital by increasing the nominal value ofissued shares requires a majority vote of a shareholders’ meeting. In addition,the issuance of shares above the number of authorized and non-issued sharesprovided in our charter necessitates a charter amendment, which requires athree-quarters majority vote of a shareholders’ meeting.

The Federal Law on Joint Stock Companies requires thatthe value of newly issued shares be determined by the board of directors basedon their market value but not less that their nominal value, except in limitedcircumstances where (i) existing shareholders exercise a preemptive rightto purchase shares at not less than 90% of the price paid by third parties, or (ii) feesof up to 10% are paid to intermediaries, in which case the fees paid may bededucted from the price. The price may not be set at less than the nominalvalue of the shares. The board of directors shall value any in-kindcontributions for new shares based on the appraisal report of an independentappraiser.

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Russian securitiesregulations set out detailed procedures for the issuance and registration ofshares of a joint stock company. These procedures require:

·       priorregistration of a share issuance with the FSFM;

·       publicdisclosure of information relating to the share issuance; and

·       following the placement ofthe shares, registration and public disclosure of the results of the placementof shares.

**Charter CapitalDecrease; Share Buy-Backs**

The Federal Law on Joint Stock Companies does notallow a company to reduce its charter capital below the minimum charter capitalrequired by law, which is 100,000 rubles for an open joint stock company orapproximately $3,500. Our charter requires that any decision to reduce ourcharter capital, whether through the repurchase and cancellation of shares or areduction in the nominal value of the shares, be made by a majority vote of ashareholders’ meeting. Additionally, within 30 days of a decision toreduce our charter capital, we must issue a written notice to our creditors andpublish this decision. Our creditors would then have the right to demand,within 30 days of publication or receipt of our notice, early terminationor discharge of relevant obligations by us, as well as compensation fordamages.

The Federal Law on Joint Stock Companies and ourcharter allow our shareholders or our board of directors to authorize therepurchase of up to 10% of our shares in exchange for cash. The repurchasedshares must be resold at market value within one year of their repurchase or,failing that, the shareholders must decide to cancel such shares and decreasethe charter capital. The shares repurchased pursuant to a decision of ourshareholders’ meeting to decrease the overall number of shares, are canceled attheir redemption. Repurchased shares do not bear voting rights.

The Federal Law onJoint Stock Companies allows us to repurchase our shares only if, at the timeof repurchase:

·       ourcharter capital is paid in full;

·       weare not and would not become, as a result of the repurchase, insolvent;

·       thevalue of our net assets at the time of repurchase of our shares is not less(and would not become less, as a result of the proposed repurchase) than thesum of our charter capital, the reserve fund and the difference between theliquidation value and par value of our issued and outstanding preferred shares;and

·       wehave repurchased all shares from shareholders having the  right to demand repurchase of their shares inaccordance with Russian law, as described immediately below.

The Federal Law onJoint Stock Companies and our charter provide that our shareholders may demandrepurchase of all or some of their shares so long as the shareholder demandingrepurchase voted against or did not participate in the voting on the decisionapproving any of the following actions:

·       reorganization;

·       conclusionof a major transaction, as defined under Russian law; or

·       amendmentof our charter or approval of a restated version of our charter in a mannerwhich restricts shareholders’ rights.

We may spend up to 10% ofour net assets calculated under Russian accounting standards on the date of theadoption of the decision which gives rise to a share redemption demanded by theshareholders. If 

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thevalue of the shares in respect of which shareholders have exercised their rightto demand repurchase exceeds 10% of our net assets, we will repurchase sharesfrom each such shareholder on a pro-rata basis.

**Registration andTransfer of Shares**

Russian legislation requires that a joint stockcompany maintain a register of its shareholders. Ownership of our registeredshares is evidenced solely by entries made in such register. Any of ourshareholders may obtain an extract from our register certifying the number ofshares that such shareholders hold. Since July 14, 2001, Central MoscowDepository OJSC has maintained our register of shareholders.

The purchase, sale orother transfer of shares is accomplished through the registration of thetransfer in the shareholder register, or the registration of the transfer witha depositary if shares are held by a depositary. The registrar or depositarymay not require any documents in addition to those required by Russian legislationin order to transfer shares in the register. Refusal to register the shares inthe name of the transferee or, upon request of the beneficial holder, in thename of a nominee holder, is not allowed except in certain instances providedfor by Russian legislation, and may be challenged in court.

**Reserve Fund**

Russian legislationrequires that each joint stock company establish a reserve fund to be used onlyto cover the company’s losses, redeem the company’s bonds and repurchase thecompany’s shares in cases when other funds are not available. Our charterprovides for a reserve fund of 5% of our charter capital, funded throughmandatory annual transfers of at least 5% of our net profits until the reservefund has reached the 5% requirement.

**Disclosure of Information**

Russian securitiesregulations require us to make the following periodic public disclosures andfilings:

·       filingquarterly reports with the FSFM containing information about us, ourshareholders and depositary, the structure of our management bodies, themembers of the board of directors, our branches and representative offices, ourshares, bank accounts and auditors, important developments during the reportingquarter and other information about our financial and business activity;

·       filingwith the FSFM and publishing in the FSFM’s periodical print publication, aswell as in other media, any information concerning material facts and changesin our financial and business activity, including our reorganization, certainchanges in the amount of our assets, decisions on share issuances, certainchanges in ownership and shareholding, as well as shareholder resolutions;

·       disclosinginformation on various stages of share placement, issuance and registrationthrough publication of certain data as required by the securities regulations;

·       disclosingour annual report and annual financial statements prepared in accordance withRussian accounting standards;

·       filingwith the FSFM on a quarterly basis a list of our affiliated persons anddisclosing the same on our website, on the same basis; and

·       other information asrequired by applicable Russian securities legislation.

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**General Meetings ofShareholders**

***Procedure***

The powers of ashareholders’ meeting are set forth in the Federal Law on Joint Stock Companiesand in our charter. A shareholders’ meeting may not decide on issues that arenot included in the list of its competence by the Federal Law on Joint StockCompanies and our charter. Among the issues which the shareholders have thepower to decide are:

·       charteramendments;

·       reorganizationor liquidation;

·       electionand removal of the members of the board of directors;

·       determinationof the number, nominal value, category/type of authorized shares and rightsgranted by such shares;

·       changesin our charter capital;

·       appointmentand removal of the members of our review commission and counting commission;

·       approvalof our external auditor;

·       approvalof certain interested party transactions and major transactions;

·       distributionof profits and losses, including approval of dividends;

·       redemptionby the company of issued shares in cases provided for by the Federal Law onJoint Stock Companies;

·       decisionon our participation in holding companies, commercial or industrial groups orother associations of commercial entities;

·       approvalof certain internal documents and corporate records; and

·       otherissues, as provided for by the Federal Law on Joint Stock Companies and ourcharter.

Voting at ashareholders’ meeting is generally based on the principle of one vote per shareof common stock, with the exception of the election of the board of directors,which is done through cumulative voting. Decisions are generally passed by amajority vote of the voting shares present at a shareholders’ meeting. However,Russian law requires a three-quarters majority vote of the voting sharespresent at a shareholders’ meeting to approve the following:

·       charteramendments;

·       reorganizationor liquidation;

·       majortransactions involving assets in excess of 50% of the balance sheet value ofthe company’s assets;

·       determinationof the number, nominal value and category (type) of authorized shares and therights granted by such shares;

·       repurchaseby the company of its issued shares;

·       anyissuance of shares or securities convertible into shares of common stock byclosed subscription; or

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·       issuanceby open subscription of shares of common stock or securities convertible intocommon stock, in each case, constituting 25% or more of the number of issuedand outstanding shares of common stock.

The quorum requirement for our shareholders’ meetingsis met if shareholders (or their representatives) accounting for more than 50%of the issued voting shares are present. If the 50% quorum requirement is notmet, another shareholders’ meeting with the same agenda may (and, in the caseof an annual shareholders’ meeting, must) be scheduled and the quorumrequirement is satisfied if shareholders (or their representatives) accountingfor at least 30% of the issued voting shares are present at that meeting.

The annualshareholders’ meeting must be convened by the board of directors between March 1and June 30 of each year, and the agenda must include the following items:

·       electionof members of the board of directors;

·       approvalof the annual report and the annual financial statements, including the balancesheet and profit and loss statement;

·       approvalof distribution of profits, including approval of annual dividends and losses,if any;

·       appointmentof an independent auditor; and

·       appointmentof the member of the review commission.

A shareholder or group of shareholders owning in theaggregate at least 2% of the issued voting shares may introduce proposals forthe agenda of the annual shareholders’ meeting and may nominate candidates tothe board of directors, management board, counting commission, reviewcommission and for the general director. Any agenda proposals or nominationsmust be provided to the company no later than 30 calendar days after thepreceding financial year end.

Extraordinaryshareholders’ meetings may be called by the board of directors on its owninitiative, or at the request of the review commission, independent auditor ora shareholder or group of shareholders owning, in the aggregate, at least 10%of the issued voting shares as of the date of the request.

A general meeting ofshareholders may be held in the form of a meeting or by absentee ballot. Theform of a meeting contemplates the adoption of resolutions by the generalmeeting of shareholders through the attendance of the shareholders or theirauthorized representatives for the purpose of discussing and voting on issuesof the agenda, provided that if a ballot is mailed to shareholders forparticipation at a meeting convened in such form, the shareholders may completeand mail the ballot back to the company without personally attending themeeting. A general meeting of the shareholders by absentee ballot contemplatesthe determination of shareholders’ opinions on issues on the agenda by means ofa written poll.

Thefollowing issues cannot be decided by a shareholders’ meeting by absenteeballot:

·       electionof the members of the board of directors;

·       electionof the review commission;

·       approvalof a company’s independent auditor; and

·       approval of the annualreport, the annual financial statements, including balance sheet, profit andloss statement and any distribution of profits and losses, including approvalof annual dividends, if any.

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***Notice andParticipation***

All shareholders entitledto participate in a general shareholders’ meeting must be notified of themeeting, whether the meeting is to be held in the form of a meeting or byabsentee ballot, no less than 30 days prior to the date of the meeting,and such notification shall specify the agenda for the meeting. However, if itis an extraordinary shareholders’ meeting to elect the board of directors,shareholders must be notified at least 50 days prior to the date of themeeting. Only those items that were set out in the agenda to shareholders maybe voted upon at a general shareholders’ meeting.

The list of shareholdersentitled to participate in a general shareholders’ meeting is to be compiled onthe basis of data in our shareholders register on the date established by theboard of directors, which date may neither be earlier than the date of adoptionof the board resolution to hold a general shareholders’ meeting nor more than50 days before the date of the meeting (or, in the case of anextraordinary shareholders’ meeting to elect the board of directors, not laterthan 65 days before the date of the meeting).

Theright to participate in a general meeting of shareholders may be exercised by ashareholder as follows:

·       bypersonally participating in the discussion of agenda items and voting thereon;

·       bysending an authorized representative to participate in the discussion of agendaitems and to vote thereon;

·       byabsentee ballot; or

·       by delegating the right tofill out the absentee ballot to an authorized representative.

**Board of Directors**

The Federal Law on JointStock Companies and our charter provide that our entire board of directors isup for election at each annual general shareholders’ meeting and that our boardof directors is elected through cumulative voting. Under cumulative voting,each shareholder may cast an aggregate number of votes equal to the number ofvoting shares held by such shareholder multiplied by the number of persons tobe elected to our board of directors, and the shareholder may give all suchvotes to one candidate or spread them between two or more candidates. Beforethe expiration of their term, the directors may be removed as a group at anytime without cause by a majority vote of a shareholders’ meeting.

The Federal Law on JointStock Companies requires at least a five-member board of directors for alljoint stock companies, at least a seven-member board of directors for ajoint stock company with more than 1,000 holders of voting shares, and at leasta nine-member board of directors for a joint stock company with more than10,000 holders of voting shares. Only natural persons (as opposed to legalentities) are entitled to sit on the board. Members of the board of directorsare not required to be shareholders of the company. The actual number ofdirectors is determined by the company’s charter or a decision of theshareholders’ meeting. Our charter provides that our board of directors shallconsist of eleven members.

TheFederal Law on Joint Stock Companies generally prohibits a board of directorsfrom acting on issues that fall within the exclusive competence of the generalshareholders’ meeting. Our board of directors has the power to perform thegeneral management of the company, and decide, among others, the followingissues:

·       determinationof our business priorities;

·       conveningannual and extraordinary shareholders’ meetings, except in certaincircumstances specified in the Federal Law on Joint Stock Companies;

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·       approvalof the agenda of a shareholders’ meeting and determination of the record datefor shareholders entitled to participate in a shareholders’ meeting;

·       placementof our bonds and other securities in cases specified in the Federal Law onJoint Stock Companies;

·       determinationof the price of our property and of our securities to be placed or repurchased,as provided for by the Federal Law on Joint Stock Companies;

·       repurchaseof our shares, bonds and other securities in certain cases provided for by theFederal Law on Joint Stock Companies;

·       formationof our executive bodies and early termination of their powers;

·       electionof our management board and its chairman and the establishment of theircompensation;

·       recommendationson the amount of remuneration and compensation to be paid to the members of ourreview commission and on the fees payable for the services of an independentauditor;

·       recommendationson the amount of the dividend and the payment procedure thereof;

·       theuse of our reserve and other funds;

·       approvalof our internal documents, except for those documents whose approval fallswithin the competence of our shareholders or executive bodies;

·       thecreation of branches and representative offices;

·       approvalof major and interested party transactions in certain cases as provided for bythe Federal Law on Joint Stock Companies;

·       approvalof our share registrar; and

·       otherissues, as provided for by the Federal Law on Joint Stock Companies and ourcharter.

Our charter generallyrequires a majority vote of the directors present for an action to pass, withthe exception of actions for which Russian legislation requires a unanimousvote or a majority vote of the disinterested and independent directors, asdescribed herein. A board meeting is considered duly assembled and legally competentto act when at least six directors are present.

**Interested PartyTransactions**

Under the FederalLaw on Joint Stock Companies, certain transactions defined as “interested partytransactions” require approval by disinterested directors or shareholders ofthe company. “Interested party transactions” include transactions involving amember of the board of directors or a member of any executive body of thecompany (including the company’s chief executive officer and/or the company’smanaging organization), any person that owns, together with any affiliates, atleast 20% of a company’s issued voting shares or any person who is able todirect the actions of the company, if that person and/or that person’s spouse,parents, children, adoptive parents or children, brothers or sisters oraffiliates, is/are:

·       aparty to, or beneficiary of, a transaction with the company, whether directlyor as a representative or intermediary;

·       theowner of at least 20% of the issued shares of a legal entity that is a partyto, or beneficiary of, a transaction with the company, whether directly or as arepresentative or intermediary; or

·       amember of the board of directors or a member of any management body of acompany that is a party to, or beneficiary of, a transaction with the company,whether directly or as a representative or 

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intermediary, or a memberof the board of directors or any management body of a management organizationof such a company.

The Federal Law on Joint Stock Companies requires thatan interested party transaction by a company with more than 1,000 shareholdersbe approved by a majority vote of the independent directors of the company whoare not interested in the transaction. For purposes of this rule, “anindependent director” is a person who is not, and within the year preceding thedecision to approve the transaction was not, the general director, a member ofany executive body or an affiliate of the company, or a member of the board ofdirectors or any management body of the company’s management organization.Additionally, such person’s spouse, parents, children, adoptive parents orchildren, brothers or sisters may not, and within the year preceding the dateof the decision to approve the transaction did not, occupy positions in theexecutive bodies of the company or positions on the board of directors or ofany management body of the company’s management organization. For companieswith 1,000 or fewer shareholders, an interested party transaction must beapproved by a majority vote of the directors who are not interested in thetransaction if the number of these directors is sufficient to constitute aquorum.

Approval by amajority of shareholders who are not interested in the transaction is requiredif:

·       thevalue of such transaction or a number of interrelated transactions is 2% ormore of the balance sheet value of the company’s assets determined underRussian accounting standards;

·       thetransaction or a number of interrelated transactions involves the issuance, bysubscription, of voting shares or securities convertible into voting shares, orsecondary market sale of such securities, in an amount exceeding 2% of thecompany’s issued voting stock;

·       thenumber of directors who are not interested in the transaction is not sufficientto constitute a quorum; or

·       allthe members of the board of directors of the company are interested parties, ornone of them is an independent director.

Approval by a majority of shareholders who are notinterested in the transaction may not be required, until the next annual shareholders’meeting, for an interested party transaction if such transaction issubstantially similar to transactions concluded by the company and theinterested party in the ordinary course of business before such party became aninterested party with respect to the transaction.

The approval ofinterested party transactions is not required in the following instances:

·       thecompany has only one shareholder that simultaneously performs the functions ofthe executive body of the company;

·       allshareholders of the company are deemed interested in such transactions;

·       thetransactions arise from the shareholders executing their preemptive rights topurchase newly issued shares of the company;

·       thetransactions arise from the repurchase, whether mandatory or not, by thecompany of its issued shares; or

·       the company merges withanother company, and the latter owns more than three-fourths of thevoting capital stock of the company.

**Major Transactions**

The Federal Law on JointStock Companies defines a “major transaction” as a transaction, or a number ofinterrelated transactions, involving the acquisition or disposal, or apossibility of disposal (whether directly or indirectly) of property having avalue of 25% or more of the balance sheet value of the 

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assetsof a company determined under Russian accounting standards, with the exceptionof transactions conducted in the ordinary course of business or transactionsinvolving the placement of shares of common stock, or securities convertibleinto shares of common stock. Major transactions involving assets having a valueranging from 25% to 50% of the balance sheet value of the assets of a companyrequire unanimous approval by all members of the board of directors or, failingto receive such approval, a simple majority vote of a shareholders’ meeting.Major transactions involving assets having a value in excess of 50% of thebalance sheet value of the assets of a company require a three-quartersvote by a shareholders’ meeting.

**Change in Control**

***Anti-takeover Protection***

Russian legislation requires that any person thatintends, either individually or together with its affiliates, to acquire 30% ormore (including, for such purposes, the shares already owned by this person orits affiliates) of the common stock of a company having more than 1,000 holdersof common stock, must give at least 30, but no more than 90, days’ priorwritten notice to the company. Additionally, the Federal Law on Joint StockCompanies provides that a person that has acquired either individually, or togetherwith its affiliates, 30% or more (including, for such purposes, the sharesalready owned by this person or its affiliates) of the common stock of acompany with more than 1,000 holders of common stock, within 30 days ofacquiring the shares, must offer to buy all of the common stock or securitiesthat are convertible into common stock at a market price which shall not belower than the weighted average price of the common stock over the six monthperiod before the date of acquisition. These requirements also apply to anyacquisitions of each subsequent 5% or more of the issued common stock of acompany by a person already holding (together with its affiliates) over 30% ofthe issued common stock of such company. If the acquirer fails to observe theserequirements, it will be limited to voting only those shares it purchased incompliance with these requirements. The requirement to make a buyout offer ofsecurities may be waived in a company’s charter or by a resolution adopted by amajority vote of a shareholders’ meeting, excluding the votes of the acquirer(and its affiliates). Our charter does not contain a waiver in relation to, andour shareholders have not waived, this requirement.

Effective July 1,2006, the above requirements of Russian legislation will be modified asfollows:

·       Aperson intending to acquire 30% or more of an open joint stock company’sordinary shares and voting preferred shares (including, for such purposes,shares already owned by such person and its affiliates), will be entitled tomake a public tender offer to other holders of such shares or securitiesconvertible into such shares.

·       Aperson that has acquired 30% or more of the totality of an open joint-stockcompany’s ordinary shares and voting preferred shares (including, for suchpurposes, shares already owned by such person and its affiliates, but excludingshares that were acquired pursuant to previous voluntary or mandatory offers)will generally be required to make, within 35 days of acquiring such shares, apublic tender offer for other shares of the same class and for securitiesconvertible into such shares, at a price determined based on a weighted marketprice of the shares, or on a price supplied by an independent appraiser if theshares have no or insufficient trading history. From the moment of acquisitionof 30% or more of the shares until the moment of delivery of an offer to thesecurity holders, the person making an offer and its affiliates will be able toregister for quorum and vote only 30% of the shares of the company (regardlessof the size of their actual holdings). These rules are also applied (orreapplied) to acquisitions resulting in a person or a group of persons owningmore than 50% and 75% of a company’s outstanding shares.

·       Aperson that as a result of such an offer becomes (individually or with itsaffiliates) the owner of more than 95% of the company’s ordinary shares andvoting preferred shares, must buy out the remaining shares of the company aswell as other securities convertible into such shares upon 

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request of the holders ofsuch shares or other securities, and may require such holders to sell suchshares and other securities, at a price based on the prices of the precedingacquisition by the offeror.

·       Anoffer of the kind described in either of the preceding three paragraphs must beaccompanied by a bank guarantee of payment. If the company is publicly traded,prior notice of the offer must be filed with the FSFM; otherwise, notice mustbe filed with the FSFM no later than the date of the offer. The FSFM may orderamendments to the terms of the offer (including price) in order to bring theminto compliance with the rules.

·       Oncesuch an offer has been made, competing offers for the same securities can bemade by third parties and, in certain circumstances, acceptance of the initialoffer may be withdrawn by the security holders who choose to accept suchcompeting offer. From the making of such an offer until 20 days after itsexpiry (which period may in certain cases exceed 100 days) the company’sshareholders meeting will have the sole power to make decisions on chartercapital increase, issuance of securities, approval of certain majortransactions, and on certain other significant matters.

The above rules maybe supplemented through FSFM rulemaking, which may result in a wider, narroweror more specific interpretation of these rules by the government andjudicial authorities, as well as by market participants.

***Approval of the Federal Antimonopoly Service***

Pursuant to Russianantimonopoly legislation, transactions exceeding a certain amount, involvingcompanies with a combined value of assets under Russian accounting standardsthat exceeds a certain threshold or companies registered as having more than a35% share of a commodity market, and which would result in a shareholder (or agroup of affiliated shareholders) holding more than 20% of the voting capitalstock of such company, or in a transfer between such companies of property orrights of property, the value of which exceeds a certain amount, must beapproved in advance by the Federal Antimonopoly Service.

**Disclosure ofOwnership**

A holder of ourcommon shares is required to disclose information concerning its holdings inthe following cases:

·       theholder acquires 20% or more of our common shares;

·       theholder increases its percentage holding of our common shares to a level inexcess of 5% (or an integral multiple thereof) higher than 20% thereof; and

·       theholder decreases its percentage holding of our common shares to a level inexcess of 5% (or an integral multiple thereof) higher (but not lower) than 20%thereof.

Effective July 1,2006, a holder of our common shares will be required to publicly disclose anacquisition of 5% or more of the outstanding common shares of the company, aswell any change in the amount of common shares held by such holder, if as aresult of such change the percentage of common shares held by the holderbecomes greater or lesser than 5, 10, 15, 20, 25, 30, 50 or 75 percent of theoutstanding common shares of the company.

**Notification ofForeign Ownership**

Foreign persons registeredas individual entrepreneurs in Russia who acquire shares in a Russian jointstock company and foreign companies that acquire shares in a Russian jointstock company may need to 

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notifythe Russian tax authorities within one month following such acquisition.However, the procedure of notifying the Russian tax authorities by foreigncompanies that are not registered with such tax authorities at the time oftheir share acquisition remains unclear.

**C.   MaterialContracts**

The following is adescription of contracts that have been entered into by us and/or oursubsidiaries that may be material to our business:

**Loan Agreementrelating to the Loan Participation Notes and Guarantee**

On May 14, 2003, we entered into a loan agreementwith UBS (Luxembourg) S.A. as lender, pursuant to which UBS (Luxembourg) S.A.lent to us a principal amount of $150,000,000 on May 21, 2003. The loanmatures on May 21, 2008, and interest is payable by us semi-annually inarrears at an annual rate of 8.5%. For the sole purpose of financing this loanto us, UBS (Luxembourg) S.A. issued $150,000,000 8.5% Loan Participation Notesdue 2008 on May 21, 2003.

The above-mentioned loan to us isunconditionally, irrevocably, jointly and severally guaranteed by the LianozovoDairy Plant, Tsaritsino Dairy Plant, Timashevsk Dairy Plant, Trade CompanyWimm-Bill-Dann and Baltic Milk pursuant to a guarantee dated May 14, 2003entered into with UBS (Luxembourg) S.A.

Both the loan agreementand the guarantee are governed by English law. In the loan agreement, we agreedto certain covenants in respect of, among other things, liens, asset sales,transactions with affiliates and related persons, change of control, mergersand similar transactions, limitation on dividend or other payments affectingour subsidiaries and maintenance of certain ratios. In the guarantee, theLianozovo Dairy Plant, Tsaritsino Dairy Plant, Timashevsk Dairy Plant, TradeCompany Wimm-Bill-Dann, Baltic Milk, Lianozovo-Samara LLC and the Ural,Krasnodar, Don and Nevsky Dairy Trade Houses agreed to similar covenants.

**Ruble Bonds**

On April 15, 2003, Wimm-Bill-Dann Foods issued1,500,000 non-convertible ruble denominated notes at a face value of 1,000rubles each guaranteed by Vitafrukt, one of our juice subsidiaries. Theoffering raised a total of 1,500,000 thousand rubles ($52.1 million at theexchange rate as of December 31, 2005 of which $2.3 million had beenrepaid as at December 31, 2005). Interest was payable semi-annually inarrears commencing on October 14, 2003, and the interest rate for eachcoupon period was based on  the ConsumerPrice Index, published by Goskomstat of the Russian Federation. The interestrate for the first, second, third, fourth, fifth and sixth coupon periods were12.9%, 11.98%, 9.38%, 8.48%, 10.78% and 11.24%, respectively. The notes wereredeemable by Wimm-Bill-Dann Foods on April 11, 2006 and we redeemed theremaining outstanding notes on this date.

On December 21, 2005,we issued five-year, 3,000,000 non-convertible ruble denominated notes at aface value of 1,000 rubles each. The offering raised a total of approximately$104.2 million at the exchange rate as of December 31, 2005. The notes areredeemable by us on December 15, 2010. The issue was priced at par with acoupon of 9% payable semi-annually.

**Tetra PakAgreements**

On January 1, 2006,the Lianozovo Dairy Plant entered into a supply agreement to purchase packagesfor our milk products from JSC Tetra Pak AO of Moscow. The contract terminateson December 31, 2006. The total amount of our purchases is estimated underthe contract at approximately €40.0 million excludingVAT. On January 1, 2006, Wimm-Bill-Dann Purchaser entered into a supplyagreement to 

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purchasepackages for its products from JSC Tetra Pak AO of Moscow. The contractterminates on December 31, 2006 and does not estimate the total amount ofour purchases thereunder. The total amount of purchases made pursuant to theprior contract in effect during 2005 between Wimm-Bill-Dann Purchaser and TetraPak was approximately €36.4 million as of December 31,2005. We expect that the total expenditures in 2006 by Wimm-Bill-Dann Purchaserpursuant to the current contract will be higher due to increased sales. Wepurchase a vast majority of our packaging materials from Tetra Pak, and in2005, we purchased approximately 58.6% of our total packaging materials(including carton, plastic, foil and other materials) from Tetra Pak.

**Amended andRestated Partnership and Cooperation Agreement**

Our current shareholders Gavril Yushvaev, MikhailDubinin, Sergei Plastinin, Alexander Orlov, David Iakobachvili, MikhailVishnyakov, Viktor Evdokimov and I.M. Arteks Holdings Limited are parties to anAmended and Restated Partnership and Cooperation Agreement which requires theparties to vote the same way, as well as:

*Independent Directors.**  *The parties to the agreementundertake to use their best efforts to ensure that a majority of our directorsare “independent.” A director is considered “independent” if that person isnot:

·       ouremployee or an employee or director of any of our subsidiaries;

·       aparty to the agreement, a family member of a party to the agreement, or aperson or entity controlled by a party to the agreement;

·       anemployee or director of a party to the agreement; a family member of a party tothe agreement; a person or entity controlled by a party to the agreement; anyother person or entity controlled by a family member of a party to theagreement; or a person or entity controlled by any employee or director of anyof the parties to the agreement; or

·       aperson or entity controlled by any family member of a party to the agreement ora person or entity controlled by any employee or director of a party to theagreement.

*Voting.**  *The parties to the agreement arerequired to vote all of our shares that they own in the same way. In order todetermine how the parties will vote, the agreement requires them to attempt toagree unanimously on a single voting position on each item on the agenda for ashareholders’ meeting. If they are unable to do so, then the followingprocedures are followed:

·       Theparties will vote their shares as determined by parties holding a two-thirdsmajority of the shares held by the parties;

·       Ifthere is no two-thirds majority among the parties, then the parties will votetheir shares consistent with the recommendation of the majority of individualswho are on our board of directors; and

·       Ifno voting position can be determined using the procedures noted above, then theparties will abstain from voting on that issue, in which case a quorum will notbe present under Russian law and the issue would fail to be adopted.

*Third-PartyBeneficiaries.**  *Beneficialowners of our ADSs are third-party beneficiaries of the agreement and areentitled to enforce and bring actions in respect of the agreement. An actionmay only be brought, however, if beneficial owners of ADSs constituting morethan 50% of our outstanding ADSs, excluding any ADSs held by the parties to theagreement, are parties to such action.

*DisputeResolution.**  *Thegoverning law of the agreement is the law of the State of New York. Anydispute, controversy or cause of action brought arising under the agreementwill be settled by arbitration under the Commercial Arbitration Rules ofthe American Arbitration Association. Any cause of action brought by beneficialowners of more than 50% of the outstanding ADSs, excluding any ADSs held by 

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parties to the agreement,at the option of these owners, may be brought in arbitration under theCommercial Arbitration Rules of the American Arbitration Association ormay be litigated in the federal or state courts in the Borough of Manhattan.The parties to the agreement expect to appoint CT Corporation System, 111Eighth Avenue, New York, New York 10011, as agent for service of process in NewYork.

*Term.**  *The agreement may not be terminateduntil the earlier to occur of:

·       anyparty to the agreement owning all of our issued and outstanding shares;

·       weare liquidated pursuant to the laws of the Russian Federation; or

·       January 16,2004 (provided that a party / the parties give 30 days’ prior writtennotice).

Upon the occurrence of thefirst two events described above, the agreement automatically terminates.Otherwise, the agreement continues in full force and effect until terminated byany party to the agreement by giving 30 days’ prior written notice to allother parties to the agreement and to us. See “Item 3. Key Information—D. RiskFactors—Risks Relating to Our Business and Industry—We are controlled by agroup of shareholders whose interests could conflict with those of the holdersof our securities.”

**D.   ExchangeControls**

The Federal Law onCurrency Regulation and Currency Control which came into effect on June 18,2004 empowers the government and the Central Bank of Russia to regulate andrestrict certain foreign currency operations, including certain types ofpayments in foreign currency, operations involving foreign securities(including ADSs) and domestic securities (including our common shares), as wellas certain types of settlements in rubles between residents and non-residentsof Russia. It is contemplated by the Law that most of the restrictions oncurrency operations will be removed effective January 1, 2007.

**Capital import andexport restrictions**

Pursuant to theFederal Law on Currency Regulation and Currency Control, the government and theCentral Bank of Russia have the power to restrict, in particular, the followingoperations:

·       investments(not involving the acquisition of securities) by Russian residents into participatoryinterests in joint ventures with foreign investors or acquired from foreigninvestors;

·       acquisitionof Russian securities by foreign investors and foreign securities by Russianinvestors;

·       grantsor receipts of loans and credits between residents and non-residents of Russia;

·       paymentsfor export-import transactions with settlement over 180 days (and inlimited cases, from over three to five years) following completion; and

·       theopening by Russian residents of bank accounts outside Russia and the transfersby Russian residents to such accounts of their funds from domestic accounts.

Restrictions thatmay be introduced include:

·       therequirement for Russian residents to register their accounts in foreign bankswith the Russian tax authorities prior to the opening of such accounts (the “priorregistration requirement”);

·       therequirement to perform the operations listed above through special bankingaccounts with authorized Russian banks (the “requirement to use a specialaccount”); and

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·       therequirement to deposit in a special non-interest bearing account with anauthorized Russian bank (the “reservation requirement”) a monetary sum of:

·        up to 100% of the amountof the foreign currency operation in question for a period of time notexceeding 60 days; or

·        up to 20% of the amount ofthe foreign currency operation in question for a period of time not exceedingone year.

Asof the date hereof, the prior registration requirement has been introduced inrespect of the Russian ruble and foreign currency accounts in banks located incountries which are not members of the Organization for Economic Co-operationand Development, or OECD, and the Financial Action Task Force on MoneyLaundering, or FATF, established by the G-7, and in respect of rubleaccounts in banks located in countries which are members of OECD or FATF.

As of the date hereof, the requirement to use aspecial account has been introduced in respect of acquisitions of Russiansecurities by foreign investors and foreign securities payable in a foreigncurrency by Russian investors and in respect of the grant or receipt of loansand credits between residents and non-residents of Russia. In particular, thefollowing operations are subject to the requirement to use special accounts:

·       receipt by residents ofRussia from non-residents of foreign currency and ruble loans and credits withmaturities of three years or less;

·       acquisition of foreignsecurities (such as ADSs) by Russian investors; and

·       acquisition of Russiansecurities (such as our shares) by foreign investors.

As of the date hereof, the reservation requirement hasbeen introduced, in particular, in respect of:

·       investments by Russianresidents into participatory interests in joint ventures with foreign investorsor acquired from foreign investors in the amount of 25% of the sum of theperformed currency transaction for 15 days;

·       receipt by residents ofRussia of foreign currency and ruble loans and credits with maturities of threeyears or less in the amount of 2% of the loan/credit for one year;

·       acquisition of foreignsecurities (such as ADSs) by Russian investors in the amount of 25% of the sumpayable for the securities for 15 days;

·       pre-payment by Russianresidents for the import of works, services and rights to intellectual propertyto be transferred by non-residents more than 180 days following thepre-payment, in the amount of 10% of the sum of pre-payment excluding the valueof the consideration received from non-residents, for a period of time notexceeding 15 days; and

·       transfer of funds byRussian companies and individual entrepreneurs from their accounts in Russianbanks to their accounts in foreign banks, in the amount of 25% of the sum ofthe transfer for 15 days (except for transfers to support foreignrepresentative offices of Russian companies).

Upto $150,000 worth of foreign securities in one calendar year may bepurchased/sold by Russian individuals from/to non-residents without any of theabove restrictions.

While at present restrictions imposed on foreigncurrency operations are limited in scope, the statutory powers of thegovernment and the Central Bank of Russia enable them to:

·       increase the reservationrequirements by an increase in the amount and/or the period of reservation;and/or

·       extend the reservationrequirements and other restrictions to other types of foreign currencyoperations envisaged by the Federal Law on Currency Regulation and CurrencyControl.

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Additionally,Russian companies must repatriate 100% of their receivables from the export ofgoods and services (with a limited number of exemptions covering, inparticular, certain types of secured financing). Furthermore, certain types ofcross-border operations may be performed only in rubles, including, forexample, transactions with domestic securities, such as our shares, betweenresidents and non-residents of Russia. These requirements increase balances inour ruble-denominated accounts and, consequently, our exposure tocurrency devaluation risk.

**Restrictions on theremittance of dividends, interest or other payments to non-residents**

The Federal Law on Foreign Investments in the RussianFederation of July 9, 1999, specifically guarantees foreign investors theright to repatriate their earnings from Russian investments. However, theevolving Russian exchange control regime may materially affect your ability todo so.

Currently, ruble dividends on common shares may beconverted into U.S. dollars without restriction. However, the ability toconvert rubles into U.S. dollars is also subject to the availability of U.S.dollars in Russia’s currency markets. Although there is an existing marketwithin Russia for the conversion of rubles into U.S. dollars, including theinterbank currency exchange and over-the-counter and currency futures markets,the further development of this market is uncertain. At present, there is nomarket for the conversion of rubles into foreign currencies outside of Russiaand no viable market in which to hedge ruble and ruble-denominatedinvestments.

**E.**   Taxation

The following discussiondescribes the material United States federal and Russian income and withholdingtax consequences to you if you are a U.S. holder of common stock or ADSs and aresident of the United States for purposes of the United States-Russiaincome tax treaty and are fully eligible for benefits under the United States-Russiaincome tax treaty. Subject to certain provisions of the United States-Russiaincome tax treaty relating to limitations on benefits, you generally will be aresident of the United States for treaty purposes that is entitled to treatybenefits if you are:

·       liable,under the laws of the United States, to U.S. tax (other than taxes in respectonly of income from sources in the United States or capital situated therein)by reason of your domicile, residence, citizenship, place of incorporation, orany other similar criterion (and, for income derived by a partnership, trust orestate, residence is determined in accordance with the residence of the personliable to tax with respect to such income); and

·       notalso a resident of the Russian Federation for purposes of the UnitedStates-Russia income tax treaty.

The benefits under the United States-Russia incometax treaty discussed in this document generally are not available to U.S.persons who hold ADSs or common stock in connection with the conduct of abusiness in the Russian Federation through a permanent establishment as definedin the United States-Russia income tax treaty. Subject to certainexceptions, a U.S. person’s permanent establishment under the United States-Russiaincome tax treaty is a fixed place of business through which such personcarries on business activities in the Russian Federation (generally including,but not limited to, a place of management, a branch, an office, and a factory).Under certain circumstances, a U.S. person may be deemed to have a permanentestablishment in the Russian Federation as a result of activities carried on inthe Russian Federation through agents of the U.S. person. This summary does notaddress the treatment of holders described in this paragraph.

The following discussionis based on:

·       theUnited States Internal Revenue Code of 1986, as amended, the Treasuryregulations promulgated thereunder, and judicial and administrativeinterpretations thereof;

·       Russianlegislation; and

·       theUnited States-Russia income tax treaty (and judicial and administrativeinterpretations thereof);

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all as in effect on thedate of this document. All of the foregoing are subject to change, possibly ona retroactive basis, after the date of this document. This discussion is alsobased, in part, on representations of the depositary, and assumes that eachobligation in the deposit agreement and any related agreements will beperformed in accordance with its terms. The discussion with respect to Russianlegislation is based on our understanding of current Russian law and Russiantax rules, which are subject to frequent change and varying interpretations.

We believe, and thefollowing discussion assumes, that for United States federal income taxpurposes, we were not a passive foreign investment company for the taxable yearending in 2005, we are not a passive foreign investment company for the currenttaxable year and we will not become a passive foreign investment company in thefuture. However, passive foreign investment company determinations are madeannually and may involve facts that are not within our control. If we were tobe a passive foreign investment company, materially adverse tax consequencescould result for investors who are “United States Persons” as defined in theUnited States Internal Revenue Code of 1986, as amended.

The following discussionis not intended as tax advice to any particular investor. It is also not acomplete analysis or listing of all potential United States federal or Russianincome and withholding tax consequences to you of ownership of common stock orADSs. We urge you to consult your own tax adviser regarding the specific UnitedStates federal, state, and local and Russian tax consequences of the ownershipand disposition of the common stock or ADSs under your own particular factualcircumstances.

**Russian Income and Withholding Tax Considerations**

The Russian tax rules applicableto U.S. holders are characterized by significant uncertainties and limitedinterpretive guidance. Russian tax authorities have provided limited guidanceregarding the treatment of ADS arrangements, and there can be no certainty asto how the Russian tax authorities will ultimately treat those arrangements. In2005, the Russian Ministry of Finance stated that ADS holders must be treatedas the beneficial owners of the underlying shares for purposes of the doubletax treaty provisions applicable to taxation of dividend income from theunderlying shares. However, double tax treaty relief is available only if,before the transfer of dividends to the depository, the latter has provided theissuer with a list of ADS holders accompanied by each holder’s tax residencycertificate (confirmation of the country of tax residence). It is currentlyunclear whether depositories will be willing or able to provide residencycertificates for ADS holders or implement procedures for holders to benefitfrom applicable tax treaties. Thus, while a U.S. holder may technically beentitled to benefit from the provisions of the United States-Russiaincome tax treaty, in practice such relief may be difficult or impossible toobtain.

Russian tax law and proceduresare also not well developed, and local tax inspectors have considerableautonomy and often interpret tax rules without regard to the rule oflaw. Both the substantive provisions of Russian tax law and the interpretationand application of those provisions by the Russian tax authorities may besubject to more rapid and unpredictable change than in jurisdictions with moredeveloped capital markets.

Currently, the Russiangovernment is in the process of replacing the existing tax legislation with acomprehensive Tax Code, but it is unclear when this process will be completedand how U.S. holders would be affected. As of January 1, 1999, Part 1(General) of the Tax Code went into effect. This law defines the generalprinciples of taxation in Russia, defines the legal status of taxpayers and taxagencies and determines general rules of tax filings and tax control, aswell as procedures for challenging tax agencies. Part 1 also specifies allthe taxes that can be imposed by federal and local authorities. Further, on January 1,2001, Part 2 of the Tax Code went into effect, providing a description ofthe most significant taxes, and several additional chapters of the tax codebecame effective during 2003, 2004 and 2005.

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**Taxation ofDividends**

Dividends paid to U.S. holders generally will besubject to Russian withholding tax at a 15% rate for legal entities (includingU.S. corporations, partnerships or other entities) and up to a 30% rate forindividual holders. This tax may be reduced to 5% to 10% under the UnitedStates-Russia income tax treaty for U.S. holders; a 5% rate applies forU.S. holders who are legal entities owning 10% or more of the company’soutstanding shares, and a 10% rate applies to dividends paid to U.S. holders,including individuals and legal entities, owning less than 10% of the company’soutstanding shares. See “—United States-Russia Income Tax TreatyProcedures.”

If the appropriate documentation (*i.e.,*residency certificate) has not been provided to us before the dividend paymentdate, we are required to withhold tax at the full rate, and U.S. holdersqualifying for a reduced rate under the United States-Russia income taxtreaty then would be required to file claims for refund within three years withthe Russian tax authorities. There is significant uncertainty regarding theavailability and timing of such refunds.

**Taxation of CapitalGains**

U.S. holdersgenerally should not be subject to any Russian income or withholding taxes inconnection with the sale, exchange, or other disposition of ADSs or commonstock outside of Russia if the shares or ADSs are not sold to a Russianresident or persons other than Russian residents who conduct business in theRussian Federation through a permanent establishment or are tax registered inRussia based on other grounds.

However, sales or other dispositions of ADSs or commonstock by a U.S. holder that is a legal entity to Russian residents or personsother than Russian residents who conduct a business in Russia through apermanent establishment or are tax registered in Russia based on other groundsmay be subject to Russian income or withholding taxes. Specifically, thepurchaser may be required to withhold 20% of the purchase price (or 24% of thegain if the seller can confirm the cost basis of the security in accordancewith Russian rules) if more than 50% of our assets consists of immovableproperty located in Russia. Regardless of the residence of the purchaser, aU.S. holder that is a legal entity should not be subject to any Russian incomeor withholding taxes in connection with the sale, exchange, or otherdisposition of ADSs if immovable property constitutes 50% or less of our assetsor if ADSs are sold via foreign exchanges where they are legally circulated.

Sales or other dispositions of ADSs or common stock byU.S. holders who are individuals to Russian residents or persons other thanRussian residents who conduct business in Russia through a permanentestablishment or are tax registered in Russia based on other grounds may besubject to Russian income or withholding taxes, and for such a sale by a U.S.holder, the purchaser may be required to withhold 30% of any gain realized onthe sale.

U.S. holders maybe able to claim the benefits of a reduced rate of withholding under the UnitedStates-Russia income tax treaty on the disposition of common stock or ADSs toRussian residents, or obtain a refund of any withheld amounts at ratesdifferent from those provided in the treaty, by relying on the UnitedStates-Russia income tax treaty and complying with the appropriate proceduresdescribed below.

**United States-RussiaIncome Tax Treaty Procedures**

Under current rules, to claim the benefit of a reducedrate of withholding under the United States-Russia income tax treaty, anon-resident generally must provide official certification from the U.S. taxauthorities of eligibility for the treaty benefits in the manner required byRussian law.

A U.S. holder may obtain the appropriate certificationby mailing completed forms, together with the holder’s name, social securitynumber, tax return form number and the tax period for which certification isrequired, to: IRS-Philadelphia Accounts Management Center, U.S. ResidencyCertification Request, P.O. Box 16347, Philadelphia, Pennsylvania 19114-0447.The procedures for obtaining certification are 

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described in greaterdetail in Internal Revenue Service Publication 686. As obtaining the requiredcertification from the Internal Revenue Service may take at least six to eightweeks, U.S. holders should apply for such certification as soon as possible.

If tax is withheld by a Russian resident on dividendsor other amounts at a rate different from that provided in the tax treaty, aU.S. holder may apply for a tax refund by filing a package of documents withthe Russian local tax inspectorate to which the withholding tax was remittedwithin three years from the withholding date for U.S. holders which are legalentities, and within one year from the end of the year in which the withholdingoccurred for individual U.S. holders. The package should include theappropriate form (1011DT (2002) for non-dividend income and 1012DT (2002) fordividend income), confirmations of residence of the foreign holder (IRS Form 6166),a copy of the agreement or other documents substantiating the payment ofincome, documents confirming the beneficial ownership of the dividendsrecipient and the transfer of tax to the budget. Under the provisions of theTax Code, the refund of the tax should be effected within one month after thesubmission of the documents. However, procedures for processing such claimshave not been clearly established, and there is significant uncertaintyregarding the availability and timing of such refunds.

Neither the depositary nor us has or will have anyobligation to assist an ADS holder with the completion and filing of any taxforms.

**United StatesFederal Income Tax Considerations**

The following is a generaldescription of the material United States federal income tax consequences thatapply to you if you are, for United States federal income tax purposes, abeneficial owner of ADSs or common stock who is a citizen or resident of theUnited States, a corporation (including any entity treated as a corporation forUnited States federal income tax purposes) created or organized in or under thelaws of the United States, any State thereof or the District of Columbia, anestate the income of which is subject to U.S. tax regardless of its source, ora trust, if a United States court can exercise primary supervision over theadministration of the trust and one or more United States persons can controlall substantial trust decisions or, if the trust was in existence on August 20,1996 and has properly elected to continue to be treated as a United Statesperson. If a partnership (including any entity treated as a partnership forUnited States federal income tax purposes) is a beneficial owner of ADSs orcommon stock, the United States federal income tax treatment of a partner inthe partnership will generally depend on the status of the partner and theactivities of the partnership. Since your United States federal income andwithholding tax treatment may vary depending upon your particular situation,you may be subject to special rules not discussed below. Special rules willapply, for example, if you are:

·       aninsurance company;

·       atax-exempt organization;

·       afinancial institution;

·       aperson subject to the alternative minimum tax;

·       aperson who is a broker-dealer in securities;

·       anS corporation;

·       anexpatriate subject to Section 877 of the United States Internal RevenueCode;

·       anowner of, directly, indirectly or by attribution, 10% or more of theoutstanding shares of common stock; or

·       anowner holding ADSs or common stock as part of a hedge, straddle, syntheticsecurity or conversion transaction.

In addition, this summary is generally limited topersons holding common stock or ADSs as “capital assets” within the meaning of Section 1221of the United States Internal Revenue Code and whose 

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functional currency is theU.S. dollar. The discussion below also does not address the effect of anyUnited States state or local tax law or foreign tax law.

For purposes of applyingUnited States federal income and withholding tax law, a holder of an ADS shouldbe treated as the owner of the underlying shares of common stock represented bythat ADS.

The United States Treasuryhas expressed concerns that parties to whom ADSs are pre-released may be takingactions that are inconsistent with the claiming, by United States personsholding ADSs, of foreign tax credits for United States federal income taxpurposes. Such actions would also be inconsistent with the claiming of thereduced rate of tax applicable to dividends received by certain non-corporateUnited States persons, as described below. Accordingly, the analysis of thecreditability of Russian taxes described below, and the availability of thereduced tax rate for dividends received by certain non-corporate United Statespersons, could be affected by future actions that may be taken by the United StatesTreasury.

**Taxation of Dividends on Common Stock or ADSs**

For United States federalincome tax purposes, the gross amount of a distribution, including any Russianwithholding taxes, with respect to common stock or ADSs will be treated as ataxable dividend to the extent of our current and accumulated earnings andprofits, computed in accordance with United States federal income taxprinciples. For taxable years beginning before January 1, 2011, if you area non-corporate taxpayer such dividends may be taxed at the lower applicablecapital gains rate provided (1) certain holding period requirements aresatisfied, (2) either (a) our ADSs continue to be listed on the NewYork Stock Exchange (or other national securities exchange that is registeredunder section 6 of the Securities Exchange Act of 1934, as amended, or theNasdaq Stock Market) or (b) we are eligible for the benefits of the UnitedStates-Russia income tax treaty, and (3) we are not, for the taxableyear in which the dividend was paid, or in the preceding taxable year, a “passiveforeign investment company.” Non-corporate U.S. holders are strongly urged toconsult their own tax advisors as to the applicability of the lower capitalgains rate to dividends received with respect to ADSs or shares of commonstock. Distributions in excess of our current or accumulated earnings andprofits will be applied against and will reduce your tax basis in common stockor ADSs and, to the extent in excess of such tax basis, will be treated as gainfrom a sale or exchange of such common stock or ADSs. You should be aware thatwe do not intend to calculate our earnings and profits for United Statesfederal income tax purposes and, unless we make such calculations, you shouldassume that any distributions with respect to common stock or ADSs generallywill be treated as a dividend, even if that distribution would otherwise betreated as a return of capital or as capital gain pursuant to the rules describedabove. If you are a corporation, you will not be allowed a deduction fordividends received in respect of distributions on common stock or ADSs, whichis generally available for dividends paid by U.S. corporations.

If a dividend distributionis paid in rubles, the amount includible in income will be the U.S. dollar valueof the dividend, calculated using the exchange rate in effect on the date thedividend is includible in income by you, regardless of whether the payment isactually converted into U.S. dollars. Any gain or loss resulting from currencyexchange rate fluctuations during the period from the date the dividend isincludible in your income to the date the rubles are converted into U.S.dollars will be treated as ordinary income or loss. You may be required torecognize foreign currency gain or loss on the receipt of a refund of Russianwithholding tax pursuant to the United States-Russia income tax treaty tothe extent the United States dollar value of the refund differs from the dollarequivalent of that amount on the date of receipt of the underlying dividend.

Russian withholding tax at the rate applicable to youunder the United States-Russia income tax treaty should be treated as aforeign income tax that, subject to generally applicable limitations andconditions, is eligible for credit against your U.S. federal income taxliability or, at your election, may be deducted in computing taxable income.If, however, the holder of an ADS is not treated as the owner of 

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the underlying commonstock represented by the ADS for U.S. federal income tax purposes, then Russianwithholding tax would not be treated as a foreign income tax eligible forcredit as described in the preceding sentence. If Russian tax is withheld at arate in excess of the rate applicable to you under the United States-Russiaincome tax treaty, you may not be entitled to credits for the excess amount,even though the procedures for claiming refunds and the practical likelihoodthat refunds will be made available in a timely fashion are uncertain.

A dividend distribution will be treated as foreign sourceincome and will generally be classified as “passive income” or, in some cases, “financialservices income” for United States foreign tax credit purposes. For taxableyears beginning after December 31, 2006, dividends will generallyconstitute “passive category income” but could, in the case of certain U.S.holders, constitute “general category income.” The rules relating to thedetermination of the foreign tax credit, or deduction in lieu of the foreigntax credit, are complex and you should consult your own tax advisors withrespect to those rules.

**Taxation on Sale orExchange of Common Stock or ADSs**

The sale of common stock or ADSs will generally resultin the recognition of gain or loss in an amount equal to the difference betweenthe amount realized on the sale and your adjusted basis in such common stock orADSs. That gain or loss will be capital gain or loss if the common stock orADSs are capital assets in your hands and will be long-term capital gain orloss if the common stock or ADSs have been held for more than one year. If youare an individual, such realized long-term capital gain is generally subject toa reduced rate of United States federal income tax. Limitations may apply toyour ability to offset capital losses against ordinary income.

Deposits and withdrawals of common stock by you inexchange for ADSs will not result in the realization of gain or loss for U.S.federal income tax purposes.

Gain realized on the sale of common stock or ADSs willgenerally be treated as U.S. source income and therefore the use of foreign taxcredits relating to any Russian taxes imposed upon such sale may be limited.You are strongly urged to consult your own tax advisors as to the availabilityof tax credits for any Russian taxes withheld on the sale of common stock orADSs.

**InformationReporting and Backup Withholding**

Dividends and proceeds from the sale or otherdisposition of common stock or ADSs that are paid in the United States or by aU.S.-related financial intermediary will be subject to U.S. informationreporting rules and U.S. backup withholding tax, unless you are acorporation or other exempt recipient. In addition, you will not be subject tobackup withholding if you provide your taxpayer identification number andcertify that no loss of exemption from backup withholding has occurred. Holdersthat are not U.S. persons generally are not subject to information reporting orbackup withholding, but such holders may be required to provide certificationas to their non-U.S. status.

**F.   Dividendsand Paying Agents**

Not applicable.

**G.   Statementby Experts**

Not applicable.

**H.   Documentson Display**

The documents that are exhibits to or incorporated byreference in this document can be read at the U.S. Securities and ExchangeCommission’s public reference facilities at Room 1024, 450 Fifth Street,N.W., Washington, D.C. 20549. You may obtain information on the operation ofthe Public Reference Room by calling the SEC at 1-800-SEC-0330or, from outside the United States, at 1-202-942-8090. Copiesmay also be obtained from the SEC website at www.sec.gov.

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**I.   Subsidiary Information**

Not applicable.

***Item 11.****                  *Quantitativeand Qualitative Disclosures about Market Risk

We are exposed to marketrisk from changes in both foreign currency exchange rates and interest rates.Foreign currency exchange risks exist to the extent that our revenues areprimarily denominated in Russian rubles and our costs are denominated incurrencies other than Russian rubles and our foreign currency denominated debt.We are subject to market risk deriving from changes in interest rates, whichmay affect the cost of our financing. We do not use financial instruments suchas foreign exchange forward contracts, foreign currency options, interest rateswaps and forward rate agreements, to manage these market risks, because themarket for these types of financial instruments in Russia is not well developedand the costs of these instruments is relatively high.

**Interest Rate Risk**

Our interest rate exposureresults mainly from debt obligations. At December 31, 2005, we had debtamounting to $371.6 million, which comprised variable-rate borrowings of$53.5 million and fixed-rate borrowings of $318.1 million. See also “Item5. Operating and Financial Review and Prospects—E. Contractual Obligations.”

Thefollowing tables present our variable and fixed-rate debt obligations as of December 31,2005 by expected maturity dates and related weighted average interest rates.
|                                 | ** ** | **Expected Maturity Date as of December 31, 2005** | ** ** |
|---------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **Currency**                                                                          | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010 and  thereafter** | ** ** | **Total** | ** ** | **Fair  value** | ** ** | **Interest  rates at  December 31,  2005** | ** ** |
| ** **                      | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Variable-rate  loans****(1)** |       | Euro                                                                                  |       | 2,703 |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 2,703 |   | 2,703 |   |   | 5.69 | % |   |
| ** **                      |       | U.S.  dollars                                                                         |       | 1,013 |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 1,013 |   | 1,013 |   |   | 6.06 | % |   |
| **Variable-rate  notes****(2)** |       | Rubles                                                                                |       | 49,794 |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 49,794 |   | 49,794 |   |   | 11.24 | % |   |
| **Total  variable rate debt**   |       |                                                                                  |       | 53,510 |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 53,510 |   | 53,510 |   |   | 10.86 | % |   |

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(1)          Ourvariable rate loans are linked to LIBOR and EURIBOR.

(2)          Ourruble notes are linked to the inflation index.
|                            | ** ** | **Expected Maturity Date as of December 31, 2005** | ** ** |
|----------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                 | ** ** | **Currency**                                                                          | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010 and  thereafter** | ** ** | **Total** | ** ** | **Fair  value** | ** ** | **Interest  rates at  December 31,  2005** | ** ** |
| ** **                 | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Fixed-rate  loan**       |       | Rubles                                                                                |       | 19,904 |   | 764 |   | 713 |   | 455 |   |   | 16 |   |   | 21,852 |   | 21,852 |   |   | 5.85 | % |   |
| ** **                 |       | U.S.  dollars                                                                         |       | 10,436 |   | 7,731 |   | 6,161 |   | 4,813 |   |   | 535 |   |   | 29,676 |   | 29,676 |   |   | 4.11 | % |   |
| ** **                 |       | Euro                                                                                  |       | 5,090 |   | 5,025 |   | 1,179 |   | 904 |   |   | 180 |   |   | 12,378 |   | 12,378 |   |   | 3.62 | % |   |
| **Fixed-rate  Notes**      |       | U.S.  dollars                                                                         |       | — |   | — |   | 150,000 |   | — |   |   | — |   |   | 150,000 |   | 150,000 |   |   | 8.5 | % |   |
| ** **                 |       | Rubles                                                                                |       |   |   |   |   |   |   |   |   |   | 104,230 |   |   | 104,230 |   | 104,230 |   |   | 9.0 | % |   |
| **Total fixed rate  debt** |       |                                                                                  |       | 35,430 |   | 13,520 |   | 158,053 |   | 6,172 |   |   | 104,961 |   |   | 318,136 |   | 318,136 |   |   | 7.89 | % |   |

 

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Thefollowing tables present our variable and fixed-rate debt obligations as of December 31,2004 by expected maturity dates and related weighted average interest rates.
|                                | ** ** | **Expected Maturity Date as of December 31, 2004** | ** ** |
|--------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                     | ** ** | **Currency**                                                                          | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009 and  thereafter** | ** ** | **Total** | ** ** | **Fair  value** | ** ** | **Interest  rates at  December 31,  2004** | ** ** |
| ** **                     | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Variable-rate loans****(1)** |       | Euro                                                                                  |       |   | — |   |   | 6,202 |   |   | — |   |   |   | — |   |   |   | — |   |   | 6,202 |   | 6,202 |   |   | 5.63 | % |   |
| ** **                     |       | U.S.  dollars                                                                         |       |   | 891 |   |   | 918 |   |   | — |   |   |   | — |   |   |   | — |   |   | 1,809 |   | 1,809 |   |   | 4.11 | % |   |
| **Variable-rate notes****(2)** |       | Rubles                                                                                |       |   | — |   |   | 51,709 |   |   | — |   |   |   | — |   |   |   | — |   |   | 51,709 |   | 51,709 |   |   | 8.5 | % |   |
| **Total variable rate   debt** |       |                                                                                  |       |   | 891 |   |   | 58,829 |   |   | — |   |   |   | — |   |   |   | — |   |   | 59,720 |   | 59,720 |   |   | 8.07 | % |   |

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(1)          Ourvariable rate loans are linked to LIBOR and EURIBOR.

(2)          Ourruble notes are linked to the inflation index.
|                            | ** ** | **Expected Maturity Date as of December 31, 2004** | ** ** |
|----------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                 | ** ** | **Currency**                                                                          | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009 and  thereafter** | ** ** | **Total** | ** ** | **Fair  value** | ** ** | **Interest  rates at  December 31,  2004** | ** ** |
| ** **                 | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Fixed-rate loan**        |       | Rubles                                                                                |       | 17,070 |   | 237 |   | 269 |   | 235 |   |   | — |   |   | 17,811 |   | 17,811 |   |   | 10.68 | % |   |
| ** **                 |       | U.S.  dollars                                                                         |       | 11,070 |   | 10,371 |   | 7,414 |   | 6,162 |   |   | 5,360 |   |   | 40,377 |   | 40,377 |   |   | 4.09 | % |   |
| ** **                 |       | Euro                                                                                  |       | 6,057 |   | 5,340 |   | 3,748 |   | 57 |   |   | 58 |   |   | 15,260 |   | 15,260 |   |   | 4.36 | % |   |
| **Fixed-rate Notes**       |       | U.S.  dollars                                                                         |       | — |   | — |   | — |   | 150,000 |   |   | — |   |   | 150,000 |   | 150,000 |   |   | 8.5 | % |   |
| **Total  fixed rate debt** |       |                                                                                  |       | 34,197 |   | 15,948 |   | 11,431 |   | 156,454 |   |   | 5,418 |   |   | 223,448 |   | 223,448 |   |   | 7.6 | % |   |

 

Our fixed rate debtincreased to $318.1 million as a result of our issuance of rubledenominatednotes in 2005 and our variable rate debt decreased to$53.5 million. See Notes 16 and 17 to our Consolidated FinancialStatements included under “Item 18. Financial Statements.”

**Foreign CurrencyRisk**

Effective from January 1, 2003, Russia no longermet the criteria for a highly inflationary economy. Therefore, commencing January 1,2003, our Russian subsidiaries changed their functional currency from the U.S.dollar to the ruble. See Note 3 to our Consolidated Financial Statementsincluded under “Item 18. Financial Statements.”

Our foreign currency exchange risk exposure resultsfrom the fact that our revenues are primarily denominated in Russian rubles anda significant portion of our costs is denominated in currencies other thanRussian rubles and net monetary liability position from our foreign currencydenominated debt. Thus, we incur remeasurement gains as the Russian rubleappreciates against other currencies and losses as the ruble depreciatesagainst other currencies. Management believes that monetary assets andliabilities denominated in foreign currencies, other then foreign currency-denominateddebt, are not significant from a foreign currency risk perspective.

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As of December 31,2005, our U.S. dollar debt position amounted to $180.6 million and our eurodebt position amounted to $15.1 million, compared to a U.S. dollar debtposition of $192.2 million and euro debt position of $21.5 million asof December 31, 2004.
|                | ** ** | **Expected Maturity Date as of December 31, 2005** | ** ** |
|----------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **     | ** ** | **Currency**                                                                          | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010 and  thereafter** | ** ** | **Total** | ** ** | **Fair  value** | ** ** |
| ** **     | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Debt**       |       | Rubles                                                                                |       | 69,798 |   | 764 |   | 713 |   | 455 |   |   | 104,246 |   |   | 175,876 |   | 175,876 |   |
| ** **     |       | U.S.  dollars                                                                         |       | 11,449 |   | 7,731 |   | 156, 161 |   | 4,813 |   |   | 535 |   |   | 180,689 |   | 180,689 |   |
| ** **     |       | Euro                                                                                  |       | 7,793 |   | 5,025 |   | 1,179 |   | 904 |   |   | 180 |   |   | 15,081 |   | 15,081 |   |
| **Total debt** |       |                                                                                  |       | 88,940 |   | 13,520 |   | 158, 053 |   | 6,172 |   |   | 104,961 |   |   | 371,646 |   | 371,646 |   |

 
|                | ** ** | **Expected Maturity Date as of December 31, 2004** | ** ** |
|----------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **     | ** ** | **Currency**                                                                          | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009 and  thereafter** | ** ** | **Total** | ** ** | **Fair  value** | ** ** |
| ** **     | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Debt**       |       | Rubles                                                                                |       | 17,070 |   | 51,946 |   | 269 |   | 235 |   |   | — |   |   | 69,520 |   | 69,520 |   |
| ** **     |       | U.S. dollars                                                                          |       | 11,961 |   | 11,289 |   | 7,414 |   | 156,162 |   |   | 5,360 |   |   | 192,186 |   | 192,186 |   |
| ** **     |       | Euro                                                                                  |       | 6,057 |   | 11,542 |   | 3,748 |   | 57 |   |   | 58 |   |   | 21,462 |   | 21,462 |   |
| **Total debt** |       |                                                                                  |       | 35,088 |   | 74,777 |   | 11,431 |   | 156,454 |   |   | 5,418 |   |   | 283,168 |   | 283,168 |   |

 

During 2005, the Russian ruble appreciated against theU.S. dollar and the euro. We incurred a currency remeasurement gain of $1.2million. In 2005, we incurred total currency remeasurement gains of $1.2million, which comprised of gains and losses from euro- and U.S. dollardenominated obligations, respectively, as well as remeasurement gains from ouroperations in Ukraine. For purposes of accounting for our U.S.dollar-denominated notes, we used the exchange rate as of December 31,2005, which depreciated nominally by 3.7% against the December 31, 2004exchange rate resulting in a currency remeasurement loss. On the other hand,as the value of the ruble increased against the euro, our euro-denominated obligations resulted in currency remeasurementgains. With respect to ruble-denominated liabilities of our Ukrainiansubsidiary, we incurred currency remeasurement gains due to the depreciation ofthe ruble against the Ukrainian hryvna.

We believe that thecarrying value of our long-term debt approximates its fair value. The carryingamounts of cash and cash equivalents, accounts receivable, accounts payable andshort-term loans reported in the consolidated balance sheet approximate theirfair values due to the short maturity of those instruments.

See also “Item 3. Key Information—A. SelectedFinancial Data—Exchange Rates and Inflation.”

***Item 12.****                  *Descriptionof Securities Other than Equity Securities

Not applicable.

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**PART II**

***Item 13.****                  *Defaults,Dividend Arrearages and Delinquencies

None.

***Item 14.****                  *MaterialModifications to the Rights of Security Holders and Use of Proceeds

Not applicable.

***Item 15.****                  *Controlsand Procedures

We are committed to maintaining disclosure controlsand procedures designed to ensure that information required to be disclosed inour Exchange Act reports is recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms, and that suchinformation is accumulated and communicated to our management, including ourchief executive officer and chief financial officer, as appropriate, to allowfor timely decisions regarding required disclosure. As required by Rules 13a-15and 15d-15 under the Securities Exchange Act of 1934, management, withthe participation of our chief executive officer and chief financial officer,has evaluated the effectiveness of our disclosure controls and procedures as ofthe end of the period covered by this report. In designing and evaluating thedisclosure controls and procedures, management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily is required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures and implementingcontrols and procedures based on the application of management’s judgment.

In the course of the audit of our financial statementsfor the year ended December 31, 2005, we and our independent registeredpublic accounting firm identified material weaknesses regarding variouselements of our internal control over financial reporting. The Public CompanyAccounting Oversight Board’s Auditing Standard No. 2 defines a materialweakness as a significant deficiency, or combination of significantdeficiencies, that results in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not be preventedor detected. As a result of the material weaknesses, our chief executiveofficer and chief financial officer concluded that, as of December 31,2005, the end of the period covered by this report, our disclosure controls andprocedures were not effective to ensure that information required to bedisclosed in the reports we file or submit under the Exchange Act is recorded,processed, summarized, and reported, within the time periods specified in theSEC’s rules and forms.

The following threematerial weaknesses in our internal control over financial reporting have beenidentified:

·       Ourfinancial statement closing process and the transformation of our statutoryfinancial statements into U.S. GAAP consolidated financial statements has notreduced to an acceptably low level the risk that material errors may occur andmay not be detected on a timely basis by management in the normal course ofbusiness;

·       Inadequateaccounting resources and expertise in respect of the preparation ofconsolidated financial statements in accordance with U.S. GAAP; and

·       Inadequateinterpretation and implementation of Statement of Financial AccountingStandards No. 109, *Accounting forIncome Taxes*.

The first weakness results from the fact that there isno fully automated process in place to support the transformation of statutoryfinancial statements of our subsidiaries to comply with U.S. GAAP or thepreparation of the consolidated balance sheet, consolidated statements ofincome and cash flows, including the reconciliation and elimination ofintragroup balances and transactions. We also lack a sufficiently 

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detailed description ofindividual procedures, responsible persons and controls over the statutory andU.S. GAAP financial statements closing processes and documentation of theircompletion. This control deficiency was identified by our internal controldepartment as part of its evaluation of our systems for internal control overfinancial reporting, which sought to observe our key internal control processesand procedures and develop new standards to comply with Section 404 of theU.S. Sarbanes-Oxley Act of 2002. The material weakness was then confirmedby our independent registered public accounting firm.

The second weakness relates to our inadequate U.S.GAAP accounting resources and expertise. Our business consists of 30 operatingsubsidiaries, of which the 10 major subsidiaries are located across 8 timezones in Russia and the Commonwealth of Independent States, each of whichprepares stand-alone financial statements for statutory purposes underRussian accounting standards or other local country accounting standards. Thepreparation of our U.S. GAAP consolidated financial statements is a partlyautomated process which involves (1) the transformation of these statutoryfinancial statements into U.S. GAAP consolidated financial statements throughaccounting adjustments and (2) a consolidation of all these stand-alonestatutory financial statements. This process is complicated, time-consuming andrequires significant attention and time from our senior accounting personnel atour subsidiaries and corporate headquarters. Moreover, U.S. GAAP accountingadjustments tend to result in large differences between our statutory and U.S.GAAP financial position and results of operations.

These difficult tasks require U.S. GAAP-experiencedaccounting personnel at each of our 5 major subsidiaries and at our Moscowcorporate offices. While we have senior accounting personnel who areACCA-qualified, Russia has available only a small number of accountingpersonnel with U.S. GAAP expertise. Moreover, there is an increasing demand forsuch personnel as more Russian companies are beginning to prepare financialstatements on the basis of U.S. GAAP or other international standards. Suchcompetition, combined with the locations of our major subsidiaries which suchpersonnel may not find suitable in comparison to other opportunities, makes itdifficult for us to hire and retain such personnel. Under these circumstances,we have had difficulty in remedying the material weaknesses identified by ourindependent registered public accounting firm and in ensuring the timely andaccurate reporting of our financial information in accordance with U.S. GAAP.

The third material weakness was identified by ourindependent registered public accounting firm during the course of their auditof our financial statements for the year ended December 31, 2005 and theyear ending December 31, 2004. The material weakness resulted frominadequate controls over financial reporting relating to the interpretation andimplementation of Statement of Financial Accounting Standards No. 109, *Accounting for Income Taxes*. However, certain improvementsin the calculation of income tax were made by us during 2005. For example, thealgorithm for the calculation of deferred taxes, including unifiedclassification of taxable, deductible, non-taxable and non-deductibledifferences between tax basis of an asset or a liability and its reporting, wasformalized for all subsidiaries. There are still further steps to be taken toeliminate this material weakness.

These material weaknesses were considered indetermining the nature, timing and extent of the procedures performed by ourindependent registered public accounting firm in their audit of our annualconsolidated financial statements and thus led them to perform additionalprocedures and verifications. Our independent registered public accounting firmissued an unqualified opinion on our consolidated financial statements, whichis consistent with management’s assertion that the consolidated financialstatements as of December 31, 2005 have been prepared in accordance withU.S. GAAP and present fairly, in all material respects, our consolidatedfinancial position, results of operations and cash flows.

We have taken andcontinue to take several steps to correct the material weaknesses.

·       Weare in the process of implementing the Hyperion Financial Management softwarepackage designed to automate the financial consolidation process which weexpect will significantly improve 

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our U.S. GAAPtransformation process and consolidation process as a result of theirautomation. We expect to complete the implementation of this new software bythe end of September 2006.

·       Managementis in the process of significantly improving internal guidelines of thestatutory and U.S. GAAP financial statements closing process, includingindividual procedures, responsible persons and controls. Management is alsodeveloping checklists and work programs for accounting personnel for documentingactual performance of procedures and controls. We expect these new procedureswill be implemented by the end of September 2006.

·       Weare in the process of hiring a senior accounting professional who will beeither ACCA or CPA-qualified and be positioned to review U.S. GAAP statementsand resolve complex issues. Further, three of our key financial staff alreadyobtained their ACCA certification.

·       In2004, we established a new department devoted to developing our systems ofinternal control over financial reporting in an effort to comply with Rule 404of the Sarbanes-Oxley Act of 2002. The department is comprised of fourfull-time employees who are tasked with identifying and evaluating our businessprocesses and implementing, where necessary, new or modified internal controlprocedures over financial reporting. The work of this department is supervisedby certain of our key business process directors and managers, as well assupervised by the Management Board, Board of Directors and the Audit Committee.The internal control system design was completed in 2005, and in 2006, thedepartment started dealing with the implementation and documentation ofindividual control procedures at our production sites.

·       In2005, we arranged a training seminar for our accounting staff to be provided byqualified external trainers on Financial Accounting Standard No. 109, *Accounting for Income Taxes*whichsignificantly enhanced the process of accounting for income tax in accordancewith Financial Accounting Standard No. 109, *Accounting for Income Taxes*. In 2006, we plan to continue toarrange training seminars for our accounting staff.

Although we have undertaken the foregoing initiatives,the existence of a material weakness is an indication that there is more than aremote likelihood that a material misstatement of our financial statements willnot be prevented or detected in a future period. In addition, we cannot assureyou that we will not in the future identify further material weaknesses orsignificant deficiencies in our internal control over financial reporting thatwe have not discovered to date. We are taking steps to refine our internalcontrol over financial reporting pursuant to Section 404 of the Sarbanes-OxleyAct, which will take effect beginning with the year ending December 31,2006, and the efficacy of the steps we have taken to date and the steps we arestill in the process of completing is subject to continued management reviewsupported by confirmation and testing by management and by our internal auditors,as well as audit committee oversight. As a result, additional changes will bemade to our internal control over financial reporting. See “Item 3. KeyInformation—D. Risk Factors—There are material weaknesses in our internalcontrol over financial reporting and we may not be able to remedy thesematerial weaknesses or prevent future material weaknesses. If we fail to do sothere is a more than remote likelihood that a material misstatement of theannual or interim statements will not be prevented or detected.”

Other than the foregoing steps, since the date of theevaluation supervised by our management, there have been no material changes inour disclosure controls and procedures, or our internal control over financialreporting, that have materially affected, or are reasonably likely tomaterially affect, our disclosure controls and procedures or our internalcontrol over financial reporting.

***Item 16A.***           Audit CommitteeFinancial Expert

Our Board of Directors has determined that Guy deSelliers is an “audit committee financial expert” as defined in Item 16A of Form 20-F.Mr. de Selliers is independent in accordance with SEC Rule 10A-3.

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***Item 16B.****          *Codeof Ethics

In July 2005, our Board of Directors approved aCode of Ethics that applies to our employees, including our principal executiveofficer, principal financial officer and principal accounting officer orcontroller, or persons performing similar functions, which is posted on ourwebsite at http://www.wbd.com/f_reports/corp_govern/. No waivers of the Code ofEthics have been granted.

***Item 16C.****         *PrincipalAccountant Fees and Services

Ernst &Young LLC has served as our independent public accountants for the fiscal yearsended December 31, 2005 and 2004, respectively, for which auditedfinancial statements appear in this annual report on Form 20-F. Thefollowing table presents the aggregate fees for professional services and otherservices rendered by Ernst & Young in 2005 and 2004, respectively.
|                     | ** ** | **Year ended December 31,** | ** ** |
|---------------------|------------|--------------------------------------------|------------|
| ** **          | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| ** **          | ** ** | **(in U.S. dollars)**            | ** ** |
| Audit Fees          |       | $                                          | 840,000    |   | $ | 805,000 |   |
| Audit-Related  Fees |       | 30,000                                     |       | — |   |
| All Other Fees      |       | 268,470                                    |       | 55,000 |   |
| Total               |       | $                                          | 1,138,870  |   | $ | 860,000 |   |

 

**Audit Fees**

Audit services consistedof the audit of the consolidated financial statements as of and for the yearsended December 31, 2005 and 2004, the Russian statutory audit of stand-alonefinancial statements prepared in accordance with Russian accounting principlesof Wimm-Bill-Dann Foods OJSC as of and for the year ended December 31,2005 and of seven of our companies as of and for the years ended December 31,2004, reviews of the consolidated condensed financial statements for the threemonths ended March 31, 2005 and 2004, the six months ended June 30,2005 and 2004 and the nine months ended September 30, 2005 and 2004 andservices performed by our external auditors in connection with our AuditCommittee meetings and related communications, as well as with their review ofthis annual report on Form 20-F.

**Audit-relatedFees**

Audit-related servicesfor the year ended December 31, 2005 consisted of services performed byour external auditors in connection with the issuance of a ruble bond.

**Tax Fees**

We did not incur any feesfor tax services for the years ended December 31, 2005 and 2004.

**Other Fees**

Other services for theyears ended December 31, 2005 and 2004 mainly consisted of advisoryservices regarding compliance with the Sarbanes-Oxley Act of 2002.

**Audit CommitteePre-Approval Policies and Procedures**

The Sarbanes-Oxley Act of 2002 required that weimplement a pre-approval process for all engagements with our IndependentRegistered Public Accounting Firm. In compliance with these requirements, ourAudit Committee pre-approves the engagement terms and fees of Ernst &Young for all audit and non-audit services. The Audit Committee pre-approvedthe engagement terms and fees of Ernst & Young for all audit andnon-audit services for the fiscal years ended December 31, 2005 and 2004.

143

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***Item 16D.****         *Exemptionfrom the Listing Standards for Audit Committees

Not applicable.

***Item 16E.****         *Purchasesof Equity Securities by the Issuer and Affiliated Purchasers

No purchases were made by or on behalf of us or anyaffiliated purchaser of shares or other units of any class of our equitysecurities during the period covered by this annual report.

144

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**PART III**

***Item 17.****                  *FinancialStatements

See instead “Item 18. Financial Statements.”

***Item 18.****                  *FinancialStatements

Thefollowing financial statements, together with the report of Ernst &Young LLC, are filed as part of this annual report on Form 20-F.

|                                                                                                                 | ** ** | **Page** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------|
| Index to the Consolidated Financial Statements                                                                  |       | F-1      |
| Report of Independent Registered Public Accounting  Firm                                                        |       | F-2      |
| Consolidated  Balance Sheets as of December 31, 2005 and 2004                                              |       | F-3      |
| Consolidated Statements of Operations for the years  ended December 31, 2005, 2004 and 2003                |       | F-4      |
| Consolidated Cash Flow Statements for the years ended  December 31, 2005, 2004 and 2003                    |       | F-5      |
| Consolidated Statements of Shareholders’ Equity for  the years ended December 31, 2005, 2004 and 2003 |       | F-7      |
| Notes to the Consolidated Financial Statements                                                                  |       | F-8      |

 

145

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***Item 19.****                  *Exhibits

| 1.1   |   | Charter of Wimm-Bill-Dann  Foods OJSC (English Translation) is incorporated by reference to  Exhibit 1 to the Annual Report filed pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 for the fiscal year ended  December 31, 2002, on Form 20-F.                                                                                                                                                                                                                                           |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.2   |   | Amendments to the  Charter of Wimm-Bill-Dann Foods OJSC (English Translation),  approved June 18, 2003 is incorporated herein by reference to  Exhibit 1.2 to the Annual Report filed pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 for the fiscal year ended  December 31, 2003 on Form 20-F.                                                                                                                                                                                   |
| 1.3   |   | Amendment to the Charter  of Wimm-Bill-Dann Foods OJSC (English Translation), approved  July 16, 2004 is incorporated herein by reference to Exhibit 1.3 to  the Annual Report filed pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934 for the fiscal year ended December 31,  2004 on Form 20-F.                                                                                                                                                                                    |
| 1.4   |   | Amendment to the Charter  of Wimm-Bill-Dann Foods OJSC (English Translation), approved  June 14, 2005 is incorporated herein by reference to Exhibit 1.4 to  the Annual Report filed pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934 for the fiscal year ended December 31,  2004 on Form 20-F.                                                                                                                                                                                    |
| 2.1   |   | Deposit Agreement, dated  January 17, 2002, by and among the Company, the Depositary, and the  holders and beneficial owners from time to time of the ADSs is incorporated  by reference to Exhibit 2.1 to the Annual Report filed pursuant to  Section 13 or 15(d) of The Securities Exchange Act of 1934 for the  fiscal year ended December 31, 2001 on Form 20-F/A.                                                                                                                                    |
| 4.1   |   | U.S. $150,000,000 Loan  Agreement, dated as of 14 May 2003 between Open Joint Stock Company Wimm-Bill-Dann  Foods as Borrower and UBS (Luxembourg) S.A. as Lender is incorporated herein  by reference to Exhibit 4.1 to the Annual Report filed pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934 for the  fiscal year ended December 31, 2002 on Form 20-F.                                                                                                                             |
| 4.2   |   | Deed of Guarantee, dated  as of 14 May 2003 between OAO Lianozovo Dairy Plant, OAO Tsaritsino  Dairy Plant, ZAO Trade Company Wimm- Bill-Dann as Guarantors and  UBS (Luxembourg) S.A. as Lender is incorporated herein by reference to  Exhibit 4.2 to the Annual Report filed pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 for the fiscal year ended  December 31, 2002, on Form 20-F.                                                                                        |
| 4.2.1 |   | Side Letter and Deed of  Accession dated 23 January 2004 is incorporated herein by reference to  Exhibit 4.2.1 to the Annual Report filed pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 for the fiscal year ended  December 31, 2004 on Form 20-F.                                                                                                                                                                                                                               |
| 4.2.2 |   | Side Letter and Deed of  Accession dated 27 January 2005 is incorporated herein by reference to  Exhibit 4.2.2 to the Annual Report filed pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 for the fiscal year ended  December 31, 2004 on Form 20-F.                                                                                                                                                                                                                               |
| 4.3   |   | Contract  No. P61011, dated January 1, 2006, by and between CJSC Tetra Pak  and OAO Lianozovo Dairy.*                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.4   |   | Contract  No. P61018, dated January 1, 2006, by and between CJSC Tetra Pak  and ZAO Wimm-Bill-Dann Purchaser.*                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.5   |   | Subsoil Use License  No. 01948 issued to Rodniki Valdaya Limited Liability Company; License  Agreement on the terms of subsoil use for the extraction of up to 500 m3/day  of underground drinking water from exploitation wells No. 2537 and  No. 2542 (English Translation) is incorporated herein by reference to  Exhibit 4.5 to the Annual Report filed pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 for the fiscal year ended  December 31, 2002, on Form 20-F. |

146

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| 4.6  |   | Exchange Agreement  No. B-01, dated April 4, 2001, by and between Moscow Baby  Food Plant and Mikhail Vishnyakov is incorporated herein by reference to  Exhibit 10.2 to Amendment No. 2 to the Registration Statement on  Form F-1 (Registration No. 333-14278).    |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.7  |   | Exchange Agreement  No. B-02, dated April 4, 2001, by and between Lianozovo Dairy  Plant and Mikhail Vishnyakov is incorporated herein by reference to  Exhibit 10.3 to Amendment No. 2 to the Registration Statement on  Form F-1 (Registration No. 333-14278).     |
| 4.8  |   | Exchange Agreement  No. B-03, dated April 4, 2001, by and between Lianozovo Dairy  Plant and Mikhail Dubinin is incorporated herein by reference to  Exhibit 10.4 to Amendment No. 2 to the Registration Statement on  Form F-1 (Registration No. 333-14278).        |
| 4.9  |   | Exchange Agreement  No. B-04, dated April 4, 2001, by and between Lianozovo Dairy  Plant and Alexander Orlov is incorporated herein by reference to  Exhibit 10.5 to Amendment No. 2 to the Registration Statement on  Form F-1 (Registration No. 333-14278).        |
| 4.10 |   | Exchange Agreement  No. B-05, dated April 4, 2001, by and between Lianozovo Dairy  Plant and Sergei Plastinin is incorporated herein by reference to  Exhibit 10.6 to Amendment No. 2 to the Registration Statement on  Form F-1 (Registration No. 333-14278).       |
| 4.11 |   | Exchange Agreement  No. B-06, dated April 4, 2001, by and between Lianozovo Dairy  Plant and Gavril Yushvaev is incorporated herein by reference to  Exhibit 10.7 to Amendment No. 2 to the Registration Statement on  Form F-1 (Registration No. 333-14278).        |
| 4.12 |   | Exchange Agreement  No. B-07, dated April 4, 2001, by and between Lianozovo Dairy  Plant and Evgeny Yaroslavsky is incorporated herein by reference to  Exhibit 10.8 to Amendment No. 2 to the Registration Statement on  Form F-1 (Registration No. 333-14278).     |
| 4.13 |   | Exchange Agreement  No. TsK-01, dated April 5, 2001, by and between Lianozovo  Dairy Plant and Mikhail Vishnyakov is incorporated herein by reference to  Exhibit 10.9 to Amendment No. 2 to the Registration Statement on  Form F-1 (Registration No. 333-14278).   |
| 4.14 |   | Exchange Agreement  No. TsK-02, dated April 5, 2001, by and between Lianozovo  Dairy Plant and Mikhail Dubinin is incorporated herein by reference to  Exhibit 10.10 to Amendment No. 2 to the Registration Statement on  Form F-1 (Registration No. 333-14278).     |
| 4.15 |   | Exchange Agreement  No. TsK-03, dated April 5, 2001, by and between Lianozovo  Dairy Plant and Alexander Orlov is incorporated herein by reference to  Exhibit 10.11 to Amendment No. 2 to the Registration Statement on  Form F-1 (Registration No. 333-14278).     |
| 4.16 |   | Exchange Agreement  No. TsK-04, dated April 5, 2001, by and between Lianozovo  Dairy Plant and Sergei Plastinin is incorporated herein by reference to  Exhibit 10.12 to Amendment No. 2 to the Registration Statement on  Form F-1 (Registration No. 333-14278).    |
| 4.17 |   | Exchange Agreement  No. TsK-05, dated April 5, 2001, by and between Lianozovo  Dairy Plant and Aleksandrs Timohins is incorporated herein by reference to  Exhibit 10.13 to Amendment No. 2 to the Registration Statement on  Form F-1 (Registration No. 333-14278). |
| 4.18 |   | Exchange Agreement  No. TsK-06, dated April 5, 2001, by and between Lianozovo  Dairy Plant and Gavril Yushvaev is incorporated herein by reference to  Exhibit 10.14 to Amendment No. 2 to the Registration Statement on  Form F-1 (Registration No. 333-14278).     |
| 4.19 |   | Exchange Agreement  No. TsK-07, dated April 5, 2001, by and between Lianozovo  Dairy Plant and Evgeny Yaroslavsky is incorporated herein by reference to  Exhibit 10.15 to Amendment No. 2 to the Registration Statement on  Form F-1 (Registration No. 333-14278).  |
| 4.20 |   | Amended and Restated  Partnership and Cooperation Agreement is incorporated herein by reference to  Exhibit 99.1 to Amendment No. 2 to the Registration Statement on  Form F-1 (Registration No. 333-14278).                                                                   |

147

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| 8.1  |   | List of Subsidiaries of  Wimm-Bill-Dann Foods OJSC.                                                                                                                |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 12.1 |   | Certification by the  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                     |
| 12.2 |   | Certification by the  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                     |
| 13.1 |   | Certification of the  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 13.2 |   | Certification of the  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

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*                    Confidentialtreatment has been requested with respect to certain portions of this exhibit.Omitted portions have been filed separately with the Securities and ExchangeCommission.

148

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**SIGNATURES**

Theregistrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersignedto sign this annual report on its behalf.

WIMM-BILL-DANN FOODS OJSC

|        |   |   | /s/ Tony D. Maher       |
|--------|--------|--------|-------------------------|
|   | By:    |   | Tony D. Maher           |
|   | Title: |   | Chief Executive Officer |

 

Date: June 16, 2006

149

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**Wimm-Bill-DannFoods**

**ConsolidatedFinancial Statements**

**Yearsended December 31, 2005 and 2004**

**Contents**
| Report of Independent  Registered Accounting Firm           |   | F-2    |   |
|-------------------------------------------------------------|--------|--------|--------|
| Consolidated Financial  Statements                          |   |   |   |
| Consolidated  Balance Sheets                                |   | F-3    |   |
| Consolidated Statements of Income and Comprehensive  Income |   | F-4    |   |
| Consolidated Statements of Cash Flows                       |   | F-5    |   |
| Consolidated Statements of Shareholders’ Equity        |   | F-7    |   |
| Notes to  Consolidated Financial Statements                 |   | F-8    |   |

 

F-1

----

**Reportof Independent Registered Accounting Firm**

The Board of Directors and ShareholdersWimm-Bill-Dann Foods

We have audited the accompanying consolidated balancesheets of Wimm-Bill-Dann Foods, a Russian Open Joint Stock Company andsubsidiaries (collectively “the Company”) as of December 31, 2005 and2004, and the related consolidated statements of income and comprehensiveincome, shareholders’ equity, and cash flows for each of the three years in theperiod ended December 31, 2005. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Wimm-Bill-Dann Foods andsubsidiaries as of December 31, 2005 and 2004 and the consolidated resultsof its operations and its cash flows for each of the three years in the periodended December 31, 2005 in conformity with U.S. generally acceptedaccounting principles.

/s/ Ernst & Young LLCMarch 21, 2006Moscow, Russia

F-2

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**Wimm-Bill-Dann FoodsConsolidated Balance Sheets(Amounts in thousands of U.S. dollars)**

| ** **                                                                                                                           | ** ** | **December 31,** | ** **  |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                                                                                           | ** ** | **2005**              | ** **  | **2004** | ** ** |
| **ASSETS**                                                                                                                           | ** ** | ** **            | ** **  | ** ** | ** ** |
| **Current assets:**                                                                                                                  | ** ** | ** **            | ** **  | ** ** | ** ** |
| Cash and cash equivalents (Note 5)                                                                                                   |       | $                     | 93,103      |   | $ | 23,791 |   |
| Short-term bank deposits                                                                                                             |       | 32,164                |        | — |   |
| Trade receivables, net (Note 6)                                                                                                      |       | 59,968                |        | 62,210 |   |
| Inventory (Note 7)                                                                                                                   |       | 130,597               |        | 102,039 |   |
| Taxes receivable                                                                                                                     |       | 61,480                |        | 85,578 |   |
| Advances paid                                                                                                                        |       | 9,715                 |        | 19,494 |   |
| Net investment in direct financing leases (Note 8)                                                                                   |       | 2,335                 |        | 2,109 |   |
| Deferred tax asset (Note 18)                                                                                                         |       | 8,750                 |        | 6,265 |   |
| Other current assets                                                                                                                 |       | 8,915                 |        | 7,145 |   |
| **Total current assets**                                                                                                             | ** ** | **407,027**           | ** **  | **308,631** | ** ** |
| **Non-current assets:**                                                                                                              | ** ** | ** **            | ** **  | ** ** | ** ** |
| Property, plant and equipment, net (Note 10)                                                                                         |       | 459,527               |        | 437,320 |   |
| Intangible assets, net (Note 9)                                                                                                      |       | 7,078                 |        | 5,027 |   |
| Goodwill (Note 11)                                                                                                                   |       | 32,008                |        | 26,291 |   |
| Net investment in direct financing leases—non-current portion (Note 8)                                                          |       | 3,072                 |        | 3,895 |   |
| Long-term investments (Note 12)                                                                                                      |       | 138                   |        | 2,417 |   |
| Deferred tax asset—non-current portion (Note 18)                                                                                |       | 5,554                 |        | 7,001 |   |
| Other non-current assets (Note 13)                                                                                                   |       | 6,153                 |        | 5,506 |   |
| **Total non-current assets**                                                                                                         | ** ** | **513,530**           | ** **  | **487,457** | ** ** |
| **Total assets**                                                                                                                     | ** ** | **$**                 | **920,557** | ** ** | **$** | **796,088** | ** ** |
| **LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                                                       | ** ** | ** **            | ** **  | ** ** | ** ** |
| **Current liabilities:**                                                                                                             | ** ** | ** **            | ** **  | ** ** | ** ** |
| Trade accounts payable                                                                                                               |       | $                     | 65,780      |   | $ | 62,400 |   |
| Advances received                                                                                                                    |       | 5,291                 |        | 3,492 |   |
| Short-term loans (Note 15)                                                                                                           |       | 19,554                |        | 17,554 |   |
| Long-term loans, current portion (Note 15)                                                                                           |       | 3,823                 |        | 936 |   |
| Notes payable (Note 16)                                                                                                              |       | 49,794                |        | — |   |
| Taxes payable                                                                                                                        |       | 13,406                |        | 13,281 |   |
| Accrued liabilities (Note 14)                                                                                                        |       | 17,071                |        | 14,691 |   |
| Government grants—current portion (Note 19)                                                                                     |       | 2,174                 |        | 2,329 |   |
| Other payables (Note 17)                                                                                                             |       | 30,200                |        | 29,615 |   |
| **Total current liabilities**                                                                                                        | ** ** | **207,093**           | ** **  | **144,298** | ** ** |
| **Long-term liabilities:**                                                                                                           |       |                  |        |   |   |
| Long-term loans (Note 15)                                                                                                            |       | 1,824                 |        | 7,120 |   |
| Long-term notes payable (Note 16)                                                                                                    |       | 254,230               |        | 201,709 |   |
| Other long-term payables (Note 17)                                                                                                   |       | 26,893                |        | 39,294 |   |
| Government grants—long-term portion (Note 19)                                                                                   |       | 3,219                 |        | 5,156 |   |
| Deferred taxes—long-term portion (Note 18)                                                                                      |       | 15,636                |        | 10,268 |   |
| **Total long-term liabilities**                                                                                                      | ** ** | **301,802**           | ** **  | **263,547** | ** ** |
| **Total liabilities**                                                                                                                | ** ** | **508,895**           | ** **  | **407,845** | ** ** |
| **Commitments and contingencies (Note 29)**                                                                                          |       | —                |        | — |   |
| **Minority interest (Note 21 and 30)**                                                                                               | ** ** | **24,619**            | ** **  | **17,327** | ** ** |
| **Shareholders’ equity (Note  20)****:**                                                                                        |       |                  |        |   |   |
| Common stock: 44,000,000 shares authorized, issued and outstanding with  a par value of 20 rubles at December 31, 2005 and 2004 |       | 29,908                |        | 29,908 |   |
| Share premium account                                                                                                                |       | 164,132               |        | 164,132 |   |
| Accumulated other comprehensive  income:                                                                                             |       |                  |        |   |   |
| Currency translation adjustment                                                                                                      |       | 29,766                |        | 43,905 |   |
| Retained earnings                                                                                                                    |       | 163,237               |        | 132,971 |   |
| **Total shareholders’ equity**                                                                                                  | ** ** | **387,043**           | ** **  | **370,916** | ** ** |
| **Total liabilities and shareholders’ equity**                                                                                  | ** ** | **$**                 | **920,557** | ** ** | **$** | **796,088** | ** ** |

 

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

F-3

----

**Wimm-Bill-Dann FoodsConsolidated Statements of Income and Comprehensive Income(Amounts in thousands of U.S. dollars, except share and per share data)**

| ** **                                                        | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Sales  (Note 27)**                                              |       | $          | 1,399,289  |       | $          | 1,189,291  |       | $ | 938,459 |   |
| **Cost of sales (Note 22)**                                       |       | (1,002,246 | )          | (861,661   | )          | (665,104   | )          |
| **Gross  profit**                                                 |       | 397,043    |       | 327,630    |       | 273,355    |       |
| Selling and distribution  expenses (Note 23)                      |       | (191,990   | )          | (173,433   | )          | (140,746   | )          |
| General and administrative expenses (Note 24)                     |       | (109,642   | )          | (92,816    | )          | (75,973    | )          |
| Other operating expenses, net                                     |       | (7,916     | )          | (8,458     | )          | (7,481     | )          |
| **Operating  income**                                             |       | 87,495     |       | 52,923     |       | 49,155     |       |
| Financial  income and expenses, net (Note 25)                     |       | (22,868    | )          | (14,618    | )          | (15,273    | )          |
| Income before provision for  income taxes and minority interest   |       | 64,627     |       | 38,305     |       | 33,882     |       |
| **Provision for income taxes  (Note 18)**                         |       | (30,712    | )          | (12,170    | )          | (10,717    | )          |
| Minority interest (Note 21)                                       |       | (3,649     | )          | (3,161     | )          | (2,012     | )          |
| **Net income**                                                    | ** ** | **$**      | **30,266** | ** ** | **$**      | **22,974** | ** ** | **$** | **21,153** | ** ** |
| **Other comprehensive income, net of tax**                        | ** ** | ** ** | ** ** | ** ** |       |       |       |
| Currency translation adjustment                                   |       | (14,139    | )          | 23,324     |       | 20,581     |       |
| **Comprehensive income**                                          | ** ** | **$**      | **16,127** | ** ** | **$**      | **46,298** | ** ** | **$** | **41,734** | ** ** |
| Earnings per share—basic and diluted:                        | ** ** | ** ** | ** ** | ** ** |       |       |       |
| **Net income**                                                    | ** ** | **$**      | **0.69**   | ** ** | **$**      | **0.52**   | ** ** | **$** | **0.48** | ** ** |
| Weighted  average number of shares outstanding, basic and diluted |       | 44,000,000 |       | 44,000,000 |       | 44,000,000 |       |

 

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

F-4

----

**Wimm-Bill-Dann Foods Consolidated Statements of Cash Flows (Amounts in thousands of U.S. dollars)**

| ** **                                                                          | ** ** | **2005**   | ** **  | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------------------------------------------------------|------------|------------|-------------|------------|------------|------------|------------|
| **Cash  flows from operating activities:**                                          | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** |
| Net Income                                                                          |       | $          | 30,266      |       | $          | 22,974     |       | $ | 21,153 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities:  |       |       |        |       |       |       |       |
| Minority interest                                                                   |       | 3,649      |        | 3,161      |       | 2,012      |       |
| Depreciation and amortisation                                                       |       | 53,435     |        | 44,003     |       | 30,780     |       |
| Currency remeasurement  loss(gain) relating to bonds payable and long-term payables |       | 990        |        | (9,938     | )          | (8,245     | )          |
| Obsolescence and net realizable value expense                                       |       | 1,077      |        | 3,482      |       | 2,100      |       |
| Provision for doubtful accounts                                                     |       | 3,908      |        | 3,722      |       | 10,220     |       |
| Loss (gain) on disposal of property, plant and  equipment                           |       | 1,321      |        | 1,013      |       | (358       | )          |
| Earned income on  net investment in direct financing leases                         |       | (402       | )           | (639       | )          | (483       | )          |
| Deferred tax expense(benefit)                                                       |       | 3,327      |        | (6,019     | )          | (4,149     | )          |
| Non-cash rental received                                                            |       | 2,496      |        | 1,957      |       | 2,095      |       |
| Reversal of tax contingent liability                                                |       | (800       | )           | (128       | )          | (389       | )          |
| Loss/(gain) from securities and disposal of  long-term investments                  |       | 1,786      |        | 190        |       | (1,903     | )          |
| Amortisation of bonds issue expenses                                                |       | 1,046      |        | 1,025      |       | 613        |       |
| Changes in operating  assets and liabilities:                                       |       |       |        |       |       |       |       |
| (Increase) decrease in inventories                                                  |       | (25,361    | )           | (9,208     | )          | 2,394      |       |
| Increase in trade accounts receivable                                               |       | (2,636     | )           | (4,883     | )          | (2,356     | )          |
| Decrease (increase) in advances paid                                                |       | 9,553      |        | 1,356      |       | (7,681     | )          |
| Decrease (increase) in taxes receivable                                             |       | 15,082     |        | 13,979     |       | (30,723    | )          |
| (Increase) decrease in other current assets                                         |       | (1,062     | )           | (3,346     | )          | 439        |       |
| Increase in trade accounts payable                                                  |       | 3,649      |        | 7,000      |       | 6,363      |       |
| Increase (decrease) in advances received                                            |       | 1,880      |        | 719        |       | (1,565     | )          |
| Increase in taxes payable                                                           |       | 6,698      |        | 1,526      |       | 5,492      |       |
| Increase in accrued liabilities                                                     |       | 2,816      |        | 2,913      |       | 2,287      |       |
| Increase (decrease) in other current payables                                       |       | 678        |        | (3,148     | )          | 2,071      |       |
| Increase (decrease) in other long-term payables                                     |       | 541        |        | 9          |       | (227       | )          |
| **Total cash provided by  operating activities**                                    | ** ** | **$**      | **113,937** | ** ** | **$**      | **71,720** | ** ** | **$** | **29,940** | ** ** |

 

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

F-5

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**Wimm-Bill-Dann Foods Consolidated Statements of Cash Flows (Continued) (Amounts in thousands of U.S. dollars)**

** **

| ** **                                                         | ** ** | **2005**     | ** ** | **2004**    | ** ** | **2003**    | ** ** |
|--------------------------------------------------------------------|------------|--------------|------------|-------------|------------|-------------|------------|
| **Cash flows from investing  activities:**                         | ** ** | ** **   | ** ** | ** **  | ** ** | ** **  | ** ** |
| Cash paid for acquisition of  subsidiaries, net of cash acquired   |       | $            | (24,964    | )           | $          | (6,697      | )          | $ | (7,002 | ) |
| Cash paid for property, plant and equipment                        |       | (72,805      | )          | (68,103     | )          | (91,974     | )          |
| Cash paid for acquisition of investments                           |       | (71          | )          | —      |       | (753        | )          |
| Proceeds from disposal of investments                              |       | 538          |       | 675         |       | 4,196       |       |
| Proceeds from disposal of property, plant and  equipment           |       | 5,944        |       | 2,081       |       | 2,437       |       |
| Cash paid for net investments in direct financing  leases          |       | (1,982       | )          | (1,764      | )          | (2,046      | )          |
| Cash invested in short-term  bank deposits                         |       | (31,817      | )          | —      |       | —      |       |
| **Net cash used in investing activities**                          | ** ** | **(125,157** | **)**      | **(73,808** | **)**      | **(95,142** | **)**      |
| **Cash  flows from financing activities:**                         | ** ** | ** **   | ** ** | ** **  | ** ** | ** **  | ** ** |
| Proceeds from long-term notes payable, net of debt  issuance costs |       | 106,000      |       | —      |       | 194,476     |       |
| Short-term loans and notes, net                                    |       | (3,795       | )          | 7,967       |       | (107,820    | )          |
| Repayment of long-term loans                                       |       | (4,099       | )          | (2,481      | )          | (3,024      | )          |
| Proceeds from long-term loans                                      |       | 1,636        |       | 343         |       | 5,138       |       |
| Repayment of long-term payables                                    |       | (17,123      | )          | (19,727     | )          | (15,371     | )          |
| Repayment of long-term notes payable                               |       | —       |       | (2,261      | )          | —      | ** ** |
| **Total  cash provided by (used in) financing activities**         | ** ** | **82,619**   | ** ** | **(16,159** | **)**      | **73,399**  | ** ** |
| Impact of exchange rate differences on cash and cash  equivalents  |       | (2,087       | )          | 1,774       |       | 2,727       |       |
| **Net  increase(decrease) in cash and cash equivalents**           | ** ** | **69,312**   | ** ** | **(16,473** | **)**      | **10,924**  | ** ** |
| **Cash  and cash equivalents, at beginning of the year**           | ** ** | **23,791**   | ** ** | **40,264**  | ** ** | **29,340**  | ** ** |
| **Cash and cash equivalents, at  the end of the year**             | ** ** | **$**        | **93,103** | ** **  | **$**      | **23,791**  | ** ** | **$** | **40,264** | ** ** |

 

| ** **                                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **SUPPLEMENTAL INFORMATION:**                                 |       |     |       |     |       |     |       |
| Income taxes paid                                             |       | $        | 27,123     |     | $          | 20,523   |       | $ | 12,280 |   |
| Interest paid                                                 |       | 22,871   |       | 14,615   |       | 17,223   |       |
| Income taxes offset with VAT  receivables                     |       | 2,715    |       | 1,842    |       | 775      |       |
| Taxes other than income  taxes offset with VAT receivables    |       | 3,896    |       | 6,390    |       | 671      |       |
| Vendor financed acquisitions of property, plant and equipment |       | $        | 5,709      |     | $          | 7,335    |       | $ | 12,899 |   |

 

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

F-6

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**Wimm-Bill-Dann FoodsConsolidated Statements of Shareholders’ Equity(Amounts in thousands of U.S. dollars, except share amounts)**

| ** **                              | ** ** | **Common Stock** | ** ** | **Share  premium** | ** ** | **Accumulated  other  comprehensive** | ** ** | **Retained**           | ** **  | ** **   | ** ** |
|-----------------------------------------|------------|-----------------------|------------|--------------------|------------|---------------------------------------|------------|------------------------|-------------|--------------|------------|
| ** **                              | ** ** | **Shares**            | ** ** | **Amount**         | ** ** | **account**                           | ** ** | **income (loss)** | ** **  | **earnings** | ** ** | **Total** | ** ** |
| Balances at  January 1, 2003       |       | 44,000,000            |       | $                  | 29,908     |                                  | $          | 164,132                |        |         | $          | — |   |   | $ | 88,844 |   | $ | 282,884 |   |
| Net income                              |       | —                |       | —             |       | —                                |       |                   | —      |         |       | 21,153 |   | 21,153 |   |
| Currency  translation adjustment        |       | —                |       | —             |       | —                                |       |                   | 20,581      |         |       | — |   | 20,581 |   |
| Balances at  December 31, 2003     |       | 44,000,000            |       | $                  | 29,908     |                                  | $          | 164,132                |        |         | $          | 20,581 |   |   | $ | 109,997 |   | $ | 324,618 |   |
| Net income                              |       | —                |       | —             |       | —                                |       |                   | —      |         |       | 22,974 |   | 22,974 |   |
| Currency  translation adjustment        |       | —                |       | —             |       | —                                |       |                   | 23,324      |         |       | — |   | 23,324 |   |
| **Balances  at December 31, 2004** | ** ** | **44,000,000**        | ** ** | **$**              | **29,908** | ** **                            | **$**      | **164,132**            | ** **  | ** **   | **$**      | **43,905** | ** ** | ** ** | **$** | **132,971** | ** ** | **$** | **370,916** | ** ** |
| Net income                              | ** ** | —                |       | —             |       | —                                | ** ** | ** **             | —      | ** **   | ** ** | **30,266** | ** ** | **30,266** | ** ** |
| Currency  translation adjustment        | ** ** | —                |       | —             |       | —                                | ** ** | ** **             | **(14,139** | **)**        | ** ** | — | ** ** | **(14,139** | **)** |
| **Balances at December 31,  2005** | ** ** | **44,000,000**        | ** ** | **$**              | **29,908** | ** **                            | **$**      | **164,132**            | ** **  | ** **   | **$**      | **29,766** | ** ** | ** ** | **$** | **163,237** | ** ** | **$** | **387,043** | ** ** |

 

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

F-7

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**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**1.   TheCompany**

Wimm-Bill-Dann Foods (“WBDFoods” or “the Company”) is an open joint stock company registered in Russia.It is a holding company which, as of December 31, 2005, owned controllinginterests in 30 manufacturing facilities in  Russia and elsewhere inthe Commonwealth of Independent States (“CIS”), as well as distributionbranches in 26 cities in Russia and elsewhere in the CIS. WBD Foods has astrong and diversified brand portfolio with over 1,100 types of dairy products,and over 150 types of juice, nectars and still drinks.

**2.   RussianEnvironment and Current Economic Situation**

TheRussian economy displays certain traits consistent with that of a market intransition. These characteristics have in the past included higher than normalhistoric inflation, lack of liquidity in the capital markets, and the existenceof currency controls which cause the national currency to be illiquid outsideof Russia. The continued success and stability of the Russian economy will besignificantly impacted by the government’s continued actions with regard tosupervisory, legal, and economic reforms.

**3.   Summary ofSignificant Accounting Policies**

*Accounting Principles*

The Company and itssubsidiaries maintain their accounting books and records in domestic currencybased on domestic accounting regulations. The consolidated financial statementshave been prepared in order to present WBD Foods’ consolidated financialposition, results of operations, and cash flows in accordance with accountingprinciples generally accepted in the United States of America (“U.S. GAAP”) andexpressed in terms of U.S. dollars (see paragraph “Translation Methodology” onthe following page).

*Principles ofConsolidation*

The consolidated financialstatements of the Company include the accounts of WBD Foods and itssubsidiaries where the Company has operating and financial control. Results ofsubsidiaries acquired or disposed of during the year and accounted for by thepurchase method have been included in operations from the relevant date ofacquisition to the relevant date of disposal. Pro forma results of operationsreflecting these acquisitions have not been presented because the results ofoperations of the acquired companies, either individually or collectively, arenot material to consolidated results of operations. All inter-company accountsand transactions are eliminated upon consolidation. Minority interests in thenet assets and net results of the Company’s subsidiaries are shown under “Minorityinterests” in the accompanying consolidated balance sheets and statements ofincome.

*Comprehensive Income*

Comprehensiveincome is defined as the change in equity of a company during a period fromnon-owner sources. Comprehensive income of WBD Foods for the years ended December 31,2005, 2004 and 2003 consists of net income and a currency translationadjustment in the amount of ($14,139), $23,324 and $20,581, respectively.

F-8

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**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**3.**   Summary of Significant AccountingPolicies (Continued)

*Translation Methodology*

Starting from January 1,2003, Russia is no longer considered a hyperinflationary economy, therefore,the U.S. GAAP financial statements are prepared using the local currency, theRussian ruble, as the functional currency for WBD Foods’ Russian subsidiaries.Subsequent translation to the reporting currency, the U.S. dollar, is made inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 52.All assets and liabilities of the Company and its subsidiaries with functionalcurrencies other than the U.S. dollar are translated into U.S. dollarequivalents at exchange rates as follows: (1) asset and liability accountsat the rate of exchange in effect on the balance sheet date, (2) revenuesand expenses at the average exchange rates for the year, and (3) shareholders’equity accounts at historical exchange rates. Translation gains or losses arerecorded as a separate component of shareholders’ equity, and transaction gainsand losses are reflected in net income.

In respect of Wimm-Bill-Dann Netherlands B.V.,the U.S. dollar has been used to prepare the financial statements as this isits’ functional currency. The financial statements of Ukrainian, Kyrgyz, Usbekhand Kazakh subsidiaries have been prepared using the Ukrainian hryvnia, Kyrgyzsom, Uzbek sum and Kazakh tenge, respectively, as the functional currency.Translation (remeasurement) of domestic currency denominated financialstatements into U.S. dollars has been performed in accordance with theprovisions of SFAS No. 52.

**Theruble is not a fully convertible currency outside the territory of the RussianFederation. Within the Russian Federation, official exchange rates aredetermined daily by the Central Bank of Russia (“CBR”). Market rates may differfrom the official rates but the differences are, generally, within narrowparameters monitored by the CBR. As of December 31, 2005 and 2004, theofficial rates of exchange were 28.78 rubles = 1 U.S. dollar and  27.75 rubles = 1 U.S. dollar, respectively. The translation of local currencydenominated assets and liabilities into US dollars for the purposes of thesefinancial statements does not indicate that the Company could realize orsettle, in U.S. dollars, the reported values of these assets and liabilities.Likewise, it does not indicate that the Company could return or distribute the reportedUS dollar value of capital to its shareholders.**

*Management Estimates*

The preparation of theconsolidated financial statements in conformity with U.S. GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the consolidated financial statementsand the reported amounts of revenues and expenses during the reporting period.Examples include estimates of provisions for bad and doubtful accounts,obsolete inventory, and valuation allowance for deferred tax assets. Actualresults could differ from those estimates.

*Cash and Cash Equivalents*

Cash and cash equivalentsrepresent cash on hand and in the Company’s bank accounts and short-terminvestments having original maturities of three months or less.

F-9

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**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**3.**   Summary of Significant AccountingPolicies (Continued)

*Short-Term Bank Deposits*

Short-term bank deposits have maturities of more thanthree months and less than one year. Short-term bank deposits are invested withbanks and earn interest at the prevailing short-term deposit rates. Depositsare presented at their cost, including accrued interest. The short-term bankdeposits are in rubles  and bear an average annual interest of6 %.

*Accounts Receivable and Allowance for Doubtful Accounts*

Accounts receivable are statedat their net realizable value which approximates their fair value. The Companyprovides an allowance for doubtful accounts based on management’s periodicreview of accounts, including the delinquency of account balances. Delinquencystatus is based on contractual terms. The Company evaluates the collectibilityof its receivables at least quarterly, based upon various factors, includingthe financial condition and payment history of major customers, an overallreview of collections experience of other accounts and economic factors orevents expected to affect the Company’s future collections. Trade receivablesare written-off when evidence exists that they will not be collectible. TheCompany generally does not require collateral from its credit customers.

*Inventory*

Inventories, includingwork-in-process, are valued at the lower of cost or market. Cost is the pricepaid or the consideration given to acquire the asset. Cost is determined on thebasis of weighted average cost. For processed inventories, cost is the sum ofthe expenditures and charges, direct and indirect, in bringing goods to theirexisting condition or location. It includes the applicable allocation ofproduction fixed and variable overhead costs. Market is the current replacementcost, whether by purchase or by reproduction, limited to the estimated sellingprice less any costs of completion and disposal (net realizable value) at themaximum level, and net realizable value, less an allowance for normal profit atthe minimum level. Net realizable value is the selling price in the ordinarycourse of business, less the costs of completion, marketing, and distribution.Unrealizable inventory is fully provided for in the accompanying consolidatedfinancial statements.

*Value-Added Taxes*

Value-added taxes (“VAT”) related to sales are payablebased upon invoices issued to the customer or collection of respective receivables.VAT incurred for purchases may be reclaimed, subject to certain restrictions,against VAT related to sales.

VAT related to purchasetransactions that are subject to offset against VAT payable after the balancesheet dates are recognized in the balance sheets on a gross basis.

*Property, Plant and Equipment*

Property, plant and equipment are stated at historicacquisition cost, less accumulated depreciation.

F-10

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**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**3.**   Summary of Significant AccountingPolicies (Continued)

The acquisition cost of property, plant andequipment comprises its purchase price,including import duties and non-refundable purchase taxes and any directlyattributable costs of bringing the asset to its working condition and locationfor its intended use. Expenditures incurred after the assets have been put intooperation, such as repairs and maintenance costs, are normally expensed in theperiod the costs are incurred. In situations where it can be clearlydemonstrated that the expenditures have resulted in an increase in the futureeconomic benefits expected to be obtained from the use of an item of property,plant and equipment beyond its originallyassessed standard of performance, the expenditures are capitalized as anadditional cost of property, plant and equipment. When assets are sold or retired, their cost and accumulateddepreciation are eliminated from the accounts and any gain or loss resultingfrom their disposal is included in other operating expenses of the consolidatedstatement of income.

Thecarrying value of property, plant and equipment, as determined above isdepreciated on a straight-line basis over the estimated useful lives of therelated assets. The following estimated useful lives have been applied:

| Buildings                |   | 20-50 years |   |
|--------------------------|--------|-------------|--------|
| Machinery and  equipment |   | 7-20 years  |   |
| Computer hardware        |   | 3-10 years  |   |
| Other                    |   | 5-10 years  |   |

 

Construction in progress comprises costs directlyrelated to construction of property, plant and equipment plus an appropriateallocation of variable and fixed overheads that are incurred in construction.Construction in progress is depreciated once the property, plant and equipmentare put into operation.

The Company capitalizesinterest costs with respect to qualifying construction projects.

*Capital Leases—Lessor Accounting*

TheCompany presents assets leased as a receivable equal to the net investment inthe lease. Finance income is based on a pattern reflecting a constant periodicrate of return on the net investment outstanding and included in otheroperating expenses. Initial direct costs are deferred and expensed over theperiod in which the related revenue is recognized.

*Intangible Assets*

Intangible assets withdeterminable useful lives are amortized using the straight-line method overtheir estimated period of benefit, ranging from two to ten years.Indefinite-lived intangibles and intangible assets with determinable usefullives are evaluated annually for impairment or when indicators exist indicatingsuch assets may be impaired, such determination of fair value being based on avaluation model that incorporates expected future cash flows and profitabilityprojections.

F-11

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**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**3.**   Summary of Significant AccountingPolicies (Continued)

*Goodwill*

Goodwill represents thepurchase price for businesses acquired in excess of the fair value ofidentifiable net assets acquired.  Goodwillis not amortized, but instead tested for impairment at least annually orwhenever indicators of impairment arise.

In cases where the fairvalue of the net assets acquired exceed the purchase price, that excess  (negative goodwill) is allocated as a prorata reduction of the amounts that otherwise would have been assigned to theidentifiable assets acquired, excluding financial assets other than investmentsaccounted for by the equity method, assets to be disposed of by sale, deferredtax assets and any current assets. If any excess remains after reducing to zerothe amounts that otherwise would have been assigned to those assets, thatremaining excess is recognized as an extraordinary gain in the period in whichthe business combination is completed.

*Impairment of Long-Lived Assets*

When events andcircumstances occur indicating that the carrying amount of a long-lived asset(group) may not be recoverable, the Company estimates the future undiscountedcash flows expected to derive from the use and eventual disposition of theasset (group). If the sum of the expected future cash flows (undiscounted andwithout interest charges) is less than the carrying amount of the long-livedasset (group), the Company would then calculate the impairment as the excess ofthe carrying value of the asset (group) over the estimate of its fair marketvalue. Impairment loss is included in other operating expenses in theconsolidated statement of income.

*Investments*

WBD Foods holdsnon-controlling interests in Russian legal entities which are valued at costand are not readily marketable securities (see Note 12). Managementperiodically assesses the realizability of the carrying values of theinvestments and provides valuation reserves, if required.

*Revenue Recognition*

Sales are recognized, net of VAT and discounts, whengoods are shipped to customers. At the time of shipment, in accordance with theCompany’s standard sales agreements, the title is transferred and the customerassumes the risk and rewards of ownership. This policy is consistent with theRussian Civil Code, which states that legal title transfers when a product isshipped to a customer unless specifically overridden by the sales agreement.

The Company offers salesvolume discounts based on individual customer volumes acquired in a previousmonth. An accrual for such discounts is made at the end of each accountingperiod and is recognized as a reduction of revenue in the consolidatedstatements of income.

F-12

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**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**3.**   Summary of Significant AccountingPolicies (Continued)

*Shipping andHandling Expenses*

Shipping and handlingexpenses incurred by the Company are reflected in sales and distributionexpenses in the accompanying consolidated statements of income.

*Government Grants*

Governmentgrants are recognized when the related cash or assets are received. Governmentgrants are deferred and amortized over the period necessary to match them withthe related costs that they are intended to compensate. Grants received aretreated as deferred income in the accompanying consolidated financialstatements. The amortization of government grants related to acquisition ofproperty, plant and equipment is recognized as a reduction of cost of saleswhen depreciation expense of the related long-term assets is recognized.Interest expense incurred in government grant loan programs is recognized infinancial income and expenses, net.

*Debt Issuance Costs*

Debt issuance costs arecapitalized and amortized using the straight line method over the lives of therelated debt.

*Taxation*

Deferred tax assets andliabilities are recognized for the expected future tax consequences of existingdifferences between financial reporting and tax reporting bases of assets andliabilities, and loss or tax credit carryforwards using enacted tax ratesexpected to be in effect at the time these differences are realized. Valuationallowances are recorded for deferred tax assets where it is more likely than notthat such assets will not be realized. For financial reporting purposes, avaluation allowance has been recognized to reflect management’s estimate of therealization of deferred tax assets. A valuation allowance is provided when itis more likely than not that some or all of the deferred tax assets will not berealized in the future. These evaluations are based on expectations of futuretaxable income and reversals of various taxable temporary differences.

*Advertising and Marketing Costs*

Advertising and marketingcosts are expensed as incurred. Advertising costs for the years ended December 31,2005, 2004 and 2003 were $45,336, $46,106 and $40,518, respectively, and arereflected as a component of selling and distribution expenses in theaccompanying consolidated statements of income (see Note 23).

*Earnings per Share*

Earningsper common share have been determined based upon the weighted average number ofshares outstanding during these periods. There are no potentiallydilutive securities.

F-13

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**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**3.**   Summary of Significant Accounting Policies (Continued)

*Concentration ofCredit Risk*

Financial instrumentswhich potentially expose the Company to concentrations of credit risk consistprimarily of cash in banks, short-term bank deposits and trade accountsreceivable. The Company deposits available cash with several financialinstitutions. The credit risk associated with trade accounts receivable islimited due to the Company’s large domestic customer base. At December 31,2005, 2004 and 2003, the Company had no other significant concentrations ofcredit risk. The Company does not usually require a collateral from itscustomers.

*Fair Value of Financial Instruments*

The carrying amounts of cash and cash equivalents,short-term bank deposits, accounts receivable, accounts payable and short-termloans reported in the consolidated balance sheets approximate fair values dueto the short maturity of those instruments. Management is of the opinion thatthe carrying value of the Company’s long-term loans approximates fair value.

The fair value of costmethod investments was not estimated as there were no identified events orchanges in circumstances that may have a significant adverse effect on the fairvalue of the investments and management believes that it is not practicableconsidering the fact that they are not readily marketable securities.

*Segment Reporting*

SFAS No. 131, *Disclosures about Segments of an Enterprise and Related Information*,requires that a business enterprise reports financial and descriptiveinformation about its reportable operating segments. WBD Foods currentlymanages its business as three major operating segments—dairy,****beverages and baby food production anddistribution, and accordingly, reports segment information on this basis.Starting from January 1, 2005 the Company changed the composition of itssegments. In the periods prior to January 1, 2005 the Company’s majorreportable business segments were dairy, juice and water. Starting from January 1,2005, the baby food segment was separated from dairy segment due to itsincreasing strategic significance as a separate business segment. Further,juice and water segment were merged into one segment, termed the beveragessegment, due to similarities of market characteristics and managementcentralization. The Company has reclassified its 2004 and 2003 segmentinformation to be consistent with the 2005 presentation.

*Reclassifications*

Where necessary,corresponding figures have been adjusted to conform with changes in thepresentation of the current period.

F-14

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**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**3.   Summary ofSignificant Accounting Policies (Continued)**

***New Accounting Pronouncements***

*Accounting forExchanges of Nonmonetary Assets*

In December 2004, the Financial AccountingStandard Board (“the FASB”) issued SFAS No. 153, *Exchanges ofNonmonetary Assets*. SFAS No. 153 addresses the measurement ofexchanges of nonmonetary assets. The guidance in APB Opinion No. 29, *Accounting for Nonmonetary Transactions* (“APB No. 29”),is based on the principle that exchanges of nonmonetary assets should bemeasured based on the fair value of the assets exchanged. The guidance in APBNo. 29, however, included certain exceptions to that principle. SFASNo. 153 amends APB No. 29 to eliminate the exception for nonmonetaryexchanges of similar productive assets and replaces it with a general exceptionfor exchanges of nonmonetary assets that do not have commercial substance. Anonmonetary exchange has commercial substance if the future cash flows of theentity are expected to change significantly as a result of the exchange. Theseprovisions of SFAS No. 153 are effective for financial statements forfiscal years beginning after June 15, 2005.

Earlier application ispermitted for nonmonetary asset exchanges incurred during fiscal yearsbeginning after the date SFAS No. 153 was issued. The adoption of theprovisions of SFAS No. 153 did not have a material impact on the Company’sresults of operations, financial position or cash flows.

*Inventory Costs*

In November 2004, the FASB issued FASB Statement No. 151,*Inventory Costs*, an amendment of theAccounting Research Bulletin No. 43, Chapter 4. The amendments made byStatement 151 clarify that abnormal amounts of idle facility expense, freight,handling costs, and wasted materials (spoilage) should be recognized ascurrent-period charges and require the allocation of fixed production overheadsto inventory based on the normal capacity of the production facilities.

The guidance is effectivefor inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costsincurred during fiscal years beginning after November 23, 2004. Theadoption of the provisions of SFAS No.151 is not expected to have animpact on the Company’s results of operations, financial position or cashflows.

***New Accounting Standards***

*Accounting forCertain Hybrid Financial Instruments*

In February 2006, the FASB issued SFAS No. 155*Accounting for Certain Hybrid Financial Instruments*,which amends FASB Statements No. 133, Accounting for DerivativeInstruments and Hedging Activities, and No. 140, Accounting for Transfersand Servicing of Financial Assets and Extinguishments of Liabilities. ThisStatement resolves issues addressed in Statement 133 Implementation Issue No. D1,Application of Statement 133 to Beneficial Interests in Securitized FinancialAssets.

SFAS No. 155 permits fair value remeasurement forany hybrid financial instrument that contains an embedded derivative thatotherwise would require bifurcation, clarifies which interest-only strips and 

F-15

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**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**3.**   Summary of Significant AccountingPolicies (Continued)

principal-only strips arenot subject to the requirements of Statement 133, establishes a requirement toevaluate interests in securitized financial assets to identify interests thatare freestanding derivatives or that are hybrid financial instruments thatcontain an embedded derivative requiring bifurcation and clarifies thatconcentrations of credit risk in the form of subordination are not embeddedderivatives. SFAS No. 155 amends Statement 140 to eliminate theprohibition on a qualifying special purpose entity from holding a derivativefinancial instrument that pertains to a beneficial interest other than anotherderivative financial instrument. These provisions of SFAS No. 155 areeffective for all financial instruments acquired or issued after the beginningof an entity’s first fiscal year that begins after September 15, 2006.

The adoption of theprovisions of SFAS No. 155 is not expected to have an impact on theCompany’s results of operations, financial position or cash flows.

*Accounting Changesand Error Corrections*

In May 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections*, which is areplacement of Accounting Principles Board (“APB”) Opinion No. 20, *Accounting Changes,* and SFAS No. 3, *Reporting Changes in Interim Financial Statements*. SFAS No. 154applies to all voluntary changes in accounting principle and changes theaccounting for and reporting of a change in accounting principle. SFAS No. 154requires retrospective application to prior periods’ financial statements of avoluntary change in accounting principle unless it is impracticable. Inaddition, SFAS No. 154 requires that a change in method of depreciation,amortization, or depletion for long-lived, nonfinancial assets be accounted foras a change in accounting estimate that is effected by a change in accountingprinciple. SFAS No. 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15,2005.

The impact of the adoptionof the provisions of SFAS No. 154 is currently not known because no suchaccounting changes are anticipated.

**4.   BusinessesAcquired**

*Acquisition ofMinority Interests*

In January 2005, WBD Foods acquired 10% of Sibirskoe Moloko dairy plant, asubsidiary, from minority shareholders for cash consideration of $1,050. Thepurchase price in excess of fair value of net assets acquired of $355 wasrecorded as goodwill. The change in minority interest related to thisacquisition is presented as “Acquisitions by the Company of minority interestsin subsidiaries” in Note 21.

In March and April 2004, WBD Foods acquired6.2% of Tsaritsino Milk Plant (“TsMK”), a subsidiary, from shareholders of WBDFoods for cash consideration of $3,406. The fair value of net assets acquiredin excess of purchase price of $939 was recorded as a reduction of the value ofproperty, plant and equipment. The change in minority interest related to thisacquisition is presented as “Acquisitions by the Company of minority interestsin subsidiaries” in Note 21.

F-16

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**4.**   Businesses Acquired(Continued)

In September 2003, WBD Foods acquired 47.7% ofUfamolagroprom, a subsidiary, from minority shareholder for cash considerationof $3,138. The fair value of net assets acquired in excess of purchase price of$827 was recorded as reduction of the value of property, plant and equipment.The change in minority interest related to this acquisition is presented as “Acquisitionsby the Company of minority interests in subsidiaries” in Note 21.

The Company made a numberof other acquisitions of minority interests in certain subsidiaries during theyears ended December 31, 2005, 2004 and 2003. The total cash considerationpaid for these acquisitions was $31, $663 and $54, respectively. Theacquisitions made during 2005, 2004 and 2003 resulted in fair value of netassets acquired in excess of purchase price of $269, $0 and $0, respectively,which was recorded as a reduction of the value of property, plant andequipment. Certain acquisitions of minority interests made during the yearended December 31, 2005 and 2004 resulted in goodwill of $0 and $78. Thechanges in minority interests related to these acquisitions are presented as “Acquisitionsby the Company of minority interests in subsidiaries” in Note 21.

*BusinessCombinations*

*2005*

In July 2005, the Company acquired 100% ofExperimental Baby Food Plant LLC for cash consideration of $3,527. ExperimentalBaby Food Plant LLC produces baby food from raw fruits. The acquisition ofExperimental Baby Food Plant LLC allows the Company to increase its productportfolio in the baby food market segment and to keep up with anticipatedgrowth in market demand. The fair value of net assets acquired in excess ofpurchase price of $2,335 was subsequently recorded as a reduction of the valueof property, plant and equipment.

In July 2005, the Company acquired 66.3% ofObninsk Dairy Plant for cash consideration of $6,365. Obninsk Diary Plant ownsseveral milk product brands and a milk product manufacturing facility. Theacquisition of Obninsk Diary Plant allows the Company to increase its existingproduct and brand portfolio and establish its presence in Kaluga region tobetter meet anticipated growth in the local marketplace. The cash considerationpaid for this acquisitionwas allocated to property, plant and equipment $2,257, intangible assets $903,goodwill $1,091, current assets $2,898, less liabilities $784.

In October 2005, the Company acquired 100% ofEssentuki mineral water plant CMW (Caucasian Mineral Water) Ltd for cash consideration of $5,505. Theacquisition of Essentuki mineral water plant CMW (Caucasian Mineral Water) Ltdallows the Company to enhance its existing product and brand portfolio bydeveloping mineral water brand “Novoessentukskaya”, expand production ofmineral water “Essentuki” in plastic bottles and increase its market share inmineral water segment. Management has established the preliminary purchaseprice allocation taking into account all relevant information at the time ofpreparing these consolidated financial statements. The purchase price was allocatedto the estimated fair value of assets acquired and liabilities assumed. Thecash consideration paid for this acquisition was allocated to property, plantand equipment $2,066, goodwill $3,442, current assets $448 less liabilities$451. As of December 31, 2005 the Company is awaiting additionalinformation related 

F-17

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**4.**   Businesses Acquired (Continued)

to the fair value ofmineral water brand “Novoessentukskaya”. Management does not expect thefinalization of this matter to have a material effect on the purchase priceallocation.

In December 2005, the Company acquired 63.53% ofNazarovskoe Milk OJSC for cash consideration of $5,167. The acquired company isone of the major condensed milk producers in Siberian and Far East regions. Theacquisition of Nazarovskoe Milk OJSC allows the Company to increase itsexisting product and brand portfolio and establish its presence in Krasnoyarsk  region that possesses a high growthpotential. The cash consideration paid for this acquisition was allocated toproperty, plant and equipment $4,482, goodwill $2,007, current assets $1,798less liabilities $3,120.

In December 2005, the Company acquired 100% ofPervouralsk City Dairy for cash consideration of $119.

In April, July and September2005, the Company acquired 100%, 99.34% and 63.5% of Plemzavod Za Mir i TrudOJSC , Zaveti Ilicha and Trud farms for cash considerations of $1,689, $344 and$420, respectively. The acquired farms produce raw milk. The acquisitions ofPlemzavod Za Mir I Trud OJSC, Zaveti Ilicha and Trud farms allow the Company toreduce raw material expenses and become less dependable on raw milk suppliers,as well as to ensure a steady supply of raw milk to keep up with anticipatedgrowth in production driven by anticipated increases in market demand. The fairvalues of net assets acquired in excess of purchase prices of $3,894, $2,761and $1,029 were subsequently recorded as a reduction of the values of property,plant and equipment.

*2004*

In December 2004, the Company acquired 88.4% ofAtamanskoe farm for cash consideration of $904. Atamanskoe farm produces rawmilk. The acquisition of Atamanskoe allows the Company to save on raw materialexpenses and become less dependable on raw milk suppliers, as well as ensure asteady supply of raw milk to keep up with anticipated growth in production drivenby anticipated increase in market demand. The fair value of net assets acquiredin excess of purchase price of $1,768 was subsequently recorded as a reductionof the value of property, plant and equipment.

In December 2004, theCompany acquired 100% of two other companies for cash considerations of $344.

*2003*

In January 2003, the Company acquired 100% ofSyberian Syr for cash consideration of $2,633. Syberian Syr owns warehousingfacilities easily accessible by road and rail. The acquisition of Syberian Syrallows the Company to save on rental expenses associated with warehousing andoffice space in Syberia and provide the Company with a solid base to keep upwith anticipated growth in the key Syberian marketplace. The cash considerationpaid for this acquisition was allocated to property, plant and equipment$1,453, goodwill $1,411, less liabilities $231.

F-18

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**4.**   Businesses Acquired (Continued)

In August 2003, theCompany acquired 100% interest in two legal entities—Geyser and Curative Spring—involvedin production of mineral water under the brand name Essentuki for cashconsideration of $4,118. Essentuki is one of Russia’s best known mineral waterbrand. With the acquisition of Essentuki, the Company acquired natural waterwells, healing springs and bottling facilities. The cashconsideration paid for these acquisitions was allocated to property, plant andequipment $3,957, goodwill $1,702, other current assets $328 less liabilities$1,869.

**5.   Cash and CashEquivalents**

Cashand cash equivalents as of December 31, 2005 and 2004 were comprised asfollows:

| ** **                          | ** ** | **2005** | ** ** | **2004**   | ** ** |
|-------------------------------------|------------|----------|------------|------------|------------|
| Rubles and other  CIS currencies    |       | $        | 90,673     |       | $          | 21,042 |   |
| Hard currencies                     |       | 2,375    |       | 2,732      |       |
| Cash equivalents                    |       | 55       |       | 17         |       |
| **Total cash and cash equivalents** | ** ** | **$**    | **93,103** | ** ** | **$**      | **23,791** | ** ** |

 

**6.   TradeReceivables, net**

Tradereceivables as of December 31, 2005 and 2004 were comprised as follows:

| ** **                       | ** ** | **2005** | ** ** | **2004**   | ** ** |
|----------------------------------|------------|----------|------------|------------|------------|
| Trade receivables                |       | $        | 65,094     |       | $          | 76,141 |   |
| Allowance for  doubtful accounts |       | (5,126   | )          | (13,931    | )          |
| **Total trade receivables, net** | ** ** | **$**    | **59,968** | ** ** | **$**      | **62,210** | ** ** |

 

The movement in the allowance for doubtful accountsfor the years ended December 31, 2005, 2004 and 2003 was as follows:

| ** **                       | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|----------------------------------|------------|----------|------------|------------|------------|------------|------------|
| Balance,  beginning of period    |       | $        | 13,931     |       | $          | 11,455     |       | $ | 2,737 |   |
| Provision for  doubtful accounts |       | 3,908    |       | 3,722      |       | 10,220     |       |
| Write off of  trade receivables  |       | (12,358  | )          | (1,938     | )          | (1,361     | )          |
| Currency  translation adjustment |       | (355     | )          | 692        |       | (141       | )          |
| **Balance, end of period**       | ** ** | **$**    | **5,126**  | ** ** | **$**      | **13,931** | ** ** | **$** | **11,455** | ** ** |

 

F-19

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**7.   Inventory**

Inventoryas of December 31, 2005 and 2004 was comprised as follows:

| ** **          | ** ** | **2005** | ** **  | **2004**   | ** ** |
|---------------------|------------|----------|-------------|------------|------------|
| Raw materials       |       | $        | 83,300      |       | $          | 68,921 |   |
| Work in progress    |       | 10,749   |        | 4,846      |       |
| Finished goods      |       | 36,548   |        | 28,272     |       |
| **Total inventory** | ** ** | **$**    | **130,597** | ** ** | **$**      | **102,039** | ** ** |

 

Obsolescence and net realizable value expense during2005, 2004 and 2003 amounted to $1,077, $3,482 and $2,100, respectively, andwas included in cost of sales in the accompanying consolidated statements ofincome.

**8.   Net Investment inDirect Financing Leases**

Commencing from 1999, the Company announced a programcalled “Dairy Rivers of Russia” with the purpose of ensuring a steady andreliable source of milk. Under this program the Company acquired agriculturalequipment and leased such equipment to several farms. These transactions wereclassified as direct financing leases. The lease agreements vary from one tofive years and provide a free of charge equipment transfer option at the end ofthe lease term. The lease receivables are denominated in EURO, U.S. dollars andRussian rubles. The lessees have the option to settle the receivable throughthe delivery of milk supplies to the Company based on a predetermined schedule.The settlement is based on milk prices which are variable dependent uponprevailing market prices.

Thefollowing lists the components of the net investment in direct financing leasesat December 31, 2005 and 2004:

| ** **                                   | ** ** | **2005** | ** ** | **2004**   | ** ** |
|----------------------------------------------|------------|----------|------------|------------|------------|
| Total future  minimum lease payments         |       | $        | 6,375      |       | $          | 6,458 |   |
| Less: Unearned  income                       |       | (968     | )          | (454       | )          |
| **Net  investment in direct finance leases** | ** ** | **$**    | **5,407**  | ** ** | **$**      | **6,004** | ** ** |
| Current portion                              |       | 2,335    |       | 2,109      |       |
| Long-term portion                            |       | 3,072    |       | 3,895      |       |

 

At December 31,2005, total future minimum lease payments to be received for each of the fivesucceeding fiscal years are as follows:

| ** ** | ** ** | **Years ended  December 31** | ** ** |
|------------|------------|----------------------------------------|------------|
| 2006       |       |                                   | $          | 2,815 |   |   |
| 2007       |       |                                   | 2,207      |   |   |
| 2008       |       |                                   | 881        |   |   |
| 2009       |       |                                   | 361        |   |   |
| 2010       |       |                                   | $          | 111 |   |   |

 

F-20

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**9.   Intangible Assets**

Identifiableintangible assets as of December 31, 2005 and 2004 were comprised asfollows:

| ** **                                 | ** ** | **2005**                        | ** ** | **2004**                      | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **Gross carrying  amount** | ** ** | **Accumulated  amortization** | ** ** | **Gross carrying  amount** | ** ** | **Accumulated  amortization** | ** ** |
| Intangible assets with determinable lives: | ** ** |                            | ** ** | ** **                    |       |   | ** ** |   |   |   |   |   |   |   |   |   |   |
| Financial accounting software              |       |                            | $          | 3,302                         | ** ** |   |   | $ | (228 | ) |   |   | $ | 2,860 |   |   |   | $ | (85 | ) |   |
| Trademarks                                 |       |                            | 2,369      | ** **                    |       |   | (456 | ) |   |   | 248 |   |   |   | (184 | ) |   |
| Supplier contracts                         |       |                            | 1,602      | ** **                    |       |   | (1,079 | ) |   |   | 1,626 |   |   |   | (794 | ) |   |
| Others                                     |       |                            | 825        | ** **                    |       |   | (21 | ) |   |   | 661 |   |   |   | (97 | ) |   |
| Intangible assets with  indefinite lives:  | ** ** |                            | ** ** | ** **                    |       |   | ** ** |   |   |   |   |   |   |   |   |   |   |
| Trademarks                                 |       |                            | 764        | ** **                    |       |   | — |   |   |   | 792 |   |   |   | — |   |   |
| **Total****intangible assets**             | ** ** |                            | **$**      | **8,862**                     | ** ** |   |   | **$** | **(1,784** | **)** | ** ** | ** ** | **$** | **6,187** |   | ** ** | ** ** | **$** | **(1,160** | **)** | ** ** |

 

Financial accounting software and supplier contractshave a weighted average useful life of five years, and trademarks have a usefullife of two to ten years.

Amortization expense during the years ended December 31,2005, 2004 and 2003 amounted to $752, $445 and $571, respectively.

Amortization expenserelating to the net carrying amount of intangible assets at December 31,2005 is estimated to be $1,096 in 2006, $1,088 in 2007, $912 in 2008, $892 in2009 and $670 in 2010.

**10.   Property, Plantand Equipment**

Thenet book value of property, plant and equipment at December 31, 2005 and2004 was comprised as follows:

| ** **                                               | ** ** | **2005** | ** **  | **2004**   | ** ** |
|----------------------------------------------------------|------------|----------|-------------|------------|------------|
| Buildings                                                |       | $        | 141,003     |       | $          | 117,095 |   |
| Machinery and  equipment                                 |       | 450,221  |        | 406,246    |       |
| Computer hardware                                        |       | 15,597   |        | 13,606     |       |
| Other                                                    |       | 50,305   |        | 39,367     |       |
| Gross book value  of property, plant and equipment       |       | 657,126  |        | 576,314    |       |
| Accumulated  depreciation                                |       | (239,305 | )           | (180,421   | )          |
| Advances paid for  property, plant and equipment         |       | 10,898   |        | 11,903     |       |
| Construction in  progress and equipment for installation |       | 30,808   |        | 29,524     |       |
| **Total property, plant and  equipment, net**            | ** ** | **$**    | **459,527** | ** ** | **$**      | **437,320** | ** ** |

 

The Company capitalized interest costs of $410, $972,and $1,741 during the years ended December 31, 2005, 2004 and 2003,respectively, with respect to qualified construction projects.

Depreciation expense during the years ended December 31,2005, 2004 and 2003 amounted to $52,683, $43,558, and $30,209, respectively.

F-21

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**10.**   Property, Plant and Equipment(Continued)

The assets transferred to theCompany upon privatisation do not include the land on which the Company’sfactories and buildings, comprising the Company’s principal manufacturingfacilities, are located. The Company has the option to purchase this land uponapplication to the state registrator body or to continue occupying this landunder rental agreements. Russian legislation does not specify an expiry date tothis option. As at December 31, 2005 the Company has not filed anyapplication to exercise the purchase option.

In 2005, the Companyformally adopted plans to dispose of certain property, plant, and equipmentwith a carrying value of $10,814. The decision to dispose of such assets isseen as beneficial for the Company since the cost of managing those assetsoutweighs the benefits gained. The assets will likely be disposed of in 2006 bysale. These assets were not classified as assets held for sale because as of December 31,2005, it has been determined that they do not meet the definition of a disposalgroup as defined by SFAS 144.

**11.   Goodwill**

Themovement of goodwill for the years ended December 31, 2005 and 2004comprised:

| Balance at  December 31, 2002     |       | $     | 19,885     |       |
|----------------------------------------|------------|-------|------------|------------|
| Acquisitions                           |       | 3,113 |       |
| Currency translation adjustment        |       | 1,697 |       |
| Balance at  December 31, 2003     |       | $     | 24,695     |       |
| Acquisitions                           |       | 78    |       |
| Currency translation adjustment        |       | 1,518 |       |
| **Balance  at December 31, 2004** | ** ** | **$** | **26,291** | ** ** |
| Acquisitions                           |       | 7,188 |       |
| Impairment loss                        |       | (546  | )          |
| Currency translation adjustment        |       | (925  | )          |
| **Balance at December 31,  2005** | ** ** | **$** | **32,008** | ** ** |

 

**12.   Long-TermInvestments**

At December 31,2005 and 2004 the Company had the following direct investments in Russiancompanies:

| ** **                       | ** ** | **2005**      | ** ** | **2004**   | ** ** |
|----------------------------------|------------|---------------|------------|------------|------------|
| ** **                       | ** ** | **Ownership** | ** ** | **Amount** | ** ** | **Ownership** | ** ** | **Amount** | ** ** |
| Albumin                          |       |          | —     |       |       |   | — |   |   |   | 40.6 | % |   |   | $ | 1,433 |   |   |
| Other                            |       |          | various    |       |       |   | 138 |   |   |   | various |   |   |   | 984 |   |   |
| **Total  long-term investments** | ** ** |          |       |       | ** ** | ** ** | **$** | **138** |   |   |   |   |   | ** ** | ** ** | **$** | **2,417** |   |   |
|                                  |            |               |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The investment in Albumin,an open joint-stock company, was disposed of in 2005.

F-22

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**13.   OtherNon-Current Assets**

Othernon-current assets at December 31, 2005 and 2004 were comprised asfollows:

| ** **                                                                                               | ** ** | **2005** | ** ** | **2004**   | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|
| Notes issuance  expenses, net of amortisation                                                            |       | $        | 2,456      |       | $          | 3,069 |   |
| Advance for  further step acquisition of minority interest in Moscow Baby Food Plant  (“ZDMP”) |       | 1,566    |       | —     |       |
| Advance for  further step acquisition of minority interest in Obninsk Dairy Plant                        |       | 1,350    |       | —     |       |
| Advance for  further step acquisition of minority interest in Sibirskoye Moloko dairy  plant        |       | 133      |       | 1,057      |       |
| Advance for acquisition  of farms                                                                        |       | 120      |       | 376        |       |
| Other                                                                                                    |       | 528      |       | 1,004      |       |
| **Total other assets**                                                                                   | ** ** | **$**    | **6,153**  | ** ** | **$**      | **5,506** | ** ** |

 

**14.   AccruedLiabilities**

Accruedliabilities at December 31, 2005 and 2004 were comprised as follows:

| ** **                    | ** ** | **2005** | ** ** | **2004**   | ** ** |
|-------------------------------|------------|----------|------------|------------|------------|
| Payroll related  accruals     |       | $        | 11,200     |       | $          | 9,604 |   |
| Interest accruals             |       | 3,154    |       | 2,737      |       |
| Other accruals                |       | 2,717    |       | 2,350      |       |
| **Total accrued liabilities** | ** ** | **$**    | **17,071** | ** ** | **$**      | **14,691** | ** ** |

 

**15.   Short-Term andLong-Term Loans**

Short-termloans at December 31, 2005 and 2004 comprised the following:

| ** **                  | ** ** | **2005**               | ** ** | **2004**   | ** ** |
|-----------------------------|------------|------------------------|------------|------------|------------|
| ** **                  | ** ** | **No. of  loans** | ** ** | **Amount** | ** ** | **Weighted  average  interest rate** | ** ** | **No. of  loans** | ** ** | **Amount** | ** ** | **Weighted  average  interest rate** | ** ** |
| EURO denominated            |       |                   | —     |       |       | $ | — |   |   | — |   |   |   | 3 |   |   | $ | 739 |   |   | 4.23 | % |   |
| Ruble denominated           |       |                   | 22         |       |       | 19,219 |   |   | 10.29 | % |   |   | 12 |   |   | 16,815 |   |   | 10.68 | % |   |
| U.S. $ denominated     |       |                   | 3          |       |       | 335 |   |   | 7.92 | % |   |   | — |   |   | — |   |   | — |   |   |
| **Total  short-term loans** | ** ** |                   |       |       | ** ** | **$** | **19,554** | ** ** |   |   |   |   |   |   |   | ** ** | **$** | **17,554** | ** ** |   |   |   |   |

 

F-23

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**15.**   Short-Term andLong-Term Loans (Continued)

Long-termloans at December 31, 2005 and 2004 comprised the following:

| ** **                                | ** ** | **2005**               | ** ** | **2004**   | ** ** |
|-------------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                                | ** ** | **No. of  loans** | ** ** | **Amount** | ** ** | **Weighted  average  interest rate** | ** ** | **No. of   loans** | ** ** | **Amount** | ** ** | **Weighted  average  interest rate** | ** ** |
| U.S. $ denominated                   |       |                   | 1          |       |       | $ | 677 |   |   | 6.59 | % |   |   | 3 |   |   |   | $ | 1,809 |   |   |   | 4.11 | % |   |
| EURO denominated                          |       |                   | 2          |       |       | 3,144 |   |   | 4.86 | % |   |   | 2 |   |   |   | 6,201 |   |   |   | 5.63 | % |   |
| Ruble denominated                         |       |                   | 5          |       |       | 1,826 |   |   | 14.50 | % |   |   | 1 |   |   |   | 46 |   |   |   | 10.00 | % |   |
| Total amount of long-term   borrowings    |       |                   |       |       |       | 5,647 |   |   |   |   |   |   |   |   |   |   | 8,056 |   |   |   |   |   |   |
| Less current portion of long-term   loans |       |                   | —     |       |       | (3,823 | ) |   | — |   |   |   | — |   |   |   | (936 | ) |   |   | — |   |   |
| **Total  long-term loans**                | ** ** |                   |       |       | ** ** | **$** | **1,824** | ** ** |   |   |   |   |   |   |   | ** ** | ** ** | **$** | **7,120** |   |   |   |   |   |   |

 

*Guarantees*

The Company’s line of creditwith ING-Bank(Eurasia), in the amount of $677, was guaranteed by a supplier of  property, plant and equipment and ING BankN.V.

At December 31,2005 and 2004, WBD Foods and certain other major subsidiaries guaranteedcertain short-term and long-term bank loans received by other subsidiaries ofWBD Foods. The aggregate amount of such guarantees equaled the carrying amountof the respective short-term and long-term loans.

*Maturity ofLong-Term Loans*

The maturities of long-term loans outstanding at December 31,2005 was as follows:

| ** **                 | ** ** | **Years ended  December 31,** | ** ** |
|----------------------------|------------|-----------------------------------------|------------|
| 2006                       |       |                                    | 3,823      |   |   |
| 2007                       |       |                                    | 913        |   |   |
| 2008                       |       |                                    | 468        |   |   |
| 2009                       |       |                                    | 443        |   |   |
| **Total  long-term loans** | ** ** | ** **                              | **5,647**  |   |   |

 

*Collateral*

Certainof the Company’s inventory, property, plant and equipment served as collateralfor the short-term and long-term loans from International Moscow Bank, ING-Bank(Eurasia) and Sberbank.

At December 31, 2005 and 2004 the assets that served as collateralconsisted of the following:

·       Inventory in the amounts of $ 3,433 and $7,133, respectively;

·       Property,plant and equipment with a net book value of $9,381 and $50,585, respectively.

F-24

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**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**16.   Short-Term andLong-Term Notes Payable**

Notespayable issued by WBD Foods at December 31, 2005 and 2004 comprised thefollowing:

| **Maturity**               | ** ** | ** ** | ** ** | **Currency** | ** ** | **2005** | ** **  | **2004**   | ** ** |
|----------------------------|------------|------------|------------|--------------|------------|----------|-------------|------------|------------|
| Short-term notes           |       |       | Ruble      |         |       | $        | 49,794      |       | $          | — |   |
|                       |       |       |       |         |       | 49,794   |        | —     |       |
| Long-term notes            |       |       | U.S.$      |         |       | $        | 150,000     |       | $          | 150,000 |   |
|                       |       |       | Ruble      |         |       | 104,230  |        | 51,709     |       |
| **Total  long-term notes** | ** ** |       |       |         | ** ** | **$**    | **254,230** | ** ** | **$**      | **201,709** | ** ** |

 

*WBD Foods U.S.$ Notes*

On May 21, 2003, UBS(Luxembourg) S.A. issued 8.5% Loan Participation Notes due 2008 for the solepurpose of funding a $150,000 loan (the “Loan”) to WBD Foods. The Loan willmature on May 21, 2008 and bears interest at an annual rate of 8.5%,payable semi-annually in arrears on May 21 and November 21 of eachyear.

Nine of WBD Foods’subsidiaries unconditionally, irrevocably, jointly and severally guarantee itsobligation under the Loan.  The loanagreement contains a number of covenants including requirements to maintaincertain financial ratios.

*WBD Foods RubleNotes*

On April 15, 2003, WBD Foods issued 1,500,000 non-convertibleruble denominated notes at a face value of 1,000 rubles each. The offeringraised a total of 1,500,000 thousand rubles ($52,115 at the exchange rate as of December 31, 2005 of which $2,321 have been repaid as of December 31, 2005). The notes are redeemableby WBD Foods on April 11, 2006. The interest rate for the years ending December 31,2005 and December 31, 2004 was 10.78% and 8,48%, respectively. Interestrates for subsequent coupon periods are subject to change due to changes in theConsumer Price Index, published by the State Statistical Committee of theRussian Federation, in comparison with the appropriate period of the prioryear. Interest is payable semi-annually in arrears commencing on October 14,2003. In accordance with the notes issuance terms, there are a number ofcovenants including requirements to maintain certain financial ratios.

On December 21, 2005, WBD Foods issued 3,000,000non-convertible ruble denominated notes at a face value of 1,000 rubles each.The offering raised a total of 3,000,000 thousand rubles  ($104,230 at the exchange rate as of December 312005). The notes are redeemable by WBD Foods on December 15, 2010. Theinterest rate of the coupon is 9%. Interest is payable semi-annually in arrearscommencing on June 21, 2006.

F-25

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**17.   Other Payables**

Other payables primarily represent payables forproperty, plant and equipment and were comprised as follows as of December 31,2005 and 2004:

| ** **                                         | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|
| Other payables for  property, plant and equipment: | ** ** | ** ** |       |       |       |
| Current payables                                   |       | $          | 5,493      |       | $          | 7,028 |   |
| Vendors financing obligations, including           |       |       |       |       |       |
| —current portion                              |       | 15,769     |       | 16,598     |       |
| —long-term portion                            |       | 26,652     |       | 39,251     |       |
|                                               |       | 47,914     |       | 62,877     |       |
| Other payables:                                    |       |       |       |       |       |
| Current payables                                   |       | 8,938      |       | 5,989      |       |
| Long-term payables, including                      |       |       |       |       |       |
| —current portion                              |       | —     |       | —     |       |
| —long-term portion                            |       | 241        |       | 43         |       |
|                                               |       | 9,179      |       | 6,032      |       |
| Total other payables                               |       | 57,093     |       | 68,909     |       |
| Less current  liabilities                          |       | (30,200    | )          | (29,615    | )          |
| **Total other long-term payables**                 | ** ** | **$**      | **26,893** | ** ** | **$**      | **39,294** | ** ** |

 

The Company has agreements withsuppliers of equipment which provide financing for the periods ranging from 1to 9 years. As of December 31, 2005 and 2004, vendor financing obligationswere $29,677 and $40,378, respectively, EURO 10,050 thousand and EURO 10,657 thousand (equivalent to $11,937 and $14,521 as of December 31, 2005and 2004, respectively) 23,225 thousand rubles and 26,346  thousand rubles (equivalent to $807 and $950as of December 31, 2005 and 2004, respectively). This financing isprovided at interest rates of LIBOR plus 1.5%, EURIBOR plus 1.5% and 16.0% forU.S. dollar, EURO and ruble denominated contracts, respectively. The majorityof equipment financing is provided by one supplier. At December 31, 2005and 2004, property, plant and equipment amounting to $47,728 and $59,681,respectively, served as collateral under these financing agreements.

F-26

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**17.**   Other Payables(Continued)

Thematurity of vendors financing obligations and other long-term payables outstanding at December 31, 2005 wasas follows:

| ** **                                        | ** ** | **Years ended  December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------|------------|
| 2006                                              |       |                                    | $          | 15,769 |   |   |
| 2007                                              |       |                                    | 12,848     |   |   |
| 2008                                              |       |                                    | 7,585      |   |   |
| 2009                                              |       |                                    | 5,729      |   |   |
| 2010                                              |       |                                    | 569        |   |   |
| Thereafter                                        |       |                                    | 162        |   |   |
| Total maturity of  other long-term payables       |       |                                    | 42,662     |   |   |
| Less current  portion of other long-term payables |       |                                    | (15,769    | ) |   |
| **Total other long-term payables**                | ** ** | ** **                              | **$**      | **26,893** |   |   |

 

**18.   Income Tax**

WBDFoods’ provision for income taxes for the years ended December 31, 2005,2004 and 2003 was as follows:

| ** **                            | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------------|------------|----------|------------|------------|------------|------------|------------|
| Current income tax provision          |       | $        | 27,385     |       | $          | 18,189     |       | $ | 14,866 |   |
| Deferred income  tax charge/(benefit) |       | 3,327    |       | (6,019     | )          | (4,149     | )          |
| **Total provision for income  taxes** | ** ** | **$**    | **30,712** | ** ** | **$**      | **12,170** | ** ** | **$** | **10,717** | ** ** |

 

WBD Foods’ statutory income tax rate was 24% for theperiods presented above.

Foreign current income taxprovisions for the years ended December 31, 2005, 2004 and 2003 were $700,$534 and $568, respectively.  Foreigndeferred income tax charge/(benefit) for the years ended December 31,2005, 2004 and 2003 were $637, ($1,255) and ($1,137), respectively.

F-27

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**18.**   Income Tax(Continued)

The actual provision forincome taxes reconciled to WBD Foods’ theoretical tax provision at statutoryrate was as follows for the respective periods ended:

| ** **                                                                          | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|------------|------------|
| Income before  provision for income taxes                                           |       | $        | 64,627     |       | $          | 38,305     |       | $ | 33,882 |   |
| Russian statutory  tax rate                                                         |       | 24       | %          | 24         | %          | 24         | %          |
| Theoretical tax provision  at statutory rate                                        |       | 15,510   |       | 9,193      |       | 8,132      |       |
| Tax effect of  expenses not deductible for national statutory taxation purposes     |       | 12,341   |       | 6,232      |       | 3,345      |       |
| Tax effect of  income not taxable for national statutory taxation purposes          |       | (974     | )          | (248       | )          | (304       | )          |
| Tax effect of  income tax privileges relating to small business enterprises benefit |       | (275     | )          | (1,278     | )          | (2,981     | )          |
| Tax effect of  income tax at different rates                                        |       | 470      |       | 550        |       | 494        |       |
| Increase  (decrease) in valuation allowance                                         |       | 2,609    |       | (2,258     | )          | 2,481      |       |
| Tax effect of other                                                                 |       | 1,031    |       | (21        | )          | (450       | )          |
| **Actual provision for income  taxes**                                              | ** ** | **$**    | **30,712** | ** ** | **$**      | **12,170** | ** ** | **$** | **10,717** | ** ** |

 

The income tax benefit for smallenterprises was abolished as of January 1, 2002 and continued to beavailable to enterprises that were established before July 1, 2001. Such enterprises****wereexempt from income taxes for the first two years of operations and in the thirdand forth years income taxes were levied at a rate of 25% and 50% of the incometax rate, respectively. Starting from****January 1, 2002the Company’s juice production primarily concentrated in two small enterprises,Fruit Rivers and Nectarin, which were registered in March and April 2001,respectively. These WBD Foods subsidiaries utilized small business enterprisesincome tax benefits until March 31, 2005.

Unused credits, such as profit tax privileges, may notusually be carried forward under Russian tax legislation. Accordingly, taxcredits are reflected in the Company’s consolidated financial statements onlyto the extent and in the year in which the credits are utilized.

F-28

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**18.**   Income Tax (Continued)

Temporarydifferences between the tax bases of assets and liabilities and the respectivecarrying amounts in these consolidated financial statements give rise to thefollowing deferred tax assets and liabilities at December 31, 2005 and2004:

| ** **                                                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets/(liabilities) arising from tax effect of:                           |       |     |       |     |       |
| Losses carried forward                                                                   |       | $        | 10,486     |     | $          | 7,055 |   |
| Intangible assets                                                                        |       | 1,058    |       | 594      |       |
| Property, plant and equipment                                                            |       | 4,359    |       | 4,074    |       |
| Net investments in direct financing leases                                               |       | 1,297    |       | 1,597    |       |
| Allowance for doubtful accounts                                                          |       | 3,557    |       | 3,437    |       |
| Obsolescence and net realizable value inventory  write off and other accrued liabilities |       | 1,729    |       | 1,362    |       |
| Payroll related accruals                                                                 |       | 907      |       | 217      |       |
| Other                                                                                    |       | 896      |       | 387      |       |
| Gross deferred tax asset                                                                 |       | 24,289   |       | 18,723   |       |
| Less valuation allowance for deferred tax asset                                          |       | (7,467   | )          | (4,858   | )          |
| Deferred tax asset net of valuation allowance                                            |       | 16,822   |       | 13,865   |       |
| Intangible assets                                                                        |       | (1,451   | )          | (54      | )          |
| Property, plant and equipment                                                            |       | (14,357  | )          | (8,523   | )          |
| Net investments in direct financing leases                                               |       | (1,114   | )          | (871     | )          |
| Bonds issuance costs                                                                     |       | (589     | )          | (737     | )          |
| Other                                                                                    |       | (643     | )          | (682     | )          |
| Gross deferred tax liability                                                             |       | (18,154  | )          | (10,867  | )          |
| **Net deferred tax (liability)/asset**                                                   | ** ** | **$**    | **(1,332** | **)**    | **$**      | **2,998** | ** ** |
| Analyzed as to:                                                                          |       |     |       |     |       |
| Current deferred tax asset                                                               |       | 8,750    |       | 6,265    |       |
| Long-term deferred tax asset                                                             |       | 5,554    |       | 7,001    |       |
| Long-term  deferred tax liability                                                        |       | (15,636  | )          | (10,268  | )          |

 

In the context of the Company’s current structure, taxlosses and current tax assets of the different subsidiaries may not be set offagainst current tax liabilities and taxable profits of other subsidiaries and,accordingly, taxes may accrue even where there is a net consolidated tax loss.Therefore, deferred tax assets of one subsidiary of the Company are not offsetagainst deferred tax liabilities of another subsidiary. As at December 31,2005 and 2004, a valuation allowance has been recorded for deferred tax assetsin the amounts of $7,467 and $4,858, respectively as it is not more likely thannot that sufficient taxable profit will be available to offset the deductibletemporary differences to which these assets relate.

For statutory income taxpurposes, WBD Foods and its subsidiaries had accumulated tax losses of $40,372which may be carried forward for use against future taxable income, of which$4,951, $5,499, $13,086 and $16,836 expire in the period 2006-2012, 2013,2014 and 2015, respectively. The use of 

F-29

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**18.**   Income Tax (Continued)

accumulatedtax losses of the Russian subsidiaries is restricted to a maximum of 50% oftaxable income per annum for the year 2006, and fully usable starting from theyear 2007.

**19.   GovernmentGrants**

In 1993-1999 ZDMP received capital grants fromthe Russian and Moscow Governments. These grants related to the acquisition ofproperty, plant and equipment for baby food production and are recognized inthe consolidated statements of income in the period in which the depreciationexpense on the related property, plant and equipment is incurred. The conditionsof the grants are that ZDMP must continue to use the related property, plantand equipment for baby food production. Management believes that it hascomplied with this condition and will continue to comply in the future.

Themovement in capital government grants during the years ended December 31,2005 and 2004 comprised:

| Balance at December 31, 2003     |       | $      | 9,246     |       |
|---------------------------------------|------------|--------|-----------|------------|
| Amortization                          |       | (2,243 | )         |
| Currency translation  adjustment      |       | 482    |      |
| Balance at December 31, 2004     | ** ** | $      | 7,485     | ** ** |
| Amortization                          |       | (2,107 | )         |
| Currency translation  adjustment      |       | 15     |      |
| **Balance at December 31, 2005** | ** ** | **$**  | **5,393** | ** ** |

 

Grants are amortized once the related property, plantand equipment are put into operation. Amortization is reported as a reductionin the depreciation expense of the related property, plant and equipment.

During the year ended December 31, 2005 and 2004,WBD Foods received operating grants from the Russian Government and Moscow CityGovernment in the amount of $276 and $687, respectively.

These grants related tointerest rates on loans used for acquisition of milk and other raw materials,and are recognized in the consolidated statements of income in the period inwhich the related interest expense is incurred. The grants were provided at onehalf of the Central Bank of Russia interest rate (equating to 12% at December 31,2005) or in a fixed amount approximating to half of the interest expense. Theconditions of the grants are that WBD Foods must use the related loans receivedfrom Russian banks for the acquisition of milk and other raw materials.

**20.   Shareholders’Equity**

In accordance with Russiancorporate laws, earnings available for dividends are limited to profits,denominated in domestic currency, after certain deductions. At December 31,2005 retained earnings of WBD Foods which are distributable under statutorylegislation totaled 203 million rubles ($7,061 at the exchange rate as at December 31,2005).

F-30

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**21.   MinorityInterest**

The movement in minority interest during the yearsended December 31, 2005 and 2004 comprised:

| Balance at December 31, 2003                                  |       | $      | 21,168     |       |
|--------------------------------------------------------------------|------------|--------|------------|------------|
| Acquisitions by the Company of  minority interests in subsidiaries |       | (8,452 | )          |
| Acquisition of subsidiaries                                        |       | 342    |       |
| Minority interest share in net  income                             |       | 3,161  |       |
| Currency translation  adjustment                                   |       | 1,108  |       |
| **Balance at December 31, 2004**                              | ** ** | **$**  | **17,327** | ** ** |
| Acquisitions by the Company of  minority interests in subsidiaries |       | (1,081 | )          |
| Acquisition of subsidiaries                                        |       | 5,312  |       |
| Minority interest share in net  income                             |       | 3,649  |       |
| Currency translation  adjustment                                   |       | (588   | )          |
| **Balance  at December 31, 2005**                             | ** ** | **$**  | **24,619** | ** ** |

 

**22.   Cost of Sales**

Costof sales for 2005, 2004, and 2003 were comprised of the following:

| ** **                     | ** ** | **2005** | ** **    | **2004**   | ** ** | **2003**    | ** ** |
|--------------------------------|------------|----------|---------------|------------|------------|-------------|------------|
| Raw materials                  |       | $        | 849,089       |       | $          | 736,229     |       | $ | 566,512 |   |
| Personnel                      |       | 50,040   |          | 44,293     |       | 33,040      |       |
| Depreciation and  amortization |       | 43,183   |          | 35,865     |       | 24,753      |       |
| Utilities                      |       | 22,583   |          | 18,593     |       | 15,646      |       |
| Goods for resale               |       | 16,724   |          | 6,675      |       | 13,640      |       |
| Other                          |       | 20,627   |          | 20,006     |       | 11,513      |       |
| **Total cost of sales**        | ** ** | **$**    | **1,002,246** | ** ** | **$**      | **861,661** | ** ** | **$** | **665,104** | ** ** |

 

**23.   Selling andDistribution Expenses**

Sellingand distribution expenses for 2005, 2004, and 2003 were comprised of thefollowing:

| ** **                                   | ** ** | **2005** | ** **      | **2004**   | ** ** | **2003**        | ** ** |
|----------------------------------------------|------------|----------|-----------------|------------|------------|-----------------|------------|
| Advertising and  marketing                   |       | $        | 57,936          |       | $          | 54,298          |       | $ | 43,777 |   |
| Personnel                                    |       | 47,665   |            | 43,831     |       | 36,562          |       |
| Shipping and  handling                       |       | 52,995   |            | 45,938     |       | 31,364          |       |
| Bad debt expense                             |       | 3,908    |            | 3,722      |       | 10,220          |       |
| Materials and  supplies                      |       | 10,446   |            | 8,447      |       | 7,446           |       |
| Warehouse                                    |       | 9,525    |            | 8,937      |       | 4,978           |       |
| Other                                        |       | 9,515    |            | 8,260      |       | 6,399           |       |
| **Total selling and distribution  expenses** | ** ** | **$**    | **191****,990** | ** ** | **$**      | **173****,433** | ** ** | **$** | **140,746** | ** ** |

 

F-31

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**24.   General andAdministrative Expenses**

Generaland administrative expenses for 2005, 2004, and 2003 were comprised of thefollowing:

| ** **                                     | ** ** | **2005** | ** **  | **2004**   | ** ** | **2003**   | ** ** |
|------------------------------------------------|------------|----------|-------------|------------|------------|------------|------------|
| Personnel                                      |       | $        | 61,830      |       | $          | 53,250     |       | $ | 45,281 |   |
| Audit, consulting  and legal fees              |       | 5,567    |        | 4,655      |       | 7,307      |       |
| Taxes other than  income tax                   |       | 13,194   |        | 11,782     |       | 5,465      |       |
| Depreciation                                   |       | 5,711    |        | 4,576      |       | 3,674      |       |
| Materials and  supplies                        |       | 3,268    |        | 3,226      |       | 3,206      |       |
| Communication  costs                           |       | 2,880    |        | 2,331      |       | 2,105      |       |
| Rent                                           |       | 2,177    |        | 2,268      |       | 1,898      |       |
| Security expenses                              |       | 1,638    |        | 469        |       | 293        |       |
| Other                                          |       | 13,377   |        | 10,259     |       | 6,744      |       |
| **Total general and  administrative expenses** | ** ** | **$**    | **109,642** | ** ** | **$**      | **92,816** | ** ** | **$** | **75,973** | ** ** |

 

**25.   Financial Incomeand Expenses, net**

Financialincome and expense, net for 2005, 2004, and 2003 were comprised of thefollowing:

| ** **                                   | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|----------------------------------------------|------------|----------|------------|------------|------------|------------|------------|
| Interest expense                             |       | $        | 23,388     |       | $          | 22,348     |       | $ | 20,903 |   |
| Interest income                              |       | (1,569   | )          | (1,421     | )          | (2,921     | )          |
| Currency remeasurement  (gains), net         |       | (1,231   | )          | (7,673     | )          | (4,834     | )          |
| Bank charges                                 |       | 1,983    |       | 1,857      |       | 1,971      |       |
| Other financial  expense /(income), net      |       | 297      |       | (493       | )          | 154        |       |
| **Total financial income and  expense, net** | ** ** | **$**    | **22,868** | ** ** | **$**      | **14,618** | ** ** | **$** | **15,273** | ** ** |

 

**26.   Pension Costs**

In the normal course of business, WBD Foods and itssubsidiaries contribute to the Russian Federation state pension scheme onbehalf of its employees. Mandatory contributions to the governmental pensionscheme are expensed when incurred. Governmental pension contributions areincluded in personnel costs in the statement of income. Pension costs amountedto $20,282, $20,557 and $17,498 in 2005, 2004 and 2003, respectively. WBD Foodshas no other pension obligations.

**27.   SegmentInformation**

The Company’s majorreportable business segments are dairy,****beverages and baby food. These segmentsare strategic business units that produce and offer distinctive products, i.e.sterilized and pasteurized milk, yogurts, dairy desserts, and other dairyproducts in the dairy segment; fruit juices, nectars, juice based drinks andbottled mineral water in the beveragessegment and milk and juice based baby food products in the baby food segment.

WBD Foods’ accountingpolicy for segments is the same as that described in the summary of significantaccounting policies. Management evaluates segment performance based on segmentprofit or 

F-32

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**27.**   Segment Information (Continued)

lossbefore minority interests and deferred taxes. Transfers between segments aremade at values that approximate market values.

*Operating Segment—year ended December 31, 2005*

| ** **                                                                | ** ** | **Dairy** | ** **  | **Beverages** | ** ** | **Baby   food** | ** ** | **Common and  corporate  assets/expenses** | ** ** | **Intersegment  receivables** | ** ** | **Consolidated** | ** **  |
|---------------------------------------------------------------------------|------------|-----------|-------------|---------------|------------|----------------------|------------|-------------------------------------------------|------------|-------------------------------|------------|------------------|-------------|
| Total sales                                                               |       | $         | 1,009,823   |          | $          | 303,797              |       | $                                               | 87,839     |                          |       | $                | 3           |   |   |   | $ | — |   |   | $ | 1,401,462 |   |
| Inter segment sales                                                       |       | (2,173    | )           | —        |       | —               |       |                                            | —     |                          |       |             | —      |   |   | (2,173 | ) |
| Sales to external customers                                               |       | 1,007,650 |        | 303,797       |       | 87,839               |       |                                            | 3          |                          |       |             | —      |   |   | 1,399,289 |   |
| Cost of sales                                                             |       | (753,285  | )           | (194,464      | )          | (54,480              | )          |                                            | (17        | )                             |       |             | —      |   |   | (1,002,246 | ) |
| Gross profit                                                              |       | 254,365   |        | 109,333       |       | 33,359               |       |                                            | (14        | )                             |       |             | —      |   |   | 397,043 |   |
| Operating expenses                                                        |       | (179,099  | )           | (88,110       | )          | (11,593              | )          |                                            | (30,746    | )                             |       |             | —      |   |   | (309,548 | ) |
| Operating income (loss)                                                   |       | 75,266    |        | 21,223        |       | 21,766               |       |                                            | (30,760    | )                             |       |             | —      |   |   | 87,495 |   |
| Financial income and expense, net and current provision for income  taxes |       | (14,663   | )           | (6,433        | )          | (5,050               | )          |                                            | (24,107    | )                             |       |             | —      |   |   | (50,253 | ) |
| Net segment profit (loss)                                                 |       | $         | 60,603      |          | $          | 14,790               |       | $                                               | 16,716     |                          |       | $                | (54,867     | ) |   |   | $ | — |   |   | $ | 37,242 |   |
| Deferred tax (charge)/benefit                                             |       |      |        |          |       |                 |       |                                            |       |                          |       |             |        |   |   | (3,327 | ) |
| Minority interest                                                         |       |      |        |          |       |                 |       |                                            |       |                          |       |             |        |   |   | (3,649 | ) |
| Net income (loss)                                                         |       |      |        |          |       |                 |       |                                            |       |                          |       |             |        |   |   | $ | 30,266 |   |
| **Total assets**                                                          | ** ** | **$**     | **572,981** | ** **    | **$**      | **213,009**          | ** ** | **$**                                           | **70,638** | ** **                    | ** ** | **$**            | **131,964** |   | ** ** | ** ** | **$** | **(68,035** | **)** | ** ** | **$** | **920,557** | ** ** |
| **Expenditure for property, plant  and equipment**                        | ** ** | **$**     | **59,922**  | ** **    | **$**      | **12,962**           | ** ** | **$**                                           | **1,754**  | ** **                    | ** ** | **$**            | **472**     |   | ** ** | ** ** | **$** | **—** | ** ** | ** ** | **$** | **75,****110** | ** ** |
| **Depreciation and  amortization**                                        | ** ** | **$**     | **41,209**  | ** **    | **$**      | **8,565**            | ** ** | **$**                                           | **2,993**  | ** **                    | ** ** | **$**            | **668**     |   | ** ** | ** ** | **$** | **—** | ** ** | ** ** | **$** | **53,435** | ** ** |

 

F-33

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**27.**   Segment Information (Continued)

*Operating Segment—year ended December 31, 2004*

| ** **                                                                | ** ** | **Dairy** | ** **  | **Beverages** | ** ** | **Baby  food** | ** ** | **Common and  corporate  assets/expenses** | ** ** | **Intersegment  receivables** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|-----------|-------------|---------------|------------|----------------|------------|-------------------------------------------------|------------|-------------------------------|------------|------------------|------------|
| Total sales                                                               |       | $         | 829,136     |          | $          | 301,701        |       | $                                               | 64,657     |                          |       | $                | 27         |   |   |   | $ | — |   |   |   | $ | 1,195,521 |   |   |
| Inter segment sales                                                       |       | (6,230    | )           | —        |       | —         |       |                                            | —     |                          |       |             | —     |   |   |   | (6,230 | ) |   |
| Sales to external customers                                               |       | 822,906   |        | 301,701       |       | 64,657         |       |                                            | 27         |                          |       |             | —     |   |   |   | 1,189,291 |   |   |
| Cost of sales                                                             |       | (621,218  | )           | (199,826      | )          | (40,611        | )          |                                            | (6         | )                             |       |             | —     |   |   |   | (861,661 | ) |   |
| Gross profit                                                              |       | 201,688   |        | 101,875       |       | 24,046         |       |                                            | 21         |                          |       |             | —     |   |   |   | 327,630 |   |   |
| Operating expenses                                                        |       | (153,950  | )           | (86,976       | )          | (7,266         | )          |                                            | (26,515    | )                             |       |             | —     |   |   |   | (274,707 | ) |   |
| Operating income (loss)                                                   |       | 47,738    |        | 14,899        |       | 16,780         |       |                                            | (26,494    | )                             |       |             | —     |   |   |   | 52,923 |   |   |
| Financial income and expense, net and current provision for income  taxes |       | (14,472   | )           | (3,348        | )          | (3,862         | )          |                                            | (11,125    | )                             |       |             | —     |   |   |   | (32,807 | ) |   |
| Net segment profit (loss)                                                 |       | $         | 33,266      |          | $          | 11,551         |       | $                                               | 12,918     |                          |       | $                | (37,619    | ) |   |   | $ | — |   |   |   | $ | 20,116 |   |   |
| Deferred tax (charge)/benefit                                             |       |      |        |          |       |           |       |                                            |       |                          |       |             |       |   |   |   | 6,019 |   |   |
| Minority interest                                                         |       |      |        |          |       |           |       |                                            |       |                          |       |             |       |   |   |   | (3,161 | ) |   |
| Net income (loss)                                                         |       |      |        |          |       |           |       |                                            |       |                          |       |             |       |   |   |   | 22,974 |   |   |
| **Total assets**                                                          | ** ** | **$**     | **544,592** | ** **    | **$**      | **226,084**    | ** ** | **$**                                           | **56,230** | ** **                    | ** ** | **$**            | **24,671** |   | ** ** | ** ** | **$** | **(55,489** | **)** | ** ** | ** ** | **$** | **796,088** |   |   |
| **Expenditure for property, plant  and equipment**                        | ** ** | **$**     | **57,161**  | ** **    | **$**      | **8,817**      | ** ** | **$**                                           | **5,092**  | ** **                    | ** ** | **$**            | **1,569**  |   | ** ** | ** ** | **$** | **—** | ** ** | ** ** | ** ** | **$** | **72,639** |   |   |
| **Depreciation ****and  amortization**                               | ** ** | **$**     | **29,856**  | ** **    | **$**      | **11,009**     | ** ** | **$**                                           | **2,234**  | ** **                    | ** ** | **$**            | **904**    |   | ** ** | ** ** | **$** | **—** | ** ** | ** ** | ** ** | **$** | **44,003** |   |   |

 

F-34

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**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**27.**   Segment Information (Continued)

*Continuing Operating Segment—year ended December 31,2003*

| ** **                                                                | ** ** | **Dairy**  | ** **  | **Beverages** | ** ** | **Baby  Food** | ** ** | **Common and  corporate  assets/expenses** | ** ** | **Intersegment  receivables** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|------------|-------------|---------------|------------|----------------|------------|-------------------------------------------------|------------|-------------------------------|------------|------------------|------------|
| Total sales                                                               |       | $          | 619,913     |          | $          | 276,025        |       | $                                               | 45,956     |                          |       | $                | 131        |   |   |   | $ | — |   |   |   | $ | 942,025 |   |   |
| Inter segment sales                                                       |       | (3,566     | )           | —        |       | —         |       |                                            | —     |                          |       |             | —     |   |   |   | (3,566 | ) |   |
| Sales to external customers                                               |       | 616,347    |        | 276,025       |       | 45,956         |       |                                            | 131        |                          |       |             | —     |   |   |   | 938,459 |   |   |
| Cost of sales                                                             |       | (451,249   | )           | (181,650      | )          | (31,606        | )          |                                            | (599       | )                             |       |             | —     |   |   |   | (665,104 | ) |   |
| Gross profit                                                              |       | 165,098    |        | 94,375        |       | 14,350         |       |                                            | (468       | )                             |       |             | —     |   |   |   | 273,355 |   |   |
| Operating expenses                                                        |       | (112,918   | )           | (80,195       | )          | (4,424         | )          |                                            | (26,663    | )                             |       |             | —     |   |   |   | (224,200 | ) |   |
| Operating income (loss)                                                   |       | 52,180     |        | 14,180        |       | 9,926          |       |                                            | (27,131    | )                             |       |             | —     |   |   |   | 49,155 |   |   |
| Financial income and expense, net and current provision for income  taxes |       | (20,112    | )           | (2,152        | )          | (2,537         | )          |                                            | (5,338     | )                             |       |             | —     |   |   |   | (30,139 | ) |   |
| Net segment profit (loss)                                                 |       | $          | 32,068      |          | $          | 12,028         |       | $                                               | 7,389      |                          |       | $                | (32,469    | ) |   |   | — |   |   |   | 19,016 |   |   |
| Deferred tax (charge)/benefit                                             |       |       |        |          |       |           |       |                                            |       |                          |       |             |       |   |   |   | 4,149 |   |   |
| Minority interest                                                         |       |       |        |          |       |           |       |                                            |       |                          |       |             |       |   |   |   | (2,012 | ) |   |
| Net income (loss)                                                         | ** ** | ** ** | ** **  | ** **    | ** ** | ** **     | ** ** | ** **                                      | ** ** |                          | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | 21,153 |   |   |
| **Total assets**                                                          | ** ** | **$**      | **454,779** | ** **    | **$**      | **230,946**    | ** ** | **$**                                           | **41,966** | ** **                    | ** ** | **$**            | **61,357** |   | ** ** | ** ** | **$** | **(45,163** | **)** | ** ** | ** ** | **$** | **743,885** |   |   |
| **Expenditure for property, plant  and equipment**                        | ** ** | **$**      | **70,078**  | ** **    | **$**      | **33,612**     | ** ** | **$**                                           | **403**    | ** **                    | ** ** | **$**            | **3,093**  |   | ** ** | ** ** | **$** | **—** | ** ** | ** ** | ** ** | **$** | **107,186** |   |   |
| **Depreciation ****and   amortization**                              | ** ** | **$**      | **22,266**  | ** **    | **$**      | **5,879**      | ** ** | **$**                                           | **1,324**  | ** **                    | ** ** | **$**            | **1,311**  |   | ** ** | ** ** | **$** | **—** | ** ** | ** ** | ** ** | **$** | **30,780** |   |   |

 

F-35

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**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**27.**   Segment Information (Continued)

The changes in thecarrying amount of goodwill for each segment for the years ended December 31,2005, 2004 and 2003 were as follows:

| ** **                             | ** ** | **Dairy** | ** ** | **Beverages** | ** ** | **Baby food** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|-----------|------------|---------------|------------|--------------------|------------|-----------|------------|
| Balance at December 31, 2003      |       | $         | 21,100     |          |       | $                  | 3,595      |      |       |   | $ | — |   |   | $ | 24,695 |   |
| Acquisitions                           |       | —    |       |          | 78         |               |       |      | —     |   |   | 78 |   |
| Currency translation  adjustment       |       | 1,298     |       |          | 220        |               |       |      | —     |   |   | 1,518 |   |
| Balance at December 31, 2004      |       | $         | 22,398     |          |       | $                  | 3,893      |      |       |   | $ | — |   |   | $ | 26,291 |   |
| Acquisitions                           |       | 3,765     |       |          | 3,423      |               |       |      | —     |   |   | 7,188 |   |
| Write-off                              |       | —    |       |          | (546       | )                  |       |      | —     |   |   | (546 | ) |
| Currency translation  adjustment       |       | (805      | )          |          | (120       | )                  |       |      | —     |   |   | (925 | ) |
| **Balance  at December 31, 2005** | ** ** | **$**     | **25,358** | ** **    | ** ** | **$**              | **6,650**  |      |       |   | $ | — |   | ** ** | **$** | **32,008** | ** ** |

 

For the years endedDecember 31, 2005, 2004, and 2003, approximately 92%, 94%, and 94% ofsales were generated in and sold to customers in Russia. As of December 31,2005, 2004 and 2003, the long-lived assets of the Company were primarilylocated in Russia.

The majority of theCompany’s packaging materials is purchased from one supplier. There can be noassurance that, in the event of a loss of this supplier or unfavourabledevelopments in the business practices of this supplier, substantially all ofthe current levels of packaging materials could be purchased at comparable, ornearly comparable, prices on the international market.

**28.  **Related Parties

*Wimm-Bill-DannTrans*

During 2005, 2004 and 2003the Company received transportation services from Wimm-Bill-Dann Trans (“WBDTrans”), a closed joint stock company, which is a WBD Foods’ investee,amounting to approximately $11,687, $11,149 and $8,616, respectively. As of December 31,2005, 2004 and 2003 advances paid to WBD Trans in respect of transportationservices amounted to $176, $247 and $18, respectively.

*Perekriostok*

Through2003 one of the members of WBD Foods’ Board of Directors was also a member ofthe Board of Directors in Trade House “Perekriostok” (“TH”), which buys dairyand juice products from WBD Foods. Sales to TH in 2003 were $9,066. Amount duefrom TH as of December 31, 2003 was $156.

*Milk Suppliers*

During 2005, 2004 and 2003the Company purchased milk from certain milk supplying companies, which arecontrolled by****members of the control group ofshareholders, amounting to $4,493, $2,614 and $900, respectively. As of December 31,2005 and 2004 accounts payable to these milk supplying companies in respect ofmilk received amounted to $134 and $109, respectively.

F-36

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**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**28.**   Related Parties (Continued)

*Auto-40*

During 2003, the Companysold vehicles to the transportation company Auto-40, which is controlledby members of the control group of shareholders. The sales amounted to $566.

*CurrentShareholders*

During 2004, WBD Foods acquired 6.2% interest in TsMKfrom current shareholders for $3,406 (see Note 4).

During 2004 and 2003 theCompany paid for legal services, in the amount of $507 and $2,086 respectively,on behalf of certain shareholders. As of December 31, 2004 all theseamounts were fully repaid by the shareholders.

**29.   Commitments and Contingencies**

*Property, Plant andEquipment Purchase Commitments*

As of December 31,2005, contracted expenditures for the purchase of property, plant and equipmentin the period subsequent to December 31, 2005 were $12,011, payable in2006.

*Insurance*

As of December 31,2005, the Company had insurance coverage of $364 million in respect ofproperty, plant and equipment at 18 major factories. The Company had insurancefor business interruption at 5 major facilities with total coverage of $55 million.At 17 facilities the Company had product liability insurance with $1 millionliability coverage per facility. In January 2006 product liabilityinsurance was increased to 23 facilities with the cumulative coverage of $5million. Until the Company obtains insurance coverage for an amount exceedingthe carrying value of property, plant and equipment, there is a risk that theloss or destruction of certain assets could have a material adverse effect onthe Company’s operations and financial position.

*Taxation*

In the periods prior to January 1, 2003, WBDFoods used certain tax optimization initiatives. The Russian tax authoritiesmay challenge these initiatives. The Company believes that the tax savings tothe Company in respect of these initiatives amounted to approximately $3.8million. Should the Russian tax authoritiesquestion these initiatives and prove successful in their claim, they would beentitled to recover these amounts, together with penalties amounting to 20% ofsuch amounts and interest at the rate of 1/300th of the Central Bank of Russia rate, equating to0.04% as of  December 31, 2005, foreach day of delay for late payment of such amounts. Management will vigorouslydefend any claims that these initiatives are contrary to Russian tax law.Starting from January 2003, WBD Foods discontinued using these taxoptimization initiatives.

During the period 2002 to March 31,2005 certain subsidiaries of WBD Foods utilized small business enterprisesincome tax benefits which were available under Russian income tax legislationbeing in force before January 1, 2002. The Company believes that the taxsavings to the Company for the period 2002 to 

F-37

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**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (Continued) Years ended December 31, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**29.**   Commitments and Contingencies (Continued)

March 31,2005 in respect of these income tax benefits amounted to approximately $9.4million. Should the Russian tax authorities question the appropriate use ofthese benefits by WBD Foods’ subsidiaries for the years 2002, 2003, 2004, and January—March 2005,issue a claim and prove successful in the court, they would be entitled torecover the amount claimed, together with penalties amounting to 20% of suchamount and interest at the rate of 1/300th ofthe Central Bank of Russia rate, equating to 0.04% as of December 31,2005, for each day of delay for late payment of such amounts. In any case,WBD Foods’ management believes that is has strong grounds on which tooppose any such claim and will vigorously defend its position.

**30.   SubsequentEvents**

In January 2006, WBD Foods acquired an additional20% of Moscow Baby Food Plant (“ZDMP”), a subsidiary, from minorityshareholders for cash consideration of $6,956. The fair value of net assetsacquired in excess of purchase price of $3,568 will be recorded as a reductionof the value of intangible assets and property, plant and equipment.

F-38

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