**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 20-F**

 

**(MarkOne)**

 

| **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, 2007** |
| ** ** | ** **                                                                                                                                               |
| **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-DANN FOODS OJSC**                                                                                                                 |
|-----------------------------------------------------------------------------------------------------------------------------------------------|
| (Exact name of Registrant as specified in its  charter)                                                                                       |
|                                                                                                                                          |
| ** **                                                                                                                                    |
| (Translation of Registrant’s name into English)                                                                                          |
|                                                                                                                                          |
| **RUSSIAN FEDERATION**                                                                                                                        |
| (Jurisdiction of incorporation or organization)                                                                                               |
|                                                                                                                                          |
| **16 Yauzsky Boulevard, Moscow 109028, Russian  Federation**                                                                                  |
| (Address of principal executive offices)                                                                                                      |
|                                                                                                                                          |
| **Natalya Belyavskaya, tel. +7 (495) 925-58-05,  e-mail: ir@wbd.ru, address: 16 Yauzsky********Boulevard, Moscow 109028, Russian Federation** |
| (Company Contact Person)                                                                                                                      |

 

Securities registered or to be registered pursuant to Section 12(b) ofthe Act.

 

| Title of  each class                                                                                                           |   | Name of  each exchange on which registered          |
|--------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|
| AMERICAN DEPOSITARY SHARES, EACH

REPRESENTING ONE SHARE OF COMMON STOCK

COMMON STOCK, PAR VALUE

20 RUSSIAN RUBLES PER SHARE |   | NEW YORK STOCK EXCHANGE  NEW YORK STOCK EXCHANGE(1) |

 

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

 
| **NONE**         |
|------------------|
| (Title of Class) |
|             |
| **NONE**         |
| (Title of Class) |

 

Indicatethe number of outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report.

 

44,000,000shares of common stock, par value 20 Russian rubles each, as ofDecember 31, 2007.

 
| SEC 1852 (02-08) | **Persons  who respond to the collection of information contained in this form are not  required to respond unless the form displays a currently valid OMB control  number.** |
|------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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Securities for which there is a reporting obligation pursuant to Section 15(d) ofthe Act.

 
| **NONE**         |
|------------------|
| (Title of Class) |

 

Indicate the number of outstanding shares of each of the issuer’sclasses of capital or common stock as of the close of the period covered by theannual report.

 

44,000,000 shares of common stock, par value20 Russian rubles each, as of December 31, 2007

 

14,405,337American Depositary Shares, each representing one share of common stock, as ofDecember 31, 2007

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act.

x Yes   o No

 

If this report is an annual or transition report, indicate by checkmark if the registrant is not required to file reports pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934.

o Yes   x No

 

Note — Checking the box above will not relieve any registrant requiredto file reports pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

o Yes   x No

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act. (Check one):

 

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

 

Indicateby check mark which basis of accounting the registrant has used to prepare thefinancial statements included in this filing:

 
| U.S. GAAP     x |   | International Financial Reporting  Standards as issued by the International Accounting Standards Board   o |   | Other  o |
|-------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------|--------|----------|

 

Indicate by check mark which financial statement item the registranthas elected to follow.

o Item17   o Item 18

 

If this is an annual report, indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).

o Yes   x No

 

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| **CAUTIONARY  STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**                                                 | 4      |
|----------------------------------------------------------------------------------------------------------------|--------|
| ** **                                                                                                     |   |
| **PART I**                                                                                                | 5      |
| Item  1.    Identity of Directors, Senior Management and Advisors                          | 5      |
| Item  2.     Offer Statistics and Expected Timetable                                  | 5      |
| Item  3.     Key Information                                                               | 5      |
| Item 4.     Information on Our Company                                                          | 41     |
| Item 4A.   Unresolved Staff Comments                                                            | 73     |
| Item 5.     Operating and  Financial Review and Prospects                             | 73     |
| Item 6.     Directors, Senior  Management and Employees                               | 100    |
| Item 7.    Major Shareholders and  Related Party Transactions                              | 109    |
| Item 8.    Financial Information                                                           | 110    |
| Item 9.    Offer and Listing  Details                                                      | 111    |
| Item 10.   Additional Information                                                               | 112    |
| Item 11.   Quantitative and Qualitative  Disclosures about Market Risk                          | 133    |
| Item 12.   Description of Securities  Other than Equity Securities                              | 136    |
| **PART II**                                                                                               | 137    |
| Item 13.     Defaults,  Dividend Arrearages and Delinquencies                         | 137    |
| Item 14.     Material  Modifications to the Rights of Security Holders and Use of Proceeds | 137    |
| Item 15.   Controls and Procedures                                                                   | 137    |
| Item 16A.    Audit Committee  Financial Expert                                             | 141    |
| Item  16B.    Code of Ethics                                                                    | 141    |
| Item 16C.  Principal Accountant Fees and Services                                                         | 141    |
| Item 16D.   Exemption from the Listing  Standards for Audit Committees                               | 142    |
| Item 16E.    Purchases of Equity  Securities by the Issuer and Affiliated Purchasers            | 142    |
| **PART III**                                                                                              | 143    |
| Item 17.     Financial Statements                                                          | 143    |
| Item 18.     Financial Statements                                                          | 143    |
| Item 19.     Exhibits                                                                 | 144    |

 

Unless the contextotherwise requires, references to “WBD,” “Company,” “we,” “us,” or “our” referto Wimm-Bill-Dann Foods OJSC and its subsidiaries. “Lianozovsky Dairy Plant”was renamed “Wimm-Bill-Dann” in 2006. References to “Lianozovsky” and “LianozovskyDairy Plant” are to “Wimm-Bill-Dann”.

 

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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 statesof the European Union that adopted a single currency in accordance with theTreaty of Rome establishing the European Economic Community, as amended by thetreaty on the European Union, signed at Maastricht on February 7, 1992.

 

3

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**CAUTIONARY STATEMENT REGARDINGFORWARD-LOOKING STATEMENTS**

** **

Mattersdiscussed in this document may constitute forward-looking statements. ThePrivate Securities Litigation Reform Act of 1995 provides safe harborprotections for forward-looking statements in order to encourage companies toprovide prospective information about their businesses. Forward-lookingstatements include statements concerning plans, objectives, goals, strategies,future events or performance, and underlying assumptions and other statements,which are other than statements of historical facts.

 

Wedesire to take advantage of the safe harbor provisions of the PrivateSecurities Litigation Reform Act of 1995 and are including this cautionarystatement in connection with this safe harbor legislation and other relevantlaws. This document and any other written or oral statements made by us or onour behalf may include forward-looking statements, which reflect our currentviews with respect to future events and financial performance. The words “believe,”“expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project” and similarexpressions identify forward-looking statements. Forward-looking statements appearin a number of places including, without limitation,

 

“Item3. Key Information—D. Risk Factors,” “Item 4. Information on Our Company” and “Item5. Operating and Financial Review and Prospects,” and include statementsregarding: strategies, outlook and growth prospects; future plans and potentialfor future growth; liquidity, capital resources and capital expenditures;growth in demand for our services; economic outlook and industry trends;developments of our markets; the impact of regulatory initiatives; and thestrength of our competitors.

 

Theforward-looking statements in this document are based upon various assumptions,many of which are based, in turn, upon further assumptions, including withoutlimitation, management’s examination of historical operating trends, datacontained in our records and other data available from third parties. Althoughwe believe that these assumptions were reasonable when made, because theseassumptions are inherently subject to significant uncertainties and contingencieswhich are difficult or impossible to predict and are beyond our control, we maynot achieve or accomplish these expectations, beliefs or projections. Inaddition to these important factors and matters discussed elsewhere herein andin the documents incorporated by reference herein, important factors that, inour view, could cause actual results to differ materially from those discussedin the forward-looking statements including the achievement of the anticipatedlevels of profitability, growth, cost and synergy of our recent acquisitions,the timely development and acceptance of new products, the impact ofcompetitive pricing, the ability to obtain necessary regulatory approvals, theimpact of general business and global economic conditions and other importantfactors described from time to time in the reports filed by us with theSecurities and Exchange Commission.

 

Exceptto the extent required by law, neither we, nor any of our respective agents,employees or advisors intend or have any duty or obligation to supplement,amend, update or revise any of the forward-looking statements contained orincorporated by reference in this document.

 

4

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**PART I**

** **

## ***Item1.    Identity of Directors, Senior Management and Advisors***

## *** ***

Notapplicable.

 

## ***Item2.    Offer Statistics and Expected Timetable***

## *** ***

Notapplicable.

 

## ***Item3.     Key Information***

## *** ***

**A.  Selected Financial Data**

** **

Theselected consolidated financial data set forth below at December 31, 2007,2006, 2005, 2004 and 2003 and for the years then ended have been derived fromour audited financial statements prepared in accordance with U.S. GAAP. Theselected consolidated financial data should be read in conjunction with ourConsolidated Financial Statements as of December 31, 2007 and 2006 and forthe years ended December 31, 2007, 2006, and 2005 included under “Item 18.Financial Statements” and “Item 5. Operating and Financial Review andProspects.”

 
| ** **                                                      | ** ** | **For the years ended December 31,**                                                       | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2007**                                                                                                            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                      | ** ** | **In thousands of U.S. Dollars, except share and per share data** | ** ** |
| **Statement of Income Data:**                                   |       |                                                                                                                |       |   |   |   |   |   |   |   |   |
| ** **                                                      |       |                                                                                                                |       |   |   |   |   |   |   |   |   |
| Sales                                                           |       | $                                                                                                                   | 2,438,328  |   | $ | 1,762,127 |   | $ | 1,394,590 |   | $ | 1,183,986 |   | $ | 938,459 |   |
| Cost of sales                                                   |       | (1,654,879                                                                                                          | )          | (1,194,159 | ) | (999,006 | ) | (858,767 | ) | (665,104 | ) |
| Gross profit                                                    |       | 783,449                                                                                                             |       | 567,968 |   | 395,584 |   | 325,219 |   | 273,355 |   |
| Selling and distribution expenses                               |       | (387,853                                                                                                            | )          | (246,054 | ) | (191,990 | ) | (173,433 | ) | (140,746 | ) |
| General and administrative expenses                             |       | (180,922                                                                                                            | )          | (134,481 |   | (109,642 | ) | (92,816 |   | (75,973 |   |
| Other operating expenses                                        |       | (704                                                                                                                | )          | (31,812 | ) | (6,457 | ) | (6,047 | ) | (7,481 | ) |
| Operating income                                                |       | 213,970                                                                                                             |       | 155,621 |   | 87,495 |   | 52,923 |   | 49,155 |   |
| Financial income and expenses, net                              |       | (16,851                                                                                                             | )          | (15,480 | ) | (22,868 | ) | (14,618 | ) | (15,273 | ) |
| Income before provision for income taxes and  minority interest |       | 197,119                                                                                                             |       | 140,141 |   | 64,627 |   | 38,305 |   | 33,882 |   |
| Provision for income taxes                                      |       | (54,302                                                                                                             | )          | (41,560 | ) | (30,712 | ) | (12,170 | ) | (10,717 | ) |
| Minority interest                                               |       | (2,769                                                                                                              | )          | (3,197 | ) | (3,649 | ) | (3,161 | ) | (2,012 | ) |
| Net income                                                      |       | $                                                                                                                   | 140,048    |   | $ | 95,384 |   | $ | 30,266 |   | $ | 22,974 |   | $ | 21,153 |   |
| Earnings per share—basic and diluted                       |       | $                                                                                                                   | 3.18       |   | $ | 2.17 |   | $ | 0.69 |   | $ | 0.52 |   | $ | 0.48 |   |
| Dividends per share (1)                                         |       | $                                                                                                                   | 0.12       |   | $ | 0.55 |   | $ | — |   | $ | — |   | $ | — |   |
| Weighted average number of shares outstanding                   |       | 44,000,000                                                                                                          |       | 44,000,000 |   | 44,000,000 |   | 44,000,000 |   | 44,000,000 |   |
| **Other Data:**                                                 |       |                                                                                                                |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                            |       | $                                                                                                                   | 192,662    |   | $ | 129,963 |   | $ | 75,110 |   | $ | 72,639 |   | $ | 107,186 |   |
| Cash provided by (used in) operating  activities                |       | $                                                                                                                   | 96,804     |   | $ | 169,954 |   | $ | 113,937 |   | $ | 71,720 |   | $ | 29,940 |   |
| Cash used in investing activities                               |       | $                                                                                                                   | (203,041   | ) | $ | (228,158 | ) | $ | (125,157 | ) | $ | (73,808 | ) | $ | (95,142 | ) |
| Cash (used in) provided by financing  activities                |       | $                                                                                                                   | 91,429     |   | $ | (1,911 | ) | $ | 82,619 |   | $ | (16,159 | ) | $ | 73,399 |   |

 

5

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(1)   Dividends paid in 2007 are attributable for 2006. Dividends paid in 2006are attributable as follows: $0.17 per share – for years 2002-2004, $0.08 pershare – for three months ended March 31, 2006, $0.30 per share - for ninemonths ended September 30, 2006.

 
| ** **                                      | ** ** | **At December 31****,**                    | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                      | ** ** | **In thousands of U.S. Dollars** | ** ** |
| **Balance Sheet Data:**                         |       |                                                 |       |   |   |   |   |   |   |   |   |
| Total assets                                    |       | 1,533,102                                            |       | 1,175,936 |   | 920,557 |   | 796,088 |   | 743,885 |   |
| Total net assets                                |       | 673,124                                              |       | 497,494 |   | 387,043 |   | 370,916 |   | 324,618 |   |
| Total debt(1)                                   |       | 578,930                                              |       | 442,999 |   | 371,646 |   | 283,168 |   | 283,442 |   |
| Total liabilities                               |       | 846,116                                              |       | 659,465 |   | 508,895 |   | 407,845 |   | 398,099 |   |
| Total liabilities and shareholders’ equity |       | $                                                    | 1,533,102  |   | $ | 1,175,936 |   | $ | 920,557 |   | $ | 796,088 |   | $ | 743,885 |   |
|                                                 |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Total debt represents long-term and short-term loans,including the current portion of long-term loans, notes payable and vendorfinancing obligations.

 

**ExchangeRates and Inflation**

** **

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,** |       |                                      |       |   |   |   |   |   |   |
| 2007                             |       | 26.58                                     |       | 24.26 |   | 25.49 |   | 24.55 |   |
| 2006                             |       | 28.48                                     |       | 26.18 |   | 27.09 |   | 26.33 |   |
| 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 |   |

 

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(1)             The average of the exchange rates on the last businessday of each full month during the relevant period.

 
| ** **         | ** ** | **Rubles per U.S. dollar** | ** ** |
|--------------------|------------|-------------------------------------------|------------|
| ** **         | ** ** | **High**                                  | ** ** | **Low** | ** ** |
| May 2008      |       | 23.88                                     |       | 23.55 |   |
| April 2008    |       | 23.67                                     |       | 23.34 |   |
| March 2008    |       | 24.00                                     |       | 23.51 |   |
| February 2008 |       | 24.78                                     |       | 24.12 |   |
| January 2008  |       | 24.89                                     |       | 24.29 |   |
| December 2007 |       | 24.75                                     |       | 24.42 |   |

 

OnJune 25, 2008, the exchange rate between the ruble and the U.S. dollar was23.62 rubles per $1.00.

 

Thefollowing table shows the rates of inflation in Russia for the years indicated:

 

6

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| ** **                       | ** ** | **Inflation rate** | ** ** |
|----------------------------------|------------|-------------------------|------------|
| **Year ended December 31,** |       |                    |       |
| 2007                             |       | 11.5                    | %          |
| 2006                             |       | 9.7                     | %          |
| 2005                             |       | 10.9                    | %          |
| 2004                             |       | 11.7                    | %          |
| 2003                             |       | 12.0                    | %          |

 

Source: Central Bank of Russia.

 

Effectivefrom January 1, 2003, Russia no longer met the criteria for a highlyinflationary economy. Inflation continued to decrease in Russia in 2004 through2006

 

Theinflation rate in 2007 was affected by several factors relating to increases ininternational energy and oil market prices, administrative decisions of theCentral Bank of Russia and the economic slowdown in the United States.

 

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). In2007, 2006 and 2005, the ruble appreciated in real terms against the U.S.dollar.

 
| ** **                                                                          | ** ** | **200****7** | ** ** | **200****6** | ** ** | **200****5** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
| Inflation(1)                                                                        |       | 11.5         | %          | 9.7          | %          | 10.9         | %          |
| Nominal appreciation/(depreciation) of the  ruble relative to the U.S. dollar(1)(2) |       | 6.3          | %          | 4.0          | %          | 1.9          | %          |
| Real appreciation of the ruble relative to  the U.S. dollar(2)                      |       | 12.8         | %          | 10.7         | %          | 10.8         | %          |

 

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(1)             Source: Central Bank of Russia.

 

(2)             For purposes of calculating the interest rate of ourU.S. dollar-denominated notes, we used the Russian ruble/U.S. dollar exchangerates at December 31, 2007, 2006 and 2005, which appreciated/(depreciated)at the rates of 6.7%, 8.5% and (3.7)%, respectively.

 

**B.  Capitalization and Indebtedness**

** **

Notapplicable.

 

**C.  Reasons for the Offer and Use of Proceeds**

** **

Notapplicable.

 

**D.  Risk Factors**

** **

*An investment in our sharesand ADSs involves a high degree of risk. You should carefully consider thefollowing information about these risks, together with the informationcontained in this document, before you decide to buy our shares or ADSs. If anyof the following risks actually occurs, our business, financial condition,results of operations or prospects could be materially adversely affected. Inthat case, the value of our shares and ADSs could also decline and you couldlose all or part of your investment.*

* *

*We have described the risksand uncertainties that our management believes are material, but these risksand uncertainties may not be the only ones we face. Additional risks anduncertainties, including those we currently are not aware of or deemimmaterial, may also result in decreased operating revenues, increasedoperating expenses or other events that could result in a decline in the valueof our ADSs.*

* *

**RisksRelating to Business Operations in Emerging Markets**

** **

***Emerging marketssuch as the Russian Federation are subject to greater risks than more developedmarkets, including significant legal, 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

 

7

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economies, such as the economy of the RussianFederation, are subject to rapid change and that the information set out hereinmay become outdated relatively quickly. Accordingly, investors should exerciseparticular care in evaluating the risks involved and must decide for themselveswhether, in light of those risks, their investment is appropriate. Generally,investment in emerging markets is only suitable for sophisticated investors whofully appreciate the significance of the risks involved and investors are urgedto consult their own legal and financial advisors before making an investmentin our securities.

 

**RisksRelating to Our Business and Industry**

** **

***Economic downturnscould hurt our turnover and materially adversely affect our strategy toincrease our sales of premium brands.***

*** ***

Demand for dairy and certain beverage products dependsprimarily on demographic factors and consumer preferences, as well as factorsrelating to discretionary consumer spending, including the general condition ofthe economy and general levels of consumer confidence. The willingness ofconsumers to purchase branded food and beverage products depends, in part, onlocal economic conditions. In periods of economic uncertainty, consumers tendto purchase more economy brands and, to the extent that our business strategydepends on the expansion of the sales of premium brands and value-addedproducts, our results of operations could suffer. Reduced consumption of ourproducts in any of our key markets could reduce our turnover and profitability.

 

***The failure of our geographic expansion strategy could hamper ourcontinued 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.

 

In addition, we currently have production facilitiesin Ukraine, Georgia, Kyrgyzstan and Uzbekistan and trade operations inKazakhstan, and our strategy contemplates the acquisition of additionaloperations in the countries of the Commonwealth of Independent States, or theCIS. As with Russia, these countries are emerging markets subject to greaterpolitical, economic, social and legal risks than more developed markets. Inmany respects, the risks inherent in transacting business in these countriesare similar to those in Russia, especially those risks set out below in “—RisksRelating to the Russian Federation.”

 

***Our growth strategyrelies on acquisitions and establishing new businesses, and our future growth,results of operations and market share would be adversely affected if we failto identify suitable targets, outbid competing bidders or finance acquisitionson acceptable terms.***

*** ***

Our strategy depends on us being a large manufacturerin the dairy, baby food and juice sectors so that we can benefit from economiesof scale, better satisfy customer needs and compete effectively against otherproducers. Our growth will suffer if we are unable to implement our acquisitionstrategy, whether because we fail to identify suitable targets, outbidcompeting bidders or finance acquisitions on acceptable terms or for any otherreason. Furthermore, any acquisitions or similar arrangements may harm ourbusiness if we are unsuccessful in our integration process or fail to achieve thesynergies and savings we expect.

 

8

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***We cannot assureyou of the successful integration of existing or newly acquired businesses. Ifwe fail to integrate our businesses successfully, our rate of expansion could slowand our results of operations and financial condition could be materiallyadversely 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 our businesses, as well as of anybusinesses we may acquire in the future, requires significant time and effortfrom our senior management, who are also responsible for managing our existingoperations. The integration of new businesses may be difficult for a variety ofreasons, including differing culture, management styles and systems andinfrastructure and poor records or internal controls. In addition, integratingnew acquisitions may require significant initial cash investments. Furthermore,even if we are successful in integrating our existing and new businesses,expected synergies and cost savings may not materialize, resulting in lowerthan expected profit margins. We cannot assure you that we will be successful inrealizing any of the anticipated benefits of the companies that we are now inthe process of integrating or that we may acquire in the future. If we do notrealize these benefits, our financial condition, results of operations andprospects could be materially adversely affected.

 

We also may acquire or establish businesses incountries that may represent new operating environments for us and which may belocated a great distance from our headquarters in Moscow. We may thus have lesscontrol over the activities of these companies and may face more uncertaintieswith respect to the operational and financial needs of these businesses, whichmay hinder our integration efforts.

 

***Rapid growth andexpansion may cause us difficulty in obtaining adequate managerial andoperational resources, restricting our ability to successfully expand ouroperations.***

*** ***

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 and the responsibilities of management have increased as a result ofthis growth, placing significant strain on our managerial and operationalresources. Our future operating results depend, in significant part, upon thecontinued contributions of our management and technical personnel.

 

We will need to continue to improve our operationaland financial systems and managerial controls and procedures to keep pace withour growth. We will also have to maintain close coordination among ourlogistical, 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 to manage our growth successfully couldhave a material adverse effect on our business, financial condition and resultsof operations.

 

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***There is a materialweakness in our internal control over financial reporting and we may not beable to remedy this material weakness or prevent future material weaknesses. Ifwe fail to do so there is a reasonable possibility that a material misstatementof the annual or interim statements will not be prevented or detected on atimely basis.***

*** ***

The material weakness in our internal control overfinancial reporting as identified by our management for the year ended December 31,2007 is summarized below:

 

·                  Ourfinancial statement closing process, including the transformation of ourstatutory financial statements into U.S. GAAP consolidated financial statementshas not reduced to an acceptably low level the risk that material errors mayoccur and may not be detected on a timely basis by management in the normalcourse of business.

 

Notwithstanding the steps we have taken and continueto take that are designed to remediate the material weakness identified above,we may not be successful in remediating this material weakness in the near orlong term and we may not be able to prevent other material weaknesses in thefuture. Any failure to maintain or implement required new or improved internalcontrol over financial reporting, or any difficulties we encounter in theirimplementation, could result in additional significant deficiencies oradditional material weaknesses, failure to meet our periodic reportingobligations or result in material misstatements in our financial statements.Any such failure could also adversely affect the results of periodic managementevaluations and annual auditor attestations regarding the effectiveness of ourinternal control over financial reporting required under Section 404 ofthe Sarbanes-Oxley Act of 2002. The existence of a material weakness couldresult in errors in our financial statements that could result in a restatementof financial statements, cause us to miss our reporting deadlines and causeinvestors to lose confidence in our reported financial information, leading toa decline in the price of our ordinary Shares and ADSs. See “Item 15. Controlsand procedures” for additional information.

 

***Increased competition among juice producers in Russia may adverselyaffect our results of operations.***

*** ***

Although juice consumption in Russia continues toincrease, our juice product sales volume decreased in 2005 and stayed almostflat in 2006 due to vigorous market competition from other domestic producersand increased activity by foreign producers. Although our juice sales increasedin 2007 by 27.8%****compared to 2006, continuedand/or increased competition among juice producers in Russia may cause futuredecline in the sales volumes of our juice products, as well as affect our juiceprices and profit margins and, consequently, may materially adversely affectour results of operations. “See Item 4. Information on OurCompany—B. Business—Business Overview—Beverage products and brands—Markettrends and competition” for additional information regarding our competitors.

 

***Consumer preferencefor low-price juice products and the volatility of certain raw materialsrequired for juice production may cause our profit margins to decline and havea material adverse affect on our results of operations.***

*** ***

Consumer preference for low-price juice products,primarily in the regions outside of Moscow and St. Petersburg where percapita household incomes are generally lower, put pressure on juice prices in2005, 2006 and 2007. In addition, raw materials required for juice production,such as juice concentrate and sugar, are international commodities and aresubject to international price fluctuations, and we have experiencedsignificant increases in the cost of these commodities in 2006 and 2007. Theprices for sugar and juice concentrate, particulary apple juice concentrate,have increased significantly and we expect them to continue to increase for theforeseeable future. A continuation of these trends may cause a decline in ourjuice product profit margins and, consequently, materially adversely affect ourresults of operations.

 

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***Increasing tariffs and restructuring in thetransport sector could have a material adverse effect on our business.***

*** ***

Railway and ground transportation are ourprincipal means of transporting supplies and juice and water products to ourfacilities and customers. Currently, the Russian government sets rail tariffsand may further increase these tariffs as it did in 2005, 2006 and 2007. Inaddition, the increase in oil prices has lead to increased fuel costs and,consequently, higher transportation costs.

 

In 2003, legislation was enacted which setsout the framework for the reorganization of the Russian Railways Ministry intoOAO Russian Railroads, a joint-stock company, to be followed by the eventualprivatization of certain of its functions. This reorganization andprivatization have not been completed in accordance with the timetablecontemplated in the legislation and it is not clear whether it will becompleted at all. However, if the privatization of Russian Railroads or otherfactors result in increased railway transport costs, thereby decreasing ourprofit margins, our results of operations could be materially adverselyaffected.

 

***Ourinability to develop and maintain awareness of new brands, products and productcategories could significantly inhibit our future growth and profitability.***

*** ***

Our business strategy contemplates our entryinto new product categories, the development of new products and marketing newbrands in existing product lines. This strategy is designed to increase ourmarket share and revenues by increasing consumer demand in our existing marketsand entering into new market segments. The success of this strategy depends, inpart, on our ability to anticipate the tastes and dietary habits of consumersand to introduce and offer products that appeal to their preferences. Ourfailure to anticipate, identify or react to changes in consumer preferences andconsequent failure to successfully develop new brands, products and productcategories could negatively affect our expansion strategy and couldsignificantly inhibit our future growth and profitability.

 

In addition, developing and maintainingawareness of our brands in a cost effective manner is critical to informing andeducating the public about our current and future product offerings and is animportant element in attracting new consumers. The successful promotion of ourbrands will depend largely on the effectiveness of our marketing efforts and onour ability to provide reliable and useful products and services at competitiveprices. Brand promotion activities may not yield increased operating revenues,and even if they do, such operating revenues may not offset the operatingexpenses we incur in building our brands. Furthermore, our ability to attractnew consumers and retain existing consumers depends, in part, on our ability tomaintain what we believe to be our favorable brand image. Our failure tosuccessfully and efficiently promote and maintain our brands may limit ourability to attract new consumers and retain our existing consumers andmaterially adversely affect our business, financial condition, results ofoperations and prospects.

 

***Ifwe do not continue to be an efficient producer in a highly competitiveenvironment, particularly in relation to purchases of our packaging and rawmaterials, or an effective advertiser in a highly inflationary mediaenvironment, our operational results will suffer.***

*** ***

Our success depends, in part, on ourcontinued ability to be an efficient producer in a highly competitive industry.If we cannot continue to control costs through productivity gains or byeliminating redundant costs resulting from acquisitions, our results ofoperations will suffer. In particular, price increases and shortages ofpackaging and raw materials could have a material adverse effect on our resultsof operations. For example, our results of operations may be affected by theavailability and pricing of packaging materials, principally cardboard andplastic containers, and raw materials, principally raw milk and juice concentrate.We are substantially dependent upon one supplier of packaging materials, TetraPak, which may make us more vulnerable to changes in global supply and demandand their 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 are 

 

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subject to international price fluctuations,and we experienced significant increases in raw milk, sugar and concentrateprices during 2005, 2006 and 2007.

 

Our success also depends on our continuedability to be an effective advertiser in a market where media inflation onleading national television channels exceeded 50% in 2007. A substantialincrease in the prices of any of the foregoing, which we may not be able topass on to customers through price increases, or a protracted interruption insupply with respect to packaging or raw materials, could have a materialadverse effect on our financial condition and results of operations. See “Item4. Information on Our Company—B. Business—Business Overview.”

 

***Wemay be unable to continue to add products and greater production capacity infaster growing and more profitable categories.***

*** ***

The food industry’s growth potential isconstrained by population growth and growth in personal income levels. Oursuccess depends, in part, on our ability to expand our business faster thanpopulations are growing in the markets that we serve, or notwithstandingdeclines in the populations in those markets. One way to achieve that growth isto enhance our portfolio by adding products and greater production capacity infaster growing and more profitable categories. In the past, we have experienceddelays in the installation of new production equipment due to internaltechnical integration issues as well as delays by vendors and other third-partysuppliers in installing and testing new production lines. Future delays in newequipment installation could inhibit our ability to add products and expand ourproduction capacity, cause our output volume to suffer and, consequently, havea material adverse effect on our results of operations.

 

***Ourinability to address the seasonal difference between the demand for dairyproducts and the supply of raw milk and the increasing prices of raw milk couldresult in a significant increase in our production costs, reducing ourprofitability.***

*** ***

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 in many markets, while raw milk productionis at its peak. If we are unable to mitigate this inverse relationshipsuccessfully, either through the purchase of raw milk during the winter atcommercially competitive prices or through the use of powder milk, ourproduction costs will increase significantly in the winter, reducing ourprofitability.

 

In 2007 we have experienced significantincreases in the raw-milk purchase price. The average weighted raw-milkpurchase price paid by us increased in ruble terms by approximately 14% in2005, 7% in 2006 and 64.8% in 2007. The price increases are due, in part, todroughts in Australia and New Zealand, the world’s largest suppliers of drypowder milk, and due to an increase in demand for milk products in such denselypopulated countries as China, Indonesia, Algeria and a number of othercountries in Asia and Africa. In order to restrain the growth of prices formilk products, we and other major Russian food producers, as well as retailchains and the Russian government entered into a voluntary agreement in October2007, according to which the prices for products of social significance (suchas some milk, kefir and sour cream) were frozen at the level as of October 15,2007. In January 2008, this agreement was extended to May 1, 2008, the priceswere fixed at the January 2008 level.

 

This unprecedented increase in the price ofraw and dry milk adversely affected our dairy profit margin in 2007, andcontinued increases in raw milk prices could further reduce our profitability.The shortage of high quality raw milk, coupled with raw milk price increases,may also limit our ability to expand our production of high margin value-addeddairy products. See “Item 5. Operating and Financial Review and Prospects—D.Trend Information” for additional information.

 

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***Inthe event that the Moscow City Government were to reduce significantly theprices or the amount of products it purchases from our baby food business, thenour revenues and profits from this business could be reduced.***

*** ***

In 2006 and 2007, baby food purchased from usby the Moscow City Government comprised approximately 33% and 26% respectivelyof the total sales revenue of our baby food segment. We supply these productsto the Moscow City Government pursuant to a tender held on a yearly basis. Inthe event that we were to lose a tender, or the Moscow City Government was toreduce significantly the prices or the amount of products it purchases from ourbaby food business, and we were unable to find alternative purchasers, then ourrevenues and profits from this business could be reduced, which could have amaterial adverse effect on our financial condition and results of operations.We discuss the sale and distribution of products produced at Wimm-Bill-Dann “B.Business—Business Overview.”

 

***Oursubstantial reliance on independent retailers and independent distributors forthe distribution of our products could lower our turnover and reduce ourcompetitiveness.***

*** ***

We sell our products either directly toretailers, including supermarkets, grocery shops and restaurants, or toindependent distributors for resale to retail outlets. We expect sales toretailers and independent distributors to continue to represent a significantportion of our revenues. Our operations and distribution costs could beaffected by the increasing consolidation of these entities, particularly asthese customers become more sophisticated and attempt to force lower pricingand increased promotional programs. For example, in the spring of 2001, severalRussian supermarket 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 other supermarketchains may attempt a similar consolidation of market power in the future. Inaddition, two of Russia’s largest supermarket chains, Perekryostok andPyatyorochka, merged in April 2006, which further strengthens thenegotiating leverage in their dealings with us. Although we have not yetexperienced any material adverse effect as a result of this merger, we cannotguarantee that we will not experience adverse consequences in the future. Anumber of large Western retailers, such as German retailer Metro andFrench retailer Auchan, have also opened stores in our markets, which will putfurther pressure on prices.

 

We also compete with other brands for shelfspace in retail stores. Retailers also offer other products, including theirown brands that compete directly with our products. In addition, retailers inRussia typically charge food and beverage producers, including us and ourcompetitors, for shelf space. If retailers give higher priority to otherbrands, 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.

 

***Independentdistributors may export our products to countries where such products do notmeet the requirements of applicable legislation.***

*** ***

In exporting our products, we attempt to meetthe standards and requirements of applicable legislation governing the importof food products into the importing country. However, we do not have controlover independent distributors, who have, in some cases, attempted to export ourproducts to countries where such products did not meet the requirements ofapplicable legislation. Any consequent recalls of our products and theassociated negative publicity may adversely affect our reputation andmaterially adversely affect our results of operations.

 

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***Wedo not carry the types of insurance coverage customary in 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.***

*** ***

We maintain insurance against some, but notall, potential risks and losses affecting our operations. We cannot provideassurance that our insurance will be adequate to cover all of our losses orliabilities. We also can provide no assurance that insurance will continue to beavailable to us on commercially reasonable terms. Should a significant eventaffect one of our facilities, we could experience substantial property loss andsignificant disruptions in production, for which we would not be compensated.Additionally, depending on the severity of the property damage, we may not beable to rebuild damaged property in a timely manner or at all. We do notmaintain separate funds or otherwise set aside reserves for these types ofevents. Any such loss or third-party claim for damages may have a materialadverse effect on our business, results of operations and financial condition.

 

We are also exposed to product liabilityclaims in the event that consumption of our products results in illness, injuryor death, and we cannot assure you that we will not experience any materialproduct liability losses in the future. Although we maintain insurance coveragefor product liability, such coverage may be insufficient in the event of aclaim. Moreover, certain of our smaller production facilities are currently notcovered by product liability insurance. In addition, if any of the products wehave produced are determined to be unsuitable for consumption, we may berequired to participate in a recall involving such products.

 

Additionally, although we have made and willcontinue to make capital and other expenditures to comply with environmentalrequirements, in 2006 and 2007 we did not incur material capital expendituresfor environmental controls. For a more detailed discussion of our insurancecoverage see “Item 4. Information on Our Company—B. BusinessOverview—Insurance.”

 

***Iftransactions of members of our group of companies and theirpredecessors-in-interest were to be challenged on the basis of non-compliancewith applicable legal requirements, the remedies in the event of any successfulchallenge could include the invalidation of such transactions or the impositionof other liabilities on such group members.***

*** ***

Members of our group, or theirpredecessors-in-interest at different times, took a variety of actions relatingto share issuances, share disposals and acquisitions, mandatory buy-out offers,valuation of property, interested party transactions, major transactions,meetings of the group members’ governing bodies, other corporate matters andanti-monopoly issues that, if successfully challenged on the basis ofnon-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 beinadequate to support our future growth.***

*** ***

Our management information system is lessdeveloped in certain respects than those of food producers in more developedmarkets and may not provide our management with as much or as accurateinformation as those in more developed markets. In addition, we may encounterdifficulties in the ongoing process of implementing and enhancing ourmanagement information system.

 

Our inability to maintain an adequatemanagement information system may have a material adverse effect on ourbusiness. See “Item 5. Operating and Financial Review and Prospects —A.Operating Results— Corporate and Operational Highlights for 2008” for adescription of the new ERP system we are currently implementing.

 

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***Our competitive position and future prospectsdepend on our senior managers and other key personnel.***

*** ***

Our ability to maintain our competitiveposition and to implement our business strategy is dependent to a large degreeon the services of our senior management team and other key personnel.Moreover, competition in Russia for personnel with relevant expertise isintense due to the small number of qualified individuals and, as a result, weattempt to structure our compensation packages in a manner consistent with theevolving standards of the Russian labor market. We are not insured against thedetrimental effects to our business resulting from the loss or dismissal of ourkey personnel. The loss or decline in the services of members of our seniormanagement team or an inability to attract, retain and motivate qualified keypersonnel could have a material adverse effect on our business, financialcondition and results of operations.

 

***Wemay not be able to adequately protect our intellectual property rights.***

*** ***

Given the importance of brand recognition toour business, we have invested considerable effort in protecting our portfolioof intellectual property rights, including trademark registration. However, thesteps we have taken may not be sufficient and third parties may infringe ormisappropriate our proprietary rights. Moreover, Russia and the other countriesof the CIS in which we operate generally offer less intellectual propertyprotection than in Western Europe or North America. If we are unable to protectour proprietary rights against infringement or misappropriation, it couldmaterially harm our future financial results and our ability to develop ourbusiness. See “Item 4. Information on OurCompany—B. Business Overview—Current Operations—Trademarks and Patents.”

 

***Failureof several of our brand names and images, for which trademarks are currentlybeing sought, to be awarded trademark protection could negatively affect ourmarketing plans, resulting in increased advertising expenses and a materialadverse effect on our financial results.***

*** ***

As of May 15, 2008, we had 83 pendingtrademark applications in Russia and 15 pending trademark applications abroad.We are also in the process of contesting the rejection for registration of anumber 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. See “Item 4. Information on Our Company—B.Business Overview—Current Operations—Trademarks and Patents.”

 

***Ifwe are unable to obtain adequate funding, we may have to limit our operationssubstantially, which could have a material adverse effect on our business,prospects and results of operations.***

*** ***

We continue to make significant capitalexpenditures, particularly in connection with the expansion of our existingoperations, upgrades of existing facilities, enhancing our infrastructure,including building new warehouses and acquisitions of new companies. For thefulfillment of our capital spending plans, excluding expenditures foracquisitions, we spent approximately $75.1 million in 2005, $130.0 million in2006 and $192.7 million in 2007. We spent approximately $24.3 million in 2005,$137.3 million in 2006 and $21.8 million in 2007 for acquisitions.However, we may not be able to meet our planned capital spending needs in thefuture in the event of the following potential developments:

 

·       a lack of external financing sources;

 

·       changes in the terms of existing financingarrangements;

 

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·       slower than anticipated growth in demand forour products;

 

·       slower than anticipated revenue growth;

 

·       regulatory developments; or

 

·       a deterioration in the Russian economy.

 

To meet our financing requirements, we mayneed to attract additional equity or debt financing. Russian companies arelimited in their ability to issue shares in the form of ADSs or otherdepositary receipts due to Russian securities regulations, which, until 2005,generally provided that no more than 40% of a Russian company’s shares may becirculated abroad through depositary receipt programs. This limitation wassubsequently decreased to 35%. Our ADS and GDS programs together account for40% of our outstanding shares (this amount was approved by the Russiansecurities regulator based on the prior limit and is not required to be reducedto 35%). As a result, we are currently unable to raise additional equityfinancing through the issuance of depositary receipts. The Russian governmentor its agencies may also impose other restrictions on international securitiesofferings by Russian issuers. Any of the foregoing factors may limit the amountof capital available to meet our operating requirements. If we cannot obtainadequate funds to satisfy our capital requirements, we may need to limit ouroperations significantly, which could have a material adverse effect on ourbusiness, results of operations and prospects.

 

***Weare controlled by a group of shareholders whose interests could conflict withthose of the holders of our securities.***

*** ***

As of June 24, 2008, to our knowledge,approximately 44.91% of our outstanding common stock was owned by our foundingshareholders**.**This group has acted in concertsince our establishment and, since 1997, pursuant to a Partnership andCooperation Agreement, amended and restated on 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, resolutionsat a shareholders’ 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, a controlling stake in our shares and act in concertpursuant to the Partnership and Cooperation Agreement, they will have the powerto control the outcome of most matters to be decided by vote at a shareholders’meeting and the appointment of the majority of directors and removal ofdirectors. The group will also be able to control or significantly influencethe outcome of any vote on, among other things, any proposed amendment to ourcharter, reorganization proposal, proposed substantial sale of assets or othermajor corporate transactions. Thus, the group can take actions that mayconflict with the interest of holders of our ADSs.

 

Members of our controlling group ofshareholders also have interests in other companies, some of which conduct businesswith us. We are not aware of any related-party transactions that are beingcarried out on preferential terms, but cannot exclude the possibility ofrelated-party transactions that may potentially result in the conclusion oftransactions on terms less favorable than could be obtained in arm’s lengthtransactions.

 

To the best of our knowledge, Groupe Danone,together with its subsidiaries, holds an 18.4% stake in Wimm-Bill-Dann FoodsOJSC, which allows Groupe Danone to nominate its candidates to our board ofdirectors. The election of a director nominated by Groupe Danone may present aconflict of interest between Wimm-Bill-Dann Foods OJSC and Groupe Danone, whichis one of our main competitors.

 

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***Recentlyadopted changes in Russian law will limit the amount of advertising timepermitted on television, which could increase our advertising expenses and havea material adverse effect on our sales and results of operations.***

*** ***

The new Federal Law on Advertising which cameinto force on July 1, 2006, limits the amount of time that a broadcastermay devote to advertising to 15% of total broadcasting time per day and 20% inany given hour. From January 1, 2008, advertising was further limited tono more than 15% in any given hour of broadcasting time.

 

As a result of this new law, the amount ofavailable advertising time decreased. In turn, the reduction in availableadvertising time is likely to lead to increased costs to advertisers forpurchasing advertising time due to an increased demand for available time slotsand a drive by media outlets to recover their losses from the decreased volumeof advertising time they are permitted to sell. We expect the greatest priceincreases to affect television advertising, particularly during primetime.

 

The new law also imposes certain restrictionson advertising that may require us to adjust some of our advertising campaigns.We are among Russia’s top advertisers. According to Gallup, we were the thirdlargest advertiser in 2004, the ninth largest advertiser in 2005, the twelfthlargest advertiser in 2006 and the tenth largest advertiser in 2007. In 2005,2006 and 2007 over 50% of our advertising expenditures related to televisionadvertisements. At the same time, media inflation in Russia has beensignificant in recent years, exceeding 34% in 2004, 28% in 2005 and 35% in 2006and 50% in 2007. Our advertising and marketing expenses increased in 2007 by81.1% or $61.8 million in absolute terms, and increased by 1.4% as a percentageof sales to 5.7% in 2007 from 4.3% in 2006. The increase in expenses was due toour continued investments into major brand promotions, media inflation onRussia’s leading national television channels and general increases inmarketing costs. Despite this media inflation, we were able to obtain volumediscounts and endeavored to manage the cost increases more effectively.Imposition of the new law, coupled with overall media inflation in Russia, islikely to continue to 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.

 

***Inthe event that deficiencies or ambiguities in privatization legislation aresuccessfully exploited to challenge our ownership in our privatizedsubsidiaries and we are unable to defeat these challenges, we risk losing ourownership interest in the subsidiaries or their assets, which could materiallyadversely affect our business, financial condition, results of operations andprospects.***

*** ***

Our business includes a number of privatizedcompanies in Russia and other countries of the former Soviet Union, and ouracquisition strategy will likely involve the acquisition of additionalprivatized companies. To the extent that privatization legislation is vague,inconsistent or in conflict with other legislation, including conflicts betweenfederal and local privatization legislation, many privatizations are vulnerableto challenge, 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 RussianFederation, which ruled, in part, that the presidential decrees addressedissues that were the subject of federal law. While this court ruling, intheory, did not require any implementing actions, the presidential decrees werenot officially annulled by another presidential decree until 2000. In the eventthat any title to, or our ownership stakes in, the privatized companiesacquired by us, are subject to challenge as having been improperly privatizedand we are unable to defeat this claim, we risk losing our ownership interestin the company or its assets, which could materially affect our business andresults of operations. In particular, as we own a substantial number of ourother subsidiaries through Wimm-Bill-Dann, (formerly Lianozovsky Dairy 

 

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Plant) and as Wimm-Bill-Dann constitutes themajority of our production capacity, its loss would materially adversely affectour prospects, business and results of operations.

 

In addition, under Russian law, transactionsin shares may be invalidated on many grounds, including a sale of shares by aperson without the right to dispose of such shares, breach of interested-partyand/or major transactions rules and failure to register the share transferin the securities register. As a result, defects in earlier transactions inshares of our subsidiaries (where such shares were acquired from third parties)may cause our title to such shares to be subject to challenge. Additionally, ofthe 97.53% of the Lianozovsky Dairy Plant which we owned, 15% were acquired inseparate investment tender held by the Department of State and MunicipalProperty of the Moscow City Government. Under the legislation governing suchtenders, a tender is not valid unless at least two participants submit bids. Inthe investment tenders for the Lianozovsky Dairy Plant, the only twoparticipants were entities which were under common control, an arguable violationof this requirement. In the event that the Russian government authorities weresuccessfully to maintain that these tenders were not duly held since theparticipants were under common control, we could lose 15% of our stakes in theLianozovsky Dairy Plant, materially adversely affecting our results ofoperations.

 

***Russian companies canbe forced into liquidation on the basis of formal non-compliance with certainrequirements of Russian law.***

*** ***

Certainprovisions of Russian law may allow a court to order liquidation of a Russianlegal entity on the basis of its formal non-compliance with certainrequirements during formation, reorganization or during its operation. Therehave been cases in the past in which formal deficiencies in the establishmentprocess of a Russian legal entity or non-compliance with provisions of Russianlaw have been used by Russian courts as a basis for liquidation of a legalentity. Weaknesses in the Russian legal system create an uncertain legalenvironment, which makes the decisions of a Russian court or a governmentalauthority difficult, if not impossible, to predict. If involuntary liquidationwere to occur, such liquidation could lead to significant negative consequencesfor our group.

 

For example, in Russian corporate law,negative net assets calculated on the basis of Russian accounting standards asat the end of the second or any subsequent year of a company’s operation canserve as a basis for a court to order the liquidation of the company upon aclaim by governmental authorities. Many Russian companies have negative netassets due to very low historical asset values reflected on their Russianaccounting standards balance sheets; however, their solvency, *i.e.*, their ability to pay debts as they come due, is nototherwise adversely affected by such negative net assets. The amount of netassets of some of our subsidiaries is below the minimum legal requirements.Although we are currently taking steps to remedy this and these subsidiariescontinue to meet all of their obligations to creditors, there is a minimal riskof their liquidation.

 

***Our inability to registerproperty in a timely manner may lead to fines and temporarily restrict ourexpansion plans.***

*** ***

We have grown both organically and throughnumerous acquisitions.  As a result, weare routinely required to register real estate that we have acquired and/orconstructed. Russian real estate laws, particularly municipal laws in Moscow,are complicated and ambiguous. Among other things, these laws require aregistrant to provide the real estate registration authority with numerousdocuments from various state authorities, including from constructionauthorities, land register authorities, tax authorities and fire safetyauthorities, among others. Each of these entities exercises considerablediscretion in matters of enforcement and interpretation of applicable laws,regulations and standards, the issuance and renewal of permits and inmonitoring compliance with the terms thereof. Consequently, a considerableamount of effort, time and money is required to register real estate in Russia,and 

 

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notwithstanding these efforts, there is noassurance we will be able to register all of our real estate on a timelybasis.  Our failure to timely registerour real estate may result in our inability to properly reflect such realestate in our accounting and tax filings, which, in turn, may lead to theimposition of fines.  In addition, we maybe restricted on our ability to use unregistered real estate.

 

***Possibleimplementation of new federal or local government policies, or selectiveapplication of existing policies, affecting the food industry couldsubstantially and negatively affect our turnover and operating margin.***

*** ***

Possible implementation of new federal orlocal government policies, or selective application of existing policies,affecting the food industry could have a significant impact on our business.For example, the federal and local governments have been known to implement tradebarriers, subsidies and other policies favoring certain producers.Additionally, customs regulations in Russia are unclear, subject to frequentchange and are applied inconsistently. The imposition of higher customs dutieson products we import would increase the costs of our products and reduce ourprofits, while the implementation of price controls on products we producewould reduce our operating margin. For example, federal customs regulationsenacted during 2001 subject juice concentrate imports to the highest level ofcustoms duties allowed for that particular category of imports. In addition,federal customs regulations enacted during 2002 stipulate minimum declarationamounts for imported goods. As a result of such regulations, we may be forcedto declare a higher value for imported goods than the amount actually paid and,consequently, pay a higher tariff on such goods.

 

Another example of a government regulationthat has affected 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 new Sanitary Rules onChildren’s Food Products, which became effective on June 1, 2005,disallow certain tax benefits we formerly enjoyed in relation to some of ourbaby food products.

 

In May 2008, the Russian Parliament (StateDuma) adopted new technical regulations for all dairy products, includingdrinking milk, fermented dairy products, cheese, butter, margarine, yogurts anddairy deserts. Recent legislation mandates that products marked “milk” shouldnot contain any dry milk, vitamins, or minerals and that any drinkable milkthat contains these be marked “milk product” or “milk drink”. Although theseclassifications are not yet being enforced and still subject to furtherapprovals, we anticipate that should they be introduced, “milk drink” labelingmay lead to a decline in sales of drinking reconstituted milk and may adverselyaffect our results.

 

We are also subject to regional legislationand regulations. For example, in February 2007, the Moscow governmentenacted regulations on the voluntary labeling of foods containing geneticallymodified organisms, or GMO. While GMO labeling is not obligatory, it may betreated as such by the regional authorities in Moscow. In this case, we will berequired to label our products as not genetically modified and incur additionalexpenses in relation to this requirement.

 

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***Increaseddomestic production by our foreign competitors could reduce our competitiveadvantages against them, which would have a material adverse effect on ourmarket share and results of operations.***

*** ***

A number of our foreign competitors, such asDanone, Parmalat, Lactalis, Campina, Ehrmann, Onken and Pascuale, have beeninvesting and continue to invest in domestic production facilities, whileothers, such as Coca-Cola and Pepsi, have acquired domestic producers. Theseinvestments and acquisitions reduce the competitive advantages that we haveover foreign competitors without domestic production capability. A continuationof this trend may result in increased competition for qualified personnel andhigher labor costs, and would have a material adverse effect on our businessand results of operations. See “Item 4. Informationon Our Company—B. Business Overview” for a further description of therecent investments by some of our foreign competitors in Russian productionfacilities.

 

***Ifthe Federal Antimonopoly Service were to conclude that we acquired or created anew company in contravention of antimonopoly legislation, it could imposeadministrative sanctions and require the unwinding of such transactions, whichcould have a material adverse effect on our business and results of operations.***

*** ***

Our business has grown substantially throughthe acquisition and founding of companies, many of which required the priorapproval or subsequent notification of the Federal Antimonopoly Service, orFAS, or its predecessor agencies. In part, relevant legislation restricts theacquisition or founding of companies by groups of companies or individualsacting in concert without this approval or notification. While we believe thatwe have complied with the applicable legislation for our acquisitions andfounding of new companies, this legislation is sometimes vague and subject tovarying interpretations. Additionally, although the common ownership by ourshareholders of a number of companies which are now our subsidiaries was generallymade known to FAS and its predecessors, the existence of the shareholders’agreement among our current shareholders was not disclosed. If FAS were toconclude 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.

 

***Furtherrestrictions on our business which is categorized as a monopoly, the extensionof monopoly status to our other businesses, or a finding that we or ourdistributors have violated antimonopoly laws could result in the regulation ofour prices and restriction of our commercial activities.***

*** ***

Under Russian legislation, FAS may categorizea company as a dominant force in a market. Our baby food business iscategorized as a monopoly in Moscow and the Moscow region, placing restrictionson our ability to increase our profit margins for that business. Any ruling thatany of our other businesses are a monopoly could result in the regulation ofour prices and restrictions on our commercial activities.

 

Following sudden and, in some cases,substantial increases in food prices in 2007, FAS initiated inspections of foodproducers, distributors and retail chains throughout Russia in order todetermine whether these price increases were caused by price collusion amongproducers and retailers. While we strongly believe that we have not violatedand are not currently violating any antimonopoly regulations, it is possiblethat FAS and its regional divisions will nonetheless determine otherwise. Todate, the regional divisions of FAS have undertaken inspections of ouroperations in Omsk, Voronezh and St. Petersburg.  In Omsk, FAS ceased its investigation afterfinding no violations. In Voronezh, the regional division of FAS found us to bein violation of antimonopoly legislation and assessed us with a fine, althoughno factual or legal basis was given for this finding. We successfully appealedthis decision to the higher FAS body and, as a result, this decision wasdeclared invalid and a new

 

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investigation was initiated which iscurrently pending. The investigation in St. Petersburg is still ongoing, and weare currently not able to predict its outcome. In Krasnoyarsk, the regional FASrequested us to provide information on our raw milk purchasing prices but hasnot yet initiated an investigation. FAS has initiated a new investigation intodairy producers connected with a decline in raw milk purchasing prices.Although we consider such a decline to be seasonal, we anticipate that we wouldbe requested by the Federal Anti-Monopoly Service to provide our raw milkpurchasing prices. We are confident that no violations in regards to theprocurement of raw milk have taken place, but cannot rule out that ourbusiness could be adversely affected by pending investigation.

 

FAS has also initiated investigations of fooddistributors in connection with the rise in food prices, and severaldistributors of our products were investigated. Six of our distributors in Voronezh were investigated, and FAS imposed afine on one of these distributors based, among other things, on a provision inour standard distribution contracts indicating a recommended price for ourproducts, which FAS found to be in violation of the antimonopoly laws.  Distributors do not always adhere to ourrecommended price, and the contract provision was not intended to hampercompetition, but, rather, to provide our distributors with guidelines insetting prices for our products.  As aresult of this ruling, in October 2007, we submitted our templatedistributor contract, which includes the recommended price provision, to FASfor their approval and confirmation that the contract does not violateantimonopoly laws.  FAS approved thecontract in March 2008, and we are hopeful that this will mitigate anyrisk that we or our distributors will be found in violation of the antimonopolylaws in the future based on our distribution contracts.

 

Any finding by FAS that our businesses haveacted in violation of the antimonopoly laws may result in the imposition ofsubstantial fines and the imposition of government-determined prices which could,in turn, lead to a decline in our profit margins. Additionally, restrictions onour activities or expansion, or government-mandated withdrawal from regions ormarkets where we currently operate, could have a material adverse effect on ourbusiness, financial condition, results of operations or prospects.

 

***Inthe event that our minority shareholders or minority shareholders of oursubsidiaries were to challenge successfully past or future interested-partytransactions, or do not approve interested-party transactions or other mattersin the future, the invalidation of such transactions or failure to approve suchmatters could have a material adverse effect on our business, financialcondition, results of operations or prospects or the value of the shares andADSs.***

*** ***

We own less than 100% of the equity interestsin some of our subsidiaries. In addition, certain of our wholly ownedsubsidiaries have had other shareholders in the past. We and our subsidiariesin the past have carried out, and continue to carry out, transactions which maybe considered to be “interested-party transactions” under Russian law,requiring approval by disinterested directors, disinterested independentdirectors or disinterested shareholders depending on the nature of thetransaction and parties involved. See “Item 10. Additional Information—B.Charter and Certain Requirements of Russian Legislation—Interested PartyTransactions.” The provisions of Russian law defining which transactions mustbe 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 the invalidationof transactions, which could have a material adverse effect on our business,financial condition, results of operations or prospects and the value of theshares and ADSs.

 

In addition, Russian law requires athree-quarters majority vote of the holders of voting stock present at ashareholders’ meeting to approve certain transactions and other matters,including, for example, charter amendments, major transactions involving assetsin excess of 50% of the assets of the company, repurchase by the company ofshares and certain share

 

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issuances. In some cases, minorityshareholders may not approve interested party transactions requiring theirapproval or other matters requiring approval of minority shareholders orsupermajority approval. In the event that these minority shareholders were tochallenge successfully past interested party transactions, or do not approveinterested party transactions or other matters in the future, we could belimited in our operational flexibility and our business, financial condition,results of operations or prospects could be materially adversely affected.

 

Over the past several years, we have soughtand continue to seek to acquire minority stakes in our subsidiaries with theaim of acquiring 100% interests in each of our key subsidiaries. For example,in January 2006, we acquired 20% ofMoscow Baby Food Plant OJSC, asubsidiary, from minority shareholders for cash consideration of $7.0 millionincreasing our beneficial ownership to 97.34%. In January 2005, weacquired a 10% stake in our subsidiarySiberian Dairy Plant from minority shareholders for a cash considerationof $1.1 million increasing our beneficial ownership to 87.1%. In March andApril 2004, we acquired a total of an additional 6.2% of our subsidiaryTsaritsino Dairy Plant from our minority shareholders for a cash considerationof $3.4 million increasing our beneficial ownership to 97.6%. In addition, weacquired a 47.7% interest in our subsidiary Ufa Dairy Plant in September 2003from minority shareholders for a cash consideration of $3.1 million increasingour beneficial ownership to 96.5%.

 

We are in the process of consolidating ourbusinesses and merging certain subsidiaries into Wimm-Bill-Dann (formerly Moscow-basedLianozovsky Dairy Plant). In this context, we are re-organizing our legalentities, which may trigger a legal requirement that we redeem shares onshareholders’ demand. According to amendments to the Federal Law on Joint StockCompanies, which came into effect on July 1, 2006, a holder of morethan 95% of shares in an open joint stock company has the right to buy out theremaining shares from the minority shareholders for a cash consideration equalto the amount determined by an independent appraiser. The new amendments alsorequire a person purchasing 30%, 50%, 75% or more shares in an open joint stockcompany to offer to other shareholders of this entity to sell their shares at aprice not less than the acquisition price of the respective stake. Pursuant tothis requirement, in 2007 we bought a 4.71% stake in Ochakovo Dairy Plant for acash consideration of $3.3 million and 0.60% of ordinary shares and 1.16%of preferred shares in Nazarovo Dairy Plant for a cash consideration ofapproximately $0.4 million for both stakes, a 33.51% stake in Obninsk DairyPlant for cash consideration of $11.9 million and a 13.24% stake in AngarskDairy Plant for cash consideration of $0.8 million. While no additional demandshave been made for us to buy out minority shareholders, we may face additionalbuy-out demands in the future.

 

Although we are and strive to be incompliance with all regulations related to consolidation, we can not guaranteethat some of our minority shareholders may bring claims against us. See “Item4. Information on Our Company – A. History and Development” for a description of our subsidiary mergers in2007 and 2008.

 

**RisksRelating to Our Financial Condition**

** **

***Inflation could increase our costs anddecrease our operating margins.***

*** ***

The Russian economy has been characterized byhigh rates of inflation. As we tend to experience inflation-driven increases incertain of our costs, including salaries and rents, which are sensitive torises in the general price level in Russia, our costs in U.S. dollar termswill rise. In this situation, due to competitive pressures, we may not be ableto raise 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.

 

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

*** ***

Our short-term and long-term debt agreements,including our year 2008 $250 million syndicated loan agreement, containcovenants that impose operating and financial restrictions on us and oursubsidiaries. These restrictions significantly limit, and in some casesprohibit, among other things, our and certain of our subsidiaries’ ability toincur additional debt, provide guarantees, create liens on assets or enter intobusiness combinations. Failure to comply with these restrictions wouldconstitute a default under our debt agreements, including our $250 millionsyndicated loan agreement and any of our other senior debt containingcross-default provisions could become immediately due and payable, which wouldmaterially adversely affect our business, financial conditions and results ofoperations. In addition, some of our debt agreements contain provisions whichpermit our lenders to require us to repay our debt to them in the event of adeterioration in our financial condition.

 

***We may not have the ability to raise thefunds necessary to finance a prepayment of certain of our outstandingindebtedness in case of a change of control event.***

*** ***

The terms of our $250 million syndicated loanagreement as well as some of our other debt agreements require that we prepaythe outstanding debt upon the occurrence of certain change of control events. Achange of control event will generally be triggered at such time as any personacting alone or together with other persons (excluding several of our majorshareholders acting individually or as a group as well as their successors,inherits and ): (i) has or acquires, directly or indirectly, in aggregatemore than 25 per cent of our voting shares (whether by virtue of anyissuance, sale or other disposition of such shares, any merger or othertransaction having a similar effect or any voting trust or other agreement), or(ii) has or acquires the right to appoint or remove a majority of ourBoard of directors or our chief executive officer, or (iii) has or acquiresthe power to cast or control the casting of more than 25 per cent of ourvoting rights.

 

If a change in control occurs, and we arerequired to prepay our debt, such event could have a material adverse effect onour business, financial condition, results of operations and businessprospects. It is also possible that we will not have sufficient funds atthe time of the change of control to satisfy such prepayment obligations, or torefinance the debt on commercially reasonable terms.

 

***Mergersof our subsidiaries may cause their indebtedness to be accelerated, and ourinability to effect certain mergers within our group of companies may preventus from optimizing our tax rate and result in increased taxes.***

*** ***

As Russian tax regulations do not allow Russiancompanies to pay taxes on a consolidated basis, *i.e.*, to offset the losses of one subsidiary againstthe profits of another subsidiary, we are seeking to merge certain companieswithin each of our segments in an effort to optimize the tax rates applicableto us. Under Russian law, such mergers would be considered a reorganization andthe merged subsidiaries would be required to notify their creditors of thisreorganization. Russian law also provides that, for a period of 30 daysafter notice, these creditors would have a right to accelerate the mergedsubsidiaries’ indebtedness and demand reimbursement for applicable losses. Inthe event that all or part of certain of our subsidiaries’ indebtedness isaccelerated in connection with the mergers, we and such subsidiaries may nothave the ability to raise the funds necessary for repayment and our businessand financial condition could be materially adversely affected. In addition,our inability or failure to consummate the mergers may prevent us from optimizingour tax rates and our effective tax rate may increase as ouroperations continue to expand.

 

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***Servicing and refinancing ourindebtedness will require a significant amount of cash. Our ability to generatecash or obtain financing depends on many factors beyond our control.***

*** ***

As of June 2008, we have outstandingindebtedness, primarily consisting of our $250 million syndicated loanagreement, our ruble bonds, bank loans and obligations under equipment financing.As of December 31, 2007, our consolidated total debt was approximately$579.6 million, of which $81.2 million was secured by equipment or inventory.

 

Among other things, increased levels ofindebtedness, and particularly increases in the level of secured indebtedness,could potentially: (1) limit our ability to obtain additional financing; (2) limitour flexibility in planning for, or reacting to, changes in the markets inwhich we compete; (3) place us at a competitive disadvantage relative toour competitors with superior financial resources; (4) lead to a partialor complete loss of control over our key subsidiaries or properties; (5) renderus more vulnerable to general adverse economic and industry conditions, (6) requireus to dedicate all or a substantial part of our cash flow to service our debt;and (7) limit or eliminate our ability to pay dividends.

 

Our ability to make payments on and torefinance our indebtedness, and to fund planned capital expenditures andresearch and development efforts, will depend on our ability to generate cashin the future. This, to a certain extent, is subject to general economic,financial, competitive, legislative, regulatory and other factors that arebeyond our control. If we are unable to generate sufficient cash flow orotherwise obtain funds necessary to make required payments, we may defaultunder the terms of our indebtedness, thereby allowing the holders of ourindebtedness to accelerate the maturity of such indebtedness, and potentiallycausing cross-defaults under and acceleration of our other indebtedness.

 

We may not be able to generate sufficientcash flow or access international capital markets or incur additionalindebtedness to enable us to service or repay our indebtedness or to fund ourother liquidity needs. We may need to refinance all or a portion of ourindebtedness on or before maturity, sell assets, reduce or delay capitalexpenditures or seek additional capital. Refinancing or additional financingmay not be available on commercially reasonable terms, and we may not be ableto sell our assets or, if sold, the proceeds therefrom may not be sufficient tomeet our debt service obligations. Our inability to generate sufficient cashflow to satisfy our debt service obligations, or to refinance debt oncommercially reasonable terms, would have a material adverse effect on ourbusiness, financial condition, results of operations and prospects.

 

***Devaluationof the ruble and other currencies we trade in against the U.S. dollar and/orEuro could increase our costs and reduce our operating revenues.***

*** ***

A significantportion of our costs, expenditures and liabilities, including costs of packaging, juice concentrateand certain other raw materials, as well as capital expenditures andborrowings, are either denominated in, or closely linked to, the U.S. dollarand/or Euro, while substantially all of ouroperating revenues are denominated in rubles. As a result, the devaluation ofthe ruble against the U.S. dollar and/or Euro can adversely affect us byincreasing our costs in ruble terms. Additionally, if the ruble declinesagainst the U.S. dollar and/or Euro and price increases cannot keep pace, wecould have difficulty repaying or refinancing our U.S. dollar- and/orEuro-denominated indebtedness. The devaluation of the ruble would also resultin losses in the value of ruble-denominated assets, such as ruble deposits.

 

The decline in the value of the ruble againstthe U.S. dollar also reduces the U.S. dollar value of tax savings arising fromthe depreciation of our property, plant and equipment, since their basis fortax purposes is denominated in rubles at the time of the investment. Increasedtax liability would increase total expenses.

 

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***Russian currency control regulations couldhinder our ability to conduct our business.***

*** ***

In the past, Russian currency regulationsimposed various restrictions on operations involving foreign currencies in anattempt to support the ruble. Effective from January 1, 2007, most of theserestrictions have been removed. However, Russian companies currently mustrepatriate proceeds from export sales. Moreover, the foreign currency market inRussia is still developing and we may experience difficulty in convertingrubles into other currencies. A majority of our major capital expenditures andpayments to vendors and a significant part of our debt are denominated andpayable in various foreign currencies.

 

Russian legislation currently permits theconversion of rubles into foreign currency. However, the market in Russia forthe conversion of rubles into foreign currencies is limited and may notcontinue to exist. Any delay or otherdifficulty in converting rubles into a foreign currency to make a payment ordelay in or restriction on the transfer of foreign currency could limit ourability to meet our payment and debt obligations, which could result in theloss of suppliers, acceleration of debt obligations and cross-defaults and,consequently, have a material adverse effect on our business, financialcondition and results of operations.

 

***Someof our customers, debtors and suppliers may fail to pay us or to comply withthe terms of their agreements with us which could adversely affect our resultsof operations.***

*** ***

Russia’s inexperience with a market economyrelative to more developed economies poses numerous risks that could interferewith our business. For example, the failure to satisfy liabilities iswidespread among Russian businesses and the government. Furthermore, it isdifficult for us to gauge the creditworthiness of some of our customers, asthere are no reliable mechanisms, such as reliable credit reports or creditdatabases, for evaluating their financial condition. Consequently, we face therisk that some of our customers or other debtors will fail to pay us or fail tocomply with the terms of their agreements with us, which could adversely affectour results of operations.

 

In addition, we are limited in our ability tocontrol the conduct of our raw materials and equipment suppliers, includingtheir adherence to contract delivery terms and their compliance with applicablelegislation, such as currency, tax, customs and environmental regulations andlaws relating to the use of food additives and genetically modified foodproducts. Failure of our suppliers to adhere to the terms of our contracts withthem or the law may negatively affect our reputation and our business.

 

***Ifthe various initiatives we have used to reduce our tax burden are successfullychallenged and/or our ability to recover VAT and take advantage of certain taxbenefits are disallowed by the Russian tax authorities, we may face significantlosses associated with the assessed amount of tax underpaid and relatedinterest and penalties, which would have a material adverse effect on ourfinancial condition and results of operations.***

*** ***

We have used various initiatives to reduceour tax burden and several of our tax initiatives have been challenged by theRussian tax authorities. There have also been press reports of instances inwhich the Russian tax authorities have successfully challenged methods similarto those we have used. If any of our initiatives are successfully challenged bythe Russian tax authorities, we would face significant losses associated withthe assessed amount of tax underpaid and related interest and penalties. Theselosses could have a material adverse effect on our financial condition andresults of operations.

 

***Failures or alleged failures byour suppliers to comply with their tax obligations may negatively affect ourability to recover VAT and increase our tax liabilities.***

*** ***

In 2006, the tax authorities found somesuppliers dealing with certain of our subsidiaries (Moscow Baby Food Plant,Trading Company Wimm-Bill-Dann, Wimm-Bill-Dann, Ochakovo Dairy Plant) to benegligent in complying with their tax obligations. Specifically, the taxauthorities have claimed, among other things, that these suppliers are, in somecases, not registered as taxpayers, have not provided tax returns and/or notpaid their taxes in full or at all. Although our subsidiaries perform extensivedue diligence on each of their suppliers,

 

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they are not able to scrutinize thoroughlyevery aspect of each supplier’s business, including whether the supplier is infull compliance with respect to its tax duties. As a result of these allegedbreaches by certain of our suppliers, the tax authorities have refused toreimburse VAT paid by our subsidiaries in an amount totaling approximately $1.0million for services rendered and goods provided by such suppliers. They alsorefused to discount profit tax paid by our subsidiaries to the budget from theamounts under transactions with such suppliers. We challenged the taxauthorities’ refusal to reimburse VAT to Ochakovo Dairy Plant and TradingCompany Wimm-Bill-Dann in four separate law suits and, in each instance thecourt ruled in our favor.

 

The negligence of our suppliers in payingtaxes may lead to claims against us from the tax authorities. For example in2007, Trading Company Wimm-Bill-Dann received a demand from the tax authoritiesto pay taxes that were reimbursed to us in the aggregate amount of $0.5 millionbased on the decision by the tax authorities that our supplier was negligent inpaying its tax obligations. We filed a court claim seeking to invalidate thisclaim. Although the court ruled against us in the first two instances, thecourt of the third instance ruled in our favor and remanded the case back tothe lower court of the first instance for reconsideration. Although we continueto provide the results of our due diligence of our suppliers to the relevantRussian authorities, we cannot exclude the possibility that some of thesesuppliers will be found to have been negligent by the tax authorities.

 

***Asuccessful challenge by the tax authorities of our use of a past tax privilegecould materially adversely affect our results of operations.***

*** ***

Our juice producing subsidiaries havebenefited from small enterprise tax legislation. If we had not taken advantageof this benefit in 2003, 2004 and 2005, our tax expenses would have increasedby $3.0 million, $1.2 million and $0.3 million, respectively.This tax benefit was eliminated as of January 1, 2002. However, under theamended legislation, our small enterprises that were formed prior to January 1,2002 were able to continue and did continue to use this benefit for two yearsfrom the date on which they were formed, and in the third and fourth yearsafter they were formed, income tax was levied at a rate of 25% and 50% of theincome tax rate, respectively. Although none of our subsidiaries currentlytakes advantage of the small enterprise tax benefits, we cannot guarantee thatthe tax authorities may not retroactively challenge previous tax benefitsenjoyed by our subsidiaries pursuant to small enterprise tax legislation. Suchchallenges, if successful, could materially adversely affect our results ofoperations.

 

Our use of the small enterprise tax exemptionhas also been subject in the past to challenge by the Russian tax authorities.

 

For example, in September 2004, oursubsidiary, Fruit Rivers, was assessed approximately $12.5 million(including penalties) by the local tax authorities relating to its use of thesmall enterprise tax exemption in calculating its profit tax liability during2001. Fruit Rivers challenged this tax assessment with a higher tax authority,which cancelled the assessment.

 

While we believe that our subsidiaries havein the past complied with the rules relating to the small enterprise taxexemption, the Russian tax authorities may in the future make additional claimsagainst our subsidiaries challenging their use of this exemption. These claimscould be significantly larger than the claim described above, and the resultinglosses could have a material adverse effect on our financial condition andresults of operations.

 

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***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.***

*** ***

Russia’s banking and other financial systemsare not well developed or regulated, and Russian legislation relating to banksand bank accounts is subject to varying interpretations and inconsistentapplication. The August 1998 financial crisis resulted in the bankruptcyand liquidation of many Russian banks and almost entirely eliminated thedeveloping market for commercial bank loans. Although the Central Bank ofRussia has the mandate and authority to suspend banking licenses of insolventbanks, many insolvent banks still operate. Most Russian banks also do not meetinternational banking standards, and the transparency of the Russian bankingsector still lags far behind internationally accepted norms. The weak bankinginfrastructure in Russia also exposes us to an increased risk of unauthorizedtransactions or charges on our accounts due to bank error or actions bycomputer hackers.

 

The serious deficiencies in the Russianbanking sector, combined with the deterioration in the credit profile of theloan portfolios of Russian banks, may result in the banking sector being moresusceptible to market downturns or economic slowdowns. In addition, the CentralBank of Russia has recently revoked the licenses of certain Russian banks,which resulted in market rumors about additional bank closures and manydepositors withdrawing their savings. If a banking crisis were to occur,Russian companies would be subject to severe liquidity constraints due to thelimited supply of domestic funding sources and the withdrawal of foreignfunding sources that would occur during such a crisis. In addition, anotherbanking crisis or the bankruptcy or insolvency of the banks from which wereceive or with which we hold our funds could result in the loss of ourdeposits or affect our ability to complete banking transactions in Russia,which could have a material adverse effect on our business, financialconditions and results of operations.

 

We have also experienced problems withtransmitting tax payments through certain Russian banks and, as a result, areexperiencing difficulties with the Russian tax authorities. In particular,between 2004 and 2007, several of our subsidiaries received tax assessmentsfrom the Russian tax authorities for tax arrears totaling approximately $8.0million. Each of these tax assessments resulted from the failure of thesubsidiaries’ banks to transfer tax payments to the state budget upon receivingthe relevant payment orders. While the Russian Tax Code provides that ataxpayer is deemed to have paid a tax when the corresponding payment order isreceived by the taxpayer’s bank, press reports indicate that the Russian taxauthorities have been actively and often successfully challenging such paymentsif the tax payment is not in fact received due to the failure of the bank totransfer such payment. Russian courts often rule in favor of the Russiantax authorities in such cases.

 

We challenged these assessments and, in eachinstance, the assessments were either declared invalid by Russian ArbitrationCourts or otherwise settled by us. There are currently no pending lawsuits inrespect of our subsidiaries’ failure to transmit tax payments through certainRussian banks.  However, it is likelythat the Russian tax authorities will continue to appeal court rulings in ourfavor and issue new assessments based on the same grounds to us and/or oursubsidiaries.

 

Our management believes that our subsidiarieshave complied with their tax payment obligations, and we intend to challengeany further appeals by the tax authorities of the foregoing assessments or anyadditional similar assessments in court. However, if a court were to rule inthe Russian tax authorities’ favor, these subsidiaries and/or other of oursubsidiaries that have faced similar problems would be liable for the amount ofthe assessments and potentially for interest and penalties on such amounts, andcould potentially be liable for significant additional amounts.

 

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***Vaguelydrafted Russian transfer pricing rules and lack of reliable pricinginformation may impact our financial condition and  results of operations.***

*** ***

Russian transfer pricing rules effectivesince 1999 give Russian tax authorities the right to control prices fortransactions between related entities and certain other types of transactionsbetween unrelated parties, such as foreign trade transactions or transactionswith significant price fluctuations if the transaction price deviates by morethan 20% from the market price. Special transfer pricing rules apply tooperations with securities and derivative instruments. The Russian transferpricing rules are vaguely drafted, and are subject of interpretation byRussian tax authorities and courts  and have been used for politically motivated investigations andprosecutions. Although we believe that we comply with Russian tax law ontransfer pricing, the uncertainties in interpretation of transfer pricinglegislation may result in the tax authorities challenging our prices and makingadjustments which could affect our tax position. If such price adjustmentsbecome effective, our results of operations could be materially adverselyaffected. In addition, we could face significant losses associated with theassessed amount of underpaid prior tax and related interest and penalties.

 

In addition, a number of draft amendments tothe transfer pricing law have recently been introduced which, if implemented,would considerably toughen the existing law. The proposed changes, among otherthings, may shift the burden of proving market prices from the tax authoritiesto the taxpayer, cancel the existing permitted deviation threshold andintroduce specific documentation requirements for proving market prices.Moreover, in the event that a transfer pricing adjustment is assessed byRussian tax authorities, the Russian transfer pricing rules do not providefor an offsetting adjustment to the related counterparty in the transactionthat is subject to adjustment.

 

**RisksRelating to our Shares and ADSs and the Trading Market**

** **

***Becausethe depositary may be considered the beneficial holder of the shares underlyingthe ADSs, these shares may be arrested or seized in legal proceedings in Russiaagainst the depositary.***

*** ***

Because Russian law may not recognize ADSholders as beneficial owners of the underlying shares, it is possible that ADSholders could lose all their rights to those shares if the depositary’s assetsin Russia 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 proceedings brought against adepositary, whether or not related to shares underlying ADSs, Russian courtsmay treat those underlying shares as the assets of the depositary, open toseizure or arrest. In the past, a lawsuit has been filed against a depositarybank, other than our depositary, seeking the seizure of various Russian companies’shares represented by ADSs issued by that depositary. In the event that thistype of suit were to be successful in the future, and the shares were to beseized or arrested, the ADS holders involved would lose their rights to theunderlying shares.

 

***Votingrights with respect to the shares represented by our ADSs are limited by theterms of the deposit agreement for the ADSs and relevant requirements ofRussian law.***

*** ***

ADS holders will have no direct voting rightswith respect to the shares represented by the ADSs. They will be able toexercise voting rights with respect to the shares represented by ADSs only inaccordance with the provisions of the deposit agreement relating to the ADSs

 

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and relevant requirements of Russian law.Therefore, there are practical limitations upon the ability of ADS holders toexercise their voting rights due to the additional procedural steps involved incommunicating with them. For example, the Federal Law on Joint Stock Companiesand our charter require us to notify shareholders no less than 30 daysprior to the date of any meeting and at least 50 days prior to the date ofan extraordinary meeting to elect our Board of Directors. Our ordinaryshareholders will receive notice directly from us and will be able to exercisetheir voting rights by either attending the meeting in person or voting bypower of attorney.

 

An ADS holder, by comparison, will notreceive notice directly from us. Rather, in accordance with the depositagreement, we will provide the notice to the depositary. The depositary hasundertaken in turn, as soon as practicable thereafter, to mail to the ADSholders the notice of such meeting, voting instruction forms and a statement asto the manner in which instructions may be given by holders. To exercise itsvoting rights, the ADS holder must then instruct the depositary how to vote itsshares. Because of this extra procedural step involving the depositary, theprocess for exercising voting rights may take longer for an ADS holder than forholders of shares. ADSs for which the depositary does not receive timely votinginstructions will not be voted at any meeting.

 

In addition, although securities regulationsexpressly permit the depositary to split the votes with respect to the sharesunderlying the ADSs in accordance with instructions from ADS holders, there islittle court or regulatory guidance on the application of such regulations, andthe depositary may choose to refrain from voting at all unless it receivesinstructions from all ADS holders to vote the shares in the same manner. ADSholders may thus have significant difficulty in exercising voting rights withrespect to the shares underlying the ADSs. There can be no assurance thatholders and beneficial owners of ADSs will (i) receive notice ofshareholder meetings to enable the timely return of voting instructions to thedepositary, (ii) receive notice to enable the timely cancellation of ADSsin respect of shareholder actions or (iii) be given the benefit ofdissenting or minority shareholders’ rights in respect of an event or action inwhich the holder or beneficial owner has voted against, abstained from votingor not given voting instructions.

 

***The price of our shares and ADSs may behighly volatile.***

*** ***

The trading prices of the shares and ADSs maybe subject to wide fluctuations in response to many factors, including:

 

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

 

·       variationsin national and industry growth rates;

 

·       actual oranticipated announcements of technical innovations or new products or servicesby us or our competitors;

 

·       changes ingovernmental 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 than 35% of a Russiancompany’s shares may be circulated abroad through depositary receipt programs,such as ADS and GDSs. Our ADS and GDS programs, however, together account for40% of our outstanding shares (this amount was approved by the Russiansecurities regulator based on the prior limit and is not required to be reducedto 35%). As a result, we are currently unable to raise additional equityfinancing through the issuance of depositary receipts. This restriction mayalso limit the liquidity of our ADSs and their trading price.

 

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***You may be unable to repatriate your earningsfrom our ADSs.***

*** ***

We anticipate that any dividends we may payin the future on the shares represented by the ADSs will be declared and paidto the depositary in rubles and will be converted into U.S. dollars by thedepositary and distributed to holders of ADSs, net of the depositary’s fees andexpenses. The ability to convert rubles into U.S. dollars is subject to theavailability of U.S. dollars in Russia’s currency markets. Although there is anexisting, albeit limited, market within Russia for the conversion of rubles intoU.S. dollars, including the interbank currency exchange and over-the-counterand currency futures markets, the further development of this market isuncertain. At present, there is no market for the conversion of rubles intoforeign currencies outside of Russia and no viable market in which to hedgeruble and ruble-denominated investments.

 

***ADS holders may not be able to benefit fromthe United States-Russia income tax treaty.***

*** ***

Under Russian law, dividends paid to anon-resident holder of shares generally will be subject to Russian withholdingtax at a rate of 15% for legal entities and organizations as well as forindividuals. Russian tax rules applicable to ADS holders are characterizedby significant uncertainties and, until recently, by an absence of interpretiveguidance. In 2005 and 2006, the Ministry of Finance of the Russian Federationexpressed its opinion in private rulings that holders of global depositaryreceipts should be treated as the beneficial owners of the dividends paid onunderlying shares for the purposes of double tax treaty provisions applicableto taxation of dividend income from the underlying shares, provided that thetax treaty residence of the holders of the global depositary receipts is dulyconfirmed. However, the Russian tax authorities have not provided official,generally applicable guidance addressing how an ADS holder should demonstrateits beneficial ownership in underlying shares. In the absence of any specificprovisions in Russian tax legislation with respect to the concept of beneficialownership and taxation of income of beneficial owners, it is unclear how theRussian tax authorities will ultimately treat the ADS holders in this regard.

 

Until the Russian tax authorities clarifywhether it is permitted under Russian law to withhold Russian withholding taxin respect of dividends a company pays to the depositary at a lower rate thanthe domestic rate applicable to such payments (currently 15%), we intend towithhold Russian withholding tax at the domestic rate applicable to suchdividends, regardless of whether the Depositary (the legal owner of the shares)or an ADS holder would be entitled to reduced rates of Russian withholding taxunder the relevant income tax treaty if it were the beneficial owner of thedividends for purposes of that treaty. Although non-resident ADS holders mayapply for a refund of a portion of the amount withheld by us under the relevantincome tax treaty, no assurance can be given that the Russian tax authoritieswill grant any such refunds. See “Item 10.  AdditionalInformation—E.  Taxation—Russian Incomeand Withholding Tax Considerations” for additional information.

 

In respect of our shareholders we are actingas a tax agent and shall withheld all applicable taxes from the dividends weare paying. When paying dividends for 2006 we withheld withholding tax from ourshareholders – individuals. In 2007 we applied to the tax authorities andmanaged to reimburse it to our shareholders – individuals. Although the Russiantax authorities’ tend to recognize beneficial ownership of the ADS holders andabide by the provisions of the double tax treaties, provided that the taxresidence of the holder is confirmed, we can not be sure that this practice isenshrined by law or not changed by the tax authorities.

 

***Capital gains from the sale of ADSs may besubject to Russian income tax.***

*** ***

Under Russian tax legislation, gains realizedby non-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

 

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this tax with respect to sales made topersons other than Russian companies and foreign companies with a registeredpermanent establishment in Russia. Gains arising from the disposition atforeign stock exchanges of the foregoing types of securities listed on theseexchanges by foreign holders who are legal entities or organizations are notsubject to taxation in Russia.

 

Gains arising from the disposition of theforegoing types of securities and derivatives outside of Russia by U.S. holderswho are individuals not resident in Russia for tax purposes will not beconsidered Russian source income and will not be taxable in Russia. Gainsarising from disposition of the foregoing types of securities and derivativesin Russia by U.S. holders who are individuals not resident in Russia for taxpurposes may be subject to tax either at the source in Russia or based on anannual tax return, which they may be required to submit with the Russian taxauthorities.

 

***Foreign judgments may not be enforceableagainst us.***

*** ***

Our presence outside the United States maylimit your legal recourse against us. We are incorporated under the laws of theRussian Federation. Substantially all of our directors and executive officersnamed in this document reside outside the United States, principally in Russia.All or a substantial portion of our assets and the assets of our officers anddirectors are located outside the United States. As a result, you may not beable to effect service of process within the United States on us or on our officersand directors. 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 between the United Statesand the Russian Federation providing for reciprocal recognition and enforcementof foreign court judgments in civil and commercial matters. These limitationsmay deprive you of effective legal recourse for claims related to yourinvestment in the ADSs. The deposit agreement provides for actions brought byany party thereto against us to be settled by arbitration in accordance withthe Commercial Arbitration Rules of the American Arbitration Association,provided that any action under the U.S. federal securities laws or the rules orregulations promulgated thereunder may, but need not, be submitted toarbitration. The Russian Federation is a party to the United Nations (New York)Convention on the Recognition and Enforcement of Foreign Arbitral Awards, butit may be difficult to enforce arbitral awards in the Russian Federation due toa 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.

 

***Thelack of a central and rigorously regulated share registration system in Russiamay result in improper record ownership of our shares, including the sharesunderlying the ADSs.***

*** ***

Ownership of Russian joint stock companyshares (or, if the shares are held through a nominee or custodian, then theholding of such nominee or custodian) is determined by entries in a shareregister and is evidenced by extracts from that register. Currently, there isno central registration system in Russia. Share registers are maintained by thecompanies themselves or, if a company has two or more shareholders or soelects, by licensed registrars located throughout Russia. Regulations have beenissued regarding 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

 

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a central and rigorously regulated shareregistration system in Russia, transactions in respect of a company’s sharescould be improperly or inaccurately recorded, and share registration could belost through fraud, negligence, official and unofficial governmental actions oroversight by registrars incapable of compensating shareholders for theirmisconduct. This creates risks of loss not normally associated with investmentsin other securities markets.

 

In March 2007, the Federal Service forthe Financial Markets, or the FSFM, terminated the license of three topmanagers of our registrar, the Central Moscow Depository. Managers of Russiandepositaries and registrars are required by law to be licensed by the FSFM, andtheir failure to do so can result in the depository or registrar’s own licensebeing terminated. While the FSFM reversed its decision to terminate the CentralMoscow Depository managers’ licenses in April 2007, it is possible thatthe FSFM may take similar action seeking to terminate the managers’ or ourregistrar’s licenses in the future.

 

***Russian thin capitalization rules couldaffect our ability to deduct interest on certain borrowings.***

*** ***

Russian thin capitalization rules limitthe amount of interest that can be deducted by a Russian company on debtpayable to non-resident shareholders. Until January 1, 2006, these rules appliedonly to loans issued to a Russian company by a foreign company owning directlyor indirectly more than 20% of the share capital of the Russian company.However, thin capitalization rules that came into effect on January 1,2006 extend the rules’ application to debt issued to a Russian company byanother Russian company that is affiliated with such foreign company, as wellas to debt issued to a Russian company which is secured by such foreign companyor such affiliated Russian company. It is not yet fully clear how these new rules willbe applied in practice by the Russian tax authorities.

 

**RisksRelating to the Russian Federation**

** **

**EconomicRisks**

** **

***TheRussian economy is less stable than those of most Western countries and couldadversely affect our business and the value of the shares and ADSs.***

*** ***

Since the dissolution of the Soviet Union inthe early 1990s, the Russian economy has experienced at various times:

 

·      significant declines in gross domestic product;

 

·      hyperinflation;

 

·       anunstable currency;

 

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

 

·       a weakbanking system providing limited liquidity to domestic enterprises;

 

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

 

·      significant use of barter transactions and illiquid promissory notes to settlecommercial transactions;

 

·       widespreadtax evasion;

 

·       growth ofa black and gray market economy;

 

·       pervasivecapital flight;

 

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

 

·      significant increases in unemployment and underemployment; and

 

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·       theimpoverishment of a large portion of the population.

 

Although Russia has benefited recently fromthe increase in global commodity prices, providing an increase in disposableincome and an increase in consumer spending, the Russian economy has beensubject to abrupt downturns in the past. In particular, on August 17,1998, in the face of a rapidly deteriorating economic situation, the Russiangovernment defaulted on its ruble-denominated securities, the Central Bank ofRussia stopped its support of the ruble and a temporary moratorium was imposedon certain foreign currency payments. These actions resulted in an immediateand severe devaluation of the ruble and a sharp increase in the rate ofinflation; a substantial decline in the prices of Russian debt and equitysecurities; and an inability of Russian issuers to raise funds in theinternational capital markets. These problems were aggravated by a majorbanking crisis in the Russian banking sector after the events of August 17,1998, as evidenced by the termination of the banking licenses of a number ofmajor Russian banks. This further impaired the ability of the banking sector toact as a consistent source of liquidity to Russian companies and resulted inthe losses of bank deposits in some cases.

 

Recently, the Russian economy has beenshowing positive trends, such as the increase in the gross domestic product, astable ruble, strong domestic demand, rising real wages and a reduced rate ofinflation; however, these trends may not continue or may be abruptly reversed.

 

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

*** ***

The infrastructure in Russia largely datesback to Soviet times and has not been adequately funded and maintained over thepast decade. Particularly affected are the rail and road networks, powergeneration and transmission systems, communication systems and building stock.In May 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 the infrastructure inRussia harms the national economy, disrupts the transportation of goods andsupplies, adds costs to doing business and can interrupt business operations.The Russian government is actively considering plans to reorganize the nation’srail, electricity and communications systems. Any such reorganization mayresult in increased charges and tariffs while failing to generate theanticipated capital investment needed to repair, maintain and improve thesesystems. These factors could have a material adverse effect on our business andresults of operations.

 

***Fluctuationsin the global economy could materially adversely affect the Russian economy andthe value of the shares and ADSs.***

*** ***

The Russian economy is vulnerable to marketdownturns and economic slowdowns elsewhere in the world. As has happened in thepast, financial problems or an increase in the perceived risks associated withinvesting in emerging economies could dampen foreign investment in Russia andRussian businesses could face severe liquidity constraints, further materiallyadversely affecting the Russian economy. Additionally, because Russia producesand exports large amounts of oil, the Russian economy is especially vulnerableto the price of oil on the world market and a decline in the price of oil couldslow or disrupt the Russian economy or undermine the value of the ruble againstforeign currencies. Recent military conflicts and international terroristactivity have also significantly impacted oil and gas prices, and poseadditional risks to the Russian economy. Russia is also a major producer andexporter of metal products and its economy is vulnerable to fluctuations inworld commodity prices and the imposition of tariffs and/or antidumpingmeasures by the United States, the European Union or by other principal exportmarkets.

 

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**Politicaland Social Risks**

** **

***Politicaland governmental instability could materially adversely affect our business,financial condition, results of operations and prospects and the value of theshares and ADSs.***

*** ***

Since 1991, Russia has sought to transformitself from a one-party state with a centrally-planned economy to a democracywith a market economy. As a result of the sweeping nature of the reforms, andthe failure 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 changes in the government,major policy shifts or lack of consensus between various branches of thegovernment and powerful economic groups could disrupt or reverse economic andregulatory reforms. Any disruption or reversal of reform policies could lead topolitical or governmental instability or the occurrence of conflicts amongpowerful economic groups, which could have a material adverse effect on ourbusiness, financial condition, results of operations and prospects and thevalue of the shares and ADSs.

 

***Conflictbetween central and regional authorities and other conflicts could create anuncertain operating environment, hindering our long-term planning ability.***

*** ***

The Russian Federation is a federation of 83sub-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 operating environment,both of which may prevent us from effectively and efficiently implementing ourbusiness strategy.

 

Additionally, ethnic, religious, historicaland other divisions have, on occasion, given rise to tensions and, in certaincases, military conflict, such as conflict in Chechnya, which has broughtnormal economic activity within Chechnya to a halt and disrupted the economiesof neighboring regions. Various armed groups in Chechnya have been regularlyengaged in guerrilla attacks in that area. Violence and attacks relating tothis conflict have spread to other parts of Russia, and several terroristattacks have been carried out by Chechen terrorists in other parts of Russia,including in Moscow. The further intensification of violence, includingterrorist attacks and suicide bombings, or its spread to other parts of Russia,could have significant political consequences, including the imposition of astate of emergency in some or all of Russia. Moreover, any terrorist attacksand the resulting heightened security measures are likely to cause disruptionsto domestic commerce and exports from Russia. These factors could materiallyadversely affect our business and the value of the shares and ADSs.

 

***Crime and corruption could disrupt ourability to conduct our business.***

*** ***

The political and economic changes in Russiain recent years have resulted in a significant dislocation of authority. Thelocal and international press have reported that significant organized criminalactivity has arisen, particularly in large metropolitan centers. Property crimein large cities has increased substantially. In addition, the local press andinternational press have reported high levels of corruption, including thebribing of officials

 

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for the purpose of initiating investigationsby government agencies. Press reports have also described instances in whichgovernment officials engaged in selective investigations and prosecutions tofurther the commercial interests of government officials or certainindividuals. Additionally, some members of the Russian media regularly publishdisparaging articles in return for payment. The depredations of organized orother crime, demands of corrupt officials or possible claims that we have beeninvolved in official corruption could result in negative publicity, coulddisrupt our ability to conduct our business effectively and could thusmaterially adversely affect our financial condition and results of operationsand the value of the shares and ADSs.

 

***Socialinstability could increase support for renewed centralized authority,nationalism or violence and thus materially adversely affect our business,financial condition, results of operations and prospects.***

*** ***

The failure of the government and manyprivate enterprises to pay full salaries on a regular basis and the failure ofsalaries and benefits generally to keep pace with the rapidly increasing costof living have led in the past, and could lead in the future, to labor andsocial unrest. Labor and social unrest may have political, social and economicconsequences, such as increased support for a renewal of centralized authority,increased nationalism, including restrictions on foreign involvement in theeconomy of Russia, and increased violence. An occurrence of any of theforegoing events could restrict our operations and lead to the loss ofoperating revenues, materially adversely affecting our business, financialcondition, results of operations and prospects.

 

**LegalRisks**

** **

***Weaknessesrelating to the legal system and legislation create an uncertain environmentfor investment and for business activity in Russia.***

*** ***

Russia is still developing the legalframework required to support a market economy. The following risks relating tothe Russian legal system create uncertainties with respect to the legal andbusiness decisions that we make, many of which do not exist in countries withmore developed market economies:

 

·      inconsistencies between and among, the Constitution, federal and regional laws,presidential decrees and governmental, ministerial and local orders, decisions,resolutions and other acts;

 

·      conflicting local, regional and federal rules and regulations;

 

·       the lackof judicial and administrative guidance on interpreting legislation;

 

·       therelative inexperience of judges and courts in interpreting legislation;

 

·       lack ofindependent judiciary;

 

·       a highdegree 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.

 

The recent nature of much of Russian legislation,the lack of consensus about the scope, content and pace of economic andpolitical reform and the rapid evolution of the Russian legal system in waysthat may not always coincide with market developments place the enforceabilityand underlying constitutionality of laws in doubt and results in ambiguities,inconsistencies and anomalies. In addition, Russian legislation oftencontemplates 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 andcontracts, or to defend ourselves against claims by others. We cannot

 

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assure you that regulators, judicialauthorities or third parties will not challenge our internal procedures andby-laws or our compliance with applicable laws, decrees and regulations.

 

***Failureto comply with existing laws and regulations or the findings of governmentinspections, or increased governmental regulation of our operations, couldresult in substantial additional compliance costs or various sanctions whichcould materially adversely affect our business, financial condition, results ofoperations 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 or to obtain all approvals,authorizations and permits required for our operations may result in theimposition of fines or penalties or more severe sanctions including thesuspension, amendment or termination of our permits, or in requirements that wecease certain of our business activities, or in criminal and administrativepenalties applicable to our officers. Any such decisions, requirements orsanctions, or any increase in governmental regulation of our operations, couldincrease our costs and materially adversely affect our business, financialcondition, results of operations and prospects.

 

We believe that our current legal andenvironmental compliance programs adequately address these concerns and that weare in substantial compliance with applicable laws and regulations. However, asthe regulations that apply to our business are constantly changing, we aresometimes unable to immediately comply with new regulations upon theirimplementation. Compliance with, or any violation of, current and future lawsor regulations could require material expenditures by us or otherwise have amaterial adverse effect on our business or financial results. See “Item 4.Information on Our Company—B. Business Overview—Regulation”.

 

Additionally, under relevant Russianlegislation, Russian regulatory agencies can impose various sanctions forviolations of environmental standards. These sanctions may include civil andadministrative 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.

 

***Lackof developed corporate and securities laws and regulations in Russia may limitour ability to attract future investment.***

*** ***

The regulation and supervision of thesecurities market, financial intermediaries and issuers are considerably lessdeveloped in Russia than, for example, in the United States and Western Europe.Securities laws, including those relating to corporate governance, disclosureand reporting requirements, are relatively new, whereas other laws relating toanti-fraud

 

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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 Financial Markets (FSFM);

 

·       theMinistry of Finance;

 

·       theFederal Antimonopoly Service;

 

·       theCentral Bank of Russia; and

 

·       variousprofessional self-regulatory organizations.

 

The regulations of these various authoritiesare not always coordinated and may be contradictory.

 

In addition, Russian corporate and securitiesrules and regulations can change rapidly, which may materially adverselyaffect our ability to conduct securities-related transactions. While someimportant areas are subject to virtually no oversight, the regulatoryrequirements imposed on Russian issuers in other areas result in delays inconducting securities offerings and in accessing the capital markets. It isoften unclear whether or how regulations, decisions and letters issued by thevarious regulatory authorities apply to our company. The FSFM has recentlyintroduced a number of regulations relating to offerings of shares in andoutside of Russia, including combined offerings involving closed subscriptionfor new shares and the sale of existing shares, which remain largely untestedand subject to varying interpretations. Any challenges of such regulations ortransactions consummated pursuant to them could have an adverse effect on ourability to conduct equity offerings in the future. As a result, we may besubject to fines and/or other enforcement measures despite our best efforts atcompliance, which could have a material adverse effect on our business,financial condition and results of operations.

 

***Thejudiciary’s lack of independence, its relative inexperience and occasionalabuse of discretion and the difficulty in enforcing court decisions couldprevent us or you from obtaining effective redress in a court proceeding.***

*** ***

The independence of the judicial system andits immunity from economic, political and nationalistic influences in Russiacan not be guaranteed. The court system is underfunded and judges and courtsare generally inexperienced in the area of business and corporate law. Judicialprecedents generally have no binding effect on subsequent decisions. Not allRussian legislation and court decisions are readily available to the public ororganized in a manner that facilitates understanding. In addition the Russian judicialsystem can be slow or unjustifiably swift. Enforcement of court orders can inpractice be very difficult in Russia. Additionally, court claims are often usedin furtherance of political and commercial aims or infighting. We may besubject to such claims and may not be able to receive a fair hearing.Additionally, court orders are not always enforced or followed by lawenforcement agencies. Moreover, judicial decisions in Russia can beunpredictable and may not provide effective redress.

 

These uncertainties also extend to propertyrights. During Russia’s transformation from a centrally planned economy to amarket economy, legislation has been enacted to protect private propertyagainst expropriation and nationalization. However, these protections may notbe enforced in the event of an attempted expropriation or nationalization.Expropriation or nationalization of any of our entities, their assets orportions thereof, potentially without adequate compensation, would have amaterial adverse effect on our business, financial condition, results ofoperations and prospects.

 

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***Selectiveor arbitrary government action could have a material adverse effect on ourbusiness, financial condition, results of operations and prospects and thevalue of the shares and ADSs.***

*** ***

Governmental authorities in Russia have ahigh degree of discretion and, at times, act selectively or arbitrarily,without hearing or prior notice, and sometimes in a manner that is inconsistentwith legislation or influenced by political or commercial considerations.Selective or arbitrary governmental actions have reportedly included the denialor withdrawal of licenses, sudden and unexpected tax audits and claims,criminal prosecutions and civil actions. Federal and local government entitieshave also used ordinary defects in matters surrounding share issuances andregistration as pretexts for court claims and other demands to invalidate suchissuances and registrations or to void transactions. Moreover, the governmentalso has the power in certain circumstances, by regulation or government act,to interfere with the performance of, nullify or terminate contracts. Standard &Poor’s, has expressed concerns that “Russian companies and their investors canbe subjected to government pressure through selective implementation ofregulations and legislation that is either politically motivated or triggeredby competing business groups.” In this environment, our competitors may receivepreferential treatment from the government, potentially giving them acompetitive advantage over us.

 

In addition, recently, the Russian taxauthorities have brought tax evasion claims aggressively on the basis ofcertain Russian companies’ use of tax-optimization schemes, and press reportshave 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 rights provisions under Russianlaw impose significant additional obligations on us.***

*** ***

Russian law provides that shareholders thatvote against or abstain from voting on certain matters have the right to selltheir shares to us at market value in accordance with Russian law. Thedecisions 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 purchase shares in thesecircumstances, which is limited to 10% of our net assets calculated accordingto Russian accounting standards, at the time the matter at issue is voted upon,could have a material adverse effect on our business, financial condition,results of operations and prospects.

 

***Becausethere is little minority shareholder protection in Russia, your ability tobring, or recover in, an action against us will be limited.***

*** ***

In general, minority shareholder protectionunder Russian law derives from supermajority shareholder approval requirementsfor certain 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 approvalrequirement is met by a vote of 75% of all voting shares that are present at ashareholders’ meeting. Thus, controlling shareholders owning slightly less than75% of outstanding shares of a company may have a 75% or more voting power ifcertain minority shareholders are not present at the meeting. In situationswhere controlling shareholders effectively have 75% or more of the voting powerat a shareholders’

 

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meeting, they are in a position to approveamendments to the charter of the company or significant transactions includingasset transfers, which could be prejudicial to the interests of minorityshareholders. It is possible that our controlling shareholders in the futuremay not act in the best interests of minority shareholders, and this couldmaterially and adversely affect the value of the shares and ADSs.

 

While the Federal Law on Joint StockCompanies provides that shareholders owning not less than 1% of the company’sstock may bring an action for damages on behalf of the company, Russian courtsto date do not have much experience with such lawsuits. Russian law does notcontemplate class action litigation. Accordingly, your ability to pursue legalredress against us may be limited, reducing the protections available to you asa holder of our shares and ADSs.

 

***Characteristicsof and changes in the Russian tax system could materially adversely affect ourbusiness, financial condition, results of operations and prospects and thevalue of the shares and ADSs.***

*** ***

The tax environment in Russia historicallyhas been complicated by the often contradictory tax legislation. Thisuncertainty potentially exposes us to significant fines and penalties andenforcement measures despite our best efforts at compliance, and could resultin a greater than expected tax burden and the suspension or termination of ourlicenses. Generally, taxes payable by Russian companies are substantial andnumerous. These taxes include, among others:

 

·       incometaxes;

 

·       VAT;

 

·       unifiedsocial tax; and

 

·       propertytax.

 

There have recently been significant changesto the Russian taxation system, including a number of changes to variouschapters of the Tax Code. Among the most recent changes are significantamendments to the chapters on VAT and on the profit tax effective as of January 1,2006, as well as the changes to Part One of the Tax Code (taxadministration provisions) effective as of January 1, 2007.

 

Since tax legislation is subject to frequentchange, some sections and regulations enacted under the Tax Code arecomparatively new, and interpretation of these regulations is often unclear ornonexistent. Taxpayers and the Russian tax authorities often interpret tax lawsdifferently whilst the Russian tax authorities’ interpretation of tax lawsrarely favors taxpayers. In some instances, the Russian tax authorities haveapplied new interpretations of tax laws retroactively. There is no establishedprecedent or consistent court practice in respect of these issues. Taxpayersoften have to resort to court proceedings to defend their positions against thetax authorities. Recent events within the Russian Federation suggest that thetax authorities may be taking a more assertive position in theirinterpretations of the legislation and assessments.

 

In addition, differing interpretations of taxregulations exist both among and within government ministries and organizationsat the federal, regional and local levels, creating uncertainties andinconsistent enforcement. Tax declarations, together with related documentationsuch as customs declarations, are subject to review and investigation by anumber of authorities, each of which may impose fines, penalties and interestcharges. Generally, in an audit taxpayers are subject to inspection withrespect to the three calendar years which immediately proceeded the year inwhich the audit is carried out. Previous audits do not completely excludesubsequent claims relating to the audited period because Russian tax lawauthorizes upper-level tax inspectorates to review the results of tax auditsconducted by subordinate tax inspectorates. In addition, in July 2005, theRussian Constitutional Court

 

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issued a decision that allows the statute oflimitations for tax liabilities to be extended beyond the three-year term setforth in the tax laws if a court determines that a taxpayer has obstructed orhindered a tax audit. Because none of the relevant terms is defined, taxauthorities may have broad discretion to argue that a taxpayer has “obstructed”or “hindered” an audit and ultimately seek penalties beyond the three-yearterm.

 

In October 2006, the Supreme ArbitrationCourt of the Russian Federation introduced a new concept of “unjustified taxbenefit” which is defined mainly by reference to specific examples of such taxbenefits (*e.g.* absence ofbusiness purpose) and which may lead to disallowance thereof for tax purposes.There is currently no practice or guidance from the tax authorities or courts forinterpreting this new concept; however, it is likely that the tax authoritieswill actively seek to apply this concept when challenging in courts taxpositions taken by taxpayers. Although the intent of the court when introducingthe concept of “unjustified tax benefit” was to combat abuse of tax law, inpractice, there is no assurance that the tax authorities will not seek to applythis concept in a broader sense than may have been intended by the court. Inaddition, a recent pronouncement by a Russian court in December 2006indicates a trend within the judicial system to broaden the application ofcriminal responsibility for tax violations.

 

Also there is no concept of a tax group inRussia, nor can a consolidated filing be made by Russian companies for taxpurposes. Therefore, Russian companies and each of their Russian subsidiariespay their own Russian taxes and may not surrender profits or losses to othergroup companies for tax purposes. In addition, payments of dividends betweentwo Russian companies are currently subject to a withholding income tax of 9%at the time they are paid out of profits, although the effective rate of thistax may be lower than 9% if the company paying the dividends has received, inthe same or a preceding tax period, dividends from other Russian companies.This may give rise to additional tax liabilities and inefficiencies.

 

The foregoing conditions create tax risks inRussia that are more significant than those typically found in jurisdictionswith more developed tax systems and complicate tax planning and relatedbusiness decisions. They also impose additional burdens and costs on ouroperations, including management resources. In addition to our substantial taxburden, these risks and uncertainties complicate our tax planning and relatedbusiness decisions, potentially exposing us to significant fines and penaltiesand enforcement measures despite our best efforts at compliance. Our exposureto additional tax liabilities could have a material adverse effect on ourbusiness, financial condition, results of operations and prospects. See also “—RisksRelating to the Russian Federation—Legal Risks and Uncertainties—Selective orarbitrary government action could have a material adverse effect on ourbusiness, financial condition, results of operations and prospects and thevalue of the shares and ADSs.”

 

**OtherRisks**

** **

***We have not independently verifiedinformation we have sourced from third parties.***

*** ***

We have sourced certain information containedin this document from third parties, including private companies and Russiangovernment agencies, and we have relied on the accuracy of this informationwithout independent verification. The official data published by Russianfederal, regional and local governments may be substantially less complete orresearched than those of Western countries. Official statistics may also beproduced on different bases than those used in Western countries. Anydiscussion of matters relating to Russia in this document must, therefore, besubject to uncertainty due to concerns about the completeness or reliability ofavailable official and public information.

 

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## ***Item4.     Information on Our Company***

## *** ***

**A.               History and Development**

** **

We trace our history back to 1992, when agroup of individuals formed an enterprise which began leasing a production lineat the Lianozovsky 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 to their perceivedhigher quality and novelty and, since its introduction, the “Wimm-Bill-Dann”name has become a brand name recognized in a substantial percentage ofRussian households.

 

To take advantage of the opportunitiesarising from the privatization of Russian state-owned assets, our currentshareholders then began acquiring shares in the Lianozovsky Dairy Plant inMoscow, and continued to expand their juice product enterprises. Followingtheir acquisition of a majority stake in the Lianozovsky Dairy Plant in 1995,they added dairy products to their portfolio, thus becoming a dairy and juiceproducer. Our growth has been accomplished, in part, through significantacquisitions, including the following:

 

·       In 1995,we acquired majority control of the Lianozovsky Dairy Plant (renamed asWimm-Bill-Dann in 2006);

 

·       In 1996and 1997, we acquired majority stakes in the Moscow Baby Food Plant, theTsaritsino Dairy Plant and the Ramenskiy Plant (renamed as Wimm-Bill-DannBeverages in 2007);

 

·       In 1998 and1999, we began to expand into regions outside Moscow, acquiring dairy plants inNovosibirsk, Nizhny Novgorod and Vladivostok;

 

·       In 2000,2001 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;

 

·       In 2001,we acquired 100% interests in dairy plants in the Altaisky and Voronezh regionsof Russia;

 

·       In 2002,we acquired control of three dairy plants in the Krasnodar, Belgorod and Samararegions of Russia;

 

·       In 2002,we acquired control of a dairy plant in Kharkov, Ukraine;

 

·       In 2002,we acquired a 100% interest in the Roska Dairy Plant (renamed Baltic Milk in2004) in St. Petersburg;

 

·       In 2002,we acquired control of Depsona (since renamed Fruktopak) in Tula and a largewarehouse complex in the Moscow region;

 

·       In 2002,we acquired control of a dried milk plant in Buryn, Ukraine;

 

·       In January 2003,we acquired a 100% interest in Siberian Cheese, a refrigeration and warehousingfacility in Novosibirsk adjacent to our principal Siberian dairy productionfacility;

 

·       In August 2003,we acquired underground wells in the Essentuki area of Russia and a waterprocessing and bottling factory which produces “Essentuki” brand mineral waterthrough our purchase of 100% interests in the companies Healing Springs andGeiser;

 

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

 

·      In April, July andSeptember 2005, we acquired three raw milk production companies,Plemzavod Za Mir i Trud, Zavety Ilyicha and Trud Farms;

 

·                  In July 2005, we acquired 66.3% control ofthe Obninsk Dairy Plant in the Kaluga region which we increased to 96.45% in May 2007;

 

·       In July 2005,we acquired a 100% interest in the Kursk Baby Food Plant in the Kursk region;

 

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·       In October 2005,we acquired a 100% interest in the Essentuki Mineral Water Plant at CMW (CaucasianMineral Waters) in the town of Essentuki in the Stavropol region;

 

·       In December 2005,we acquired a controlling stake in Nazarovskoe Milk in the Krasnoyarsk region;

 

·       In December 2005,we acquired a 100% interest in the Pervouralsk City Dairy Plant in theSverdlovsk region;

 

·       In January 2006,we increased our aggregate ownership in the Moscow Baby Food Plant to 97.3%;

 

·       In September 2006,we acquired a 100% interest in the Surgut City Dairy Plant in Western Siberia;

 

·       In November 2006,we acquired 93.74% control of the Moscow-based dairy producer Ochakovo;

 

·       In December 2006,we acquired 100% control of the Omsk-based dairy producer Manros-M; and

 

·       In December 2006,we acquired 83.36% control of Angarsky Dairy Plant (MOLKA), one of the largestdairy enterprises in Irkutsk region.

 

·                  InOctober 2007, we acquired 100% control of dairy producer Georgian Foods inTbilisi, Georgia.

 

·                  In December 2007, we increasedour shareholding in Obninsk Dairy Factory OJSC to 99.84% of its charter capitalfrom the previous level of 96.45%.

 

Our operations are currently organized intothree separately reported segments: dairy products, beverages, baby food, alloperating under the umbrella of our holding company, Wimm-Bill-Dann Foods OJSC,which was incorporated on May 31, 2001. In addition, at the end of 2004,we created a separately managed non-core business unit called “Agro” for thepurpose of buying and managing a select number of dairy farms in certainRussian regions. “Agro” is currently reported as part of our dairy division.

 

In order to improve our corporate structureand management, as well as to reduce our expenses in 2007, we merged 14 of oursubsidiaries (Tsaritsino Dairy Plant, Ufa Dairy Plant, Siberian Milk DairyPlant, Rubtsovsk Dairy Plant, Siberian Cheese Plant, Nizhny Novgorod DairyPlant, Baltic Milk Dairy Plant, Nazarovo Dairy Plant, PAG Rodnik,Pervouralsk Dairy Plant, Kursk Baby Food Plant, Moscow Baby Food Plant,Timashevsk Dairy Plant and Vladivostok Dairy Plant) into Wimm-Bill-Dann(formerly Lianozovsky Dairy Plant). In 2008 we have merged nine othersubsidiaries into Wimm-Bill-Dann (Surgut Dairy Plant, Ochakovo Dairy Plant,Obninsk Dairy Plant, Pavlogradsky Dairy Plant, Krutinsky Dairy Plant, AngarskyDairy Plant (MOLKA), Anna milk, SP Julia, Va-Bank-2000). We are planning tocontinue the consolidation process throughout 2008.

 

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.

 

According to Standard & Poor’sglobal scale, our corporate credit rating is BB-, and Moody’s Investors Serviceranks our Corporate Credit rating as Ba3. In 2007, Standard & Poor’sGovernance Services confirmed our Corporate Governance Score (CGS) 7+, which isthe highest score in Russia.

 

Our legal name is Wimm-Bill-Dann Foods OJSC,and we are incorporated as an open joint stock company under the laws of theRussian Federation and registered with the Moscow Inter-District Inspectorate No. 39of the Russian Ministry of Taxes and Duties under the state registration number1037700236738. We operate in the Russian Federation and the CIS under

 

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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 andbeverages and children’s food. Our head office is located at 16 YauzskyBoulevard, Moscow 109028, Russian Federation, and our telephone number is +7495-925-5805. We maintain a website at http://www.wbd.com. The information onour website is not a part of this report. We have appointed CT CorporationSystem, 111 Eighth Avenue, New York, New York 10011, as our authorized agentfor service of process for any suit or proceeding arising out of or relating toour shares, ADSs, or the deposit agreement.

 

**B.   Business Overview**

** **

We are one of Russia’s largest manufacturers of food products. Our reportablebusiness segments in 2007 were dairy, beverage and baby food products. In 2007,the dairy segment accounted for 76.0% of our sales, the beverages segment,which includes juice and bottled mineral water, accounted for 17.0% of oursales and the baby food segment accounted for 7.0% of our sales.

** **

Since our founding in 1992, we have become the market leader in Russiain the dairy market and one of the market leaders in the juice market. In thedairy market, according to an AC Nielsen study of 24 major cities locatedthroughout Russia, including Moscow and St. Petersburg, we were the marketleader at the end of 2007 with a 33% market share in value terms. In theRussian juice market, according to a Business Analytica survey of all ofRussia, we had an 18% market share in terms of value at the end of 2007. In2007 we achieved market leadership in the baby food market with a 23% marketshare in volume terms (according to MEMRB), whilst our value share reached 18%.

 

We currently have 37 manufacturing facilities in Russia, Ukraine,Kyrgyzstan, Uzbekistan and Georgia as well as distribution centers in 24 citiesthroughout Russia and the CIS. During 2007, we employed on average 19,325people.

 

We offer our consumers a full range of quality branded dairy, juice,water and baby food products, using 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 demandsand tastes.

 

Our principal dairy products include:

 

·                  Traditional products, such as sterilized and pasteurized milk, butterand cream, as well as traditional sour-milk products such as kefir, cottagecheese, soft cottage cheese and sour cream;

 

·                  Yogurts and dairy desserts, such as traditional and drinking yogurt,fruit-flavored milk and kefir, puddings and flavored cottage cheese;

 

·                  Cheese products, including hard yellow and processed cheese.

 

Our principal beverage products include:

 

·                  Juice and nectars produced from juice concentrate;

 

·                  Enriched juice-based drinks;

 

·                  A traditional berry-juice-based drink mors made from natural berries;

 

·                  Bottled natural mineral water.

 

Our baby food products include:

 

·                  Liquid dairy products for infants under the age of three;

 

·                  Juices and water for infants under the age of three;

 

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·                  Meat, fish, poultry, fruit, vegetable and dairy purees for infants underthe age of three; and

 

·                  Products for pregnant women and nursing mothers.

 

**Business Goals andStrategy**

** **

Our strategy is driven by clearly defined business architecture. In March 2007,our senior management, after extensive consultation, approved a concisestrategic approach for the company aimed at meeting our qualitative andquantitative goals over monthly, quarterly, annual and multi-year timehorizons. This approach does not mark a departure from our longer-termstrategic vision, rather it lends greater clarity and defines the steps to betaken following the important restructuring work implemented during 2006. The visionis that by 2010 we should be Russia’s leading fast-moving consumer goods (FMCG)company with leading key profit ratios for the industry.

 

Our strategy reflects our mission and is driven by a vision of wherethe company should be in the future. The mission, as articulated during 2006,is to help the entire family live healthier by enjoying our nutritious anddelicious food and beverage products every day throughout their lives.

 

**Business Goals**

** **

Our business goals for 2010 represent the key individual elementsneeded to achieve this vision. By this date, our goal is to be recognized byboth consumers and all key Russian regulators as the leading food company interms of health and nutrition and for our top ten brands by revenue to be amongthe top-50 FMCG brands in Russia. At the same time, we intend to undertake anaccelerated process of innovation with the aim of increasing revenues by 2010.

 

In addition, we will seek to further strengthen our corporate image andto become one of the most desired employers of choice in Russia.  Finally, by 2010, we will aim to achievebetter route-to-market execution, with greater control over how products aresold at the outlet level.

 

**Business Strategies**

** **

In order to meet these goals, our strategy is focused on key elementsthat are relevant across all of our business units as well as departmentsserving the group as a whole, including Marketing, Human Resources, Researchand Development and Corporate Communications. These key elements are asfollows:

 

·                  **Investing in marketing to build brand equity**. We intend to increase our marketing activities and focus sponsorshipon sports and active lifestyle to promote the health and wellness values of ourbrands.

 

·                  **Investing in the sales team and route-to-market (RTM)control.** We will seek to increase our salesforce, with consolidated key account teams focusing on large and growing retailchain customers and an increased focus on training. We have defined ourmerchandizing standards and are starting to implement them in the markets wherewe are present.

 

·                  **Driving margin improvements through optimal brand,pack and price mix.** We will studychanging consumer price elasticity in order to adapt the right approach tobrand, packaging type and size as well as price. New, higher margin packagingwill be introduced with investment focused on higher margin brands.

 

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·                  **Driving lowest appropriate cost and protectingquality.** We will regularly audit retailersto ensure quality and provide detailed quality specifications for eachstock-keeping unit (SKU). We will seek to continue to improve plant efficiencyand reduce logistics costs. We also intend to continue to buy out minorityshareholdings and consolidate legal entities to create a more efficient andstreamlined company and tax entity.

 

·                  **Accelerating innovation, new category entry andacquisitions.** We will seek tocontinue to enter new and innovative categories and segments offeringprofitable growth consistent with our mission. We also intend to continue ourpolicy of acquiring successful companies across Russia and the CIS and we willcarefully study opportunities for selective acquisitions of other foodcompanies. Finally, we will continually assess the attractiveness and potentialfor entry into new strategic geographic areas.

 

·                  **Strengthening human resource capability**. We operate in both maturing markets, such as Moscow and St Petersburg,and emerging markets, such as Russia’s regions and the CIS. We will strive todevelop our human resource capability at all levels to attract and retaintalented executives with experience in developed and emerging marketsworldwide. At the same time, we are dedicated to developing our considerablehuman resource capacity within the company. This entails promoting talentedpeople within the organization and providing them with experience in otherparts of the business and other regions. We seek to provide ongoingopportunities for our employees to learn new skills through training andcontinued education in our Corporate University. A yearly appraisal processallows managers to understand what is expected from them, provides a forum fordialogue and an opportunity to discuss career planning. Improved corporatecommunications are also helping central management communicate the company’splans and goals to employees across the business and build a more unifiedcorporate culture. We understand that motivated and well-informed employees aredirectly responsible for our success.

 

**CurrentOperations**

** **

**DairyIndustry**

** **

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

 

We estimate, based on combined data from Comcon, AC Nielsen and RussianState Statistics, that per capita consumption of packaged dairy products inRussia was 66.1, 70.9 and 75.2 liters per year in 2005, 2006 and 2007,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 staple consumergoods. In addition, increasing per capita income following 1998 has positivelyaffected dairy consumption, particularly of higher-priced and higher-marginproducts such as yogurt and dessert dairy products.  We estimate that per capita consumption of traditionalpackaged dairy products in Russia increased 5.5% to 59.7 kg in 2007, from 56.6kg in 2006. We believe that packaged dairy product consumption levels willcontinue to increase at a solid pace in Russia due to increasing per capitaincome, the growing desire and demand for sterilized milk and the greaterconvenience of packaged products. The spike in raw milk prices observed in 2007caused retail price increases for dairy products and this could partiallyoffset consumption growth in 2008.

 

Since its first widespread commercial appearance in Russia in the early1990s, the popularity of yogurt has increased. For instance, the consumption ofsuch products as

 

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drinkableyogurt, functional foods/drinks and flavored milk is relatively high amongcertain groups of consumers and comparable with milk consumption levels.However, the per capita consumption of the above products remains relativelylow, although we believe that this segment of the dairy market has a highgrowth potential as incomes in Russia grow rapidly.

 

According to our estimates, annual per capita consumption of yogurt anddairy desserts in Russia increased to about 10.2 kilograms in 2007 from 9.3kilograms in 2006, reflecting an increase of 9.1%.

 

According to our estimates, annual cheese consumption (yellow, whiteand processed) in Russia increased by 7.5% to 5.4 kilograms per capita in 2007from 5.0 kilograms per capita in 2006. We believe that cheese consumptionlevels will continue to grow due to increasing per capita incomes and thegreater variety of cheese products available to Russian consumers.

 

***Production.  ***Milk productionand processing in Russia declined dramatically during the 1990s due to thegeneral state of the Russian economy, a lack of raw materials due, in part, tothe slaughter of dairy cows necessitated by a shortage of feed, and a sharpincrease in energy prices. Additionally, the majority of Russian milkproducers, comprising individual farmers and collective agriculturalenterprises, operate with inefficient and outdated facilities and equipment,and function under outdated management practices. Yields per cow are still lessthan half of those in Western Europe.

 

The result of this decline was a drop in processing volumes and anincreased reliance upon imported dairy products. While the financial crisis of1998 aided Russian producers to some extent, as it pushed imported foods out ofthe Russian market, it also caused difficulties for Russian companies thatdepended on imported materials for production. In general, producers that wereable to limit their exposure to fluctuations in the value of the ruble and toestablish links with Russian suppliers survived the crisis and took leadingpositions in the marketplace. The milk processing sector, however, stillremains fragmented, and currently includes over 1,600 registered producers,according to the official register of manufacturers. There is evidence, though,that the process of consolidation is under-way, with the less efficientproducers going out of business or being acquired by larger companies.

 

In addition, foreign, particularly European, producers have recognizedthe potential for growth in the demand in Russia for milk, yogurt and dairydesserts and are investing in the Russian market. A number of Europeanproducers, such as Danone, Parmalat, Campina, Lactalis and Ehrmann, producedairy products in Russia, principally in the Moscow region, and comprise ourprincipal competition in the yogurt and dairy dessert segment of the dairymarket. The dessert market is growing at higher rates than the traditionaldairy market. It is also developing to cater to changing consumer tastes withmore attention being paid to fresh health and wellness products.

 

We have made significant investments in the development of our ownfarms and also establishing long-term relationships with third party raw milksuppliers.  These steps help us toaddress the seasonal problem of raw milk deficits and increase the quality ofthe raw milk we purchase. The government has also started a large scale programaimed at the revival of the agricultural sector in Russia, which we see as animportant and helpful development.

 

**Juiceand Mineral Water industries**

** **

***Consumption.  ***Before the early1990s, consumption of juice products in Russia was limited. Juice productsmanufactured in the Soviet Union included only vegetable juices and fruitjuices made of locally grown fruit such as apples and pears. Most Russianhouseholds tried orange, pineapple, grapefruit and other exotic fruit juicesfor the first time in 1991 and 1992, following the dissolution of the SovietUnion. Russian juice consumption grew each year until 1998, when it fellfollowing the 1998 financial crisis, which led to a reduction in Russian incomesand a significant increase in the cost of juice products due to the increase inthe ruble cost of imported juice packaging and ingredients. While Russian juiceconsumption

 

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has recoveredfrom the effects of the 1998 financial crisis, it is still relatively lowcompared to most European countries.

 

The following table shows annual per capita juice and water product percapita consumption in liters in Russia and selected European countries in 2007according to Canadean:

 
| **Country**    | ** ** | **Juices, Nectars  & Still drinks** | ** ** | **Packaged Water** | ** ** |
|----------------|------------|--------------------------------------------------------|------------|-------------------------|------------|
| Germany        |       | 51                                                     |       | 156                     |       |
| Netherlands    |       | 49                                                     |       | 22                      |       |
| Poland         |       | 42                                                     |       | 62                      |       |
| United Kingdom |       | 38                                                     |       | 26                      |       |
| Hungary        |       | 35                                                     |       | 110                     |       |
| France         |       | 33                                                     |       | 120                     |       |
| Bulgaria       |       | 28                                                     |       | 70                      |       |
| Russia         |       | 22                                                     |       | 24                      |       |
| Italy          |       | 16                                                     |       | 198                     |       |

 

Source: Canadean, 2007

 

We estimate that the annual per capita juice product consumption inRussia in 2007, 2006 and 2005 was approximately 21.5 liters, 19 liters and 16liters, respectively, based on Business Analytica market estimates. Consumptionof bottled water in Russia is now on par with juice consumption. Still, webelieve that Russia has strong growth potential in this sector in comparisonwith consumption per capita in developed markets.

 

***Production.  ***Following thedissolution of the Soviet Union and the economic reforms that liberalizedimport procedures, foreign producers were able to capture a significant shareof the Russian juice market by importing their products. However, the 1998financial crisis caused a majority of the foreign companies to leave themarket, and also forced a majority of Russian producers to decrease ordiscontinue 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.

 

In addition, 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 2007,according to a Business Analytica survey of ‘Total Urban Russia’ (cities with apopulation of over 100,000 people), the four largest Russian producers had an85% share of the juice market. Russian producers often use cheaper domesticinputs and modern packaging technologies, and they increasingly promote theirbrands on a national scale. The industry is now experiencing consolidation, asdemonstrated by the increase in acquisition activity. According to the BusinessAnalytica survey, during 2007, there were more than 200 brands of juiceproducts in the Russian juice market, although 10 of them accounted for 77% ofthe market. The bottled-water market in Russia is characterized by a largenumber of brands, including local brands that are strong in the regions wherethey are produced. In addition, the leading brands in Moscow differ from thosewith leading market shares in many of the regions outside of Moscow. Accordingto Business Analytica, in 2007, the top-ten bottled water producers in Russiahad jointly a 71% market share in Moscow and a 66% market share in the tenlargest cities of Russia in value terms. This difference is largely due to theprominence of local or regional producers in certain regions outside of Moscowwhose water products have traditionally benefited from consumer loyalty inthose regions.

 

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**BabyFood Industry**

** **

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

 

·      powdered formula and cereals;

 

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

 

·      supplemental infant food products (early solid foods, including juices,purees);

 

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

 

According to our estimates, from 2003 to 2007, the baby food market inRussia grew by 77% in terms of volume, mainly due to growing categorypenetration. We estimate that over 80% of nationwide baby food product salesare in the European part of Russia.

 

In 2006, the Russian government launched a nationwide program aimed atimproving the health of the nation and increasing the birth rate, which webelieve could have a positive impact on the baby food market over the next fiveyears. Within the framework of the program, mothers get additional compensationfor the birth of their second and following children. More and more Russianwomen go back to work shortly after giving birth. Many of them rely onready-to-eat baby food.

 

***Production.***The baby food market emerged in Russia in the early 1990s with agovernment plan to build approximately 110 production sites throughout thecountry to develop baby food products such as meat, fruit, vegetable, grain andfish purees and various dairy products. Although only a small number of thesegovernment-sponsored production sites have since been built, domestic andforeign producers of baby food started to acquire production facilities inRussia in the second half of the 1990s. Since 2000, the baby food market hasgrown substantially with additional types of products being introduced andincreased consumption due to the increasing birth rate in Russia.

 

In the individual product categories, foreign producers currentlydominate the powdered formula and cereals market, while domestic producers holdleading positions in the liquid dairy products and supplemental infant foodmarket.

 

**Ourproducts and brands**

** **

Our dairy, beverage and baby food productsaccounted for 76.0%, 17.0% and 7.0% of our net sales in 2007, respectively. Ourprincipal geographic market is Russia, with Moscow being the most significantone. The following table sets forth our annual consolidated net sales, the proportionof consolidated net sales accounted for by our main business lines, ourreported annual production volumes and their growth rates:

 
| ** **                             | ** ** | **2007**   | ** ** | **200****6** | ** ** | **2005**   | ** ** |
|----------------------------------------|------------|------------|------------|--------------|------------|------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** |
| **Dairy products**                     |       |       |       |         |       |       |       |
| ** **                             |       |       |       |         |       |       |       |
| Sales (in millionUSD)                  |       | 1,853      |       | 1,321        |       | 1,004      |       |
|                                   |       |       |       |         |       |       |       |
| Annual sales growth (% year on  year)  |       | 40.2       | %          | 31.6         | %          | 22.6       | %          |
|                                   |       |       |       |         |       |       |       |
| Percent of total sales                 |       | 76.0       | %          | 75.0         | %          | 72.0       | %          |
|                                   |       |       |       |         |       |       |       |
| Sales volume (in th. tons)             |       | 1,599      |       | 1,354        |       | 1,195      |       |
|                                   |       |       |       |         |       |       |       |
| Annual volume growth (% year  on year) |       | 18.2       | %          | 13.2         | %          | 8.7        | %          |
|                                   |       |       |       |         |       |       |       |
| **Beverage products**                  |       |       |       |         |       |       |       |
| ** **                             |       |       |       |         |       |       |       |
| Sales (in million USD)                 |       | 414        |       | 324          |       | 303        |       |
|                                   |       |       |       |         |       |       |       |
| Annual sales growth (% year on  year)  |       | 27.8       | %          | 6.9          | %          | 0.7        | %          |

 

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| Percent of total sales                 |       | 17.0      | %          | 18.4      | %          | 21.7      | %          |
|----------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                                   |       |      |       |      |       |      |       |
| Sales volume (in million  liters)      |       | 491       |       | 445       |       | 436       |       |
|                                   |       |      |       |      |       |      |       |
| Annual volume growth (% year  on year) |       | 10.3      | %          | 2.1       | %          | -5.7      | %          |
|                                   |       |      |       |      |       |      |       |
| **Baby food products**                 |       |      |       |      |       |      |       |
| ** **                             |       |      |       |      |       |      |       |
| Sales (in million USD)                 |       | 172       |       | 117       |       | 88        |       |
|                                   |       |      |       |      |       |      |       |
| Annual sales growth (% year on  year)  |       | 46.6      | %          | 33.5      | %          | 35.9      | %          |
|                                   |       |      |       |      |       |      |       |
| Percent of total sales                 |       | 7.0       | %          | 6.6       | %          | 6.3       | %          |
|                                   |       |      |       |      |       |      |       |
| Sales volume (in th. tons)             |       | 87        |       | 66        |       | 58        |       |
|                                   |       |      |       |      |       |      |       |
| Annual volume growth (% year  on year) |       | 31.9      | %          | 14.7      | %          | 15.5      | %          |
|                                   |       |      |       |      |       |      |       |
| **Total net sales (in million  USD)**  | ** ** | **2,438** | ** ** | **1,762** | ** ** | **1,395** | ** ** |

 

**Dairy Products and Brands**

 

Our principal dairy product lines, types of products, principal brands,and their approximate percentage of our total dairy revenue in 2007, 2006 and2005 are as follows:

 
| **Product line** | ** ** | **Main brands**                                                                                                                                                | ** ** | **Approximate  percentage of  total dairy  revenue in  2007** | ** ** | **Approximate  percentage of  total dairy  revenue in  2006** | ** ** | **Approximate  percentage of  total dairy  revenue in  2005** | ** ** |
|-----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| Essential Dairy       |       | “Vesely Molochnik”, “M”, “Kubanskaya Burenka”, “33 Cows”, “Pastushok”                                             |       | 41                                                                           | %          | 39                                                                           | %          | 46                                                                           | %          |
|                  |       |                                                                                                                                                                |       |                                                                         |       |                                                                         |       |                                                                         |       |
| Value-Added Dairy     |       | “Little House in the Village”, “Beauty”, “Imunele”, “Chudo”,  “Bio-Max”, “Lamber”, “Mazhitel” |       | 59                                                                           | %(1)       | 61                                                                           | %          | 54                                                                           | %          |

 

The Russian market for packaged dairy products has several definedmarket segments. It can also be divided into non-branded and branded products,although non-branded products generally cover only the low segment of themarket. Our branding policy is designed to ensure we reach customers in most ofthe segments with the right mix of brands, products and packaging formats. Wesupport strong national brands, as well as a few key local brands which arewell established in their respective regions. The following chart illustratesour estimates of the current market segment positioning for our major brands,as well as a general description of the purchasers which each market segmentcovers:

 

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(1) Slightdownshift was caused by the acquisition and portfolio integration of Ochakovoand Manros.

 

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| **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, monthly income above $500 per family member |       | “Little House in the  Village”                                                                                                                |       |                                                      |       | “Beauty”, “Imunele”,  “Bio-Max”, “Mazhitel” |       | “Lamber”           |
|            |       |                                                                                         |       |                                                                                                                                                    |       |                                                      |       |                                                                                |       |                         |
| Value for Money |       | Enough money to buy  food and clothing, but not enough to buy major household appliances     |       | “33 Cows”, “Na  Zdorovye”, “Vesely Molochnik”, “Slavyanochka”, “Kubanskaya Burenka” and “M” |       | “Chudo”, “Frugurt”,  “Lada” |       |                                                                                |       | “Vesely Molochnik” |
|            |       |                                                                                         |       |                                                                                                                                                    |       |                                                      |       |                                                                                |       |                         |
| Econom          |       | Enough money for food  only                                                                  |       | “Zavetny Bidonchik”,  “Pastushok”, “Nash Doctor”                                                                          |       |                                                      |       |                                                                                |       |                         |

 

In general, we seek to maintain at least one brand within most dairymarket segments, and we intend to develop new brands to expand our coverage ofattractive segments. In 2003 we launched the premium “NEO” brand and themass-market “Zavetny Bidonchik”. In the premium segment of the market welaunched a broad selection of products throughout 2004 and 2005, including ourflagship functional product Imunele. In 2007, we extended our functional rangeto include Beauty with aloe vera, the first product of its kind on the Russiandairy market.

 

***Market trends and*****competition**.   The Russian dairy market has been growing in the lastthree years. According to our estimates, the total market for packaged dairyproducts in Russia was 8.8 billion liters in 2005, 9.3 billion litersin 2006 and 9.9 billion liters in 2007. We believe that consumption may continueto increase, as rising household incomes in Russia may tend to bring abouthigher protein consumption and preferences for dairy products. In particular,Russian households have proven receptive to yogurt, enriched dairy products anddessert dairy products. Given the existing low per capita consumption, we seethis market segment as providing an opportunity for growth. We also expectcontinued growth in the consumption of products with long shelf life, includingsterilized milk.

 

Though some measure of consolidation is occurring in the Russian dairyindustry, the milk processing sector in Russia remains fragmented and includesmore than 1,600 large, medium and small enterprises. Due to the high degree offragmentation, the market is very competitive in pricing terms. From 2000 tothe present, we have expanded our distribution capacity, reduced our sales towholesalers, increased our sales to retailers and increased advertising. Wealso remain committed to our regional expansion strategy and are constantlyexpanding our regional product offerings as consumer spending is growingsteadily in the regions. Cutting costs and improving the quality of ourproducts remain our main focus areas. We believe that these strategies andstrengthening marketing investment have increased public awareness and loyaltyto our products and helped us expand our business. We have also increased ourproduction of value-added products available in attractive and convenientpackaging.

 

In the dairy market, according to an AC Nielsen study of 24 majorcities, including Moscow and St. Petersburg, we were the market leader at theend of 2007 with a 34% market share in volume terms*. In the traditional dairymarket, we lead the market with a 33.5% market share in volume terms. In the enricheddairy market, our share was 29% in volume

 

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* Thedairy market shares stated for our company and all the competitors exclude ineach case cheese and butter

 

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terms at theend of 2007. In yogurts and desserts, we were the market leader with 45.1% involume terms.

 

In traditional dairy, we compete primarily with local producers, suchas Unimilk, Voronezhsky M.K. (Molvest), as well as with a number of smallerregional producers. In enriched dairy, we compete primarily with Groupe Danone.In yogurts and desserts and, to some extent, in products for children, wecompete with foreign producers such as Danone, Campina and Ehrmann who continueto invest in their businesses in Russia. We view the following producers as ourprimary competitors:

 

·                  *Groupe Danone*, a French company which is the most active foreign producer in Russiaand aggressively promotes its products. It has a dairy plant in the Volgaregion where it produces yogurts, as well as a dairy plant in the Moscowregion. We understand that Danone may have plans to build a new plant inSiberia. Both domestically produced and imported products are sold under theDanone brand name across Russia through its own distribution network. Keybrands are Activia, Actimel, Rastishka and Danissimo. According to the ACNielsen study of 24 cities, in 2007, Danone had a 12.9% market share in yogurtsand desserts in volume terms and a 6.7% share of the total Russian dairy marketin volume terms.

 

·                  *Unimilk*, the secondlargest dairy holding company in Russia. Unimilk has over 25 dairy productionfacilities in Russia and two in Ukraine. Its largest production facility, theSt. Petersburg-based Petmol, produces a wide range of dairy products. Accordingto the AC Nielsen study of 24 cities, in 2007, Unimilk had a 12.9% market sharein traditional dairy, a 6.5% market share in yogurts and desserts and 13.1%share of the total Russian dairy market in volume terms.

 

·                  *Ehrmann*, a Germancompany producing yogurts at its plant located in the Moscow region. Its brandnames Ehrmigurt, Yogurtovich, Fruktovich and Uslada were developed specificallyfor Russian consumers. According to the AC Nielsen study of 24 cities, Ehrmannhad a 5.7% market share in yogurts and desserts in 2007 in volume terms.

 

·                  *Voronezhsky M.K.,* a Russian company producing a wide range of dairy products. Its mainbrand names are Vkusnoteevo and Ivan Poddubniy. According to the AC Nielsenstudy of 24 cities, Voronezhsky M.K had a 4.3% market share in traditionaldairy and a 3.8% share of the total Russian dairy market in volume terms in2007.

 

·                  *Campina* is aninternational co-operative dairy company that specializes in production ofmilk, yogurt and desserts. Its main brand names are Campina, Fruttis, Nezhniy,Stupinskoe and Yogho! In May 2008, Campina and Friesland Foods, anotherlarge international diary co-operative, signed a merger agreement, which issubject to the approval of European regulators. According to the AC Nielsenstudy of 24 cities, Campina had a 7.7% market share in yogurts and desserts in2007 and a 1.2% share of the total Russian dairy market in volume terms.

 

Recent trends also indicate that industry consolidation may lead to theemergence of larger domestic producers, which could become our significantcompetitors.

 

Foreign dairy manufacturers generally have large promotional budgetsand advanced production know-how, allowing them to offer quality and innovativeproducts, and strong distribution networks. While foreign manufacturersgenerally tended in the past to focus on niche markets, usually in the premiumsegment, they are now increasingly offering products to an average Russianconsumer with an average income. For example, Danone owns two plants in Russiaand has introduced several of its yogurt brands into the Russian market, someof which were developed specifically for Russian consumers. Dutch companyCampina also owns a dairy plant in Russia that produces fresh yogurts andyogurts with a long shelf life. In addition, the German companies Ehrmann and Onkenproduce yogurt at Russian plants, and

 

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Onken launchedits own dairy production factory in Russia in 2003. Foreign cheese producersalso launched production facilities in 2003, including French company Lactalisand German company Hochland. In 2004, Lactalis acquired FoodmasterInternational, a company owning seven dairy factories in Kazakhstan, Moldovaand Ukraine that produce milk, kefir, sour cream, yogurt and cheese. In Russia,Lactalis owns Lactalis Istra, a factory located near Moscow with capacity toproduce up to 6,000 metric tons of cheese annually, and in Ukraine it owns adairy plant in Nikolaev that produces various dairy products. Due to theirincreased domestic production of yogurt and dairy desserts, foreign producershave become our main competitors in these sectors, whereas we mainly competewith domestic producers in the traditional dairy sector.

 

We believe that we have several important competitive advantages thatwill allow us to maintain a leading position in the Russian dairy market:strong and diversified brands, stable access to raw milk, a broad distributionnetwork, new product development focus, a substantial in-house R&Ddepartment, modern production assets and technology, access to external capitaland a strong management team. We also benefit from our strong regionalproduction base, while our foreign competitors must generally transport theiryogurts and premium segment desserts from Moscow to the regions, which iscostly and logistically complex.

 

We intend to take advantage of these strengths through our strategy ofpromoting brand awareness and loyalty with an emphasis on product quality, aswell as by continuing our efforts to focus on developing new products equal toor better in quality than those offered by Western producers.

 

**Beverageproducts and brands**

** **

Our beverage products consist of juice and bottled mineral and drinkingwater products. In 2007, juice products made up 92.5% of beverages sales withbottled mineral water accounting for 7.5%.

 

Our juices are produced primarily at the Ramenskiy Plant in Moscow(renamed Wimm-Bill-Dann Beverages in 2007) and at Fruktopak in Tula, and wehave also retained juice lines at our dairy production facilities inVladivostok, Novosibirsk and at the Tsaritsino Dairy Plant in Moscow. Ourmineral water is produced at our two plants in the Essentuki area.

 

Our principal beverage product lines and types of products and brandsare as follows:

 
| **Product Line**                              | ** ** | **Brands and Types of Products**                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|----------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Juice and nectars  produced from juice concentrate |       | ·        “J-7,” covering 14 kinds of fruit  and berry juices and nectars

·        “100% Gold,” covering 9 kinds of  fruit juices and nectars

·        “Lovely Garden,” covering 17 kinds  of fruit 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 Exotic,” an exotic fruit  juice and nectar range                                                                                                                                                                                                                                                                                                                                                                               |
|                                               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Traditional  berry-juice-based drinks              |       | ·        “Wonder Berry,” covering 4 kinds  of berry-juice based drinks. Compote was moved out of range in the beginning  of 2007.                                                                                                                                                                                                                                                                                                            |
|                                               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Mineral water                                      |       | ·        “Essentuki,” covering 3 kinds of  therapeutic mineral water (Essentuki #4, #17 and #20)                                                                                                                                                                                                                                                                                                                                             |
|                                               |       | ·        “Novoessentukskaya,” covering 1  kind of therapeutic mineral table water                                                                                                                                                                                                                                                                                                                                                            |

 

The juice market consists of three basic segments, and WBD juiceproducts are presented in all of them. We have positioned our portfolio ofjuice and nectar brands against three major volume segments, so that our threebrands are placed in key competitive price segments. Investments into J-7 andEssentuki marketing and distribution in 2007 have been very successful.

 

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Forexample, in 2007, we introduced new packaging design and marketing approachesfor “J-7” brand products. The main packaging for the brand remains Tetra Prizmaand PET packaging. The portfolio of “Lovely Garden” was improved andstrengthened via additional introductions of ‘Future Consumption’ packs andsmaller format 0.5 liter packs, which had not been used previously for “LovelyGarden”. In addition, the use of 2-liter packaging was extended to otherflavors, 1.5-liter packs were launched along with the 0.5 liter format in threeflavors. “Wonder Berry” remained in 1-liter and 0.33 liter packs. At the end of2007, we moved from 0.425 liter PET bottles to 0.39-liter formats for “J-7” and“Lovely Garden”. A new pack design in new Tetra Prizma packaging was launchedfor “100% Gold” juices and nectars in the 1-liter format.

 

 In 2007, J-7 was repositioned to the premiumsegment and showed strong business results. The following chart illustrates ourestimates of the current market-segment positioning for our major brands, aswell as a general description of the purchasers which each market segmentcovers:

 
| **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

· Men and women in the middle to upper-middle income bracket                                                                                                                                                                                                                    |       | “J-7”                                                 |       | “Wonder Berry”                           |       | “J-7 Exotic”              |       | “Essentuki”         |       |
| Value for Money |       | ·  Aged 20-45

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

·  Active, optimistic and open-minded

 

Aged 25-45 

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

·  Self-confident, rational, but not trend setters |       | “100% Gold”                                           |       |                                               |       |                                     |       |                          |       |
| Econom          |       | ·  Aged 25-45 

·  Men and women typically with children and below average incomes; family  oriented                                                                                                                                                                                         |       | “Lovely Garden”                                       |       | “Lovely Garden”                          |       |                                     |       | “Novoessentukskaya” |       |

 

Ourmain water brand is produced at factories from underground wells in theEssentuki area of Russia. Our mineral water products are positioned in both premiumand econom segments of the market and cater to consumers who prefer bottlednatural mineral water to purified or ordinary tap water. We remain committed toexpanding our Essentuki production capacity.

 

Ouraim in entering the bottled water sector is to satisfy the growing demand amongRussian consumers for quality mineral and drinking water using ecologicallypure Russian 

 

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sources. We believe thatconsumers will eventually distinguish and value the superior quality spring andnatural water that we offer them as opposed to purified water.

 

Webelieve that our primary competitors in this area are Pepsi’s “Aqua Minerale”and Coca-Cola’s “BonAqua,” as well as Borzhomi, Narzan and Saint Springs, allof which are produced in the CIS. We have positioned our brand in a moreup-to-date style, accentuating the fact that it is naturally produced mineralwater, and offer both still and carbonated waters in a variety of bottle sizes,giving consumers a wider selection.

 

***Market trends and competition.  ***The Russian juicemarket grew steadily from the time of the dissolution of the Soviet Union untilthe 1998 financial crisis, following which there was a significant decrease inconsumption from which the market had substantially recovered by 2000. Thetotal market for juice products, defined as the total consumption ofdomestically produced and imported products, increased to 3,062 millionliters in 2007, according to Business Analytica, from 2,700 million litersin 2006. We believe that rising household incomes in Russia and the increasingpreference for juice over fresh fruit, which generally accompanies increasedincomes, will encourage the consumption of vitamin-rich, value-added productswith different tastes and nutritional characteristics. For example, accordingto Business Analytica, in Moscow, which enjoys higher average per-capitaincomes than most other parts of Russia, the average consumption of juice in2007 was approximately 51 liters per capita, as opposed to national percapita consumption of approximately 21.5 liters per capita (according toCanadean study). The most dynamic growth in recent years has been in thelower-middle price bracket, which we expect will continue to drive market growthin the foreseeable future.

 

Themarkets for juice products in Moscow, the Moscow region and St. Petersburg arerelatively mature compared to other regions of Russia, and are expected toexhibit relatively modest growth rates in the future, with particular growthexpected in the upper-middle product segment. We believe that significantgrowth opportunities lie in the regions of Russia. In many of them juice isstill a novelty and we believe that with rising household incomes there will bea growing demand for lower-middle juice offerings. The operating environmenthas been challenging since the 1998 financial crisis. Competitive pressureshave intensified because of the low purchasing power of households outside ofMoscow and St. Petersburg and the rising number of domestic producers. Weinitially responded to this competitive challenge by introducing two newbrands, one targeted at the middle-market price segment and the other at themass-market price segment. In addition, we have been revising our juice distributionnetwork, reducing the number of distributors we work with and building strongerrelationships with distributors having direct distribution capabilities. Webelieve that, together with the launch of new products, the increased share ofhigher-priced products in our product mix, increased advertising, new packagingand increased production capacity, these strategies will increase publicawareness of our products and our sales, which will allow us to expand ourmarket share at acceptable prices.

 

Inthe Russian juice market, according to a Business Analytica survey of all ofRussia, we had an 18% market share in value terms at the end of 2007.

 

Ourprincipal competitors in the Russian juice market include the followingcompanies:

 

·      *Multon*is based in St. Petersburgand, according to Business Analytica, had a 22% market share in Russia in 2007.Dobry, Rich and Nico are key brands of the company. Multon gained significantmarket share since 1998 primarily through aggressive pricing policies andadvertising. In 2007 it launched the Rich Fruit drinkable puree. Multon wasacquired by Coca-Cola in April 2005.

 

·      *Lebedyansky* is based in theLipetsk region and, according to Business Analytica, had a 28% market share inRussia. Tonus, Ya, Fruktovy Sad and other brands have become well-known amongRussian consumers. In 2007 Lebedyansky acquired Troya 

 

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Ultra juice producer based in St. Petersburg andcomplete purchase of Progress juice plant. In March 2008 PepsiCo announcedacquisition of 76% of Lebedyansky.

 

·      *Nidan* is a Novosibirsk-basedRussian company that accounted for 16% of the market in value terms in 2007.Moya Semya is a major brand of the company. Other key brands are Caprise andChampion. In August 2007 Lion Capital, a British investment fund, agreed toacquire 75% of Nidan’s shares.

 

Themarket shares of our principal competitors mentioned above are indicated ineach case as of the end of 2007, in value terms.

 

Themarket for mineral water is characterized by rising consumption, as well asmany local brands that are strong in their respective home regions. Accordingto Business Analytica, the total market for bottled water in Russia increasedto 3,349 million liters in 2007 from 2,965 million liters in 2006. Russianbottled-water producers dominated the market, with a 67% market share in termsof value, while the share of the two market leaders, PepsiCo and Coca-Cola,accounted for 33%, according to a Business Analytica survey of Russia’s 10largest cities in 2007. According to the same survey, we were among the top-tenwater producers in Russia, with a 2.9% market share by value. The market growthin recent years has been driven mainly by the increased consumption of bottledwater sold in large packaging, which is consumed for drinking, as well ascooking purposes. We believe that this market will continue to expand in thecoming years due to the growing per capita income in Russia and increasingconcern among the population over food and water quality.

 

**Babyfood products and brands**

** **

Ourbaby food products, sold under the “Agusha” brand, include liquid dairy babyfood, juice, purees and products for pregnant and nursing women. These productsare mainly produced at the Moscow Dairy Baby Food Plant and at the Kursk BabyFood Plant, with production launched at Manros-M in Omsk in March 2008. In2007, baby food products comprised 7% of our total sales.

 

Asof 2005, baby food is a stand alone business for operational and reportingpurposes. Prior to 2005, baby food was part of our dairy segment.

 

Weare currently developing our baby food division by focusing on geographicalexpansion, full range of products and increased production. We also plan tolaunch new products, as well as expand the range of the existing ones.

 

Tofurther expand our geographical reach and widen our portfolio, we acquired theKursk Baby Food Plant in July 2005 and re-launched it after an extensivemodernization in April 2007. The plant sources certain of its raw materialsfrom its own fruit orchards, and our acquisition of the plant allows us toexpand our baby food product range to include fruit and vegetable 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. The baby foodmarket is already consolidated, with top six players accounting forapproximately 78% of the total baby food market, according to MEMRB. Given theexisting low per capita consumption and growing incomes this market segment hasa strong growth potential. Another factor driving the growth of the Russianbaby food market is the increase in the number of infants aged four and under 

 

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by 3.5% in 2005, by 2.5%in 2006 and by 2.6% in 2007, according to the Federal State Statistics Service(former GosKomStat).

 

Accordingto MEMRB, we were the market leader in dairy products for babies and infants inRussia in 2007, with 75% value share, followed by Petmol (part of Unimilk,Tyoma brand) with 25% value share. Nestlé and Nutricia were the market leadersfor powdered formula and cereals, with 50% and 31% value shares in powderedformula and 21% and 29% value shares in cereals, respectively.  Localproducers of baby food products are also active in regional markets, thelargest of which are the Zelenodolsk Baby Food Dairy Plant, Ekaterinburg DairyNo. 1, Novosibirsk Dairy and Ratmir Tver Dairy.

 

Amongthe leading producers of baby food in Russia are foreign companies such asNestlé, Nutricia, Heinz and Hipp, which generally operate in all of the mainbaby food categories, as well as domestic producers such as us, Nutritek, MKTikhoretsky and Lebedyansky, which generally operate in select baby foodproduct categories.

 

**NewProduct Development**

** **

Fora leading consumer goods company operating in an ever more competitivemarketplace, we rely on the process of innovation in order to strengthen ourmarket position and win market share in other segments. A high-technologyresearch and development capability is a crucial competitive advantage for usand a key to our long-term profitability growth.

 

OurResearch and Development (R&D) base, employing more than 40 people, islocated at Lianozovsky Dairy Plant in Moscow, the company’s flagship enterpriseand one of the largest and one of the best technically equipped dairyproduction facilities in Europe including its own testing platform.  R&D creates and tests new products forthe company’s dairy, beverages and baby food units, working closely withproduction across the company. Since 2006, with the creation of the new post ofHead of Marketing and Innovation, R&D is working even more closely withMarketing to combine intelligence and research about changing consumer habitsand patterns to develop new products across all three main business units.

 

Innovationscan include enriched versions of existing products, new formats and packagingfor popular products – changing how they are consumed – and wholly new productsfor the Russian market. New packaging technology can turn a product into aconvenient snack or meal, such as “Vesely Molochnik” kasha with a spoon. All ofthese innovations are aimed at providing higher margin goods for the companyand nutritious, convenient and tasty foods for the consumer.

 

Lookingforward, new product development is being conducted in line with the company’smission to provide healthy, high-quality and safe foods for the entire family.Functional foods, products aimed at women and convenience products for busylifestyles are key areas of focus. The department is working to develop new,enriched products that deliver added nutrition through the use of biologicallyactive ingredients that help deliver essential nutrients. The successful launchin the second half of 2007 of the “Beauty” brand, which contains aloe extractand is formulated to rejuvenate the skin, nails and hair, is an example ofsuch a functional product. In baby food, R&D is focused on filling out ourrange and enhancing product quality.

 

Muchof our new product development effort over the past three years has focused onhigher-margin, value-added yogurt and dessert products. At present, we arefocused on the development of value-added dairy products oriented towardsRussian consumers, taking into consideration the general deficit of micro- and macro-nutrientsin the diets of the average Russian consumer, and leveraging our superiorunderstanding of Russian taste preferences.

 

Throughout2005 and 2006 we actively develop our cheese and enriched dairy products. Weexpanded our cheese production, introducing new brands and varieties. Forexample, we 

 

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introduced a wideselection of processed cheese products under our “Vesely Molochnik” brand, aswell as hard cheese sold under “Lamber” brand. In addition, in 2005, welaunched a new line of “5 Grain” yogurts and cottage cheese products and lowlactose milk under the “Bio-Max” brand.

 

In2006, we launched a new kefir called “Effective” under the Bio-Max brand. Inaddition, in 2006, we launched rice pudding under the “Vesely Molochnik’’brand.

 

Inthe beverages segment, we launched a new product under our “Lovely Garden”brand called “Lovely Garden—10 Vitamins” during 2005. In the same year, weintroduced new PET bottle packaging for this brand.

 

In2006 we launched a new production line at the Kursk Baby Food Plant for juicesand fruit purees. In the first quarter of 2007 we launched new Agusha productranges, including meat and fish purees containing essential vitamins andminerals and made from GM-free ingredients. The Chudo assortment reached 200SKUs (stock-keeping units) by the end of 2007, offering wider range of flavorsin every category it operates.

 

During2007 a significant number of innovative products were introduced to Russianconsumers. The launch of “Beauty” was considered one of the most importantlaunches across the portfolio. A number of packaging ideas were implemented in2007, such as multipacks for Chudo, Imunele and Beauty to stimulate consumeroff-take. J-7 core orange flavor upgrade, new packaging and advertisingcampaign stimulated J-7 sales growth in 2007. In addition, a number of newflavors were launched in the Juice segment, including two versions of tomatojuice under the “Lovely Garden” brand and “Mango Cinnamon” under J-7.

 

**Advertisingand Marketing**

** **

Brandbuilding and marketing have always been at the core of our business. Since theearly 1990’s, we have built brands into household names in Russia and theCIS,  from the J-7 brand of juice to oneof Russia’s first yogurts under the Chudo brand to Agusha, the most popularbaby food brand.

 

Ourmarketing strategy is aimed at turning our leading portfolio of brands intoeven stronger competitive advantage. We will aim to accelerate brand buildingbased on a deeper understanding of consumers and faster reaction to new trendsin the marketplace. As the cost of advertising on Russian television continuesto rise, we will concentrate on more focused and more efficient campaigns toreach target consumer audiences.

 

Ourinvestment in some 10 power brands in 2007 is aimed at increasing their averageselling price and market share, while achieving the right product mix. Webelieve, our most successful brands still have considerable untapped potential.

 

Injuice, the J-7 brand saw radical changes in 2007, with a new, breakthroughadvertising campaign, new packaging, improved taste profile and new pricingstructure.

 

Insteadof viewing products within the context of a single market niche, all of ourpower brands are today being positioned on the basis of health and wellness,reflecting our mission and the emerging trend toward healthier lifestylesvisible today in Russia. We see each brand as a reflection of our broadercorporate identity, with our label on every product aimed at conveying a consistentmessage of quality, taste and health.

 

Inaddition, the scientific potential of the R&D division and consumerknowledge have been brought together, with R&D reporting to marketing. Theinnovation process has been accelerated with a focus on value-added, functionalfoods.

 

Ouradvertising and marketing expenditures of $57.9 million in 2005, $76.2million in 2006 and $138.0 million in 2007 constituted 4.1%, 4.3%, and5.7% of net sales, respectively. Though we are, in some instances, able toobtain volume discounts, we expect these expenditures, as a percent of netsales, to increase significantly due to market competition and annual mediainflation. According to Gallup, in Russia, we were the ninth largest advertiserin 2005, the twelfth largest advertiser in 2006 and the tenth largestadvertiser in 2007. In 2007, 

 

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we began systematictesting of the quality of our advertising, and saw positive results on severalkey brands, including J-7, Little House in the Village and Agusha.

 

Weplan to continue to allocate the bulk of our advertising budget to a limitedgroup of strategic brands which are highly ranked in their respective markets.We also plan to continue our aggressive advertising and marketing of selectednew products.

 

Wehave also built brand awareness through charitable work and sponsored events.For example, in 2004, 2005 and 2006, we sponsored the “Tefi” NationalTelevision Awards program. For several years, we have sponsored International CharityFoundation events benefiting orphans through its “Hope Around the World”program. We also support several other charitable organizations and serve as atrustee of the Charity Foundation for Special Grants, which was headed by thelate Mstislav Rostropovich, a prominent Russian musician.

 

**Salesand Distribution**

** **

According to Russia’s Federal Statistics Agency, totalretail sales in 2007 in Russia as a whole grew 15.2% year-on-year.

 

 Seven Russianregions (Moscow, Saint-Petersburg, Moscow region, Sverdlovsk region, Rostovregion, Tyumen region and Krasnodar region) accounted for 43.2% of total retailturnover, including 19% in Moscow alone.

 

In recent years, individuals in Russia have beenspending an increasing percentage of their incomes on consumer goods. In 2007,the cash income of the population grew 22.4% compared to 2006, and purchase ofgoods and services grew by 23.5%. The growth in the income of the populationled to growth in demand as well as a change in its structure, as consumersbegan to buy more expensive and higher quality goods.

 

Today, Russia’s retail landscape is in the midst of atransformation. International and domestic food retail chains, the familiarretail model in Western countries, have expanded, replacing more traditionaloutlets such as open markets and kiosks.

 

Anotable feature of 2007 was a decrease in sales at open markets. Retail volumesat open markets in 2007 were 10% below 2006 levels. The decline of open marketsreflects the fact that modern stores provide a wide range of products across awide range of price categories and that consumers are increasingly dissatisfiedwith the quality of products as well as environment and lack of convenienceinherent in shopping at open markets. At the same time, the current share ofmodern****retail formats among total retailturnover in Russia as a whole remains low compared to developed markets, ataround 25% compared to 75% in most of Europe.

 

Theabsolute size of the retail market continues to grow every year, with Russia’sregional markets seeing the fastest growth. According to Business Analytica andNielsen data, the share of sales via modern formats, such as supermarkets,hypermarkets and discounters, in general volume of retail sales is seeing rapidgrowth. According to Business Analytica, the share of juice sold in modernformat outlets grew from 13.4% of all juice sales in 2006 to 15.7% in 2007,while the share of all dairy products grew from 57% in 2006 to 63% in 2007(according to AC Nielsen).

 

InMoscow, the country’s largest single market, this ratio is considerably higherand in the last few years, foreign and domestic retail chains have focused onexpanding in large regional cities, in particular targeting fast-growing butunder-served regions such as the Urals and Siberia. We believe that growth inretail chains creates additional opportunity for market expansion and has agenerally positive effect. In particular, retail chains provide increasedbusiness transparency and new technologies for sales and marketing, and offer manufacturersnew opportunities to increase sales volumes, and expand sales geographically.

 

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**Sales**

 

In2007, we made substantial investments in our Sales and Distribution (S&D)function as part of a long-term commitment to improve our “route-to-market” andbetter control our in-store execution.

 

Weplan to meet the changing and increasing demands of our customers by deliveringappropriate stock levels and reasonable delivery times consistent withachieving the optimal economics of distribution. In order to achieve theseobjectives, we have developed a network of distribution centers and tradeoffices throughout Russia and other countries of the CIS. At the end of 2006 wehad 14 distribution centers for dairy products, whereas in the fourth quarterof 2007 this number grew to 25. On the basis of distribution centers, teams offield managers were created that allow us to control sales, includingcontrolling trade marketing actions by these centers. We also sell our productsdirectly from production sites.

 

Akey part of our strategy is to enhance control over the “route-to-market” andcollaborate successfully with retailers to ensure key brands are wellpositioned in retail outlets, priced correctly and maintained at the same highquality as when they left the factory. Investment in our own fleet ofcold-chain delivery vehicles represents a substantial upfront cost, but ensuresbetter control and flexibility over deliveries of perishable dairy products.Across the company, improvements are being made to the supply chain to reducecosts, maintain quality and tightly track products from the factory to theconsumer.

 

Anotherkey strategic direction is development and increasing efficiency of our fieldsales force.

 

Weare also developing our merchandising standards and setting up pilot stores forour sales personnel and distributors to showcase our brands and provide atemplate for merchandizing strategies.

 

**Distribution**

** **

Dueto different consumption patterns and product characteristics, our dairy, babyfood and beverage businesses require different distribution strategies. We havetherefore built two distribution systems: one for our dairy and baby food, andthe other one for beverage products, although we use the same marketingapproach in each business and take advantage of synergies between the systemsto the extent possible. We also develop our sales through exclusivedistributors, for which our products sales is a 100% of their business.

 

We sell our products through various sales channels, including independentdistributors and wholesalers, supermarket chains, small- and medium-sizedgrocery stores, open air markets, pavilions and restaurants.

 

**Independent distributors**

** **

Asa percentage of total sales during 2007, in terms of products value, we sold60% of our dairy products, 67% of beverages and 40% of baby food productsthrough large chains of independent distributors. The process is controlled byour sales personnel.

 

Allof our dairy distributors in Moscow are exclusive to us and do not distributedairy products of our competitors. We also implemented a segmentation programamong the Moscow distributors whereby each distributor controls thedistribution of a particular segment or segments of the dairy product market.In St. Petersburg and the surrounding areas, we also have large independentdistributors who purchase products from us in accordance with the segmentationprogram. We believe that this strategy increases the quality and efficiency ofdistribution while allowing distributors a larger financial stake and incentiveto operate high-quality distribution channels.

 

Anumber of independent distributors with whom we work purchase dairy, beverageand baby food products from us.

 

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Ourbeverage product distribution network consisted of 15 regional sales officesthroughout Russia in 2007. We have reduced the number of distributors we workwith and broadened the scope of sales made through the distributors to includesales to sub-distributors, wholesalers and small retailers. In Moscow, ourindependent distributors act principally as logistical coordinators, as oursales representatives work directly with retail outlets and other customers inmaking sales but rely on the distributors to execute the orders throughdelivery and payment collection. Outside of Moscow, we rely more heavily on ourindependent distributors. Some of our beverage distributors have teams devotedexclusively to the sale and distribution of our products.

 

Independentdistributors purchase directly from us and then resell our products throughtheir own distribution centers. Given the importance of these customers, weprocess orders from independent distributors relatively quickly. We launchedour Internet order system in Moscow 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

 

During2004, we worked and invested with our independent distributors in Moscow toestablish warehouses and transportation capable of supporting a “cold supplychain” in order to maintain our products’ integrity, freshness and nutritionalvalue.

 

**Directsales**

** **

Wesell our products through all the available sales channels, includingindependent distributors and wholesalers, supermarket chains, small- andmedium-sized grocery stores, open air markets, pavilions and restaurants.However, as the share of chain retailers grows, our strategy is to increase theshare of our own direct sales to them.

 

As a percentage of ourtotal sales during 2007, in terms of product value, we sold 36% of our dairyproducts, 30% of beverages and 25% of baby food products directly through ournational and local key accounts. We believe that theimportance of these customers will continue to grow in the coming years. In2007, our share of sales via the sector grew 6.1% compared 2006. We want tobecome the supplier of choice for these customers 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.

 

Whilerelationships with supermarket chains are currently beneficial for us, we expectthat the growth of certain chains and consolidation of market power mayincrease the bargaining power of some of these customers. For example, someRussian supermarket chains have, from time to time, created informal alliancesin an attempt to obtain greater price discounts from manufacturers. We do notintend to seek or sustain inefficient sales volumes and may withdraw fromunprofitable business relationships.

 

**Other sales**

** **

Ourinfant dairy products are also purchased by the Moscow City Government, which,in turn, distributes them through specialized milk kitchens located aroundMoscow and the Moscow region. In 2005 and 2006, the Moscow City Governmentpurchased 36% and 33% respectively of our total baby food sales in terms ofproduct value. In 2007, our baby food sales through milk kitchens decreased to26%, while, the value of commercial sales increased.

 

Wesell our juice products directly to certain airlines, restaurants, schools,hotels and other establishments. As a percentage of total sales during 2007 wesold 2.9% of our dairy products and 2.6% of our juices products through thesecustomers.

 

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** **

**Exportprogram**

** **

Webegan exporting our juice products, in particular our “Wonder Berry”traditional berry-juice drinks, to Western markets in 1999, mainly focusing onRussian communities abroad. We selected this product because of itsdistinctiveness and the opportunity it presented to take advantage of theexpansion of the red-berry juice market in Europe.

 

Wecurrently export our juice products to the United States, Canada, Australia,Germany, France, Israel, Latvia, Estonia and Lithuania, Mongolia and China. Ourjuice products are distributed in these countries through independentdistributors and are sold in various national and multinational retail chains.Our products are also exported and sold through various sales channels in CIScountries such as Kazakhstan, Georgia, Armenia and Moldova, and we furtherdeveloped our distribution channels, marketing efforts and sales in Belarusduring 2007. We also export our “Essentuki” mineral water, principally to theUnited States, Canada and Moldova. Our production facilities were certified in2007 to export “Essentuki” to Ukraine. Our beverages export sales totaled$2.6 million in 2004, $3.0 million in 2005, $3.3 million in 2006 and $4.6million in 2007.

 

TheTsaritsino Dairy Plant (at the end of 2005) and the Rubtsovsk dairy plant (atthe beginning of 2007) received a license to export dairy products to the EU.During the licensing process, all of the plants’ equipment and production,technological and control processes were inspected to ensure compliance with internationalnorms and standards. The Lianozovsky Dairy Plant received a similar license in2004 and currently exports dairy products to the Baltic States and Germany.

 

Weroutinely participate in trade shows in foreign countries and work with foreigndistributors on promotional campaigns and product tastings (e.g., “Green Week”,“ANUGA” and “SIA”). 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.

 

Inexporting our products to a country, we strive 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.

 

**Productionand raw materials**

** **

**Production efficiency and quality**

** **

OurQuality System (QS) is a clearly defined set of procedures that work togetherto ensure quality process control and quality assurance.

 

OurQS undertakes Supplier Assessment audits to ensure suppliers provide materialsthat meet our exacting quality standards. This includes raw materials formaking our products, packaging and equipment. Our experts work with existingand prospective suppliers to ensure their goods can demonstrate compliance withour quality, safety and performance standards. Suppliers are graded andassigned Key Production Indicators (KPIs) based on the criteria of productquality, delivery, cost and responsiveness. This work not only ensuressuppliers meet our standards but helps make them more efficient, lowering ourinput costs.

 

TheQS plays a critical role in ongoing technological integration across all of ourfactories and trading groups. In the dairy business unit, where we haveinvested substantially since 2003 in modernizing acquired productionfacilities, quality control experts have led the Unification Project, aimed atestablishing tight coordination of the manufacturing process at many of ourgeographically distant plants. Consistent manufacturing procedures andtechnology mean plants operating thousands of kilometers apart can makeproducts with consistently high and uniform taste and quality.

 

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Wehave our own certified research laboratory with a team of scientists andexperts. Samples of all our primary ingredients and samples of our finalproducts undergo microbiological analysis and in-depth testing. In addition, wehave laboratories at all of our plants that perform quality checks on ourproducts at all stages, including quality checks on the raw milk supplied byfarms to us, the materials at our production facilities and the finishedproducts in our warehouses.

 

TheTrade QS measures the quality of the product and packaging in the marketplaceitself. Under a system launched in 2007, trade sampling and laboratory analysismatch products against our specifications and provide a Quality Indexcalculation determining whether a product meets the high standards set by usfor our consumers.

 

Indeveloping new types of products, we cooperate closely with the Institute ofNutrition of the Russian Academy of Medical Sciences, Moscow State Universityof Food Production, Moscow State University of Applied Biotechnology,All-Russian Institute of Dairy Industry and the GFL-Laboratory in Berlin,Germany. This cooperation has provided our employees with scientific advice,solutions to technical problems and on-site training. We also work closely withseveral multinational raw material and additive suppliers in order to benefitfrom their collective technical expertise in relation to our new productdevelopment and evolving quality standards.

 

 In addition, our researchers and qualitycontrol experts work closely with Russian federal bodies and their regional andlocal departments, such as the Sanitary and Epidemiological Inspectorate andthe country’s main consumer safety agency, known as Rospotrebnadzor. We workactively with lawmakers and government experts to develop new regulations andprocedures for the food industry aimed at making sure rules are clear forall participants.

 

Inaddition to compliance with the relevant Russian quality standards, we striveto ensure that our products conform to the quality standards of organizationssuch as the World Health Organization, l’Association Francaise de Normalisationand the Food and Agricultural Organization, as well as the regulations of theEuropean Union. We are also a member of the International Federation of FruitJuice Producers, the Russian Union of Juice Manufacturers and the Russian DairyUnion. Additionally, we assist relevant Russian government agencies ininitiating and developing corresponding regulations for the Russian market.

 

Toimprove the feedback and receive queries from our consumers a nation-widetoll-free hot-line was developed and implemented. The number is printed on ourpackaging for all of our products.

 

Wehave been upgrading and expanding our facilities with advanced technologicalengineering. Our significant investments in manufacturing have helped enableour products to compete with those of leading domestic and internationalmanufacturers. For example, at the Lianozovsky and Tsaritsino Dairy Plants, weinstalled new equipment improving the quality of raw milk used in production;at the Timashevsk Dairy Plant, we installed an automatic system controllingproduction processes; and at the Vladivostok Dairy Plant, we modernized thewater purification system. Additionally, the reconstruction of the Moscow BabyFood Plant and installation of new production lines there have allowed us toimprove the quality of the products produced at this plant. All the lines atthe Moscow Baby Food Plant are now equipped with aseptic technology. The methodof ultrafiltration we use at this plant also allows us to produce children’scheese paste which retains its most beneficial nutrient, serum protein, givingit a higher nutritional value than similar products manufactured at otherplants.

 

During2005, we continued to modernize the Lianozovsky and Tsaritsino Dairy Plants byupgrading acceptance workshops, broadened our cheese production capacity at theRubtsovsk Dairy Plant in order to satisfy the growing demand for our hardcheese products and added a new production line for porridges and processedcheese at the Timashevsk Dairy Plant. At the Vladivostok Dairy Plant, we installeda juice production line to produce “Lovely Garden” and “J-7” juice products.

 

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During2006, we installed a new innovative line of fruit preparation that allows us toimprove the quality of jams used in our products. A unique technology foraseptic dairy-based sauce production was developed and implemented atLianozovsky Dairy Plant. A new filling line with tunnel autoclave was installedat the Kursk Baby Food Plant. New technologies for purification of raw juicewere implemented at Ramenskoye.

 

In2007 we completely overhauled our newly acquired plants, Manros and AngarskyDairy Plant (MOLKA). They are now fully operational. We are also in the processof closing down Ochakovsky Dairy Plant for a major overhaul and moving theproduction to our other facilities.

 

**Foodraw materials**

** **

Themain raw materials we use in our production include the following:

 

·                         raw milk, whichwe generally obtain from domestic farmers;

 

·                         powder milk,which we generally obtain from our own production, domestic producers orimport;

 

·                         bacteriacultures, which we generally import;

 

·                         flavorings, whichwe generally import;

 

·                         sugar, which wegenerally import;

 

·                         juice concentrateand juice puree, which we primarily import, but also purchase domestically; and

 

·                         other ingredientssuch as frozen fruits, aromas and stabilizers.

 

Theprices of each of the foregoing raw materials are generally volatile.

 

Ourpurchasing policy is to build long-term strategic relationships with thesuppliers-partners. We have focused on developing partnerships with establishedleaders in the field of local and global food production, including the leadingRussian and international sugar, fruit concentrates and purees, powder milk,frozen fruits and ingredients producers.

 

Wepurchase almost all of our raw materials from the producers and do not engagein a significant amount of barter transactions. We purchase certain rawmaterials such as bacteria cultures, juice concentrates and flavors fromforeign manufacturers when products of appropriate quality are not availablelocally.

 

Withthe aim of ensuring a stable supply of raw milk at reasonable and forecastedprices, ensuring consistent quality of milk and balancing out seasonality, weare moving towards long-term milk supply contracts, leasing milking andrefrigeration equipment to local producers, providing selected local milkproducers with working capital loans or guarantees, assisting with long-termsubsidized bank financing arrangements, contracting directly with farmers andavoiding middlemen and working with the state authorities that regulate thissector.

 

***“Milk Rivers” program.***   Wehave strengthened our position in the dairy market by developing our own networkof raw material suppliers, in significant part through investments that supportagricultural producers.

 

Inthe summer of 1999, we merged and formalized these programs under our “MilkRivers” program, through which we provide local dairies with trade loans, feed,and leased combine-harvesters and milking and refrigeration equipment. Inselecting farms to participate in this program, we choose only those that seekto increase the quality of their products and raise the productivity of theirherds. We also look for producers that can help balance out the seasonality inraw milk production volumes.

 

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Underthe Milk Rivers program, we have rented milking and refrigeration equipment forperiods from three to eight years for agricultural enterprises located in theMoscow and other regions, including Voronezh, Nizhny Novgorod, Ufa,Novosibirsk, Krasnodar and Altai. The lease receivables are offset with milksupplies based on a predetermined schedule during the lease term. The leasereceivables are denominated in U.S. dollars and Russian rubles. Equipmentleased out to farms includes milking and refrigeration equipment foraccelerated milk cooling and the temporary storage of milk at farms and othertechnical devices that increase the productivity of farms. The type ofequipment provided depends on the needs of each particular farm.

 

Underthe Milk Rivers program, we also provide loans to Milk Rivers dairy producersfor the purchase of dairy cattle. We have also offered seminars and lectures toour Milk Rivers program participants to help them improve the quality of themilk they produce.

 

Weplan to eventually expand the scope of this program to other regions of Russia.

 

***Other initiatives.***   Akey factor for enhancing milk productivity of a herd and increasing milkquality is the availability of a good feed base. This particular problem hasbeen one of the most important in recent years and arose because of harvestingproblems deriving from a lack of modern harvesting machinery. For this reason,the second stage of the Milk Rivers program has entailed providing a number ofthe participating agricultural enterprises with new fodder-harvesting machines.German company Doppstadt, through its joint-venture in St. Petersburg, hasbecome our partner in this project.

 

Webelieve that providing dairies with wholesome, well-balanced compound animalfodder is essential for increasing the productivity of dairy herds, especiallyin the winter. We have been working with select farms and fodder producerssince 1999. As with the Milk Rivers program, payment for the fodder is madewith milk supplies.

 

In February 2008, we opened a new mega-farm complex inVolosovsk District near St Petersburg, built in place of the Trud collectivefarm, which we had acquired in 2005. The state-of-the-art farm is designed for 1,200 Holstein milking cows.

 

**Seasonality**

** **

Thedemand for our dairy products is significantly higher during the winter months,when Russian raw milk production is at its lowest. Conversely, during thesummer months, we generally experience lower demand for dairy products, whileraw milk production is at its peak. To address these seasonal demands, we havecommenced and expanded the production of powder milk at some of our dairy productionfacilities for use in production during the winter months.

 

Thedemand for our juice products traditionally peaks during April through May andin December. We believe that the high demand during April through May isrelated to the public’s heightened desire for vitamin-rich food and drinkproducts during the transition from winter to spring, and the high demand in December isrelated to increased juice consumption during the holidays.

 

Thedemand for both dairy and juice products in southern Russia rises in the summerdue to an increase in the number of tourists.

 

Salesof certain baby food products are affected by seasonal factors. In particular,sales of juice and purees for babies are typically 10-15% higher during thesummer months, while sales of liquid dairy baby products are typically 5-8%lower in the summer due, in part, to the fact that many Russians travel to thecountryside for vacations in the summer and are unable to transport suchproducts, which have short shelf life.

 

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**Packaging**

** **

Ourprincipal packaging raw materials include materials needed for packaging ourdairy, baby food and juice products, consisting mainly of five groups:

 

·                  aseptic paper

 

·                  nonaseptic paper

 

·                  plastics (PP, PE,Polysterene and others)

 

·                  foils

 

·                  corrugated board

 

Ourmain supplier 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.

 

TetraPak supplied approximately 71% of our total packaging materials in value termsin 2007 (including carton, plastic, foil and other materials), and we aresubstantially dependent upon this packaging supplier to meet our requirements.

 

Asa major Russian consumer of Tetra Pak products, we have annual contracts withTetra Pak, which supplies us from its Russian plants as well as from its otherEuropean plants.

 

Wehave established similar relationships with companies such as SIG Combibloc(aseptic paper for juice and milk) and Elopak (nonaseptic paper).

 

Aspart of our strategy to increase locally produced raw materials, we aredeveloping relationships with Russian manufacturers of packaging materials, inparticular with companies such as Gofra, Polimer, Formoline, Formaplast,Eximpack, Lukoil-Neftekhim and Planet Thermoforning.

 

Wefocus on two main areas building our procurement strategy:

 

·                  standardizationof specifications for raw materials and packaging allowing group purchasing;and

 

·                  strategicrelationships with key group-wide suppliers

 

Thesetwo factors are aimed at allowing us to benefit from economies of scale, whichwe believe will lead to enhanced effectiveness and cost optimization.

 

**Trademarksand Patents**

** **

Wehave registered brand names and trademarks throughout Russia and in othercountries. We keep track of our intellectual property and monitor theprotection of our brand names and instances of copyright infringement in Russiaand the CIS. The extent to which we seek protection of our trademarks outsideof Russia and the CIS depends on the significance of the brand and jurisdictionconcerned. The brand names listed above under “—Our products and brands—Dairyproducts and brands” and “—Our products and brands—Beverage products andbrands,” which we have registered in Russia, are material to us. We also ownseveral licenses, patents and proprietary recipes, know-how and technologiesrelated to our products and processes. See “Item 3. Key Information—D. RiskFactors—Risks Relating to Our Business and Industry—We may not be able toprotect our intellectual property rights adequately, resulting in material harmto our financial results and ability to develop our business” for a descriptionof the risks related to the protection of our trademarks.

 

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In2007, we obtained recognition of two of our trademarks (“Wimm-Bill-Dann” as aword mark (literal) and combined trade mark “Wimm-Bill-Dann, that’s what youwant” as a combined mark) as well-known trademarks of high renown fromRospatent, the Russian patent bodytrademark office. Such recognition protectsthese trademarks for an unlimited duration of time and provides us with certainadditional benefits with respect to our use of these trademarks.

 

**Insurance**

** **

We maintain property insurance coverage for our 19major facilities, including Wimm-Bill-Dann Foods, Wimm-Bill-Dann, TsaritsinoDairy Plant, Moscow Baby Food Plant, Ochakovo Dairy Plant, Ramenskiy Plant,Timashevsk Dairy Plant, Obninsk Dairy Plant, Annino Dairy Plant, Ufa DairyPlant, Siberian Dairy Plant, Vladivostok Dairy Plant, Nizhny Novgorod DairyPlant, Rubtsovsk Dairy Plant, Pervouralsk Dairy Plant, Healing Springs, BalticMilk, Kiev Dairy Plant, Kharkov Dairy Plant, Buryn Dairy Plant, Bishkeksut,Toshkent Dairy Plant and our warehousing facility at Tomilino distributioncenter. Insurance coverage is on “All Risks” basis covering buildings of 15plants and Tomilino distribution center, equipment at 18 facilities for thetotal sum of $485.2 million. We have insurance for business interruption at 14major manufacturing facilities with the total coverage of $421.7 million.

 

We have product liability insurance with $1 millionliability coverage per insurance case within the territory of Russia, the CIScountries and Mongolia, $2.5 million liability coverage per insurance caseworldwide except for the territory of Russia, the CIS countries and Mongoliawith the cumulative coverage of $5 million for production and distributionoperations of diary, soft drinks, juices and baby foods in Russia.

 

See“Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business andIndustry—We do not carry the types of insurance coverage customary in othermore economically developed countries for a business of our size and nature,and a significant event could result in substantial property loss and inabilityto rebuild in a timely manner or at all.”

 

**Environmentaland Product Liability**

** **

Weare subject to the requirements of environmental laws and regulations. While wedevote resources designed to maintain compliance with these requirements, wecannot assure you that we operate at all times in complete compliance with allsuch requirements. We could be subject to potentially significant fines andpenalties for any noncompliance that may occur. See “Item 3. KeyInformation—D. Risk Factors—Risks Relating to Our Business and Industry—Failureto comply with existing laws and regulations or the findings of governmentinspections, or increased governmental regulation of our operations, couldresult in substantial additional compliance costs or various sanctions whichcould materially adversely affect our business, financial condition, results ofoperations and prospects.”

 

Wealso face an inherent business risk of exposure to product liability claims inthe event that consumption of our products results in personal illness ordeath, and we cannot assure you that we will not experience any materialproduct liability losses in the future. In addition, if any of the products wehave produced are determined to be unsuitable for consumption, we may berequired to participate in a recall involving such products. We have not hadany significant historical experience of such claims and are unaware of anypotential unasserted claims. 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” and “Item 3. Key Information—D. Risk Factors—Risks Relating to OurBusiness and Industry—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

 

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associated negativepublicity may adversely affect our reputation in the Russian Federation, theCIS and abroad, and adversely affect our results of operations.”

 

**Regulation**

** **

Theproduction, sale and distribution of food and beverages in the RussianFederation are regulated by general civil legislation and by speciallegislation that includes quality standards and various safety and sanitaryrules.

 

**GovernmentEntities Involved**

** **

Asidefrom federal executive bodies and their structural subdivisions that haveauthority over general issues, such as defense, internal affairs, security,border service, justice, tax enforcement and rail transport, there are a largenumber of government agencies directly involved in regulating and supervisingthe quality and safety of food in the Russian Federation.

 

*The Ministry of Health Protection and SocialDevelopment.  *This Ministry is authorized to issue regulations invarious areas, including with respect to sanitary and epidemiological safetyand consumer rights protection. The Ministry supervises and coordinates itssubordinate bodies, including, among others, the Federal Service forSupervision in the Area of Protection of Consumer Rights and Human Welfare.

 

*The Federal Service for Supervision in the Area ofProtection of Consumer 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, sanitary standards and hygienicrequirements), monitors the sanitary conditions of production sites andequipment, fulfillment of sanitary standards for raw material and finishedproduct storage at manufacturing plants, compliance with sanitary standards forthe storage and sale of food products, their quality and safety at wholesaleand retail outlets and businesses catering to the public. The Service also carriesout inspections of sellers’ premises.

 

*The Federal Agency for Technical Regulation andMetrology.  *This Agency manages government property in the sphereof technical regulation and metrology. On a temporary basis, until suchfunctions are transferred to other federal authorities, the Agency overseescompliance with obligatory general and industrial standards. This Agency issubordinated to the Ministry of Industry and Energy.

 

*The Federal Service for Veterinary and Fito-SanitarySupervision.  *This Service supervises the sanitary safety of rawfood materials used in the production of food products and beverages where suchraw food materials are derived from animals. This Service is subordinated to the Ministry of Agriculture.

 

**ApplicableFood and Health Legislation**

** **

Russianlegislation regulating quality and safety of food and beverages includes thefollowing acts:

 

*The Federal Law on Quality and Safety of Food Products* establishes ageneral framework for ensuring that food products and materials used in theirproduction conform to certain quality, safety and sanitary requirements andprovides for the state registration and certification of food products oncethey so conform. It also establishes general requirements for themanufacturing, packaging, storage, transportation and sale of food products andbeverages, and for the destruction of poor-quality and unsafe products.

 

*The Federal Law on the Sanitary Epidemiological Well Beingof People* requires food products and beverages, and the rawmaterials used in their production, to meet certain sanitary standards andhealth requirements and to have no harmful effects. Products that do notconform to sanitary rules and health requirements and represent a dangerto consumers

 

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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 thedevelopment, enactment, application and enforcement of obligatory technicalrequirements and the development of voluntarily standards relating tomanufacturing processes, operations, storage, transportation, selling andutilization. Amendments to this law, dated May 1, 2007, provide for theadoption of obligatory technical requirements on the safety of food products byJanuary 1, 2010. Until such technical requirements are developed and adopted,the existing standards are mandatory to the extent they are necessary to securethe protection of safety and health, environmental protection and consumers’rights.

 

*The Governmental Regulation on Monitoring of Quality andSafety of Food Products and Health of People*establishesa procedure for supervising and monitoring the quality and safety of foodproducts.

 

*The Government Regulation on State Registration of New FoodProducts, Materials and Goods* provides for theobligatory state registration of certain food products, including mineralwater, 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.

 

*The Regulation for the Conduct of Sanitary-EpidemiologicalExaminations of Products*establishes procedures for the sanitary-epidemiologicalexamination of products. Government bodies that monitor sanitary and healthissues conduct sanitary-epidemiological examinations of samples of each productand issue a conclusion as to whether such product satisfies the prescribedrequirements. Products that have not undergone a hygienic evaluation may not beproduced, shipped, used, sold or certified.

 

Anumber of other regulations also apply to food products, including baby foodproducts. For example, requirements for the storage, production, labeling,transportation and sale of food and beverages are established by statestandards, sanitary rules, hygienic requirements and other regulations.

 

Inaddition, food products may be subject to regulation by regional authorities.For instance, the Moscow Government approved a series of regulations relatingto the use of GMO in food products aimed at informing customers about such useand providing preferences to manufacturers who do not use GMO. In particular,in February 2007, the Moscow Government issued a decree recommending thatmanufacturers refrain from marketing GMO products in Moscow and establishing avoluntary GMO labeling system.

 

**RegistrationRequirements**

** **

Certainfood and beverage products (such as children’s products, dietary foods, milkproducts enriched by vitamins and/or other microelements, additives to food andfood products manufactured using technologies that have never been applied inthe Russian Federation) must be registered with the Russian government if theyare either manufactured in Russia or imported into Russia for the first time.The regulation makes it illegal to manufacture, import or circulate productsthat are subject to state registration but have not been registered.

 

Theproduct registration process includes:

 

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·      An examination of documents provided by the manufacturer or supplier of theproduct describing the product, its safety and evidencing its conformity withapplicable rules;

 

·      Toxicological, hygienic, veterinary and other types of tests of products and,with respect to products manufactured in Russia, an examination of themanufacturing conditions of such products;

 

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

 

·      Issuance of a certificate of state registration permitting the product to bemanufactured, imported or distributed in the Russian Federation.

 

Thestate registration of products is carried out by the Federal Service forSupervision in the Area of Protection of Consumer Rights and Human Welfare(together with the Federal Service for Veterinary and Fito- SanitarySupervision with respect to products derived from animals).

 

**Certification**

** **

Thecertification of products and services is currently regulated by the FederalLaw on Technical Regulation. Product certification is a procedure whereby anagency authorized by the government confirms that a product complies withtechnical regulations, standards and requirements. Milk products, baby foods,juice, certain water products and other beverages are subject to mandatorycertification. Conformity symbols evidencing that the manufacturer hasundergone certification procedures are required to be printed on a product’spackaging. Failure to mark a product with a required conformity symbol carriespossible administrative sanctions.

 

**BulkPurchase of Raw Milk**

** **

Asupplier of raw milk must provide a certificate stating that the farm fromwhich it originated has passed a health inspection. Milk bought in bulk mustalso conform to requirements with respect to temperature, color, sedimentation,content of neutralizers, heavy metals, density, protein content, fat content,alcohol content and other characteristics.

 

**Productionand Transportation**

** **

Laboratory employees andtechnical specialists must verify that the condition of equipment, implements,raw materials and packaging conform to sanitary requirements. For example, inthe course of manufacturing, microbiological tests must be conducted of samplesof raw materials, packaging and products. Products are tested for their contentof chemical pollutants, toxins, medicinal and hormonal preparations,radionuclides and pathogenic microorganisms. They are also tested to identifybacteria, yeast and mold content, and to determine their sterility and theeffectiveness of the pasteurization process. Products are also examined todetermine 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.

 

Foodproducts and beverages must be transported in specially equipped vehicles, forwhich sanitary registration documents must have been issued.

 

**PackagingMaterial and Labeling Requirements**

** **

Manufacturersand suppliers of all types of packaging materials used in the production ofdairy and juice products must provide certificates of conformity andsanitary-epidemiological certificates for packaging materials showing that thepackaging materials are permitted and safe for contact with the food products.

 

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TheLaw on the Protection of Consumers’ Rights and the Law on Quality and Safety ofFood Products determine the scope and format of the information that should bemade available to consumers. According to these laws and other applicablenational standards, the packaging of finished products must contain thefollowing information: the name of the product, information regarding itscertification, conditions of use (if necessary), contraindications (if any),preservatives and food additives, net mass or volume, ingredients, nutritionalvalue, conditions of storage, shelf life, name and address of the manufacturerand other information. The law also authorizes a wide range of government andpublic agencies to monitor producers’ compliance with the requirements of thelaw and imposes sanctions and penalties if such requirements are not met.

 

**SpecialRequirements for Children’s Dairy Products**

** **

TheLaw on the Quality and Safety of Food Products defines children’s food productsas food products specially designed for children under 14 that meet certainnutritional requirements. Such products are subject to more stringentsanitary-epidemiological standards. For example, certain ingredients andcomponents are prohibited for use in children’s food products, and theprocedures for monitoring raw materials and ingredients used in manufacturing,technological processes and sanitary conditions of production are stricter forchildren’s dairy products than for other dairy products. Laboratory analysesand tests must be conducted for a broader list of microbiological indicators.Packaging materials for children’s dairy products must be certified for usewith children’s products. Children’s dairy products are also subject to speciallabeling requirements. For example, packaging of children’s dairy products mustbear information on the purpose and conditions of use of such products.

 

Underthe Sanitary Rules on Children’s Food Products, which became effective on June 1,2005, the volume of liquid food product packaging for children under threeyears old cannot exceed 0.35 liter. In addition, such products may be producedonly by separate specialized factories or manufacturing lines that are subjectto special certification.

 

**Competitionand Pricing**

** **

TheFederal Antimonopoly Service is the governmental agency that regulates theprevention and limitation of monopolistic activity and the support ofcompetition in the market. The Federal Law on the Protection of Competitionprohibits the abuse of a dominant position to limit competition. Oursubsidiary, the Moscow Baby Food Plant, has been included in the register of entitiesholding a significant share of the market. Inclusion in this register does notimpose additional reporting or other requirements on us; however, because ofour significant position, the Federal Antimonopoly Service monitors ouractivities and we are required to notify the Federal Antimonopoly Serviceand/or apply for its prior approval for the acquisition of other companies.

 

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** **

**C.   Organizational Structure**

** **

The following table sets out ourprimary production subsidiaries, their countries of incorporation and ouraggregate beneficial ownership interest and voting interest in each subsidiaryas of June 24, 2008.

 
| **Plant**                                                       | ** ** | **Ownership****Interest** | ** ** | **Country of********Incorporation** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------|------------|------------------------------------------|------------|
| Wimm-Bill-Dann Plant (1)                                        |       | 97.54                     | %          | Russian Federation                       |       |
| Karasuk Dairy Plant                                             |       | 93.80                     | %          | Russian Federation                       |       |
| Wimm-Bill-Dann Ukraine (2)                                      |       | 98.35                     | %          | Ukraine                                  |       |
| Moloko Veidelevki                                               |       | 100                       | %          | Russian Federation                       |       |
| Tuymazinskiy Dairy Plant                                        |       | 85.00                     | %          | Russian Federation                       |       |
| Bishkek Dairy Plant                                             |       | 96.10                     | %          | Kyrgyz Republic                          |       |
| Gulkevichy Dairy Plant                                          |       | 52.27                     | %          | Russian Federation                       |       |
| WBD Toshkent                                                    |       | 100                       | %          | Republic of Uzbekistan                   |       |
| Manros-M                                                        |       | 100                       | %          | Russian Federation                       |       |
| Bolsherechensk Dairy Plant                                      |       | 79.78                     | %          | Russian Federation                       |       |
| **Beverage plants**                                             |       |                      |       |                                     |       |
| Wimm-Bill-Dann Beverages (3)                                    |       | 97.00                     | %          | Russian Federation                       |       |
| Valdai Springs Water Plant                                      |       | 100                       | %          | Russian Federation                       |       |
| Essentuki Mineral Water Plant at CMW (Caucasian Mineral Waters) |       | 100                       | %          | Russian Federation                       |       |
| **Farms**                                                       |       |                      |       |                                     |       |
| Trud                                                            |       | 96.48                     | %          | Russian Federation                       |       |
| Atamanskoe Farm                                                 |       | 99.53                     | %          | Russian Federation                       |       |
| Plemzavod Za Mir and Trud                                       |       | 100.00                    | %          | Russian Federation                       |       |
| Zavety Ilyicha                                                  |       | 99.59                     | %          | Russian  Federation                      |       |
| Niva                                                            |       | 94.62                     | %          | Russian  Federation                      |       |

 

----

(1) Formerly Lianozovsky Dairy Plant. During 2007and 2008, the following subsidiaries were merged into Wimm-Bill-Dann:Tsaritsyno Dairy Plant, Ufa Dairy Plant, Siberian Milk Dairy Plant, RubtsovskDairy Plant, Siberian Cheese Plant, Nizhny Novgorod Dairy Plant, Baltic MilkDairy Plant, Nazarovo Dairy Plant, PAG Rodnik, Pervouralsk Dairy Plant,Kursk Baby Food Plant, Moscow Baby Food Plant, Timashevsk Dairy Plant,Vladivostok Dairy Plant, Surgut Dairy Plant, Ochakovo Dairy Plant, ObninskDairy Plant, Pavlogradsky Dairy Plant, Krutinsky Dairy Plant, Angarsky DairyPlant (MOLKA), Anna milk, SP Julia and Va-Bank-2000

 

(2) FormerlyKiev Dairy Plant No 3. In 2007 we merged Buryn Powder Milk Plant and Kharkov Dairy Plantinto Wimm-Bill-Dann Ukraine.

 

(3) FormerlyRamensky Dairy Plant

 

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

** **

We currently manufacture our products at 37 production facilities,including 31 production sites that produce dairy products, four baby foodproduction sites and two plants that produce exclusively juices. We have madesubstantial investments to maintain and enhance quality, lower costs andincrease productivity. Over 2005, 2006 and 2007 we invested approximately$397.5 million in the modernization of our existing production facilitiesand $153.0 million in the 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 efficiency, waste reduction and cost cutting programs atall of our plants.

 

We also review our production headcount with the aim of enhancingproductivity. Sales per production employee, calculated on the basis of ourtotal headcount, which is a common

 

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measure ofproductivity used in the food industry was $142,815 per employee in 2005,$162,994 per employee in 2006 and $220,145 per employee in 2007.

 

In 2006 we started working with an international management consultingfirm on a training and business-process optimization program at the LianozovskyDairy Plant and Moscow Baby Food Plant in an effort to increase assetutilization, to cut costs, and to raise labor productivity. As a result, wewere able to reduce our employee headcount during 2007, excluding the plants weacquired during the second half of 2006, where the reduction of headcount isstill in process.

 

The following table contains data regarding our main productionfacilities.

 
| ** **                                                                | ** ** | **Year of  Acquisition ****(1)** | ** ** | **Year of   Building** | ** ** | **Number of  Production  Lines** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------|------------|----------------------------------|------------|---------------------------------------|------------|
| **Moscow and Moscow region**                                              |       |                                       |       |                             |       |                                  |       |
| Wimm-Bill-Dann + BF  (2)                                                  |       | 1995                                       |       | 1989                             |       | 58                                    |       |
| Wimm-Bill-Dann Beverages (3)                                              |       | 1997                                       |       | 1982                             |       | 14                                    |       |
| Obninsk Dairy Plant OJSC                                                  |       | 2005                                       |       | 1982                             |       | 9                                     |       |
| Ochakovskiy Dairy Plant                                                   |       | 2006                                       |       | 1962                             |       | 18                                    |       |
| **Central Russia (excluding  Moscow)**                                    |       |                                       |       |                             |       |                                  |       |
| Annino Dairy Plant                                                        |       | 2001                                       |       | 1978                             |       | 8                                     |       |
| Timashevsk Dairy                                                          |       | 2001                                       |       | 1985                             |       | 18                                    |       |
| Essentuki Mineral water Plant  at the CMW (Caucasian Mineral Waters) |       | 2005                                       |       | 2001                             |       | 3                                     |       |
| **Siberia and Far East Russia**                                           |       |                                       |       |                             |       |                                  |       |
| Karasuk Dairy Plant                                                       |       | 1999                                       |       | 1952                             |       | 5                                     |       |
| Angarsky Dairy Plant (MOLKA)                                              |       | 2006                                       |       | 1956                             |       | 8                                     |       |
| Surgut Dairy Plant                                                        |       | 2006                                       |       | 1974                             |       | 5                                     |       |
| Manros-M                                                                  |       | 2006                                       |       | 1970                             |       | 8                                     |       |
| Tuimazy Dairy Plant                                                       |       | 2002                                       |       | 1958                             |       | 9                                     |       |
| **Other CIS countries**                                                   |       |                                       |       |                             |       |                                  |       |
| Wimm-Bill-Dann Ukraine (4)                                                |       | 2001                                       |       | 1973                             |       | 21                                    |       |
| Kharkov Dairy Plant                                                       |       | 2002                                       |       | 1974                             |       | 16                                    |       |
| Buryn Powder Milk Plant                                                   |       | 2002                                       |       | 1974                             |       | 4                                     |       |
| Bishkek Dairy Plant                                                       |       | 2000                                       |       | 1990                             |       | 14                                    |       |

 

----

(1) “Acquisition”means the purchase of more than 50% of the issued share capital. Only plantsacquired by us as of June 24, 2008 are included in this table.

 

(2) FormerlyLianozovsky Dairy Plant. In April and May 2007, the followingsubsidiaries were merged into Wimm-Bill-Dann: Tsaritsyno Dairy Plant, Ufa DairyPlant, Siberian Milk Dairy Plant, Rubtsovsk Dairy Plant, Siberian Cheese Plant,Nizhny Novgorod Dairy Plant, Baltic Milk Dairy Plant, Nazarovo Dairy Plant, PAGRodnik, Pervouralsk Dairy Plant, Kursk Baby Food Plant, Moscow Baby Food Plant,Timashevsk Dairy Plant and Vladivostok Dairy Plant. On March 5,2007, we sold Novokuibyshevskmoloko – our Samara region-based subsidiary.

 

(3) FormerlyRamensky Dairy Plant

 

(4) Formerly KievDairy Plant *N*o 3

 

As of December 31, 2007 and 2006 the assets that served ascollateral consisted of the following:

 

·                  Inventoryin the amounts of $3.2 million and $12.1 million, respectively;

·                  Property,plant and equipment with a net book value of $78.0 million and $95.6 million,respectively.

 

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## ***Item4A.    Unresolved Staff Comments***

## *** ***

None.

 

## ***Item5.      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. Ouractual 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 Financial Statementsare expressed in U.S. dollars and prepared in accordance with accountingprinciples generally accepted in the United States (“U.S. GAAP”).*

* *

**A.  Operating Results**

** **

**Overview**

** **

We are one of the largest Russian manufacturers of dairy and juiceproducts, with sales of $2,438.3 million, $1,762.1 million and$1,394.6 million in 2007, 2006 and 2005, respectively. Our reportablebusiness segments in 2007 were dairy products, beverage products and baby foodproducts. In 2007, the dairy segment accounted for 76.0% of our sales, thebeverages segment, which includes juice and bottled mineral water products,accounted for 17.0% of our sales and the baby food segment accounted for 7.0% ofour sales. In 2006, the dairy segment accounted for 75.0% of our sales, thebeverages segment accounted for 18.4% of our sales and the baby food segmentaccounted for 6.6% of our sales. Our principal geographic market is Russia,which accounted approximately for 93%, 93% and 92% of our sales in 2007, 2006and 2005, respectively. However, we also have production facilities in Ukraine,Kyrgyzstan and Uzbekistan and acquired a dairy production facility in Georgiain the fourth quarter of 2007.

 

In 2007, our net income increased by 46.8% to $140.0 million from $95.4million in 2006. Our sales increased by 38.4% in 2007, including year-on-yearsales increases of 40.2%, 27.8% and 46.6% in the dairy, beverage and baby foodsegments, respectively. By volume, dairy segment sales were higher by 18.2%,beverage segment sales increased by 9.8% and baby food sales increased by 31.9%in 2007.

 

The gross margin in the dairy segment decreased slightly to 29.2% in2007 from 30.5% in 2006 due to a sharp rise in the price of raw milk of 35.7%which was partially offset by selling price increases and a more favorableproduct mix. The gross margin in the beverage segment increased to 39.8% in2007 from 35.3% in 2006 despite raw materials cost pressure, driven bycontinued efficiency improvements and better pricing and discount management inall regions. The gross margin in the baby food Segment increased to 45.1% in2007 from 43.1% in 2006, driven by a growing share of non-dairy baby food and adecreased share of baby food produced by co-packing in our sales.

 

Our selling and distribution expenses increased in 2007 as compared to2006 in absolute terms and also as a percentage of sales, from 14.0% to 15.9%.In particular, our marketing, advertising and transportation costs were higherin 2007 in line with our strategy of supporting strong national brands,improving our route-to-market and expanding our geography.

 

Our net income increased 46.8% to $140.0 million for the full year of2007 from $95.4 million in 2006.

 

Over the past three years, we have been constructing new capacity,modernizing existing capacity and making strategic acquisitions. Our capitalexpenditures (excluding acquisitions)

 

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in 2007, 2006and 2005 were $192.7 million, $130.0 million and $75.1 million,respectively. Expenditures for acquisitions of subsidiaries in 2007, 2006 and2005 totaled $21.8, $137.3 million (exclusive of advances made in 2006 foracquisitions completed in 2007) and $24.3 million (exclusive of advancesmade in 2005 for acquisitions completed in 2006 but including advances made in2004 for acquisitions made in 2005), respectively.

 

As of December 31, 2007, we had a total of $579.6 million inoutstanding debt (consisting of long-term loans, notes payable, vendorfinancing obligations and $0.7 million of third parties guarantees). Of ourtotal indebtedness as of December 31, 2007, 58.3% was denominated inforeign currency and 41.7% was denominated in rubles.

 

Below is asummary of our operational highlights for 2007 and the beginning of 2008.

 

**Corporate and Operational Highlights for 2007**

 
| February  |   | On  February 8, 2007 our executives, directors and shareholders marked the  fifth anniversary of the company’s initial public offering on the New York Stock  Exchange by ringing the opening bell of the NYSE trading session. At the  close of trading that day, our share price was US$66.0 and market  capitalization was US$2.73bn.            |
|-----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |   |                                                                                                                                                                                                                                                                                                                                                          |
| February  |   | UBS  (Luxembourg) S.A. issued 7.5% Loan Participation Notes due 2008 for the sole  purpose of funding a $150 million loan (the “Loan”). The Loan will mature on  May 14, 2008 and bears interest at an annual rate of 7.5%, payable in  arrears on November 14, 2007 and May 14, 2008, and matured on  May 14, 2008.            |
|      |   |                                                                                                                                                                                                                                                                                                                                                          |
| March     |   | We sold our  87.13% stake in Novokuibyshevsk Dairy Plant, which was impaired in the third  quarter of 2006.                                                                                                                                                                                                                                                   |
|      |   |                                                                                                                                                                                                                                                                                                                                                          |
| April     |   | New Head of  the Baby Food Business Unit, Gary Sobel, was appointed. Mr. Sobel began  his career at Procter and Gamble, where over 13 years he worked in various  positions in Canada, the US, the UK and Russia. From 2005, Mr. Sobel  headed Dirol Cadbury (a division of Cadbury Schweppes) in Russia.                                           |
|      |   |                                                                                                                                                                                                                                                                                                                                                          |
| April     |   | On April 25, 2007, the following subsidiaries were merged into  Wimm-Bill-Dann (formerly Lianozovsky Dairy Plant): Tsaritsyno Dairy Plant,  Ufa Dairy Plant, Siberian Milk Dairy Plant, Rubtsovsk Dairy Plant, Siberian  Cheese Plant, Nizhny Novgorod Dairy Plant, Baltic Milk Dairy Plant, PAG  Rodnik, Nazarovo Dairy Plant, Pervouralsk Dairy Plant. |
|      |   |                                                                                                                                                                                                                                                                                                                                                          |
| April     |   | We announced the launch of baby food production at the Kursk  baby food plant. Acquired in 2005, the plant underwent extensive  renovation, and 90% of the equipment was replaced. Today, it is the  most modern plant of its type in Russia, making use of cutting edge global  technology and the latest scientific research in the industry.               |
|      |   |                                                                                                                                                                                                                                                                                                                                                          |
| May       |   | On May 29, 2007, we acquired an additional 30.12% stake in the  founding capital of Obninsk Dairy Plant OJSC from 66.33%, increasing our  share to 96.45% of its charter capital.                                                                                                                                                                        |
|      |   |                                                                                                                                                                                                                                                                                                                                                          |
| May       |   | On May 31, 2007, the following subsidiaries were merged into  Wimm-Bill-Dann: Kursk Baby Food Plant, Moscow Baby Food Plant, Timashevsk  Dairy Plant and Vladivostok Dairy Plant.                                                                                                                                                                        |
|      |   |                                                                                                                                                                                                                                                                                                                                                          |
| September |   | We launched Neo Beauty, an innovative dairy drink, and the first functional food product of its kind on the  Russian market with a proven impact on the overall health and particularly  the state of skin,                                                                                                                                                   |

 

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|     |   | nails and hair                                                                                                                                                  |
|----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                            |
| October  |   | On October 16, 2007, we announced the acquisition of 100% of ****dairy production plant********Georgian Foods Ltd, which is based in Tbilisi, Georgia.**** |
|     |   |                                                                                                                                                            |
| November |   | We announced the launch of mors production in Canada in  partnership with Canadian juice company Wonder Berry.                                                  |
|     |   |                                                                                                                                                            |
| December |   | On December 12, 2007, we increased our shareholding in Obninsk  Dairy Factory OJSC to 99.84% of its charter capital from the previous level  of 96.45%.    |

** **

**Corporate and Operational Highlights for 2008**

 
| January  |   | On  January 31, 2008, the following subsidiaries were merged into  Wimm-Bill-Dann (formerly Lianozovsky Dairy Plant): Surgut City Dairy Plant  OJSC, Ochakovo Dairy Plant OJSC, Anna milk CJSC, Angarsky Dairy Plant OJSC,  Obninsk Dairy Plant OJSC.                                                                                                                                                |
|----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                      |
| February |   | We opened a new mega-farm complex in Volosovsk District near  St Petersburg, built in place of the Trud collective farm, which we had acquired in 2005. The state-of-the-art farm  is designed for 1,200  Holstein milking cows.                                                                                                                                                                          |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                      |
| February |   | We launched a major project to implement a new Enterprise Resource  Planning (ERP) information system that will cover finance, production,  supply, logistics and distribution and will be based on Oracle E-Business  Suite software. We plan to complete the main stage of the ERP system  implementation by the end of 2010.                                                                      |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                      |
| March    |   | A new corporate structure and management  positions went into effect from March 1, 2008. As part of the  restructuring, the existing dairy and baby food business units, along with  the Holding company, were combined into a single structure: Wimm-Bill-Dann Foods.                                                                                                                               |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                      |
| March    |   | In  March and April 2008, WBD Foods issued five-year ruble-denominated  bonds for a total value of 5 billion rubles. The interest rate of the first  coupon was established at an auction  at an annual rate of 9.30% and the bond yield to the  annual offer amounted to 9.52% annually.                                                                                                       |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                      |
| March    |   | We launched the production of  Agusha baby food and Imunele functional products at our Manros-M production facility in the Omsk Region,  Siberia.                                                                                                                                                                                                                                                         |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                      |
| April    |   | On  April 25, 2008, we entered into a syndicate loan agreement with ING Bank  N.V., ABN Amro N.V. and CALYON as mandated lead arrangers, pursuant to which  mandated lead arrangers and syndicate lent to us a principal amount of $250  million on May 8, 2008. The loan matures on April 25, 2011, and interest  is payable by us quarterly in arrears at an annual rate of LIBOR+1.75%. |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                      |
| May      |   | On  May 15, 2008 and on May 7, 2008, we repaid our 2003 and 2007  Eurobond loans with the accrued interest, respectively.                                                                                                                                                                                                                                                                       |

 

75

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**Results of Operations**

** **

The following table summarizes the results of our operations for theyears ended December 31, 2007, 2006 and 2005:

 
| ** **                           | ** ** | **2007**                | ** ** | **% of  sales** | ** ** | **2006**                | ** ** | **% of  sales** | ** ** | **2005**                | ** ** | **% of  sales** | ** ** |
|--------------------------------------|------------|-------------------------|------------|----------------------|------------|-------------------------|------------|----------------------|------------|-------------------------|------------|----------------------|------------|
| ** **                           | ** ** | **(in thousands)** | ** ** | ** **           | ** ** | **(in thousands)** | ** ** | ** **           | ** ** | **(in thousands)** | ** ** | ** **           | ** ** |
| Sales                                |       | $                       | 2,438,328  |                 | 100.0      |                    | $          | 1,762,127            |       | 100.0                   |       | $                    | 1,394,590  |   | 100.0 |   |
| including:                           |       |                    |       |                 |       |                    |       |                 |       |                    |       |                 |       |
| Dairy                                |       | 1,852,458               |       | 76.0                 |       | 1,320,901               |       | 75.0                 |       | 1,003,601               |       | 72.0                 |       |
| Beverages                            |       | 414,117                 |       | 17.0                 |       | 324,074                 |       | 18.4                 |       | 303,147                 |       | 21.7                 |       |
| Baby Food                            |       | 171,753                 |       | 7.0                  |       | 117,152                 |       | 6.6                  |       | 87,839                  |       | 6.3                  |       |
| Cost of sales                        |       | (1,654,879              | )          | 67.9                 |       | (1,194,159              | )          | 67.8                 |       | (999,006                | )          | 71.6                 |       |
| Gross profit                         |       | 783,449                 |       | 32.1                 |       | 567,968                 |       | 32.2                 |       | 395,584                 |       | 28.4                 |       |
| Selling and distribution  expenses   |       | (387,853                | )          | 15.9                 |       | (246,054                | )          | 14.0                 |       | (191,990                | )          | 13.8                 |       |
| General and administrative  expenses |       | (180,922                | )          | 7.4                  |       | (134,481                | )          | 7.6                  |       | (109,642                | )          | 7.9                  |       |
| Other operating expenses             |       | (704                    | )          | 0.0                  |       | (31,812                 | )          | 1.8                  |       | (6,457                  | )          | 0.5                  |       |
| Operating income                     |       | 213,970                 |       | 8.8                  |       | 155,621                 |       | 8.8                  |       | 87,495                  |       | 6.3                  |       |
| Financial income and expenses,  net  |       | (16,851                 | )          | 0.7                  |       | (15,480                 | )          | 0.9                  |       | (22,868                 | )          | 1.6                  |       |
| Provision for income taxes           |       | (54,302                 | )          | 2.2                  |       | (41,560                 | )          | 2.4                  |       | (30,712                 | )          | 2.2                  |       |
| Minority interest                    |       | (2,769                  | )          | 0.1                  |       | (3,197                  | )          | 0.2                  |       | (3,649                  | )          | 0.3                  |       |
| Net Income                           |       | $                       | 140,048    |                 | 5.7        |                    | $          | 95,384               |       | 5.4                     |       | $                    | 30,266     |   | 2.2 |   |
| Volume                               |       |                    |       |                 |       |                    |       |                 |       |                    |       |                 |       |
| Dairy (th. tons)                     |       | 1,599                   |       |                 |       | 1,354                   |       |                 |       | 1,195                   |       |                 |       |
| Beverages (th. liters)               |       | 491                     |       |                 |       | 445                     |       |                 |       | 436                     |       |                 |       |
| Baby Food (th. tons)                 |       | 87                      |       |                 |       | 66                      |       |                 |       | 58                      |       |                 |       |

 

**YearEnded December 31, 2007 Compared to Year Ended December 31, 2006**

** **

**Sales**

** **

Sales increased by 38.4% to $2,438.3 million in 2007 from$1,762.1 million in 2006. The dairy business was our largest segment,representing 76.0% of sales in 2007 compared to 75.0% in 2006.

 
| ** **        | ** ** | **Year ended December 31,** | ** ** |
|-------------------|------------|--------------------------------------------|------------|
| ** **        | ** ** | **2007**                                   | ** ** | **% of  sales** | ** ** | **2006** | ** ** | **% of  sales** | ** ** |
| ** **        | ** ** | **(in thousands)**                    | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Dairy products    |       | $                                          | 1,852,458  |   | 76.0 |   | $ | 1,320,901 |   | 75.0 |   |
| Beverage products |       | 414,117                                    |       | 17.0 |   | 324,074 |   | 18.4 |   |
| Baby food         |       | 171,753                                    |       | 7.0 |   | 117,152 |   | 6.6 |   |
|              |       | $                                          | 2,438, 328 |   | 100.0 |   | $ | 1,762,127 |   | 100.0 |   |

 

76

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Sales in our dairy segment increased by 40.2% to $1,852.5 millionin 2007 from $1,320.9 million in 2006. We sold 1,599.5 thousand tonsof dairy products in 2007 and 1,353.5 thousand tons of dairy products in2006. The average selling price increased by 18.7% from $0.976 per kilogram in2006 to $1.158 per kilogram in 2007 driven by a favorable sales mix, rubleprice increases and ruble appreciation. Our improved dairy sales were driven byour increased presence in the regions of Russia and the CIS, especially inNorth West and Southern Russia, the addition of new products to our portfolioand further optimization of our product portfolio, the launch of new productlines and increased marketing activities.

 

Sales in our beverages segment increased by 27.8% to$414.1 million in 2007 from $324.1 million in 2006. We sold490.6 million liters of juice and water in 2007 and 447.0 million litersof juice and water in 2006. The average selling price increased by 16.4% from$0.725 per liter in 2006 to $0.844 per liter in 2007, primarily due to changesin our product mix in favor of higher priced brands and ruble price increases.

 

Sales in our baby food segment increased by 46.6% to $171.8 million in2007 from $117.2 million in 2006. We sold 87.4 thousand tons of baby foodproducts in 2007 and 66.3 thousand tons in 2006. The average selling priceincreased by 11.2% from $1.768 per kilogram in 2006 to $1.966 per kilogram in2007 driven by ruble price increases and ruble appreciation.

 

In 2007, 54% of our sales revenues came from regional Russia and otherCIS countries. Regional sales represented 53%, 66% and 24% of dairy, beveragesand baby food segment revenues in 2007, respectively. Over a number of years, wehave focused on sales growth in the regions through the expansion of ourdistribution and production capabilities in various regions, as well as certainCIS countries.

 

**Costof Sales**

** **

Cost of sales primarily consists of expenses relating to raw materials(raw milk for dairy and baby food products, concentrates for juices andpackaging materials for all products), which accounted for 84.9% and 82.6% ofour total cost of sales in 2007 and 2006, respectively. The table below setsforth these costs for both 2007 and 2006:

 
| ** **                    | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **2007**                                   | ** ** | **%** | ** ** | **2006** | ** ** | **%** | ** ** |
| ** **                    | ** ** | **(in thousands)**                    | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Raw materials                 |       | $                                          | 1,405,801  |   | 84.9 |   | $ | 986,477 |   | 82.6 |   |
| Personnel                     |       | 90,207                                     |       | 5.5 |   | 68,464 |   | 5.7 |   |
| Depreciation and amortization |       | 65,879                                     |       | 4.0 |   | 50,136 |   | 4.2 |   |
| Utilities                     |       | 42,554                                     |       | 2.6 |   | 29,240 |   | 2.5 |   |
| Goods for resale              |       | 7,341                                      |       | 0.4 |   | 22,556 |   | 1.9 |   |
| Other                         |       | 43,097                                     |       | 2.6 |   | 37,286 |   | 3.1 |   |
| Total cost of sales           |       | $                                          | 1,654,879  |   | 100.0 |   | $ | 1,194,159 |   | 100 |   |

 

Raw material costs increased by 42.5% in 2007. Raw materials increasedas a percentage of sales to 57.7% in 2007 from 56.0% in 2006. Raw materialcosts accounted for 60.3% of dairy sales in 2007 compared to 57.5% in 2006.This was caused by an unprecedented rise in raw milk prices, which outpaced theincreases in selling prices. Raw material costs accounted for 44.3% baby foodsales in 2007 compared to 41.2% in 2006, owing to the same reason.

 

77

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Raw materialcosts decreased to 51.4% of beverage sales in 2007 from 55.0% in 2006 due toenhanced cost control measures and centralized procurement, undertaken from2006.

 

In the dairy segment, 86.3% of our raw material costs wereruble-denominated and 13.7% were hard-currency-denominated in 2007, whereas83.9% of these costs were ruble-denominated and 16.1% werehard-currency-denominated in 2006. In the baby food segment, 65.5% of our rawmaterial costs were ruble-denominated and 34.5% were hard-currency-denominatedin 2007, unchanged as of 2006. In the beverages segment, 21.2% of our rawmaterial costs were ruble-denominated and 78.8% were hard-currency-denominatedin 2007, while the majority of our raw material costs werehard-currency-denominated in 2006.

 

Personnel expenses increased by 31.8% in 2007 as compared to 2006. Theaverage number of production personnel increased in 2007 by 2.5% to 11,076(including Ochakovo, MOLKA, Manros and Surgut dairy plants acquired in the endof 2006) compared to 10,811 in 2006 (excluding Ochakovo, MOLKA, Manros andSurgut)  mainly due to increased utilization of manufacturingfacilities and  production volumes growthin 2007.

 

Depreciation and amortization increased by 31.4% from$50.1 million in 2006 to $65.9 million in 2007, reflectingsignificant capital expenditures we have been making to increase our productioncapacity by improving our facilities and overall infrastructure.

 

Utility costs increased in by 45.5% in 2007 due to larger productionand warehousing facilities, as well as an increase in production volumes andelectricity and gas tariffs.

 

Goods for resale include various dairy products that we purchase fromindependent producers and resell.

 

**Gross Profit**

** **

Our gross profit increased by 37.9% to $783.4 million in 2007 from$568.0 million in 2006. Our gross margin decreased to 32.1% in 2007 from32.2% in 2006.

 

Gross margin in our dairy segment decreased to 29.2% in 2007 from 30.5%in 2006 due to the unprecedented rise in raw milk prices.  Our raw milk purchase price increased 64.8%year-on-year in ruble terms (77.5% in U.S. dollar terms) in the fourth quarterand 27.7% year-on-year in ruble terms (35.7% in U.S. dollar terms) for the fullyear 2007.

 

Gross margin in our beverages segment increased to 39.8% in 2007 from35.3% in 2006. This increase was primarily due to better pricing and discountmanagement which largely offset higher sugar and concentrate costs, and a shiftin our product mix in favor of value-added products. As a result, the increasein the average selling price outpaced the increase in cost of sales

 

Gross margin in our baby food segment increased to 45.1% in 2007 from43.1% in 2006 mainly due to increased selling prices and a shift in our productmix in favor of higher margin, value-added products.

 

**Selling andDistribution Expenses**

** **

Selling and distribution expenses increased by 57.6% between 2007 and2006. As a percentage of sales, selling and distribution expenses increased to15.9% in 2007 from 14.0% in 2006. Our selling and distribution expenses in 2007and 2006 were as follows:

 

78

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| ** **                               | ** ** | **Year ended  December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| ** **                               | ** ** | **(in thousands)**                | ** ** |
| Advertising and marketing                |       | $                                      | 137,965    |   | $ | 76,194 |   |
| Personnel                                |       | 83,901                                 |       | 55,955 |   |
| Shipping and handling                    |       | 111,228                                |       | 73,565 |   |
| Bad debt expense                         |       | 1,650                                  |       | 3,130 |   |
| Materials and supplies                   |       | 11,249                                 |       | 9,369 |   |
| Warehouse                                |       | 11,534                                 |       | 10,986 |   |
| Other                                    |       | 30,326                                 |       | 16,855 |   |
| Total selling and distribution  expenses |       | $                                      | 387,853    |   | $ | 246,054 |   |

 

Advertising and marketing expenses increased in 2007 by 81.1% or$61.8 million in absolute terms, and increased by 1.4% as a percentage ofsales to 5.7% in 2007 from 4.3% in 2006. The increase in expenses was due toour continued investments into major brand promotions, media inflation onRussia’s leading national television channels, which, in 2007, exceeded 50% andgeneral increases in marketing costs. Despite this media inflation, we wereable to obtain volume discounts and manage the cost increases more effectively.

 

Personnel expenses increased by 49.9% in 2007 as compared to 2006. Theaverage number of employees in our selling and distribution departmentincreased to 5,712 in 2007 (including Surgut, Manros, Ochakovo, and MOLKA dairyplants acquired in late 2006) from 5,355 in 2006 (excluding Surgut, Manros,Ochakovo, and MOLKA dairy plants) mainly due to the development of our branchnetwork in 2007. Our payroll cost per employee increased by 42.1% to $14,689 in2007 from $10,336 in 2006, mainly due to implementation of a performance basedreward system as well as enhancing the quality of our sales force in 2007. Ourpersonnel costs as a percentage of sales increased to 3.4% in 2007 from 3.2% in2006. Our personnel costs as a percentage of sales increased to 3.4% in 2007from 3.2% in 2006.

 

Shipping and handling costs, which primarily consist of externaltransportation costs, increased by 51.2% in 2007 as compared to 2006. Ourtransportation expenses as a percentage of sales slightly increased to 4.6% in2007 from 4.2% in 2006. The increase in transportation costs was mainly due tothe expansion of our sales volumes in the regions and increased transportationtariffs. In particular, costs for motor transportation, which accountedapproximately for about half of the total beverages transportation expenses,increased by 13.0%, despite record fuel prices.

 

We continued to maintain control of our bad debt expenses, whichdecreased slightly to 0.1% as a percentage of sales in 2007 from 0.2% in 2006.See “B. Liquidity and Capital Resources—Critical Accounting Policies andEstimates—Allowance for Doubtful Accounts” below.

 

**General andAdministrative Expenses**

** **

General and administrative expenses increased by 34.5% in 2007 ascompared to 2006, and decreased as a percentage of sales to 7.4% in 2007 from7.6% in 2006. Our general and administrative expenses in 2007 and 2006 were asfollows:

 
| ** **                                 | ** ** | **Year ended  December 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | **200****7**                           | ** ** | **200****6** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                | ** ** |
| Personnel                                  |       | $                                      | 102,195    |   | $ | 78,227 |   |
| Taxes other than income tax                |       | 17,200                                 |       | 12,789 |   |
| Audit, consulting and legal  fees          |       | 10,636                                 |       | 10,506 |   |
| Depreciation                               |       | 9,512                                  |       | 7,215 |   |
| Materials and supplies                     |       | 4,654                                  |       | 2,462 |   |
| Communication costs                        |       | 3,647                                  |       | 2,731 |   |
| Rent                                       |       | 3,278                                  |       | 2,670 |   |
| Other                                      |       | 29,800                                 |       | 17,881 |   |
| Total general and  administrative expenses |       | $                                      | 180,922    |   | $ | 134,481 |   |

 

79

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Personnel expenses increased by 30.6%, while the average number ofemployees decreased to 3,008 in 2007 (including Surgut, Manros, Ochakovo, andMOLKA dairy plants acquired in late 2006) compared to 3,159 in 2006 (excludingSurgut, Manros, Ochakovo, and MOLKA dairy plants). Our average cost peremployee increased by 38.5% to $33,978 in 2007 from $24,532 in 2006, due towage inflation, compensatory payments made during the process of personnelheadcount optimization and SAR program implemented for some of our key managersin 2007.

 

Our expenses for audit, consulting and legal services remainedapproximately flat showing an increase of 1.2% in 2007 compared to 2006.

 

Depreciation expense increased by 31.8% from $7.2 million in 2006to $9.5 million in 2007, reflecting capital expenditures made to supportour expansion into the regions of Russia and the CIS.

 

**Other OperatingExpenses**

** **

Other operating expenses decreased by 97.8% to $0.7 million in 2007from $31.8 million in 2006.  Otheroperating expenses were unusually high in 2006, due to a one time impairmentcharge of US$16.3 million to our operating income, partially to cover thewriting down of Valdai mineral water facility in beverage business unit and theclosing off of a small dairy plant in Novokuibyshevsk in dairy business unit.

 

**Operating Income**

** **

Operating income increased by 37.5% to $214.0 million in 2007 from$155.6 million in 2006, as a result of cost control measures undertaken inthe last two years. Our acquisitions made at the end of 2006 also contributedto the improvement of our operating income. As a percentage of sales, operatingincome remained stable at 8.8% in 2007 as in 2006.

 

**Financial Income andExpenses**

** **

Financial income and expenses comprised the following:

 
| ** **                               | ** ** | **Year ended  December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| ** **                               | ** ** | **(in thousands)**                | ** ** |
| Interest expense                         |       | $                                      | 34,988     |   | $ | 27,898 |   |
| Interest income                          |       | (2,952                                 | )          | (4,372 | ) |
| Currency remeasurement gains             |       | (18,120                                | )          | (10,288 | ) |
| Bank charges                             |       | 2,912                                  |       | 2,070 |   |
| Other financial expense  (income)        |       | 23                                     |       | 172 |   |
| Total financial income and  expense, net |       | $                                      | 16,851     |   | $ | 15,480 |   |

 

80

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Interest expense increased by 25.4% in 2007 compared to 2006. This wasmainly due to an increase in our average debt, including a $150 million LoanParticipation Notes issued in February 2007.

 

We received interest income of $3.0 million from free cash managementin 2007 compared to $4.4 million in 2006.

 

In 2007, we incurred total currency remeasurement gains of$18.1 million, mainly comprised of gains and losses from U.S.dollar-denominated and Euro-denominated debt respectively.  For accounting purposes for our hard currencydenominated liabilities we used the exchange rates as of December 31, 2007vs. December 31, 2006. Based on these rates, the US Dollar depreciated by6.7% against Russian ruble, while EURO appreciated by 3.6%.

 

**Provisionfor Income Taxes**

** **

Our provision for income taxes for the years ended December 31,2007 and 2006 was as follows:

 
| ** **                            | ** ** | **Year ended  December 31,** | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|
| ** **                            | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| ** **                            | ** ** | **(in thousands)**                | ** ** |
| Current provision                     |       | $                                      | 49,409     |   | $ | 48,232 |   |
| Deferred income tax  charge/(benefit) |       | 4,893                                  |       | (6,672 | ) |
| Total provision for income  taxes     |       | $                                      | 54,302     |   | $ | 41,560 |   |

 

Provision for income taxes amounted to $54.3 million in 2007 and$41.6 million in 2006. These provisions comprise current income taxcharges of $49.4 million in 2007 and $48.2 million in 2006, and adeferred tax expense of $4.9 million in 2007 and the expense of benefit of$6.7 million in 2006. Deferred tax benefits and charges arise on temporarydifferences between the bases of computing income under domestic tax principlesand U.S. GAAP.

 

In 2007, our effective income tax rate was 27.5%compared to the Russian statutory income tax rate of 24.0% and, in 2006, oureffective income tax rate was 29.7% compared to the Russian statutory incometax rate of 24.0%. This decrease in 2007 of our effective income tax rate isprimarily driven by an increase in taxable profits accompanied by a decrease inthe group’s non-deductible expenses as a percentage of sales in 2007, comparedto 2006, as well as utilization of losses incurred in previous periods by certainsubsidiaries which were merged into Wimm-Bill-Dann OJSC in 2007.  Suchlosses were not deemed recoverable during previous periods.

 

**Minority Interest**

** **

The minority interest reflects the net income and losses of oursubsidiaries that are attributable to the minority shareholders in thosesubsidiaries. In 2007, net income attributable to minority shareholders of oursubsidiaries decreased to $2.8 million from $3.2 million in 2006. Netincome attributable to the minority interests in the dairy segment was $2.0million in 2007 and $1.9 million in 2006, respectively.

 

81

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**Net Income**

 

Netincome increased in 2007 to $140.0 million (5.7% of sales) from$95.4 million (5.4% of sales) in 2006, primarily as a result of theincrease in operating income explained above, which was partially offset by anincrease in income tax expense.

 

**YearEnded December 31, 2006 Compared to Year Ended December 31, 2005**

** **

**Sales**

** **

Sales increased by 26.4% to $1,762.1 million in 2006 from$1,394.6 million in 2005. The dairy business was our largest segment,representing 75.0% of sales in 2006 compared to 72.0% in 2005.

 
| ** **        | ** ** | **Year ended December 31,** | ** ** |
|-------------------|------------|--------------------------------------------|------------|
| ** **        | ** ** | **200****6**                               | ** ** | **% of  sales** | ** ** | **200****5** | ** ** | **% of  sales** | ** ** |
| ** **        | ** ** | **(in thousands)**                    | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Dairy products    |       | $                                          | 1,320,901  |   | 75.0 |   | $ | 1,003,604 |   | 72.0 |   |
| Beverage products |       | 324,074                                    |       | 18.4 |   | 303,147 |   | 21.7 |   |
| Baby food         |       | 117,152                                    |       | 6.6 |   | 87,839 |   | 6.3 |   |
|              |       | $                                          | 1,762,127  |   | 100.0 |   | $ | 1,394,590 |   | 100.0 |   |

 

Sales in our dairy segment increased by 31.6% to $1,320.9 millionin 2006 from $1,003.6 million in 2005. We sold 1,353.5 thousand tonsof dairy products in 2006 and 1,195.3 thousand tons of dairy products in2005. The average selling price increased by 16.2% from $0.840 per kilogram in2005 to $0.976 per kilogram in 2006 driven by a favorable sales mix,incremental ruble price increases and ruble appreciation. Our improved dairysales were driven by our increased presence in the regions of Russia and theCIS, especially in Siberian and Southern Russia, the addition of new productsto our portfolio and further optimization of our product portfolio, the launchof new product lines and increased marketing activities.

 

Sales in our beverages segment increased by 6.9% to $324.1 millionin 2006 from $303.1 million in 2005. We sold 447.0 million liters ofjuice and water in 2006 and 436.2 million liters of juice and water in2005. The average selling price increased by 4.3% from $0.695 per liter in 2005to $0.725 per liter in 2006, primarily due to incremental ruble price increasesand ruble appreciation, partially offset by changes in our product mix in favorof lower priced brands.

 

Sales in our baby food segment increased by 33.4% to $117.2 million in2006 from $87.8 million in 2005. We sold 66.3 thousand tons of baby food productsin 2006 and 57.8 thousand tons in 2005. The average selling price increased by16.3% from $1.520 per kilogram in 2005 to $1.768 per kilogram in 2006 driven byincremental ruble price increases, ruble appreciation and a change in ourproduct mix favoring value-added products. Our improved baby food sales weredriven by the addition of new products to our portfolio and increased sales innew regions.

 

In 2006, 67% of our revenues came from sales outside of the Moscowregion in other parts of Russia and the CIS. Regional sales represented 71%,63% and 22% of dairy, beverages and baby food segment revenues in 2006. Overthe last years, we have focused on sales growth in the regions through theexpansion of our distribution and production capabilities in various regions,as well as certain CIS countries.

 

82

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**Cost of Sales**

 

Cost of sales primarily consists of expenses relating to raw materials(raw milk for dairy and baby food products, concentrates for juices andpackaging materials for all products), which accounted for 82.6% and 83.7% ofour total cost of sales in 2006 and 2005, respectively. The table below setsforth these costs for both 2006 and 2005:

 
| ** **                    | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                   | ** ** | **%** | ** ** | **2005** | ** ** | **%** | ** ** |
| ** **                    | ** ** | **(in thousands)**                    | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Raw materials                 |       | $                                          | 986,477    |   | 82.6 |   | $ | 836,404 |   | 83.7 |   |
| Personnel                     |       | 68,464                                     |       | 5.7 |   | 50,030 |   | 5.0 |   |
| Depreciation and amortization |       | 50,136                                     |       | 4.2 |   | 41,921 |   | 4.2 |   |
| Utilities                     |       | 29,240                                     |       | 2.5 |   | 21,222 |   | 2.1 |   |
| Goods for resale              |       | 22,556                                     |       | 1.9 |   | 16,724 |   | 1.7 |   |
| Other                         |       | 37,286                                     |       | 3.1 |   | 32,705 |   | 3.3 |   |
| Total cost of sales           |       | $                                          | 1,194,159  |   | 100.0 |   | $ | 999,006 |   | 100 |   |

 

Raw material costs increased by 17.9% between 2006 and 2005 butdecreased as a percentage of sales to 56.0% in 2006 from 60.0% in 2005,primarily due to the increase in selling prices. Raw material costs as apercentage of dairy segment sales were lower (57.5% in 2006 compared to 62.8%in 2005) because of the increases in selling prices, which outpaced theincrease in raw milk prices. Raw material costs as a percentage of baby foodsegment sales slightly decreased from 44.7% to 41.2% for the same reason. Rawmaterial costs as a percentage of beverages segment sales remained at the levelof 55.0% in 2006 and in 2005. In the dairy segment, 83.9% of our raw materialcosts were ruble-denominated and 16.1% were hard-currency-denominated in 2006,whereas 78.0% of these costs were ruble-denominated and 22% werehard-currency-denominated in 2005. In the baby food segment, 65.6% of our rawmaterial costs were ruble-denominated and 34.4% were hard-currency-denominatedin 2006, whereas 67.0% of these costs were ruble-denominated and 33.0% werehard-currency-denominated in 2005. In the beverages segment, the majority ofour raw material costs were hard-currency-denominated in 2006 and 2005.

 

Personnel expenses increased by 36.9% in 2006 as compared to 2005. Theaverage number of production personnel increased in 2006 by 10.7% to 10,811(excluding newly acquired dairy plants, Surgut, Manros, Ochakovo, and MOLKA)compared to 9,766 in 2005mainly due to increased utilization of manufacturingfacilities and the related growth of production volumes in 2006.

 

Production personnel cost per employee increased by 21.3% to $6,212 in2006 from $5,123 in 2005 (including the dairy farm employees). This was mainlydriven by a manning reduction initiative which commenced in the end of2006, with subsequent compensatory payments reported in 2006, as well asincreased salaries in 2006.

 

Depreciation and amortization increased by 19.6% from$41.9 million in 2005 to $50.1 million in 2006, reflectingsignificant capital expenditures we have been making to increase our productioncapacity by improving our facilities and overall infrastructure.

 

Utility costs increased by 37.8% in 2006 due to larger production andwarehousing facilities, as well as an increase in production volumes andelectricity and gas tariffs.

 

Goods for resale include various dairy products that we purchase fromindependent producers and resell.

 

**Gross Profit**

** **

Our gross profit increased by 43.6% to $568.0 million in 2006 from$395.6 million in 2005. Our gross margin increased to 32.2% in 2006 from28.4% in 2005.

 

83

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Gross margin in our dairy segment increased to 30.5% in 2006 from 25.2%in 2005 due to enhanced efficiency and increased selling prices and volumes.

 

Despite additional cost control measures undertaken in 2006, grossmargin in our beverages segment decreased to 35.3% in 2006 from 36.1% in 2005.This decrease was primarily due to higher sugar and concentrate costs, a shiftin our product mix in favor of lower margin products and, as a result, a fasterincrease of cost of sales than of the average price.

 

Gross margin in our baby food segment increased to 43.1% in 2006 from38.0% in 2005 mainly due to increased selling prices and a shift in our productmix in favor of higher margin, value-added products.

 

**Selling andDistribution Expenses**

** **

Selling and distribution expenses increased by 28.2% between 2006 and2005. As a percentage of sales, selling and distribution expenses increased to14.0% in 2006 from 13.8% in 2005. Our selling and distribution expenses in 2006and 2005 were as follows:

 
| ** **                               | ** ** | **Year ended  December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(in thousands)**                | ** ** |
| Advertising and marketing                |       | $                                      | 76,194     |   | $ | 57,936 |   |
| Personnel                                |       | 55,955                                 |       | 47,665 |   |
| Shipping and handling                    |       | 73,565                                 |       | 52,995 |   |
| Bad debt expense                         |       | 3,130                                  |       | 3,908 |   |
| Materials and supplies                   |       | 9,369                                  |       | 10,446 |   |
| Warehouse                                |       | 10,986                                 |       | 9,525 |   |
| Other                                    |       | 16,855                                 |       | 9,515 |   |
| Total selling and distribution  expenses |       | $                                      | 246,054    |   | $ | 191,990 |   |

 

Advertising and marketing expenses increased in 2006 by 31.5% or$18.3 million in absolute terms, and increased by 0.2% as a percentage ofsales to 4.3% in 2006 from 4.1% in 2005. The increase in expenses was due toour continued investments into major brand promotions, media inflation onRussia’s leading national television channels, which, in 2006, reached 35% andgeneral increases in marketing costs. Despite this media inflation, we were ableto obtain volume discounts and manage the cost increases more effectively. In2006 and 2005, television advertising expenses represented more than half ofour advertising budget.

 

Personnel expenses increased by 17.4% in 2006 as compared to 2005. Theaverage number of employees in our selling and distribution departmentdecreased to 5,355 in 2006 from 5,713 in 2005 due to the development of ourbranch network in 2006. Our payroll cost per employee increased by 23.9% to$10,336 in 2006 (excluding newly acquired dairy plants - Surgut, Manros,Ochakovo, and MOLKA) from $8,343 in 2005 mainly due to performance based rewardsystem implementation in 2006. Our personnel costs as a percentage of salesdecreased to 3.2% in 2006 from 3.4% in 2005.

 

Shipping and handling costs, which primarily consist of externaltransportation costs, increased by 38.8% in 2006, as compared to 2005. Ourtransportation expenses as a percentage of sales slightly increased to 4.2% in2006 from 3.8% in 2005. The increase in transportation costs was mainly due tothe expansion of our sales volumes in the regions and increased transportationtariffs. In particular, ruble tariffs for railway transportation, which

 

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accounted formore than half of the total beverages transportation expenses, increased by14.0%, which slightly exceeded inflation.

 

We continued to maintain control of our bad debt expenses, whichremained stable at 0.2% as a percentage of sales in 2006. See “B. Liquidity andCapital Resources—Critical Accounting Policies and Estimates—Allowance forDoubtful Accounts” below.

 

**General andAdministrative Expenses**

** **

General and administrative expenses increased by 22.7% in 2006 ascompared to 2005, and decreased as a percentage of sales to 7.6% in 2006 from7.9% in 2005. Our general and administrative expenses in 2006 and 2005 were asfollows:

 
| ** **                                 | ** ** | **Year ended  December 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                | ** ** |
| Personnel                                  |       | $                                      | 78,227     |   | $ | 61,830 |   |
| Taxes other than income tax                |       | 12,789                                 |       | 13,194 |   |
| Audit, consulting and legal  fees          |       | 10,506                                 |       | 5,567 |   |
| Depreciation                               |       | 7,215                                  |       | 5,711 |   |
| Materials and supplies                     |       | 2,462                                  |       | 3,268 |   |
| Communication costs                        |       | 2,731                                  |       | 2,880 |   |
| Rent                                       |       | 2,670                                  |       | 2,177 |   |
| Other                                      |       | 17,881                                 |       | 15,015 |   |
| Total general and  administrative expenses |       | $                                      | 134,481    |   | $ | 109,642 |   |

 

Personnel expenses increased by 26.5%, while the average number ofemployees decreased to 3,159 in 2006 compared to 3,478 in 2005. Our averagecost per employee increased by 38.0% to $24,532 in 2006 from about $17,778 in2005 (excluding newly acquired dairy plants - Surgut, Manros, Ochakovo, andMOLKA), due to the hiring of new managers, wage inflation and compensatorypayments made during the process of personnel headcount optimization.

 

Our expenses for audit, consulting and legal services increased by88.7% in 2006 compared to 2005, primarily due to the increased  restructuring costs, strategic businessconsulting costs, costs associated with improving professional skills of ouremployees and general increases in audit-related fees, as well as compliancecosts with respect to the Sarbanes-Oxley Act of 2002.

 

Depreciation expense increased by 26.3% from $5.7 million to$7.2 million, reflecting capital expenditures made to support ourexpansion into the regions of Russia and the CIS.

 

**Operating Income**

** **

Operating income increased by 77.9% to $155.6 million in 2006 from$87.5 million in 2005. As a percentage of sales, operating incomeincreased to 8.8% in 2006 from 6.3% in 2005. As discussed above, the increasein operating income was primarily due to the improvement in the gross margin asa result of cost control procedures. Our major acquisitions also contributed tothe improvement of our operating income.

 

85

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**Financial Income andExpenses**

 

Financial income and expenses comprised the following:

 
| ** **                               | ** ** | **Year ended  December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(in thousands)**                | ** ** |
| Interest expense                         |       | $                                      | 27,898     |   | $ | 23,388 |   |
| Interest income                          |       | (4,372                                 | )          | (1,569 | ) |
| Currency remeasurement gains             |       | (10,288                                | )          | (1,231 | ) |
| Bank charges                             |       | 2,070                                  |       | 1,983 |   |
| Other financial expense  (income)        |       | 172                                    |       | 297 |   |
| Total financial income and  expense, net |       | $                                      | 15,480     |   | $ | 22,868 |   |

 

Interest expense increased by 19.3% in 2006 compared to 2005. This wasmainly due to the increased interest rate payable on our variable rate3,000,000 non-convertible ruble notes issued in December 2005, as well asan overall increase in our debt.

 

We received interest income of $4.4 million from free cashmanagement in 2006 compared to $1.6 million in 2005.

 

In 2006, we incurred total currency remeasurement gains of$10.3 million, which comprised of gains and losses from U.S.dollar-denominated notes and Euro-denominated loan respectively. For accountingpurposes for our U.S. dollar-denominated notes, we used the exchange rate as ofDecember 31, 2006, which depreciated nominally by 8.5% against the December 31,2005 exchange rate resulting in a currency remeasurement gains.

 

**Provision for IncomeTaxes**

** **

Our provision for income taxes for the years ended December 31,2006 and 2005 was as follows:

 
| ** **                            | ** ** | **Year ended  December 31,** | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|
| ** **                            | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| ** **                            | ** ** | **(in thousands)**                | ** ** |
| Current provision                     |       | $                                      | 48,232     |   | $ | 27,385 |   |
| Deferred income tax  charge/(benefit) |       | (6,672                                 | )          | 3,327 |   |
| Total provision for income  taxes     |       | $                                      | 41,560     |   | $ | 30,712 |   |

 

Provision for income taxes amounted to $41.6 million in 2006 and$30.7 million in 2005. These provisions comprise current income taxcharges of $48.2 million in 2006 and $27.4 million in 2005, and adeferred tax benefit of $6.7 million in 2006 and the expense of $3.3 millionin 2005. Deferred tax benefits and charges arise on temporary differencesbetween the bases of computing income under domestic tax principles and U.S.GAAP.

 

In2006, our effective income tax rate was 29.7% compared to the Russian statutoryincome tax rate of 24.0% and, in 2005, our effective income tax rate was 47.5%compared to the Russian statutory income tax rate of 24.0%. This decrease in2006 of our effective income tax rate is primarily driven by an increase intaxable profits accompanied by a decrease in the group’s non-deductibleexpenses as a percentage of sales in 2006, compared to 2005.

 

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**Minority Interest**

 

The minority interest reflects the net income and losses of oursubsidiaries that are attributable to the minority shareholders in thosesubsidiaries. In 2006, net income attributable to minority shareholders of oursubsidiaries decreased to $3.2 million from $3.6 million in 2005.Most of the net income attributable to minority interests relate to the dairysegment, which had minority interest in net income of $1.9 million in 2006,while most of minority interest of $3.6 million in 2005 were attributed toMoscow Baby Food Plant. The $0.4 million decrease in 2006 was partially offsetby the other minority interest in losses.

 

**Net Income**

** **

Netincome increased in 2006 to $95.4 million (5.4% of sales) from$30.3 million (2.2% of sales) in 2005, primarily as a result of theincrease in operating income and financial income explained above, which waspartially offset by an increase in income tax expense.

 

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**B.  Liquidity and Capital Resources**

* *

**CapitalRequirements**

** **

We need capital to finance the following:

 

·               repayment of debt;

 

·               capital expenditures, consisting of purchases of property, plant andequipment;

 

·               acquisitions; and

 

·               dividend payouts.

 

We anticipate that the repayment of long-term debt including oursyndicated loan, capital expenditures and acquisitions will represent the mostsignificant use of funds for several years to come. In 2007, we continued topurchase property, plant and equipment in order to increase production capacityand to improve infrastructure at our new and existing subsidiaries inanticipation of the expected further growth in the Russian economy and risingincomes.

 

**Capital Expenditures**

 

Our total capital expenditures in 2007, excluding acquisitions,amounted to $192.7 million, including new vendor credits. Capitalexpenditures in our dairy segment amounted to $134.6 million and related to theimprovement of our existing dairy and cheese production facilities, warehousesfacilities and quality control procedures for raw milk used in production.Capital expenditures in our beverages segment amounted to $21.5 million andrelated mainly to the installation of new production lines and other operatingequipment at our production sites. Capital expenditures in our baby foodsegment amounted to $28.2 million and related mainly to the launch of baby foodproduction on Omsk Plant, acquisition of baby food packaging lines on WBD andmodernization of our Kursk Baby Food Plant. Our corporate and common capitalexpenditures, including those relating to IT infrastructure and software, totaled$8.4 million.

 

Our capital expenditures, excluding acquisitions, for the period from2005 to 2007 are set forth in the following table:

 
| ** **                         | ** ** | **Year ended December 31,**          | ** ** |
|------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **2005** | ** ** | **Total** | ** ** |
| ** **                         | ** ** | **In millions of U.S. Dollars** | ** ** |
| Dairy segment                      |       | $                                                   | 134.6      |   | $ | 93.3 |   | $ | 59.9 |   | $ | 287.8 |   |
| Beverages segment                  |       | 21.5                                                |       | 13.5 |   | 12.9 |   | 47.9 |   |
| Baby food segment                  |       | 28.2                                                |       | 19.4 |   | 1.8 |   | 49.4 |   |
| Corporate and common  expenditures |       | 8.4                                                 |       | 3.8 |   | 0.5 |   | 12.7 |   |
| Total capital expenditures         |       | $                                                   | 192.7      |   | $ | 130.0 |   | $ | 75.1 |   | $ | 397.8 |   |

 

As of December 31, 2007, our capital commitments amounted to $66.4million mainly for construction projects. As of March 31, 2008, we hadcapital commitments of approximately $54.7 million, primarily for constructionprojects at our production sites and purchase of equipment.  We plan to finance our capital commitmentsthrough cash generated by operating activities and additional borrowings.

 

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**Acquisitions of Subsidiaries and Purchase of Minority Stakes**

** **

During 2007, 2006 and 2005, we made a number of acquisitions for thetotal consideration of $21.8 million, $137.3 million and $24.3 million,respectively. The goal of these acquisitions was to expand into new markets,strengthen our operational presence in the regions of Russia and the CIS and topurchase minority stakes. The following table summarizes our acquisitions inthe last three years:

 
| ** **                                                                           | ** ** | **Direct owner  -ship  interest  acquired, %** | ** ** | **Acquisition cost  (in ****US$ ‘000****)** | ** **  |
|--------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------------|-------------|
| **2007**                                                                             |       |                                                     |       |                                                            |        |
| Ochakovo Dairy Plant (purchase  of minority stake)                                   |       | 4.72                                                     |       | 3,312                                                           |        |
| Obninsk Dairy Plant (purchase  of minority stake)                                    |       | 33.51                                                    |       | 11,877                                                          |        |
| Niva Farm                                                                            |       | 94.62                                                    |       | 1,185                                                           |        |
| Angarsky Dairy Plant (MOLKA)  (purchase of minority stake)                           |       | 13.23                                                    |       | 836                                                             |        |
| Georgian products                                                                    |       | 100.00                                                   |       | 1,100                                                           |        |
| Acquisition of minority  interests in subsidiaries                                   |       | 17.08                                                    |       | 2,746                                                           |        |
| Other                                                                                |       | various                                                  |       | 750                                                             |        |
| **Total**                                                                            | ** ** | ** **                                               |       | **$**                                                           | **21, 806** |   |
| **2006**                                                                             |       |                                                     |       |                                                            |        |
| Ochakovo Dairy Plant                                                                 |       | 93.74                                                    |       | $                                                               | 66,792      |   |
| Manros                                                                               |       | 100                                                      |       | 51,336                                                          |        |
| Angarsky Dairy Plant (MOLKA)                                                         |       | 83.36                                                    |       | 4,908                                                           |        |
| Surgut Dairy Plant                                                                   |       | 100                                                      |       | 4,536                                                           |        |
| Wimm-Bill-Dann OJSC (formerly  Lianozovsky Dairy Plant) (purchase of minority stake) |       | 0.26                                                     |       | 812                                                             |        |
| Nazarovo Dairy Plant (purchase  of minority stake)                                   |       | 30.35                                                    |       | 1,982                                                           |        |
| Moscow Baby Food Plant  (purchase of minority stake)                                 |       | 20                                                       |       | 6,955                                                           |        |
| **Total**                                                                            | ** ** | ** **                                               |       | **$**                                                           | **137,321** |   |
| **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                                                                        |       | 99.34                                                    |       | 344                                                             |        |
| Trud                                                                                 |       | 63.5                                                     |       | 420                                                             |        |
| Kursk Baby Food Plant CJSC                                                           |       | 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**  |   |

 

See “Item 4. Information on Our Company” for more information on ouracquired businesses and Note 3 to our Consolidated Financial Statementsincluded elsewhere herein. In

 

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addition tothe acquisitions mentioned above, as of December 31, 2007, we also issueda cash advance for the further purchases of minority stakes in certain of ourlegal entities, which are not included in the summary table above.

 

**CapitalResources**

** **

We generally rely on operating cash flows and debt issuance to financecapital expenditures and acquisitions. In addition, we finance a portion of ourequipment 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 Condition—Covenants in our debt agreements restrictour ability to borrow, invest and engage in various activities, which couldimpair our ability to expand or finance our future operations.”

 

**Debt**

** **

Our debt consists of notes, bank loans and vendor financing forproperty, plant and equipment, of which 85% are at fixed rates. The followingtable summarizes our debt position as of December 31, 2007 and 2006:

 
| ** **                                 | ** ** | **At December 31,  200****7** | ** ** | **At December 31,  200****6** | ** ** |
|--------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                 | ** ** | **(in thousands)**                 | ** ** |
| Long-tem debt, including  current portion: |       |                                    |       |                                    |       |
| Notes                                      |       | $                                       | 405,922    |                                    | $          | 248,742 |   |
| Bank loans                                 |       | 41,086                                  |       | 34,219                                  |       |
| Vendor financing                           |       | 33,103                                  |       | 36,189                                  |       |
| Total                                      |       | 480,111                                 |       | 319,150                                 |       |
| Short-term debt                            |       | 98,819                                  |       | 123,849                                 |       |
| Total debt                                 |       | $                                       | 578,930    |                                    | $          | 442,999 |   |
| **Denominated in:**                        |       |                                    |       |                                    |       |
| U.S. dollars                               |       | $                                       | 315,305    |                                    | $          | 171,013 |   |
| Euro                                       |       | $                                       | 23,034     |                                    | $          | 21,702 |   |
| Rubles                                     |       | $                                       | 240,591    |                                    | $          | 250,284 |   |

 

Our debt matures as follows:

 
| **Year**            | ** ** | **(in thousands)** | ** ** |
|---------------------|------------|-------------------------|------------|
| 2008                |       | $                       | 421,005    |   |
| 2009                |       | $                       | 19,277     |   |
| 2010                |       | $                       | 120,885    |   |
| 2011                |       | $                       | 7,353      |   |
| 2012 and thereafter |       | $                       | 10,410     |   |

 

**Notes**

 

***U.S. Dollar Notes***

*** ***

On May 21, 2003, UBS (Luxembourg) S.A. issued 8.5% LoanParticipation Notes due 2008 for the sole purpose of funding a $150 millionloan to WBD Foods. The loan, which matured on May 21, 2008, had an annualinterest rate of 8.5%, payable semi-annually in arrears on May 21 and November 21of each year. Two of our subsidiaries unconditionally, irrevocably, jointly andseverally guaranteed our obligation under the loan. The loan agreementcontained a number of covenants including requirements to maintain certainfinancial ratios.

 

On February 6, 2007, UBS (Luxembourg) S.A. issued 7.5% LoanParticipation Notes due 2008 for the sole purpose of funding a $150 millionloan to WBD Foods. The loan, which matured on May 14, 2008, had an annualinterest rate of 7.5%, payable in two installments on

 

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November 14,2007 and May 14, 2008. The loan agreement contained a number of covenantsincluding requirements to maintain certain financial ratios.

 

We repaid our 2003 and 2007 Eurobond loans with the accrued interest onMay 15, 2008 and on May 7, 2008, respectively.

 

***Ruble Notes***

*** ***

On December 21, 2005, WBD Foods issued 3million non-convertible ruble denominated notes at a face value of 1,000 rubleseach. The offering raised a total of 3 billion rubles ($122,219 at the exchange rate as of December 31,2007 of which $ 16,297 have been repaid as of December 31, 2007). Thenotes are redeemable by WBD Foods on December 15, 2010. The interest rateof the coupon is 9%. Interest is payable semi-annually in arrears commencing onJune 21, 2006.

 

In March and April 2008, theCompany placed a third series of bonds on the Moscow Inter-bank CurrencyExchange (MICEX). The bonds, with a total nominal value of 5 billion rubles($203.7 million at exchange rate as at December 31, 2007), have a maturityof five years and coupons are paid on a half-year basis. The interest rates forboth coupons in the first year are equal and amount to 9.30% annually and therates for subsequent coupons will be set hereinafter. The issue includesbuilt-in 1-year put option.

 

**BankLoans**

** **

Substantially all of our long-term bank loans as of December 31,2007 consisted of ruble and euro-denominated loans from Sberbank, RussianAgricultural Bank and Moscow City Government at effective interest ratesranging from 3.3% to 6.3%. Our short-term debt balance as of December 31,2007 consisted of loans from Commerzbank, International Moscow Bank and theMoscow City Government at interest rates ranging from 3.6% to 8.3%.

 

On April 25, 2008, we entered into asyndicate loan agreement with ING Bank N.V., ABN Amro N.V. and CALYON asmandated lead arrangers, pursuant to which mandated lead arrangers andsyndicate lent to us a principal amount of $250 million on May 8, 2008.The loan matures on April 25, 2011, and interest is payable by usquarterly in arrears at an annual rate of LIBOR+1.75%.

 

The above-mentioned loan is unconditionallyand irrevocably guaranteed by Wimm-Bill-Dann and Wimm-Bill-Dann Beveragespursuant to guarantees dated April 25, 2008 entered into with ING BankN.V. as the agent.

 

Both the loan agreement and the guaranteesare governed by English law. In the loan agreement, we agreed to certaincovenants in respect of, among other things, liens, asset sales, transactionswith affiliates and related persons, change of control, mergers and similartransactions, limitation on dividend or other payments affecting oursubsidiaries and maintenance of certain ratios. In the guaranteesWimm-Bill-Dann and Wimm-Bill-Dann Beverages agreed to similar covenants.

 

**VendorFinance**

** **

We haveagreementswith suppliers of equipment, which provide financing for the periods rangingfrom 1 to 9 years. As of December 31, 2007 and 2006, vendor financingobligations were $14.0 million and $21.0 million respectively, EURO 11.1 million and EURO 10.6 million,respectively (equivalent to $16.3 million and $14.0 million as of December 31,2007 and 2006, respectively); and 68.7 million rubles and 30.9 million rubles,respectively (equivalent to $2.8 million and $1.2 million as of December 31,2007 and 2006, respectively). This financing is provided at interest rates ofLIBOR plus 1.5%, EURIBOR plus 1.6%, and 10.0% for U.S. dollar, EURO and rubledenominated contracts, respectively. As of December

 

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31, 2007 and2006, property, plant and equipment amounting to $48.8 million and $60.8million, respectively, served as collateral under these financing agreements.

 

**Cash Flows**

** **

A summary of our cash flows from continuing operations is as follows:

 
| ** **                                                        | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                        | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | **(in thousands)**                    | ** ** |
| Cash provided by operating  activities                            |       | $                                          | 96,804     |   | $ | 169,954 | * | $ | 113,937 |   |
| Cash used in investing  activities                                |       | (203,041                                   | )          | (228,158 | ) | (125,157 | ) |
| Cash provided (used in) by  financing activities                  |       | 91,429                                     |       | (1,911 | ) | 82,619 |   |
| Impact of exchange rate differences  on cash and cash equivalents |       | 7,950                                      |       | 7,322 |   | (2,087 | ) |
| Net increase (decrease) in  cash                                  |       | $                                          | (6,858     | ) | $ | (52,793 | ) | $ | 69,312 |   |
| Cash paid for acquisition of  property, plant and equipment       |       | $                                          | (189,049   | ) | $ | (127,713 | ) | $ | (72,805 | ) |
| Cash paid for acquisition of  subsidiaries, net of cash acquired  |       | (24,850                                    | )          | (134,367 | ) | (24,964 | ) |
| Vendor financed acquisitions  of property, plant and equipment    |       | 6,860                                      |       | 5,561 |   | 5,709 |   |

 

In 2007, we financed our capital expenditures and acquisitionsexclusively through operating cash flows and short-term loans.

 

We spent $203.0 million on our investment activities in 2007, includingacquisitions of property, plant and equipment of $189.0 million, acquisitionsof subsidiaries of $24.9 million and investments in direct financing leases of$0.2 million, offset by $6.8 million proceeds from return of short-term bankdeposits, $3.7 million proceeds from disposal of property, plant and equipment.

 

**Working Capital**

** **

Our short-term demands for liquidity, including seasonal fluctuationsin working capital requirements, are met by cash flows from operations andshort-term debt.

 

As of December 31, 2007, our cash and cash equivalents balance was$33.5 million, of which $32.3 million was ruble-denominated and $1.2 millionwere euro and U.S. dollar-denominated. Our net working capital balance was $236.5 million. Our working capitalposition as of December 31, 2007 increased from $90.4 million as of December 31,2006 primarily due to an increase in trade receivables and inventory, off-setby trade accounts payable growth. We believe that our working capital issufficient for our present requirements

 

Tax receivables increased by $14.5 million to $65.7 million as of December 31,2007 from $51.2 million as of December 31, 2006. Tax receivablesrepresent VAT and other taxes owed to us by the state budget. The increase asof December 31, 2007 was primarily due to issues related to legal entitiesconsolidation and transfer of VAT receivables from the regional tax authoritiesto the Moscow tax authority. Under existing tax legislation, we are able tooffset this VAT receivable against income tax and other taxes payable to thestate budget or to recover from the state budget in cash. We are taking alllegally available steps, including filing litigation claims, to facilitate therecovery of tax receivables from the state budget. In

 

----

*                   In 2006, the Company included tax paid on dividends as cash flows fromoperating activities in the Consolidated Statements of Cash Flows. In 2007, theCompany classified such amounts as cash flows from financing activities. Priorperiod amounts have been reclassified accordingly for comparative periodspresented in the accompanying financial statements. This change inclassification has no effect on previously reported net income.

 

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2007, $29.5million of VAT was recovered from the state budget in cash. We also received$0.85 million from the tax authorities as interest that was accrued on theamount of VAT not refunded within the established time limit.

 

Trade accounts payables increased to $130.7 million at December 31,2007 from $104.1 million at December 31, 2006. Trade payables turnoveraveraged 26 days as of December 31, 2007 and 26 days as of December 31,2006.

 

Trade receivables increased from $89.9 million as of December 31,2006 to $157.6 million as of December 31, 2007 after the allowance for baddebts of $3.7 million, as compared to $7.1 million as of December 31,2006. Trade receivables turnover averaged 19 days as of December 31, 2007and 16 days as of December 31, 2006. The increase was mainly due toan increased share of sales going through large supermarket chains.

 

Inventory increased from $174.1 million as of December 31, 2006 to$261.3 million as of December 31, 2007. Turnover of inventory in days asof December 31, 2007 amounted to 48 days, as compared to 47 days asof December 31, 2006. The increase in inventory levels was mainly due toan increase in our stock of milk powder and concentrates. The value of our inventorywas also affected by purchasing price increases, primarily in the latter partof 2007, following the rise in global milk prices.

 

**CreditRating Discussion**

** **

Our credit ratings impact our ability to obtain short- and long-termfinancing, and the cost of such financing. In determining our credit ratings,the rating agencies consider a number of factors, including our operating cashflows, total debt outstanding, commitments, interest requirements, liquidityneeds and availability of liquidity. Other factors considered may include ourbusiness strategy, the condition of our industry and our position within theindustry. Although we understand that these and other factors are among thoseconsidered by the rating agencies, each agency might calculate and weigh eachfactor differently.

 

In 2007, both Rating agencies increased ourcredit ratings were upgraded to BB- by S&P and to Ba3 by Moody’s:

 
| **Rating Agency**             | ** ** | **Company’s rating** | ** ** | **Outlook/Watch** | ** ** |
|------------------------------------|------------|--------------------------------|------------|-------------------|------------|
| Moody’s(1)                    |       | Ba3                            |       | stable            |       |
| Standard & Poor’s(2) |       | BB-                            |       | stable            |       |

 

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(1)  Rated on July,16, 2007.

 

(2) Rated on July,13, 2007.

 

The two loan agreements relating to each of our two $150 millionloan participation notes due 2008 contain, in each case, provisions requiring,subject to certain conditions, our prepayment of the loan in full in the eventthat a change in control or merger results in a decline in our credit ratings

 

**Critical Accounting Policies and Estimates**

** **

Critical accounting policies are those policies that require theapplication of management’s most challenging, subjective or complex judgments,often as a result of the need to make estimates about the effect of mattersthat are inherently uncertain and may change in subsequent periods. Criticalaccounting policies involve judgments that are sufficiently sensitive to givematerially different results under different assumptions and conditions. Webelieve that our most critical accounting policies are those described below.For a detailed discussion of these and other accounting policies, seeNote 3 to our Consolidated Financial Statements included elsewhere herein.

 

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**Estimatesand assumptions**

** **

The preparation of the consolidated financial statements in conformitywith U.S. GAAP requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities at the date of theconsolidated financial statements and the reported amounts of revenues andexpenses during the reporting period. Examples include estimates of provisionsfor allowance for doubtful accounts, obsolete inventory, and valuationallowance for deferred tax assets. Actual results could differ from thoseestimates.

 

**Allowancefor Doubtful Accounts**

** **

Allowance for doubtful accounts is established if there is objectiveevidence that we will not be able to collect the amounts due according tooriginal contractual terms and reduces receivables to amounts expected to becollected. In estimating uncollectible amounts, we consider factors such ascurrent overall economic conditions, industry-specific economic conditions,historical customer performance and anticipated customer performance. Ourprovisions cover individual balances where there is evidence that losses areprobable as at the balance sheet date. We use significant judgment inestimating uncollectible amounts. While we believe our processes effectivelyaddress our exposure for doubtful accounts, changes in the economy, industry orspecific customer conditions may require adjustments to the allowance fordoubtful accounts recorded in our Consolidated Financial Statements.

 

**Accountingfor Income Taxes**

** **

We assess the temporary differences resulting from differentialtreatment of certain items for tax and accounting purposes. These differencesresult in deferred tax assets and liabilities, which are recognized in ourConsolidated Financial Statements. We assess our deferred tax assets on anongoing basis by assessing our valuation allowance and adjusting the valuationallowance appropriately.  A valuationallowance is provided when it is more likely than not that some or all of thedeferred tax assets will not be realized in the future.

 

**InventoryValuation**

** **

We review our inventory balances to determine if inventories can besold at amounts equal to or greater than their carrying amounts. The reviewincludes identification of slow moving inventories, obsolete inventories,expired inventories and discontinued products or lines of products. Theidentification process includes historical performance of the inventory,current operational plans for the inventory, as well as industry and customerspecific trends. Obsolete items are provided or written off. If our actualresults differ from our expectations with respect to the selling of ourinventories at amounts equal to or greater than their carrying amounts, wewould be required to adjust our inventories accordingly.

 

**Depreciationperiods for property, plant and equipment**

** **

Depreciation periods of property, plant and equipment are based onestimated useful life of related assets. The adoption of depreciation periodsrequires judgment in determining appropriate estimated useful life over whichthe related assets will be utilized. In estimating useful life, we considerfactors such as our historical experience and the industry, manufacturers’estimates, anticipated use and our maintenance policies. As these factorschange, management estimates may change and we could be required to reassessdepreciation periods for property, plant and equipment and consider impairment.

 

**Impairmentof Goodwill and Long-Lived Assets**

** **

When events and circumstances occur indicating that the carrying amountof a long-lived asset (group) may not be recoverable, we estimate the futureundiscounted cash flows expected to derive from the use and eventualdisposition of the asset (group). If the sum of the expected future cash flows(undiscounted and without interest charges) is less than the

 

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carryingamount of the long-lived asset (group), we would then calculate the impairmentas the excess of the carrying value of the asset (group) over the estimate ofits recoverable amount, which is the higher of either fair market value orvalue in use.

 

For goodwill, we perform a review for possible impairment of goodwillat least on an annual basis or more often if indicators of impairment arepresent at the reporting unit level. If the fair value of the reporting unit isless than the carrying amount of the reporting unit including goodwill andindefinite lived intangibles, we would then calculate the impairment loss asthe excess of the carrying value of the goodwill over its implied fair value,which is to be recognized in a similar manner as the amount of goodwill isrecognized in a business combination.

 

**Newand Recently Adopted Accounting Pronouncements**

** **

In July 2006, the FASB issued Interpretation No. 48(“FIN 48”) *Accounting for Uncertainty in Income Taxes*,an interpretation of FASB Statement No. 109*Accountingfor Income Taxes*. FIN 48 clarifies accounting for income taxes byprescribing the minimum recognition threshold a tax position is required tomeet before being recognized in the financial statements. FIN 48 also providesguidance on derecognition, measurement, classification, interest and penalties,accounting in interim periods, disclosure and transition. In addition, FIN 48states that income taxes should not be accounted for under the provisions ofSFAS No. 5, Accounting for Contingencies. The Company adopted FIN 48 atthe beginning of the fiscal year 2007. Upon adoption, there was no an effect toretained earnings of the Company (Note 16).

 

InSeptember 2006, the FASB issued SFAS No. 157, *Fair ValueMeasurements. *This Statementdefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles (GAAP), and expands disclosures aboutfair value measurements. This Statement applies under other accountingpronouncements that require or permit fair value measurements, the Board havingpreviously concluded in those accounting pronouncements that fair value is therelevant measurement attribute. Accordingly, this Statement does not requireany new fair value measurements.  The Company adopted theprovisions of SFAS No. 157 in the first quarter 2008 which had no materialimpact on its financial statements upon adoption.

 

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities **—Including an amendment of FASB Statement No. 115**.*  This Statement permits entities to choose tomeasure many financial instruments and certain other items at fair value. Theobjective is to improve financial reporting by providing entities with theopportunity to mitigate volatility in reported earnings caused by measuringrelated assets and liabilities differently without having to apply complexhedge accounting provisions.  ThisStatement is effective as of the beginning of an entity’s first fiscal yearthat begins after November 15, 2007; however, early adoption isallowed.  The adoption of the provisionsof SFAS No. 159 did not have an impact on the Company’s results ofoperations, financial position or cash flows.

 

In December 2007, the FASB issued FAS 141 (revised 2007), Businesscombinations – the replacement of FASB Statement No. 141, BusinessCombinations. This Statement amends the principles and requirements for how anacquirer recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, any non-controlling interest in theacquiree and the goodwill acquired; and establishes disclosure requirements inrelation to business combinations.  ThisStatement is effective for business combinations for which the acquisitiondate is on or after the beginning of the first annual reporting periodbeginning on or after December 15, 2008. The effect that SFAS No. 141 (R) has on the accounting forfuture business combinations is dependant on future acquisitions.

 

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InDecember 2007, the FASB issued FAS 160, Noncontrolling Interests inConsolidated Financial Statements — an amendment of ARB No. 51.  This Statement amends ARB 51 and providesguidance for accounting for changes in a parent’s ownership interest anddeconsolidation of a subsidiary and disclosure requirements.  This Statement is effective for fiscal years,and interim periods within those fiscal years, beginning on or after December 15,2008. Earlier adoption is prohibited. The Company is assessing the effect of FAS No. 160 implementation.

 

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

** **

We invest significant financial and human resources in new productdevelopment, focusing on long-term strategic projects aimed at creatinginnovative products and technologies and new food categories.  Our research and development departmentfocuses on new project development for all three of our business segments. Itis located at Lianozovsky Dairy Plant and has more than 40 employees. For amore detailed discussion of new product development see “Item 4. Information onOur Company - B. Business Overview-New Product Development.”

 

**D.  Trend Information**

** **

**Markets**

** **

According to the Ministry of Economic Development of RussianFederation, the Russian economy continues to experience growth, with grossdomestic product growing at rates of 8.1%, 7.4% and 6.4% in 2007, 2006 and2005, 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 fruit-containing, dessert and enriched products. We expectthe 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 dairy andjuice markets will continue to become more competitive, with producers engagingin aggressive advertising and marketing strategies, as well as makingsubstantial investments in modernizing packaging and manufacturing equipment. Thedairy industry is also seeing the stronger presence of small regionalproducers.

 

Consumption of baby food continued to grow in 2007. We estimate thatthe Russian baby food market grew by 23% in value terms in 2007. This growthwas driven by higher category penetration as a result of increasing purchasingpower and shorter maternity leaves by new mothers.

 

**Dairy Segment**

** **

In recent years, raw milk volumes decreased in Russia mainly due tolivestock reduction. However, in 2006, the raw milk supply increased by 0.6%compared to 2005 and in 2007 the raw milk supply increased by 2.3% due tosignificant investments into farm development by major dairy producers,enhanced effectiveness of cattle-breeding methods, the application of moderntechnologies by Russian farms and the National Program of Agro-IndustrialDevelopment, a government sponsored initiative offering interest free loans forthe development of agriculture and the creation of large farming enterprisesand regional milk collection centers.

 

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Although domestic raw milk production increased only by 2.3% in 2007,industry experts estimate that the Russian dairy market grew by 6.1% in termsof volume in 2007. The most significant growth was seen in UHT milk, dairydesserts and cheese.

 

In 2007, we experienced significant increases in the raw milk purchaseprice. The average weighted raw milk purchase price paid by us increased inruble terms by approximately 14% in 2005, 7% in 2006 and 64.8% in 2007. The priceincreases were due, in part, to droughts in Australia and New Zealand, theworld’s largest suppliers of dry powder milk, and due to an increase in demandfor milk products in such densely populated countries as China, Indonesia,Algeria and a number of other countries in Asia and Africa. This unprecedentedincrease in the price of raw and dry milk adversely affected our dairy profitmargin in 2007, and continued increases in raw milk prices could further reduceour profitability.

 

Our market leadership in the Russian dairy market depends on adaptationto a rapidly changing marketplace. The emergence of a middle class, not only inMoscow and a handful of large cities, but across the country is translatinginto greater health awareness and busier lifestyles. We expect dairy market togrow 5.0% in terms of volume in 2008 (based on our estimates and marketstatistics). Once challenging markets such as Siberia and the Urals are seeingrapid growth in consumer spending and will be a continued focus going forward.At the same time, emerging CIS markets are still several years behind Russia interms of consumer market development but are enjoying higher rates of growththan Russia.

 

The regional structure of Russia’s dairy market continued to shift in2007, with dairy product sales increasing in regional markets at a more rapidrate than in Moscow and the Central Region of Russia. We expect that the growthin regional dairy sales will continue to outpace growth in Moscow during 2008.

** **

A focus on core dairy brands is essential going forward. We were thetenth largest television advertiser in Russia in 2007. As advertising ratescontinue to rise above inflation, our marketing efforts will aim to be moreeffective and targeted, conveying key values of health and wellness.

 

**BeveragesSegment**

** **

At the end of 2006, we witnessed price increases in juice concentrateand other ingredients resulting, in part, from bad harvests and poor weatherconditions in juice-concentrate producing regions. We had substantial priceincreases for juice concentrate and other materials during the latter half of2007 (e.g. apple juice concentrate which is included in the majority of ourrecipes), at the same time the average selling price in ruble terms increased16.4% in 2007. This allowed us to offset input costs and improve gross margins.

 

In 2005, in order to increase our presence in the regions throughengaging lower-middle income consumers, we successfully re-launched the “LovelyGarden” brand. We sponsored and promoted the brand through televisioncommercial and print advertisements in 2005 and 2006, which resulted in steadysales growth of the “Lovely Garden” juices and nectars. Although we expectfurther growth of juice sales in the lower-middle segment, we believe thataverage selling prices in the regions will generally continue to be lower thanaverage selling prices in Moscow and St. Petersburg due to the consumerpreferences in the regions, where household incomes are typically lower, forlower priced products, which have a negative effect on our gross margin. Forthe Central region of Russia where incomes are higher, we are focusing ourefforts on providing beverage products in the upper-middle and premiumsegments. Thus, in 2007 we witnessed an over 30% sales increase of J-7, our flagshipupper-middle brand. We expect Russian juice, nectars and still drinks market togrow 8.0% in volume terms in 2008 (based on our estimates and marketstatistics).

 

We entered the mineral water market in 2003. We estimate that themineral water market in Russia is growing annually at approximately 10% involume. Our water offerings include the premium “Essentuki” brand, which istraditionally known to be used for medical purposes.

 

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**BabyFood Segment**

** **

Baby food consumption in Russia is growing due to increased healthawareness and knowledge of the critical importance of proper nutrition in theearliest years for later life. Currently, higher and upper middle income groupsare driving consumption, with income growth expanding demand for healthy,specialized products for babies across Russia.

 

With a fast-growing middle class, Russian per capita consumption ofbaby food is expected to rapidly catch up with Central and Eastern Europeanlevels. In addition, purchases by publicly owned institutions such as hospitalsand children’s homes, as well as targeted state-run programs aimed at childhoodnutrition, continue to play an important role, although the share of governmentpurchases of the overall market is expected to decline.

 

The baby food market is currently relatively fragmented and newplayers, foreign and domestic, are entering the market. We expect the market toconsolidate, and we believe that we are well positioned to benefit fromconsolidation. Expansion into regional markets will require increased marketingand sales expenditure as well as increased transportation costs. We continue toreview options for expanding our baby food production capacity in terms ofvolume and type of production as well as geographic location. We expect Russianbaby food market to grow 12.0% in terms of volume in 2008 (based on ourestimates and market statistics).

 

**E.  Off-balance Sheet Arrangements**

** **

As of December 31, 2007, we did not have any off-balance sheetarrangements.

** **

**F.Contractual Obligations**

** **

We have various contractual obligations and commercial commitments tomake future payments, including capital commitments, notes payable and vendorequipment financing obligations.

 

The following table summarizes our future obligations and commitmentsunder these contracts due by the periods indicated as of December 31,2007:

 
| ** **                   | ** ** | **Payments due by periods  At December 31, 2007** | ** ** |
|------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **Contractual  Obligations** | ** ** | **Total**                                                                       | ** ** | **Less than  1 year** | ** ** | **1-  3 years** | ** ** | **4-  5 years** | ** ** | **After  5 years** | ** ** |
| ** **                   | ** ** | **In thousands of U.S. Dollars**                            | ** ** |
| Notes payable                |       | $                                                                               | 405,922    |   | $ | 300,000 |   | $ | 105,922 |   | $ |   |   | — |   |
| Vendor financing obligations |       | $                                                                               | 33,103     |   | $ | 15,731 |   | $ | 16,316 |   | $ | 1,056 |   | — |   |
| Long-term loans              |       | $                                                                               | 41,086     |   | $ | 6,455 |   | $ | 17,924 |   | $ | 16,707 |   | — |   |
| Short-term loans             |       | $                                                                               | 98,819     |   | $ | 98,819 |   | $ | — |   | $ | — |   | — |   |
| Purchase obligations         |       | $                                                                               | 66,365     |   | $ | 66,365 |   | $ | — |   | $ | — |   | — |   |
| Estimated interest expense   |       | $                                                                               | 54,476     |   | $ |   |   | $ |   |   | $ |   |   | — |   |
| Total                        |       | $                                                                               | 661,771    |   | $ | 487,370 |   | $ | 140,162 |   | $ | 17,763 |   | — |   |

 

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For additional information, see “Item 11. Quantitative and QualitativeDisclosures about Market Risk—Interest Rate Risk.”

 

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## ***Item6.      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                                                                           |
| Igor V. Kostikov          |       | 1958                        |       | Director                                                                           |
| Michael A. O’Neill   |       | 1945                        |       | Director                                                                           |
| Alexander S. Orlov(1)     |       | 1948                        |       | Director                                                                           |
| Earnest Linwood Tipton(2) |       | 1934                        |       | Director                                                                           |
| Jacques Vincent           |       | 1946                        |       | Director                                                                           |
| Evgeny G. Yasin           |       | 1934                        |       | Director                                                                           |
| Gavril A. Yushvaev(1)     |       | 1957                        |       | Director                                                                           |
| Tony D. Maher             |       | 1956                        |       | Chief Executive  Officer, Chairman of the Management Board                         |
| Dmitry V. Ivanov          |       | 1967                        |       | Chief Financial  Officer                                                           |
| Natalia K. Turkulets      |       | 1966                        |       | Head of Personnel  Department                                                      |
| Marina G. Kagan           |       | 1968                        |       | Head of Public  Affairs, Management Board Member                                   |
| Gennady K. Krainov        |       | 1951                        |       | Director of  Information, analysis and Control Department, Management Board Member |
| Oleg E. Kuzmin            |       | 1969                        |       | Group VP Operations,  Management Board Member                                      |
| Silviu Popovici           |       | 1968                        |       | Head of Beverages  Business Unit, Management Board Member                          |
| Grant Winterton           |       | 1970                        |       | Group VP Sales,  Management Board Member                                           |
| Gary Sobel                |       | 1967                        |       | Group VP Marketing and  Innovation                                                 |

 

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(1)         Party to the Amended and Restated Partnership and Cooperation Agreement. See “Item 7.Major Shareholders and Related Party Transactions—B. Related Party Transactions”and “Item 3. Key Information—D. Risk Factors—Risks Relating to OurBusiness and Industry—We are controlled by a group of shareholders whoseinterests could conflict with those of the holders of our securities.”

 

(2)         Member of the Audit Committee.

 

**David Iakobachvili** has served as Chairman of our Board ofDirectors since May 2001. He also serves on the board of directors of anumber of businesses that he founded and developed into large agricultural,real estate, mining and entertainment holdings, namely RusAgroProject CJSC,Agrocomplex Gorki-2 CJSC, Mill Plant #4 OJSC, Eisk Port Elevator OJSC, Coalmine Kolmogorovskaya-2 LLC and Metelitsa-Club CJSC. He also serves as thedirector of Airport Financial Services Limited, a company that providesfinancial services. Mr. Iakobachvili also serves on the board of directorsof a number of our subsidiaries: Wimm-Bill-Dann Ukraine OJSC, Bishkeksut OJSC,Timashevsk Dairy Plant OJSC, Wimm-Bill-Dann Beverages OJSC and GulkevichiCreamery CJSC. He is the Chairman of the Board of directors of RusBrandnon-profit partnership; the Chairman of Committee, member of the Presidium Officeand the Vice-President of the Russian Union of Industrialists andEntrepreneurs. In addition, he plays an active role in the Russian Chamber ofCommerce and Industry, the National Corporate Governance Council, theRussian-American Business Council, the Russo-British Chamber of Commerce, theSenate of Economic Advisers of the European Democracy Forum, the World EconomicForum and Monaco World Summit.

 

**Sergei A. Plastinin** has served as a member of our Board of Directors since May 2001.He served as the Chairman of the Management Board, which is the chiefexecutive officer position, from 2001 to April 2006. Mr. Plastinin isalso a founder and the chief executive officer of a number of businesses in theagricultural, real estate and fashion industries, including, among others, TalyEnterprises Limited and Lendero Limited. Mr. Plastinin also

 

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serves on theboard of directors of a number of our subsidiaries: Wimm-Bill-Dann BeveragesOJSC, Timashevsk Dairy Plant OJSC, Wimm-Bill-Dann Ukraine OJSC, BishkekesutOJSC, Karasuk CJSC and Gulkevichi Creamery CJSC.

 

**Guy de Selliers** has served as an independent member of our Board of Directors since December 2001.Currently, Mr. de Selliers serves as a member of the board ofdirectors and a Chairman of the Audit Committee at Norilsk Nickel OJSC anda member of the board of directors of furniture manufacturer 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. Mr. de Selliers is also the Chairman of Apprion Group Ltd,HB Advisers (UK) and Partners in Hope. During 2004 and 2005, Mr. de Sellierswas a member of the international supervisory board at Fortis Group, aninternational financial services provider and, from 2001 to 2003, he actedas Chairman of Leader Capital equity fund. During 1998 to 2000, he headedup the European business of Fleming Investment Bank. Mr. de Selliersserved as chief executive officer of MC BBL investment bank from 1997 to1998. He was also a Deputy Vice President of EBRD from 1991 to 1997. Hereceived a degree in engineering in 1975 and in economics in 1977 at theUniversity of Lourain.

 

**Mikhail V. Dubinin** has served as a member of our Board of Directors since May 2001.Currently, Mr. Dubinin serves on the board of directors of severalreal estate companies that he founded or co-founded, namely Istra Springs LLC,Nadezhny Fundament LLC, Petri-trade LLC, Cliff-Real Estate LLC, Non-commercialpartnership Benelux Residence, non-commercial organization Internationalcommunity council on “Golden Falcon” order awarding.

 

****Igor V.Kostikov**** has served as anindependent member of our Board of Directors since June 2007. Between 1992and 1993, he served as a managing director at UK-based Friends Providence AssetManagement. Mr. Kostikov serves as the chairman of the management board ofthe Institute of Stock market and Governance, as the general director ofAlmaz-Antey Infinity, general director of Institute of World’s Economic andInternational Relations and general director of InvestKom Finance. Between 1999and 2000, Mr. Kostikov was Deputy Chairman of the Finance Committee in theSt Petersburg City Administration. From 2000 to 2004, Mr. Kostikov servedas Chairman of the Federal Commission of the Securities Market. He is one ofthe authors of the Russian Corporate Governance Code. Since 2005, Mr. Kostikovhas been a professor at the Moscow State University Business School, Doctor ofEconomics with a focus on world economy and finance and credit. Since 2006, Mr. Kostikovhas served as CEO of Almaz Antei Thomson Broadcast. He actively participates inthe work of international organizations, including the OECD, EES, IBRD andEBRD, among others. Mr. Kostikov is a graduate of the economics departmentof Leningrad State University.

 

**Michael A. O’Neill** has served as an independent member of our Board of Directors since December 2001.Currently, Mr. O’Neil serves as chief executive officer of Coca-Cola Icecekin Turkey. He also serves on the board of directors of Efes BreweriesInternational. From 1989 to 2000, Mr. O’Neill held various executivepositions within the Coca-Cola Company. He received a degree in IndustrialEngineering from the College of Commerce Rathmines in 1967.

 

**Alexander S. Orlov** has served as a member of our Board of Directors since May 2001.Mr. Orlov serves on the board of directors of Non-commercial partnershipBenelux Residence. He also serves on the board of directors of our subsidiary:Wimm-Bill-Dann Ukraine OJSC. From 1992 and 1997, he was director of the dairydepartment and the general director of the Moscow Baby Food Plant. From1997 to 1998, he was general director of the Lianozovsky Dairy Plant. Mr. Orlovgraduated from the Moscow Technology Institute of Meat and Dairy Industryin 1975.

 

**Earnest Linwood Tipton** has served as an independent member of our Board ofDirectors since May 2002. He has held various posts at the U.S.International Dairy Food Association (IDFA) and its organizations for over35 years, culminating with his appointment

 

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to presidentand chief executive officer in 1983. Prior to joining IDFA, Mr. Tiptonworked as an economist for a milk producers’ cooperative and as a dairyeconomic consultant. He also served as an officer in the U.S. Army FinanceCorp. and holds Bachelor’s and Master’s degrees from the University ofMissouri.

 

****JacquesVincent********has served as a member of ourBoard of Directors since June2007. Mr. Vincent also serves as Vice-Chairman of Groupe Danone, a memberof the Board of Directors of Syngenta (Switzerland) and Yakult Honsa Co. Ltd.(Japan), and as Chairman of the Board of Directors of Ecole Normale Superieure(Lyon).  Mr. Vincent was appointed Advisor to the Chairman of GroupeDanone as of January 08. Prior to this, he had been Vice Chairman andChief Operating Officer of Groupe Danone since 1998. Having spent most of hiscareer with Groupe Danone, he occupied various positions as general manager ofcertain of its subsidiaries in France, Germany, Italy and the United States inthe water and dairy businesses. He holds an engineering degree from EcoleCentrale de Paris, a Master of Science degree from Stanford University and adegree in economics.****

**** ****

**Evgeny G. Yasin** has served as an independent member of our Board of Directors since December 2001.He has been a professor of the State University—High School of Economics since July 1998.Mr. Yasin also serves on the board of directors in a number of businesses,namely Seversta’l—Auto, Otkrytie Investitsii OJSC, Echo of Moscow CJSC andInsurance Group Alfainsurance. He also serves as the president ofnon-governmental fund Expert Institute. From 1994 to 1998, Mr. Yasinwas Russia’s Minister of the Economy. He graduated from the HydrotechnicalInstitute in 1957 with a degree in engineering and in 1963 from MoscowState University with a degree in economics.

 

**Gavril A. Yushvaev**has served as a member of our Board of Directors since June 2005.He also serves as a member of the board of directors of a number ofbusinesses that he founded and developed into large agricultural and realestate holdings, namely RusAgroProject CJSC, Agrocomplex Gorki-2 CJSC, MillPlant #4 OJSC, Eisk Port Elevator OJSC and Cattle Farm Naroosanovsky OJSC. Mr. Yushvaevalso serves as the president of RusAgroProject CJSC.

 

**Tony D. Maher** has served as our Chief Executive Officer and Chairman of theManagement Board since April 2006. Prior to joining Wimm-Bill-Dann, heserved as chairman of the board of directors of Multon, a Russian juicecompany. He also held a variety of senior positions in Western, Central andEastern European markets within the Coca-Cola group of companies, includingRegion Managing Director for Coca-Cola HBC, one of the largest bottlers ofnon-alcoholic beverages in Europe.

 

**Dmitry V. Ivanov******has served as our ChiefFinancial Officer since May 2008. Mr Ivanov has17 years of financial experience in leading Russian and internationalcompanies. He most recently served asChief Financial Officer at Sitronics, a publicly listed company within the AFKSistema group, where he was responsible for capital market transactions,coprorate financial strategy and all financial processes, including annualbudgeting and forecasting, cash management and treasury functions. Mr Ivanovwas born in St Petersburg, Russia and has worked in a variety of senior financeroles within the AFK Sistema group, Multon, Creditanstalt Investment Bank andSmall Enterprise Assistance Funds. He graduated from the St PetersburgShipbuilding University in 1991 and the same year received a Certificate inAccounting from the St Petersburg University of Economics. He holds an MBA fromVlerick Leuven Gent Management School.

 

**Natalia K. Turkulets**has served as our Head of Personnel Departmentsince May 2008. Prior to joining Wimm-Bill-Dann, between 2003 and 2008,Natalia served as Head of HR for Salym Petroleum Development N.V. (Shell JV).From 1996 to 2003 Ms Turkulets served in a variety of senior HR roles at ConocoPhillips,a US-based oil company. Natalia Turkulets graduated in mathematics from PatriceLumumba University in 1990. She subsequently received a PhD in Social Scienceand interpreting.

 

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** **

**Marina G. Kagan** has served as our Headof Public Affairs and a member of the Management Board since May 2004. From1991 to 1998, Ms. Kagan worked for BBC radio and TV, and served as a Moscowcorrespondent for the BBC World Service from 1995 to 1998. She joined GavinAnderson & Co, an international investor and public relations consultancyin 1998, where she served on the Board of Directors until 2001. From 2001 to2004, Ms. Kagan worked as a partner at Shared Value, a London-basedinternational financial public relations and investor relations firm. Ms. Kagangraduated from Westminster University in London, England.

 

**Gennady K. Krainov** has served as our Headof Information, Analysis and Control Department since December 2003 and as amember of the Management Board since June 2005. From 1975 until 2003,Mr. Krainov held managerial positions within national security bodies andat the tax police. He also worked for the Russian External Trade Ministry andChamber of Commerce and Industry. Mr. Krainov graduated from the Moscow GeologyInstitute and the Higher School of Committee for State Security, where hereceived a legal degree.

 

**Oleg E. Kuzmin** has served as GroupVice-President Operations since March 2008 and as a member of the ManagementBoard since 2005. Mr. Kuzmin served as our Head of Dairy Business Unit sinceAugust 2004 Mr. Kuzmin serves on the board of directors of a number of oursubsidiaries: Wimm-Bill-Dann Ukraine OJSC, Tuimazy Dairy Plant OJSC, BishkeksutOJSC, Karasuk CJSC. He also serves as chief executive officer of oursubsidiaries Wimm-Bill-Dann OJSC and Moscow Baby Food Plant OJSC. Mr. Kuzminhas been employed by Wimm-Bill-Dann since 1995. From September 2003 to August2004, he was head of operations of the dairy business unit. Prior to that, heserved in various managerial positions, including head of the cheese project,director of the Nizhny Novgorod Dairy Plant, strategy director of theLianozovsky Dairy Plant and marketing director of Wimm-Bill-Dann’s TradingCompany. Mr. Kuzmin graduated from Moscow State Bauman Technical University andMoscow State University. He also received an MBA from the Academy of theNational Economy of the Government of the Russian Federation.

 

**Silviu Popovici** has served as our Headof Beverages Business Unit since September 2006 and as a member of theManagement Board since May 2007. Mr. Popovici has extensive experience insales, marketing, operations and general management with Bristol-Myers Squibband Coca-Cola in Romania, Russia and Ukraine. In the two and a half yearsbefore he joined the company, Mr. Popovici worked as country manager forCoca-Cola HBC Ukraine. He has a degree in physics from the University ofBucharest and is currently completing an MBA at the London Business School inthe UK.

 

**Grant Winterton**has served as our GroupVice-President Sales since March 2008 and as a member of the Management Boardsince May 2007. Mr. Winterton served as our Group Head of Marketing andInnovations from November 2006 to February 2008. He has extensive experience inmarketing and sales with multinational companies, including Wella Haircare,Campbell Soup Company (Arnotts Snacking) and Coca-Cola in Australia, Russia,Ukraine, Belarus and China. He also has dairy industry experience with threeyears in both the milk and soft dairy divisions of National Dairies,Australia’s largest dairy producer. Over the course of 14 years before joiningWimm-Bill-Dann, Mr. Winterton worked in a variety of senior marketing,sales and managerial positions in these fast-moving consumer goods companies.Mr. Winterton holds a Bachelor of Commerce degree from the University of NewSouth Wales, Australia, where he graduated with a double major in marketing andfinance.

 

**Gary Sobel** has served as our GroupVice-President Marketing since March 2008. From March 2007 to March 2008 Mr.Sobel served as our Head of Baby Food Business Unit. Mr. Sobel began his careerat Procter and Gamble, where over 13 years he worked in various positions inCanada, the United States, the United Kingdom and Russia. His experienceincluded working in Procter & Gamble’s Wal*Mart Customer Team, as well asheading up In-store Marketing and New Product Performance for their Baby CareDivision. He headed 

 

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Dirol Cadbury (adivision of Cadbury Schweppes) in Russia. Mr. Sobel graduated fromConcordia University (Montreal, Canada) with honors and received a B.A. inBusiness Administration, as well as an MBA from the University of WesternOntario (Canada).

 

Allof our directors were elected on June 27, 2007 and, pursuant to Russianlaw, their terms will expire on the date of our next annual shareholders’meeting, which will take place on June 27, 2008.

 

**B.  Compensation of Directors and Senior Management**

** **

In2007, the aggregate amount of compensation to the directors and ManagementBoard members of Wimm-Bill-Dann Foods OJSC as a group for services in allcapacities was $10.4 million. In 2006 the Company entered into a share-basedaward agreement with some of its executives. Commencing April 2007 StockAppreciation Rights incentive program linked to ADS has been approved for widersenior management. See Note 22 to our Consolidated Financial Statementsincluded under “Item 18. Financial Statements.”

 

Nofunds were set aside for pension, retirement and other similar benefits for thesame directors and executive officers as of December 31, 2007.

 

Wecompensate each board of directors member $70,000 annually, plus transportationand lodging expenses incurred in connection with board meeting attendance, andup to $2,000 per year for other expenses incurred in connection withboard-related activities. The Chairman of the Board is compensated $320,000annually 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. We also compensate each member ofthe Personnel and Compensation Committee and each member of the Investment andStrategic Planning Committee $3,000 and each member of the Audit Committee$5,000 for participation in each planned direct Committee meeting.

 

**C.  Board Practices**

* *

**Boardof Directors**

** **

Membersof our Board of Directors are elected by a majority vote of shareholders at ourannual general meeting using a cumulative voting system. Each director iselected for a term that lasts until the next annual general meeting and may bere-elected an unlimited number of times. Our Board of Directors currentlyconsists of eleven members, six of whom are independent directors. The Board ofDirectors has the authority to make overall management decisions for theCompany, except those matters reserved to the shareholders. See “Item 10.Additional Information—B. Charter and Certain Requirements of RussianLegislation—General Meetings of Shareholders” for more information regardingthe competence of our shareholders’ meetings.

 

Themembers of our Board of Directors serve pursuant to a contract. The contractsdo not provide for benefits to the board members upon termination of theiremployment. We indemnify each member of our Board of Directors pursuant toagreements, under which we indemnify them against, among others, expenses andcosts incurred by them in connection with any claims, suits or proceedings arisingout of or as a result of their service as a director, subject to certainlimitations. The agreements also limit the liability of the directors tocompensate us for any losses caused by them, as well as our ability to take anyaction against them, subject to certain exclusions.

 

Thebusiness address for all of our officers and directors is 16 Yauzsky Boulevard,Moscow 109028, Russian Federation.

 

**ManagementBoard**

** **

Thecomposition of our Management Board, which consists of our executive officers,is determined by the Board of Directors and consists of six members: Tony D.Maher, Marina 

 

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G. Kagan, Oleg E.Kuzmin, Grant Winterton, Silviu Popovici and Gennady K. Krainov. Members of theManagement Board are nominated by the Chairman of the Management Board andconfirmed by our Board of Directors for a term of three years. The ManagementBoard is the collective executive body of the Company and, under the directionof the Chairman of the Management Board, is responsible for our day-to-daymanagement. We indemnify each member of our Management Board pursuant toagreements, under which we indemnify them against, among others, expenses andcosts incurred by them in connection with any claims, suits or proceedingsarising out of or as a result of their service as a Management Board member,subject to certain limitations. The agreements also limit the liability of theManagement Board members to compensate us for any losses caused by them, aswell as our ability to take any action against them, subject to certainexclusions.

 

**Chairman of the Management Board**

** **

Inaccordance with our current Charter, the Board of Directors appoints theChairman of our Management Board, our chief executive officer, for a term ofthree years, which term we intend to extend to five years by amending ourCharter. We concluded an employment contract with the current Chairman of ourManagement Board for a term of five years. The rights, obligations and thetimes and amounts of payment for the Chairman’s services are determinedpursuant to our charter and by contract. The Chairman of the Management Boardis responsible for day-to-day management of our activities.

 

**Board of Directors Committees**

** **

**Audit Committee**

** **

TheAudit Committee of our Board of Directors was established on April 24,2003 by a decision of our Board of Directors and functions pursuant to bylawsapproved by the Board. It is currently comprised of three independentdirectors, G. de Selliers, E. Linwood Tipton and I. Kostikov. OurBoard of Directors has determined that G. de Selliers is an “auditcommittee financial expert” as defined in Item 16A of Form 20-F.

 

Thegoals and objectives of the Audit Committee, as set forth in the bylaws, are toassist the Board of Directors in carrying out its oversight responsibilities inthe areas of:

 

·                           our financialstatements and the processes of their preparation;

 

·                           our internalaccounting and financial control system;

 

·                           work of theinternal audit service and independent auditors;

 

·                           qualificationsand independence of the independent auditors;

 

·                           our compliancewith ethical principles; and

 

·                           requirements oflegislative and normative acts.

 

Accordingto the bylaws, the Audit Committee shall meet, separately from thenon-independent directors, at least once during each fiscal quarter and morefrequently as the Committee deems desirable.

 

**Investment and Strategic PlanningCommittee**

** **

TheInvestment and Strategic Planning Committee of our Board of Directors wasformed on April 24, 2003 by a decision of our Board of Directors andfunctions pursuant to bylaws approved by the Board. It is composed of M.O’Neill, an independent director who serves as the Committee Chairman, S.Plastinin, M. Dubinin and. According to its bylaws, the Investments and StrategicPlanning Committee is designed to assist the Board of Directors in approvingand carrying out its oversight responsibilities in relation to significantinvestment programs, mergers and acquisitions and strategic planning.

 

Accordingto the bylaws, the Investment and Strategic Planning Committee shall meet notless than once during each fiscal quarter.

 

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**Personneland Compensation Committee**

** **

ThePersonnel and Compensation Committee of our Board of Directors was formed onApril 24, 2003 by a decision of our Board of Directors and functionspursuant to bylaws approved by the Board. It is composed of E. Yasin, anindependent director who serves as Committee Chairman, G. Yushvaev and A. Orlov.According to the bylaws, the Personnel and Compensation Committee is taskedwith assisting in the selection of Board of Directors candidates. Its membersalso assist the Management Board in formulating and implementing:

 
| · |                  | a uniform personnel  policy for all of our subsidiaries;                                                             |
|--------|-----------------------|----------------------------------------------------------------------------------------------------------------------|
|   |                  |                                                                                                                 |
| · |                  | a personnel appraisal,  rotation, dismissal, education and training policy and administrative  accounting standards; |
|   |                  |                                                                                                                 |
| · |                  | a remuneration and  compensation policy, as well as other incentive programs (stock option and  pension plans,       |
|   | social programs); and |
|   |                  |                                                                                                                 |
| · |                  | a corporate ethics and  communications policy.                                                                       |

 

According to the bylaws,the Personnel and Compensation Committee shall meet not less than once duringeach fiscal quarter.

 

**CorporateGovernance Committee**

** **

TheCorporate Governance Committee of our Board of Directors was formed on June 1,2007 by a decision of our Board of Directors and functions pursuant to bylawsapproved by the Board. It is composed of D. Iakobachvili, a Chairman of theBoard of Directors who serves as Committee Chairman, E. Yasin and M.O’Neill. According to the bylaws, the Corporate Governance Committee is taskedto assist to the Board of Directors in implementing its functions in thefollowing areas:

 
| ·                                                      |   | compliance with the  principles of corporate governance;                                                        |
|-------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------|
|                                                        |   |                                                                                                            |
| ·                                                      |   | development of the  principles of corporate governance;                                                         |
|                                                        |   |                                                                                                            |
| ·                                                      |   | evaluation of the independence  of the members of the Board of Directors;                                       |
|                                                        |   |                                                                                                            |
| ·                                                      |   | anticipating, avoiding and solving  in case of necessity the conflicts of interests between the Company and the |
| Management Board, the  Board of Directors and shareholders; |
|                                                        |   |                                                                                                            |
| ·                                                      |   | determination of the best ways of  interaction of the Board of Directors and /or its members with officials and |
| employees                                                   |

 

Accordingto the bylaws, the Corporate Governance Committee shall meet not less than onceduring each fiscal quarter.

 

**CompanyCommittees**

** **

**Disclosure Committee**

** **

OurDisclosure Committee was formed on March 24, 2003 by the order of theChairman of our Management Board. It is currently composed of our Chief FinancialOfficer, Head of Public Affairs, Head of the Legal Department, Head of theTreasury, Head of Internal Audit, VP Operations, Head of the Beverages Unit,Financial Director of the Beverages Unit, VP Sales and Head of the Reporting,Budgeting and Analysis Department. The Committee’s activities are coordinatedby the senior investor relations manager.

 

TheDisclosure Committee functions pursuant to bylaws and meets as determined bythe Committee. It is directly supervised by and reports to the Chairman of theManagement Board and Chief Financial Officer.

 

Accordingto its bylaws, the Disclosure Committee is tasked with:

 

·                           overseeing thecollecting, evaluating and reporting of information relating to our disclosureobligations;

 

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·                           evaluating oursystem of disclosure controls and procedures; and

 

·                           preparing writtenconfirmations relating to our observance of the information disclosurerules and principles.

 

Asset forth in the bylaws, the Disclosure Committee is also responsible for allaspects of information disclosure, including ensuring proper documentaryexecution, transmission, implementation and performance of our rules andprinciples of information disclosure, as well as for coordinating the work ofour legal department, external and internal auditors and our other departmentsfor the purpose of preparation of our annual reports and other disclosuredocuments in accordance with applicable law.

 

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

** **

TheAudit Commission verifies the accuracy of our financial reporting under Russianlaw and generally supervises our financial activity. The members of our AuditCommission are nominated and elected by our shareholders for a term of oneyear. A Director may not simultaneously be a member of the Audit Commission.Our Audit Commission currently has ten members: I.N. Ieshkina, L.M. Gavrilenko,V.V. Dzhemelinskaya, A.A. Davidyuk, T.A. Nazarova, G.S. Sergeev, A.D. Popov,E.A.Kozlova, M.A. Zavalina and G.P. Kusyakin. 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 in June, 2008.

 

**CorporateGovernance**

** **

Weare required under the New York Stock Exchange listing rules to discloseany significant differences between the corporate governance practices that wefollow under Russian law and applicable listing standards and those followed byU.S. domestic companies under New York Stock Exchange listing standards. Thisdisclosure is posted on our website http://www.wbd.com/page_pid_518.aspx

 

**D.  Employees**

* *

In2007, we had an average of 19,796 employees within Russia and the othercountries of the CIS, including 11,076 production employees, 5,712 marketing,sales and distribution employees and 3,008 general and administrativeemployees. We do not employ a significant number of part-time employees. In2006 and 2007, we experienced a higher level of departures due to headcountoptimization. We have not experienced any work stoppages, and we consider ourrelations with employees to be strong. Some of our employees are unionized andare employed pursuant to collective labor agreements.

 
| **Average for the year ended  December 31st** | ** ** | **Production** | ** ** | **Marketing  Sales  and  Distribution** | ** ** | **General and  Administrative** | ** ** | **Percent  Change  over  Prior Year** | ** ** |
|------------------------------------------------------------------------|------------|----------------|------------|-----------------------------------------|------------|--------------------------------------|------------|--------------------------------------------|------------|
| 2007                                                                   |       | 11,076         |       | 5,712                                   |       | 3,008                                |       | 2                                          | %          |
| 2006 (1)                                                               |       | 10,811         |       | 5,355                                   |       | 3,159                                |       | 2                                          | %(2)       |
| 2005                                                                   |       | 9,766          |       | 5,713                                   |       | 3,478                                |       | 7                                          | %          |

 

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(1)          Excluding employees of businesses we acquired in 2006(Surgut, Ochakovo, Manros and MOLKA).

 

(2)          Despite a workforce reduction of over 900 people inthe period from June to December 2006, we still had a 2% increase in theaverage number of personnel in 2006 vs. 2005. This growth was due to anincrease in production personnel caused by increasingutilization of manufacturing facilities in 2006, growing Agrobusiness, and relaunching the plants acquired in 2005 (Obninsk, Pervouralsk andNazarovo dairy plants).

 

Our personnel enjoy a relatively high level of socialbenefits. We provide subsidies for meals, medical care and summer vacations foremployees and their children. Our employees have 

 

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opportunities to upgrade their qualifications byparticipating in professional and management education programs. Starting in1998, leading managers of our subsidiaries have been involved in programs toupgrade their professional skills through a program of the Russian government.We seek to maintain effective management teams at our plants by recruitingqualified new employees, as well as through customized retraining programs andon-site training in our leading plants. Programs for training personnel havebeen developed and implemented at all our regional plants as well as salesoffices and managing company. In addition, in 2005, we created a corporateuniversity to educate and train our personnel, create an internal managementpool and provide an opportunity for employees to share their knowledge andexperience as well as an opportunity to advance their careers. In 2006, we alsoinitiated various HR projects in the Compensation & Benefits domain.  In 2006 we commenced Key PerformanceIndicators (KPI) system implementation across all business units and introducedindividual development plans for top 500 employees. All our employees now havevariable salaries linked to performance. Their progress is monitored throughsemi-annual performance review. In 2007 we introduced a long-term incentiveprogram for our top executives based on SARs.

 

**E.  Share Ownership**

** **

EachADS (GDS) is the economic equivalent of one share of our common stock.

 

Theaggregate beneficial interest of our directors, senior management and employeesas of June 24, 2008 was as follows:

 
| **Number of Shares of Common Stock** | ** ** | **Number of GDSs** | ** ** | **% Capital Stock Outstanding** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|------------------------------------------------|------------|
| 17,073,249                                                    |       | 2,686,182                    | *          | 44.91                                          |       |

 

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* Mr. Iakobachvili converted his GDRs in the amount of803,783 into ADSs.

 

Forfurther description of the individual interest of our directors and seniormanagement, see “Item 7. Major Shareholders and Related Party Transactions—A.Major Shareholders.”

 

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## ***Item7.     Major Shareholders and Related Party Transactions***

## *** ***

**A.  Major Shareholders**

** **

Thefollowing table sets forth information regarding the beneficial ownership ofour common stock as of June 24, 2008:

 
| **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)                    |       | 7,590,880                         |       | 17.25                                       | %          | 1,038,638                            |       | 2.36                                        | %          | 8,629,518                                                                    |       | 19.61                                                                              | %          |
| Sergei A. Plastinin(1)(2)(3)                |       | 2,333,604                         |       | 5.30                                        | %          | 284,809                              |       | 0.65                                        | %          | 2,618,413                                                                    |       | 5.95                                                                               | %          |
| David Iakobachvili(1)(2)                    |       | 3,754,802                         |       | 8.53                                        | %          | 803,783                              | *          | 1.83                                        | %          | 4,558,585                                                                    |       | 10.36                                                                              | %          |
| Mikhail V. Dubinin(1)(2)                    |       | 1,809,260                         |       | 4.11                                        | %          | 264,112                              |       | 0.60                                        | %          | 2,073,372                                                                    |       | 4.71                                                                               | %          |
| I.M. Arteks Holdings Limited                |       | 183,639                           |       | 0.42                                        | %          | —                               |       | —                                      |       | 183,639                                                                      |       | 0.42                                                                               | %          |
| Alexander S. Orlov(1)(2)                    |       | 1,201,064                         |       | 2.73                                        | %          | 172,662                              |       | 0.39                                        | %          | 1,373,726                                                                    |       | 3.12                                                                               | %          |
| Mikhail I. Vishnyakov(2)                    |       | 200,000                           |       | 0.45                                        | %          | 100,000                              |       | 0.23                                        | %          | 300,000                                                                      |       | 0.68                                                                               | %          |
| Viktor E. Evdokimov(2)                      |       | 0.00                              |       | 0.00                                        | %          | 22,178                               |       | 0.05                                        | %          | 22,178                                                                       |       | 0.05                                                                               | %          |
| Other holders of ordinary shares            |       | 9,331,851                         |       | 21.21                                       | %          | —                               |       | —                                      |       | 9,331,851                                                                    |       | 21.21                                                                              | %          |
| Holders of American  Shares(4)              |       | —                            |       | —                                      |       | 14,908,718                           |       | 33.88                                       | %          | 14,908,718                                                                   |       | 33.88                                                                              | %          |
| Total                                       |       | 26,405,100                        |       | 60.0116                                     | %          | 17,594,900                           |       | 39.9884                                     | %          | 44,000,000                                                                   |       | 100.00                                                                             | %          |

 

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(1)             Member of our Board of Directors.

 

(2)             Party to the Amended and Restated Partnership andCooperation Agreement.

 

(3)             This figure contains 0.5% of shares owned by LenderoLtd. controlled by Sergei A. Plastinin.

 

(4)             Best to our knowledge, Groupe Danone, together withits subsidiaries, holds a 18.4% stake in Wimm-Bill-Dann Foods OJSC.

 

* Mr. Iakobachvili converted his GDRs in the amount of803,783 into ADSs.

 

Asof June 24, 2008, we had 44,000,000 shares of common stock outstanding.The total number of ADSs outstanding was 15,712,501 representing underlyingownership of 15,712,501 shares, or 35.71% of our outstanding shares. The totalnumber of GDSs outstanding was 1,882,399 representing underlying ownership of1,882,399  shares, or 4.2787% of ouroutstanding shares.The shares underlying the ADSs and GDSs are deposited withDeutsche Bank Trust Company Americas and the local custodian is OOO DeutscheBank. All shares of common stock have the same voting rights. According toCapital Bridge Analytics we have 34 record holders in the U.S., holding ADSsand/or shares comprising at least 0.034% of our total outstanding sharecapital.

 

Basedon our share register, we believe we are not directly or indirectly owned orcontrolled by another corporation or government, and that there are noarrangements the operation of which may result in a change of control.

 

During 2007 and 2008 our shareholders entered intoseveral transactions thus changing their shareholdings as follows: Mr.Iakobachvili increased his shareholding on 0.22% from 10.14% to 10.36%; Mr.Plastinin decreased his shareholding on 3.13% from 8.58% to 5.45% (includingtransactions with shares owned by Lendero controlled by Mr. Plastinin); Mr.Orlov increased his shareholding on 0.1% from 3.02% to 3.12%; Mr. Dubinindecreased his shareholding on 0.21% from 4.92% to 4.71%; Mr. Yushvaev increasedhis shareholding on 0.16% from 19.45% to 19.61%; Mr. Vishnyakov decreased hisshareholding on 0.32% from 1% to 0.68%.

 

See“Item 3. Key Information-D. Risk Factors-We are controlled by a group ofshareholders whose interests could conflict with those of the holders of oursecurities.”

 

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**B.  Related Party Transactions**

** **

SeeNote 23 (Related Parties) to the Consolidated Financial Statements includedelsewhere in this document.

 

**C.  Interests of Experts and Counsel**

** **

Notapplicable.

 

## ***Item8.     Financial Information***

## *** ***

**A.  Consolidated Statements and Other Financial Information**

** **

**8.A.1-4                    See “Item 18. Financial Statements**.”

** **

**8.A.5-6                       **Not applicable.

** **

**8.A.7                                  Litigation**

** **

Priorto January 1, 2003, we used certain tax optimization initiatives, whichresulted in tax savings of approximately $3.8 million. Although we believethese tax optimization initiatives comply with Russian tax law, the taxauthorities may nonetheless challenge such initiatives and attempt to recoverthe full amount of the savings, as well as seek penalties. Starting January 1,2003, we discontinued using these tax optimization initiatives.

 

Duringthe period 2004 to March 31, 2005, certain subsidiaries of WBD Foods benefitedfrom small enterprise tax legislation. If we had not taken advantage of thisbenefit, our tax expenses would have increased by approximately $1.7 millionduring this period. None of our subsidiaries currently takes advantage of thesmall enterprise tax benefits.  However,our prior use of this benefit in the past has been challenged by the taxauthorities and the tax authorities may continue to retroactively challengethese previous tax benefits enjoyed by our subsidiaries and seek to recover thefull amount of tax savings plus penalties. Such challenges, if successful,could materially adversely affect our results of operations.

 

Seealso “Item 3. Key Information—D. Risk Factors—Risks Relating to Our FinancialCondition—If the various initiatives we have used to reduce our tax burdenand/or our calculation of our VAT and profit tax liabilities are successfullychallenged by the Russian tax authorities, we will face significant lossesassociated with the assessed amount of tax and related interest and penalties,which would 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“—We are 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                                  Dividend Distribution Policy**

** **

Wedo not have a formal dividend policy, and annual dividend payments, if any,must be recommended by our board of directors and approved by our shareholders.In particular, dividends may be paid only out of net profits for the currentyear calculated under Russian accounting principles and as long as thefollowing conditions have been met:

 

·                  our charter capital hasbeen paid in full;

·                  the value of our netassets, minus the proposed dividend payment, is greater than the total of ourcharter capital and our reserve fund;

 

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·                  we have repurchased allshares from shareholders having the right to demand repurchase; and

·                  we are not, and wouldnot become as the result of payment of dividends, insolvent.

 

InJune 2006 the General Meeting of Shareholders approved payments of  dividends, recommended by the board, for thefinancial years 2002, 2003 and 2004 in the amount of RUR 4.60 (approximately$0.17) per share, as well as for the first quarter of 2006 in the amount of RUR2.27 (approximately $0.08) per share.

 

InDecember 2006, the General Meeting of Shareholders approved payment ofdividends, recommended by the board, for the 9 months of 2006 in the amount ofRUR 7.86 (approximately $0.30) per share. We have paid to the shareholders allthe dividends approved by GM.

 

InJune 2007, the Annual General Meeting of Shareholders approved payment ofdividends, recommended by the board, for the full year 2006 in the amount ofRUR 3.18 (approximately $0.12) per share. The preceding dividends have, in eachcase, been paid to shareholders.

 

**B.  Significant Changes**

** **

OnJanuary 31, 2008, the following subsidiaries were merged intoWimm-Bill-Dann (formerly Lianozovsky Dairy Plant): Surgut City Dairy PlantOJSC, Ochakovo Dairy Plant OJSC, Anna milk CJSC, Angarsky Dairy Plant OJSC,Obninsk Dairy Plant OJSC.

 

In March and April 2008, WBD Foods issued Russianinterest-bearing, non-convertible, paid to the bearer bonds series 03 withnominal value 1,000 rubles per bond in the aggregate amount of 5.0 millionbonds, repayable on the 1820th day from the date of issuance. Thecoupon rate of the bonds was determined according to the decision of the Boardof Directors on the tender and constitutes 9.3% annually.

 

On April 25, 2008, we entered into a syndicateloan agreement with ING Bank N.V., ABN Amro N.V. and CALYON as mandated leadarrangers, pursuant to which mandated lead arrangers and syndicate lent to us aprincipal amount of $250 million on May 8, 2008. The loan matures onApril 25, 2011, and interest is payable by us quarterly in arrears at anannual rate of LIBOR+1.75%.

 

## ***Item9.     Offer and Listing Details***

## *** ***

(Onlyitems 9.A.4 and 9.C are applicable.)

 

**A.  Market Price Information**

** **

Thefollowing table sets forth the monthly high and low market closing prices perADS on the New York Stock Exchange for each of the most recent six months; thequarterly high and low market closing prices per ADS for each quarter of 2006and 2007 and the first quarter of 2008; and the annual high and low marketclosing prices per ADS during 2003, 2004, 2005, 2006 and 2007. Also set forthare the high and low market closing prices for shares of our common stock onthe RTS.

 

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| ** **          | ** ** | **Shares of  Common Stock  High** | ** ** | **Shares of  Common Stock  Low** | ** ** | **ADS  High** | ** ** | **ADS  Low** | ** ** |
|---------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|---------------|------------|--------------|------------|
| May 2008            |       | $                                           | 83.41      |                                       | $          | 75.84         |       | $            | 138.85     |   | $ | 119.07 |   |
| April 2008     |       | $                                           | 83.07      |                                       | $          | 73.45         |       | $            | 130.94     |   | $ | 104.58 |   |
| March 2008     |       | $                                           | 80.20      |                                       | $          | 69.83         |       | $            | 105.91     |   | $ | 90.00 |   |
| February 2008  |       | $                                           | 85.44      |                                       | $          | 80.56         |       | $            | 123.74     |   | $ | 105.26 |   |
| January 2008   |       | $                                           | 92.79      |                                       | $          | 81.96         |       | $            | 144.40     |   | $ | 108.01 |   |
| December 2007  |       | $                                           | 88.88      |                                       | $          | 81.90         |       | $            | 134.93     |   | $ | 108.87 |   |
| First Quarter 2008  |       | $                                           | 92.79      |                                       | $          | 69.83         |       | $            | 144.40     |   | $ | 90.00 |   |
| Fourth Quarter 2007 |       | $                                           | 85.89      |                                       | $          | 77.34         |       | $            | 134.93     |   | $ | 102.50 |   |
| Third Quarter 2007  |       | $                                           | 88.28      |                                       | $          | 66.98         |       | $            | 117.31     |   | $ | 84.83 |   |
| Second Quarter 2007 |       | $                                           | 69.16      |                                       | $          | 60.08         |       | $            | 104.01     |   | $ | 76.70 |   |
| First Quarter 2007  |       | $                                           | 67.02      |                                       | $          | 49.13         |       | $            | 79.86      |   | $ | 56.49 |   |
| Fourth Quarter 2006 |       | $                                           | 56.24      |                                       | $          | 37.75         |       | $            | 66.59      |   | $ | 41.20 |   |
| Third Quarter 2006  |       | $                                           | 40.11      |                                       | $          | 27.77         |       | $            | 47.85      |   | $ | 36.55 |   |
| Second Quarter 2006 |       | $                                           | 36.93      |                                       | $          | 25.20         |       | $            | 39.50      |   | $ | 27.90 |   |
| First Quarter 2006  |       | $                                           | 26.80      |                                       | $          | 20.50         |       | $            | 28.36      |   | $ | 22.60 |   |
| 2007                |       | $                                           | 88.88      |                                       | $          | 49.13         |       | $            | 134.93     |   | $ | 56.49 |   |
| 2006                |       | $                                           | 56.24      |                                       | $          | 25.20         |       | $            | 66.59      |   | $ | 22.60 |   |
| 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 |   |

 

**C.  Markets**

** **

InRussia, our common stock is listed on the RTS under the symbol “WBDF,” and isadmitted for trading on the Moscow Interbank Currency Exchange (MICEX).American Depositary Receipts, each representing one share of our common stock,have been listed on the New York Stock Exchange under the symbol “WBD” sinceFebruary 8, 2002. Our American Depositary Receipts are also traded on theFrankfurt Stock Exchange pursuant to a broker-established unsponsored facility.

 

## ***Item10.    Additional Information***

## *** ***

**A.  Share Capital**

** **

Notapplicable.

 

**B.  Charter and Certain Requirements of Russian Legislation**

** **

Wedescribe below material provisions of our charter in effect on the date of thisdocument and certain requirements of Russian legislation. In addition to thisdescription, we urge you to review our charter to learn its complete terms.

 

**OurPurpose**

** **

Article 4.1of our charter provides that our main goal is to provide the fullest andhighest-quality satisfaction of the needs of legal entities and individuals forthe products and services we offer, as well as to generate profits.

 

Weare registered with the Moscow Inter-District Inspectorate No. 39 of theRussian Ministry of Taxes and Duties under the state registration number1037700236738.

 

**GeneralMatters**

** **

Pursuantto our charter, we have the right to issue registered shares of common stock,shares of preferred stock and other securities provided for by legal acts ofthe Russian 

 

112

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Federation with respectto securities. Our capital stock currently consists of 44,000,000 commonshares, each with a nominal value of 20 rubles, all of which are fully paid,issued and outstanding. Under Russian legislation, charter capital refers tothe aggregate nominal value of the issued and outstanding shares. We are alsoauthorized to issue 44,000,000 common shares with a nominal value of 20 rubleseach. No preferred shares are authorized or outstanding. Preferred shares mayonly be issued if corresponding amendments have been made to our charterpursuant to a resolution of the general meeting of shareholders. We have issuedonly shares of common stock. The Federal Law on Joint Stock Companies requiresus to dispose of any of our shares that we acquire within one year of theiracquisition or, failing that, reduce our charter capital. We refer to suchshares as treasury shares for the purposes hereof. Russian legislation does notallow for the voting of such treasury shares.

 

**RightsAttaching to Shares**

** **

Holdersof our common stock have the right to vote at all shareholders’ meetings. Asrequired by the Federal Law on Joint Stock Companies and our charter, allshares of our common stock have the same nominal value and grant identicalrights to their holders. Each fully paid share of common stock, except fortreasury shares, gives its holder the right to:

 
| · |                                                                                                                                                                                                                       |   | freely transfer the  shares without consent of other shareholders;                                                         |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                       |   |                                                                                                                       |
| · |                                                                                                                                                                                                                       |   | receive dividends;                                                                                                         |
|   |                                                                                                                                                                                                                       |   |                                                                                                                       |
| · |                                                                                                                                                                                                                       |   | participate in  shareholders’ meetings and vote on all matters within shareholders’  competence;                 |
|   |                                                                                                                                                                                                                       |   |                                                                                                                       |
| · |                                                                                                                                                                                                                       |   | transfer voting rights  to its representative on the basis of a power of attorney;                                         |
|   |                                                                                                                                                                                                                       |   |                                                                                                                       |
| · |                                                                                                                                                                                                                       |   | participate in the  election and dismissal of members for the board of directors and review  commission;                   |
|   |                                                                                                                                                                                                                       |   |                                                                                                                       |
| · |                                                                                                                                                                                                                       |   | if holding, alone or  with other holders, 2% or more of the voting stock, within 30 days after  the end of our fiscal |
|   | year, make proposals  for the agendas of the annual shareholders’ meeting and nominate candidates  to the board of directors, management board, counting commission, review  commission and for the general director; |
|   |                                                                                                                                                                                                                       |   |                                                                                                                       |
| · |                                                                                                                                                                                                                       |   | if holding, alone or  with other holders, 10% or more of the voting stock, demand from 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  following circumstances, 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 on the decision approving  the following:                                                                                                          |
|   |                                                                                                                                                                                                                       |   |                                                                                                                       |
|   |                                                                                                                                                                                                                       | · |                                                                                                                       | any reorganization; |
|   |                                                                                                                                                                                                                       |   |                                                                                                                       |   |
|   |                                                                                                                                                                                                                       | · |                                                                                                                       | the conclusion of a  major transaction, as defined under Russian law; and |
|   |                                                                                                                                                                                                                       |   |                                                                                                                       |   |
|   |                                                                                                                                                                                                                       | · |                                                                                                                       | any amendment of our  charter or approval of a restated version of our charter in a manner that  restricts the |
|   |                                                                                                                                                                                                                       |   | holder’s rights;                                                                                                      |
|   |                                                                                                                                                                                                                       |   |                                                                                                                       |
| · |                                                                                                                                                                                                                       |   | upon liquidation,  receive a proportionate amount of our property after our obligations are  fulfilled;                    |
|   |                                                                                                                                                                                                                       |   |                                                                                                                       |
| · |                                                                                                                                                                                                                       |   | have access 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, have free access to accounting documents and  minutes of the company’s management board meetings; and                                                                |
|   |                                                                                                                                                                                                                       |   |                                                                                                                       |
| · |                                                                                                                                                                                                                       |   | exercise other rights  of a shareholder provided by our charter, Russian legislation and decisions  of shareholders’  |
|   | meeting approved in  accordance with its competence.                                                                                                                                                                       |
|   |                                                                                                                                                                                                                       |

113

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** **

**PreemptiveRights**

** **

TheFederal Law on Joint Stock Companies and our charter provide existingshareholders with a preemptive right to purchase shares or securitiesconvertible into shares during an open subscription in the amount proportionateto their existing shareholdings. In addition, the Federal Law on Joint StockCompanies provides shareholders with a preemptive right to purchase shares orsecurities convertible into shares, in an amount proportionate to theirexisting shareholdings, during a closed subscription if the shareholders votedagainst or did not participate in the voting on the decision approving suchsubscription. The preemptive right does not apply to a closed subscription toexisting shareholders provided that such shareholders may each acquire a wholenumber of shares or securities convertible into shares being placed in anamount proportionate to their existing shareholdings. We must provideshareholders with written notice of the proposed sale of shares at least45 days prior to the offering, during which time shareholders may exercisetheir 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 theshareholders’ meeting approving the dividends. See “—General Meetings ofShareholders—Notice and Participation.” Dividends are not paid on treasuryshares.

 

TheFederal Law on Joint Stock Companies allows dividends to be declared only outof net profits calculated under Russian accounting standards and as long as thefollowing conditions have been met:

 
| · |                                                                                                                                                                                                                                                                                    | the charter capital of  the company has been paid in full;                                                                 |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                    |                                                                                                                       |
| · |                                                                                                                                                                                                                                                                                    | the value of the  company’s net 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) than the sum of the company’s  charter capital, the company’s reserve fund and the difference between the  liquidation value and the par value of the issued and outstanding preferred  shares of the company; |
|   |                                                                                                                                                                                                                                                                                    |                                                                                                                       |
| · |                                                                                                                                                                                                                                                                                    | the company has  repurchased all shares from shareholders having the right to demand  repurchase; and                      |
|   |                                                                                                                                                                                                                                                                                    |                                                                                                                       |
| · |                                                                                                                                                                                                                                                                                    | the company is not,  and would not become, insolvent as the result of the proposed dividend  payment.                      |

 

**Distributionsto Shareholders on Liquidation**

** **

UnderRussian legislation, liquidation of a company results in its terminationwithout the transfer of rights and obligations to other persons as legalsuccessors. The Federal Law on Joint Stock Companies and our charter allow usto be liquidated:

 

·                           by athree-quarters majority vote of a shareholders’ meeting; or

 

·                           by a court order.

 

Followinga decision to liquidate us, the right to manage our affairs would pass to aliquidation commission appointed by a shareholders’ meeting. In the event of aninvoluntary liquidation, the court may vest the duty to liquidate the companyto its shareholders. Creditors may file claims within a period to be determinedby the liquidation commission, but such 

 

114

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period must not be lessthan two months from the date of publication of notice of liquidation by theliquidation commission.

 

TheCivil Code of the Russian Federation gives creditors the following order ofpriority during liquidation:

 
| · |                      | individuals owed compensation  for injuries, deaths or moral damages;                                                 |
|--------|---------------------------|-----------------------------------------------------------------------------------------------------------------------|
|   |                      |                                                                                                                  |
| · |                      | employees;                                                                                                            |
|   |                      |                                                                                                                  |
| · |                      | federal and local  governmental entities claiming taxes and similar payments to the federal and  local budgets and to |
|   | non-budgetary funds;  and |
|   |                      |                                                                                                                  |
| · |                      | other creditors in  accordance with Russian legislation.                                                              |

 

Claimsof creditors in obligations secured by a pledge of the company’s property(“secured claims”) are satisfied out of the proceeds of sale of the pledgedproperty prior to claims of any other creditors except for the creditors of thefirst and second priorities described above, provided that claims of suchcreditors arose before the pledge agreements in respect of the company’sproperty were made. To the extent that the proceeds of sale of the pledgedproperty are not sufficient to satisfy secured claims, the latter are satisfiedsimultaneously with claims of the fourth priority creditors as described above.

 

TheFederal Law on Insolvency (Bankruptcy), however, provides for a different orderof priority for creditors’ claims in the event of bankruptcy.

 

Theremaining assets of a company are distributed among shareholders in thefollowing order of priority:

 
| · |                                                   | payments to repurchase  shares from shareholders having the right to demand repurchase;                           |
|--------|--------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------|
|   |                                                   |                                                                                                              |
| · |                                                   | payments of declared  but unpaid dividends on preferred shares and the liquidation value of the  preferred shares |
|   | determined by the  company’s charter, if any; and |
|   |                                                   |                                                                                                              |
| · |                                                   | payments to holders of  common and preferred shares.                                                              |

 

**Liabilityof Shareholders**

** **

TheCivil Code of the Russian Federation and the Federal Law on Joint StockCompanies generally provide that shareholders in a Russian joint stock companyare not liable for the obligations of a joint stock company and bear only therisk of loss of their investments. This may not be the case, however, when oneperson or entity is capable of determining decisions made by another person orentity. The person or entity capable of determining such decisions is called an“effective parent.” The person or entity whose decisions are capable of beingso determined is called an “effective subsidiary.” The effective parent bearsjoint and several responsibility for transactions concluded by the effectivesubsidiary in carrying out these decisions if:

 
| · |         | this decision-making  capability is provided for in the charter of the effective subsidiary or in a  contract between such |
|--------|--------------|----------------------------------------------------------------------------------------------------------------------------|
|   | persons; and |
|   |         |                                                                                                                       |
| · |         | the effective parent  gives binding instructions to the effective subsidiary.                                              |

 

Thus,a shareholder of an effective parent is not itself liable for the debts of theeffective parent’s effective subsidiary, unless that shareholder is itself aneffective parent of the effective parent. Accordingly, a shareholder will notbe personally liable for our debts or those of our effective subsidiariesunless such shareholder controls our business and the conditions set forthabove are met.

 

Inaddition, an effective parent is secondarily liable for an effectivesubsidiary’s debts if an effective subsidiary becomes insolvent or bankruptresulting from the action or omission of an effective parent only when theeffective parent has used the right to give binding 

 

115

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instructions knowingthat they would result in insolvency of the effective subsidiary. This is thecase no matter how the effective parent’s capability to determine decisions ofthe effective subsidiary arises, such as through ownership of voting securitiesor by contract. In these instances, other shareholders of the effectivesubsidiary may claim compensation for the effective subsidiary’s losses fromthe effective parent that caused the effective subsidiary to take any action orfail to take any action knowing that such action or failure to take actionwould result in losses.

 

**Alterationof Capital**

** **

**CharterCapital Increase**

** **

Wemay increase our charter capital by:

 

·                           issuing newshares, or

 

·                           increasing thenominal value of previously issued shares.

 

Adecision on any issuance of shares or securities convertible into shares byclosed subscription, or an issuance by open subscription of common shares orsecurities convertible into common shares constituting 25% or more of thenumber of issued common shares, requires a three-quarters majority vote of ashareholders’ meeting. In addition, a decision to increase the charter capitalby increasing the nominal value of issued shares requires a majority vote of ashareholders’ meeting. In addition, the issuance of shares above the number ofauthorized and non-issued shares provided in our charter necessitates a charteramendment, which requires a three-quarters majority vote of a shareholders’meeting.

 

TheFederal Law on Joint Stock Companies requires that the value of newly issuedshares be determined by the board of directors based on their market value butnot less that their nominal value, except in limited circumstances where(i) existing shareholders exercise a preemptive right to purchase sharesat not less than 90% of the price paid by third parties, or (ii) fees ofup 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.

 

Russiansecurities regulations set out detailed procedures for the issuance andregistration of shares of a joint stock company. These procedures require:

 

·                           priorregistration of a share issuance with the FSFM;

 

·                           public disclosureof information relating to the share issuance; and

 

·                           following theplacement of the shares, registration and public disclosure of the results ofthe placement of shares.

 

**CharterCapital Decrease; Share Buy-Backs**

** **

TheFederal Law on Joint Stock Companies does not allow a company to reduce itscharter capital below the minimum charter capital required by law, which is100,000 rubles for an open joint stock company or approximately $4,250. Ourcharter requires that any decision to reduce our charter capital, whetherthrough the repurchase and cancellation of shares or a reduction in the nominalvalue of the shares, be made by a majority vote of a shareholders’ meeting.Additionally, within 30 days of a decision to reduce our charter capital,we must issue a written notice to our creditors and publish this decision. Ourcreditors would then have the right to demand, within 30 days ofpublication or receipt of our notice, early termination or discharge ofrelevant obligations by us, as well as compensation for damages.

 

TheFederal Law on Joint Stock Companies and our charter allow our shareholders orour board of directors to authorize the repurchase of up to 10% of our sharesin exchange for cash. 

 

116

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The repurchased sharesmust be resold at market value within one year of their repurchase or, failingthat, the shareholders must decide to cancel such shares and decrease thecharter 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.

 

TheFederal Law on Joint Stock Companies allows us to repurchase our shares onlyif, at the time of repurchase:

 
| · |                                                                                                                                                                                                 | our charter capital is  paid in full;                                                                                        |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                 |                                                                                                                         |
| · |                                                                                                                                                                                                 | we are not and would  not become, as a result of the repurchase, insolvent;                                                  |
|   |                                                                                                                                                                                                 |                                                                                                                         |
| · |                                                                                                                                                                                                 | the value 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 the sum of our charter capital, the reserve fund and the  difference between the liquidation value and par value of our issued and  outstanding preferred shares; and |
|   |                                                                                                                                                                                                 |                                                                                                                         |
| · |                                                                                                                                                                                                 | we have repurchased  all shares from shareholders having the  right to demand repurchase of  their shares in accordance |
|   |  with Russian law, as described immediately  below.                                                                                                                                             |

 

TheFederal Law on Joint Stock Companies and our charter provide that ourshareholders may demand repurchase of all or some of their shares so long asthe shareholder demanding repurchase voted against or did not participate inthe voting on the decision approving any of the following actions:

 
| · |                       | reorganization;                                                                                         |
|--------|----------------------------|---------------------------------------------------------------------------------------------------------|
|   |                       |                                                                                                    |
| · |                       | conclusion of a major  transaction, as defined under Russian law; or                                    |
|   |                       |                                                                                                    |
| · |                       | amendment of our  charter or approval of a restated version of our charter in a manner which  restricts |
|   | shareholders’ rights. |

 

Wemay spend up to 10% of our net assets calculated under Russian accountingstandards on the date of the adoption of the decision which gives rise to ashare redemption demanded by the shareholders. If the value of the shares inrespect of which shareholders have exercised their right to demand repurchaseexceeds 10% of our net assets, we will repurchase shares from each suchshareholder on a pro-rata basis.

 

**Registrationand Transfer of Shares**

** **

Russianlegislation requires that a joint stock company maintain a register of itsshareholders. Ownership of our registered shares is evidenced solely by entriesmade in such register. Any of our shareholders may obtain an extract from ourregister certifying the number of shares that such shareholders hold. SinceJuly 14, 2001, Central Moscow Depository OJSC has maintained our registerof shareholders.

 

Thepurchase, sale or other transfer of shares is accomplished through theregistration of the transfer in the shareholder register, or the registrationof the transfer with a depositary if shares are held by a depositary. Theregistrar or depositary may not require any documents in addition to thoserequired by Russian legislation in order to transfer shares in the register.Refusal to register the shares in the name of the transferee or, upon requestof the beneficial holder, in the name of a nominee holder, is not allowedexcept in certain instances provided for by Russian legislation, and may bechallenged in court.

 

**ReserveFund**

** **

Russianlegislation requires that each joint stock company establish a reserve fund tobe used only to cover the company’s losses, redeem the company’s bonds andrepurchase the company’s shares in cases when other funds are not available.Our charter provides for a 

 

117

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reserve fund of 5% ofour charter capital, funded through mandatory annual transfers of at least 5%of our net profits until the reserve fund has reached the 5% requirement.

 

**Disclosureof Information**

** **

Russiansecurities regulations require us to make the following periodic publicdisclosures and filings:

 
| · |                                                                                                                                                                                                                                                                                      | filing quarterly  reports with the FSFM containing information about us, our shareholders and  depositary, the          |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------|
|   | structure of our  management bodies, the members of the board of directors, our branches and  representative offices, our shares, bank accounts and auditors, important  developments during the reporting quarter and other information about our  financial and business activity;      |
|   |                                                                                                                                                                                                                                                                                      |                                                                                                                    |
| · |                                                                                                                                                                                                                                                                                      | filing with the FSFM  and publishing in the FSFM’s periodical print publication, as well as in  other media, any   |
|   | information concerning  material facts and changes in our financial and business activity, including  our reorganization, certain changes in the amount of our assets, decisions on  share issuances, certain changes in ownership and shareholding, as well as  shareholder resolutions; |
|   |                                                                                                                                                                                                                                                                                      |                                                                                                                    |
| · |                                                                                                                                                                                                                                                                                      | disclosing information  on various stages of share placement, issuance and registration through  publication of certain |
|   | data as required by  the securities regulations;                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                      |                                                                                                                    |
| · |                                                                                                                                                                                                                                                                                      | disclosing our annual  report and annual financial statements prepared in accordance with Russian  accounting           |
|   | standards;                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                      |                                                                                                                    |
| · |                                                                                                                                                                                                                                                                                      | filing with the FSFM  on a quarterly basis a list of our affiliated persons and disclosing the same  on our website, on |
|   | the same basis; and                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                      |                                                                                                                    |
| · |                                                                                                                                                                                                                                                                                      | other information as  required by applicable Russian securities legislation.                                            |

 

**GeneralMeetings of Shareholders**

** **

***Procedure***

*** ***

Thepowers of a shareholders’ meeting are set forth in the Federal Law on JointStock Companies and in our charter. A shareholders’ meeting may not decide onissues that are not included in the list of its competence by the Federal Lawon Joint Stock Companies and our charter. Among the issues which theshareholders have the power to decide are:

 
| · |                 | charter amendments;                                                                                                 |
|--------|----------------------|---------------------------------------------------------------------------------------------------------------------|
|   |                 |                                                                                                                |
| · |                 | reorganization or  liquidation;                                                                                     |
|   |                 |                                                                                                                |
| · |                 | election and removal  of the members of the board of directors;                                                     |
|   |                 |                                                                                                                |
| · |                 | determination of the  number, nominal value, category/type of authorized shares and rights granted  by such shares; |
|   |                 |                                                                                                                |
| · |                 | changes in our charter  capital;                                                                                    |
|   |                 |                                                                                                                |
| · |                 | appointment and  removal of the members of our review commission and counting commission;                           |
|   |                 |                                                                                                                |
| · |                 | approval of our  external auditor;                                                                                  |
|   |                 |                                                                                                                |
| · |                 | approval of certain  interested party transactions and major transactions;                                          |
|   |                 |                                                                                                                |
| · |                 | distribution of  profits and losses, including approval of dividends;                                               |
|   |                 |                                                                                                                |
| · |                 | redemption by the  company of issued shares in cases provided for by the Federal Law on Joint  Stock Companies;     |
|   |                 |                                                                                                                |
| · |                 | decision on our  participation in holding companies, commercial or industrial groups or other  associations of      |
|   | commercial entities; |

 

118

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| · |   | approval of certain  internal documents and corporate records; and                          |
|--------|--------|---------------------------------------------------------------------------------------------|
|   |   |                                                                                        |
| · |   | other issues, as  provided for by the Federal Law on Joint Stock Companies and our charter. |

 

Votingat a shareholders’ meeting is generally based on the principle of one vote pershare of common stock, with the exception of the election of the board ofdirectors, which is done through cumulative voting. Decisions are generallypassed by a majority vote of the voting shares present at a shareholders’meeting. However, Russian law requires a three-quarters majority vote of thevoting shares present at a shareholders’ meeting to approve the following:

 
| · |                                                                                      | charter amendments;                                                                                                  |
|--------|-------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------|
|   |                                                                                      |                                                                                                                 |
| · |                                                                                      | reorganization or  liquidation;                                                                                      |
|   |                                                                                      |                                                                                                                 |
| · |                                                                                      | major transactions  involving assets in excess of 50% of the balance sheet value of the company’s  assets;      |
|   |                                                                                      |                                                                                                                 |
| · |                                                                                      | determination of the  number, nominal value and category (type) of authorized shares and the rights  granted by such |
|   | shares;                                                                                   |
|   |                                                                                      |                                                                                                                 |
| · |                                                                                      | repurchase by the  company of its issued shares;                                                                     |
|   |                                                                                      |                                                                                                                 |
| · |                                                                                      | any issuance of shares  or securities convertible into shares of common stock by closed subscription;  or            |
|   |                                                                                      |                                                                                                                 |
| · |                                                                                      | issuance by open  subscription of shares of common stock or securities convertible into common  stock, in each case, |
|   | constituting 25% or  more of the number of issued and outstanding shares of common stock. |

 

Thequorum requirement for our shareholders’ meetings is met if shareholders (ortheir representatives) accounting for more than 50% of the issued voting sharesare present. If the 50% quorum requirement is not met, another shareholders’meeting with the same agenda may (and, in the case of an annual shareholders’meeting, must) be scheduled and the quorum requirement is satisfied ifshareholders (or their representatives) accounting for at least 30% of theissued voting shares are present at that meeting.

 

Theannual shareholders’ meeting must be convened by the board of directors betweenMarch 1 and June 30 of each year, and the agenda must include thefollowing items:

 
| · |       | election of members of  the board of directors;                                                                      |
|--------|------------|----------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                 |
| · |       | approval of the annual  report and the annual financial statements, including the balance sheet and  profit and loss |
|   | statement; |
|   |       |                                                                                                                 |
| · |       | approval of  distribution of profits, including approval of annual dividends and losses,  if any;                    |
|   |       |                                                                                                                 |
| · |       | appointment of an  independent auditor; and                                                                          |
|   |       |                                                                                                                 |
| · |       | appointment of the  member of the review commission.                                                                 |

 

Ashareholder or group of shareholders owning in the aggregate at least 2% of theissued voting shares may introduce proposals for the agenda of the annualshareholders’ meeting and may nominate candidates to the board of directors,management board, counting commission, review commission and for the generaldirector. Any agenda proposals or nominations must be provided to the companyno later than 30 calendar days after the preceding 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.

 

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Ageneral meeting of shareholders may be held in the form of a meeting or byabsentee ballot. The form of a meeting contemplates the adoption of resolutionsby the general meeting of shareholders through the attendance of theshareholders or their authorized representatives for the purpose of discussingand voting on issues of the agenda, provided that if a ballot is mailed toshareholders for participation at a meeting convened in such form, theshareholders may complete and mail the ballot back to the company withoutpersonally attending the meeting. A general meeting of the shareholders byabsentee ballot contemplates the determination of shareholders’ opinions onissues on the agenda by means of a written poll.

 

Thefollowing issues cannot be decided by a shareholders’ meeting by absenteeballot:

 
| · |                                                                                     | election of the  members of the board of directors;                                                                      |
|--------|------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                     |                                                                                                                     |
| · |                                                                                     | election of the review  commission;                                                                                      |
|   |                                                                                     |                                                                                                                     |
| · |                                                                                     | approval of a  company’s independent auditor; and                                                                   |
|   |                                                                                     |                                                                                                                     |
| · |                                                                                     | approval of the annual  report, the annual financial statements, including balance sheet, profit and  loss statement and |
|   | any distribution of  profits and losses, including approval of annual dividends, if any. |

 

***Notice and Participation***

*** ***

Allshareholders entitled to participate in a general shareholders’ meeting must benotified of the meeting, whether the meeting is to be held in the form of ameeting or by absentee ballot, no less than 30 days prior to the date ofthe meeting, and such notification shall specify the agenda for the meeting.However, if it is an extraordinary shareholders’ meeting to elect the board ofdirectors, shareholders must be notified at least 50 days prior to the date ofthe meeting. Only those items that were set out in the agenda to shareholdersmay be voted upon at a general shareholders’ meeting.

 

Thelist of shareholders entitled to participate in a general shareholders’ meetingis to be compiled on the basis of data in our shareholders register on the dateestablished by the board of directors, which date may neither be earlier thanthe date of adoption of the board resolution to hold a general shareholders’meeting nor more than 50 days before the date of the meeting (or, in thecase of an extraordinary shareholders’ meeting to elect the board of directors,not later than 65 days before the date of the meeting).

 

Theright to participate in a general meeting of shareholders may be exercised by ashareholder as follows:

 
| · |   | by personally  participating in the discussion of agenda items and voting thereon;                              |
|--------|--------|-----------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                            |
| · |   | by sending an  authorized representative to participate in the discussion of agenda items  and to vote thereon; |
|   |   |                                                                                                            |
| · |   | by absentee ballot; or                                                                                          |
|   |   |                                                                                                            |
| · |   | by delegating the  right to fill out the absentee ballot to an authorized representative.                       |

 

**Boardof Directors**

** **

TheFederal Law on Joint Stock Companies and our charter provide that our entireboard of directors is up for election at each annual general shareholders’meeting and that our board of directors is elected through cumulative voting.Under cumulative voting, each shareholder may cast an aggregate number of votesequal to the number of voting shares held by such shareholder multiplied by thenumber of persons to be elected to our board of directors, and the shareholdermay give all such votes to one candidate or spread them between two or morecandidates. Before the expiration of their term, the directors may be removedas a group at any time without cause by a majority vote of a shareholders’meeting.

 

TheFederal Law on Joint Stock Companies requires at least a five-member board ofdirectors for all joint stock companies, at least a seven-member board ofdirectors for a joint 

 

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stock company with morethan 1,000 holders of voting shares, and at least a nine-member board ofdirectors for a joint stock company with more than 10,000 holders of votingshares. Only natural persons (as opposed to legal entities) are entitled to siton the board. Members of the board of directors are not required to beshareholders of the company. The actual number of directors is determined bythe company’s charter or a decision of the shareholders’ meeting. Our charterprovides that our board of directors shall consist 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:

 
| · |                                                                            | determination of our  business priorities;                                                                              |
|--------|---------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------|
|   |                                                                            |                                                                                                                    |
| · |                                                                            | convening annual and  extraordinary shareholders’ meetings, except in certain circumstances  specified in the      |
|   | Federal Law on Joint  Stock Companies;                                          |
|   |                                                                            |                                                                                                                    |
| · |                                                                            | approval of the agenda  of a shareholders’ meeting and determination of the record date for  shareholders entitled |
|   | to participate in a shareholders’  meeting;                                |
|   |                                                                            |                                                                                                                    |
| · |                                                                            | placement of our bonds  and other securities in cases specified in the Federal Law on Joint Stock  Companies;           |
|   |                                                                            |                                                                                                                    |
| · |                                                                            | determination of 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;                                      |
|   |                                                                            |                                                                                                                    |
| · |                                                                            | repurchase of our  shares, bonds and other securities in certain cases provided for by the  Federal Law on Joint        |
|   | Stock Companies;                                                                |
|   |                                                                            |                                                                                                                    |
| · |                                                                            | formation of our  executive bodies and early termination of their powers;                                               |
|   |                                                                            |                                                                                                                    |
| · |                                                                            | election of our  management board and its chairman and the establishment of their  compensation;                        |
|   |                                                                            |                                                                                                                    |
| · |                                                                            | recommendations on the  amount of remuneration and compensation to be paid to the members of our  review                |
|   | commission and on the  fees payable for the services of an independent auditor; |
|   |                                                                            |                                                                                                                    |
| · |                                                                            | recommendations on the  amount of the dividend and the payment procedure thereof;                                       |
|   |                                                                            |                                                                                                                    |
| · |                                                                            | the use of our reserve  and other funds;                                                                                |
|   |                                                                            |                                                                                                                    |
| · |                                                                            | approval of our  internal documents, except for those documents whose approval falls within  the competence of          |
|   | our shareholders or  executive bodies;                                          |
|   |                                                                            |                                                                                                                    |
| · |                                                                            | the creation of  branches and representative offices;                                                                   |
|   |                                                                            |                                                                                                                    |
| · |                                                                            | approval of major and  interested party transactions in certain cases as provided for by the Federal  Law on Joint      |
|   | Stock Companies;                                                                |
|   |                                                                            |                                                                                                                    |
| · |                                                                            | approval of our share  registrar;                                                                                       |
|   |                                                                            |                                                                                                                    |
| · |                                                                            | our participation in,  or exit from, other companies, unless such matters fall under the  jurisdiction of our           |
|   | shareholders or  executive bodies;                                              |
|   |                                                                            |                                                                                                                    |
| · |                                                                            | other issues, as provided  for by the Federal Law on Joint Stock Companies and our charter.                             |

 

Ourcharter generally requires a majority vote of the directors present for anaction to pass, with the exception of actions for which Russian legislationrequires a unanimous vote or a majority vote of the disinterested andindependent directors, as described herein. A board meeting is considered dulyassembled and legally competent to act when at least six directors are present.

 

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**InterestedParty Transactions**

** **

Underthe Federal Law on Joint Stock Companies, certain transactions defined as“interested party transactions” require approval by disinterested directors orshareholders of the company. “Interested party transactions” includetransactions involving a member of the board of directors or a member of anyexecutive body of the company (including the company’s chief executive officerand/or the company’s managing organization), any person that owns, togetherwith any affiliates, at least 20% of a company’s issued voting shares or anyperson who is able to direct the actions of the company, if that person and/orthat person’s spouse, parents, children, adoptive parents or children, brothersor sisters or affiliates, is/are:

 
| · |                                                                                                                                                                                                                     | a party to, or  beneficiary of, a transaction with the company, whether directly or as a  representative or             |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------|
|   | intermediary;                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                     |                                                                                                                    |
| · |                                                                                                                                                                                                                     | the owner of at least  20% of the issued shares of a legal entity that is a party to, or beneficiary  of, a transaction |
|   | with the company,  whether directly or as a representative or intermediary; or                                                                                                                                           |
|   |                                                                                                                                                                                                                     |                                                                                                                    |
| · |                                                                                                                                                                                                                     | a member of the board  of directors or a member of any management body of a company that is a party  to, or             |
|   | beneficiary of, a  transaction with the company, whether directly or as a representative or  intermediary, or a member of the board of directors or any management body of  a management organization of such a company. |

 

TheFederal Law on Joint Stock Companies requires that an interested partytransaction by a company with more than 1,000 shareholders be approved by amajority vote of the independent directors of the company who are notinterested in the transaction. For purposes of this rule, “an independentdirector” is a person who is not, and within the year preceding the decision toapprove the transaction was not, the general director, a member of anyexecutive 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 the transactionif the number of these directors is sufficient to constitute a quorum.

 

Approvalby a majority of shareholders who are not interested in the transaction isrequired if:

 
| · |                                                                                                                                                           | the value of such  transaction or a number of interrelated transactions is 2% or more of the  balance sheet value of   |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------|
|   | the company’s assets  determined under Russian accounting standards;                                                                                      |
|   |                                                                                                                                                           |                                                                                                                   |
| · |                                                                                                                                                           | the transaction or a  number of interrelated transactions involves the issuance, by subscription,  of voting shares or |
|   | securities convertible  into voting shares, or secondary market sale of such securities, in an amount  exceeding 2% of the company’s issued voting stock; |
|   |                                                                                                                                                           |                                                                                                                   |
| · |                                                                                                                                                           | the number of  directors who are not interested in the transaction is not sufficient to  constitute a quorum; or       |
|   |                                                                                                                                                           |                                                                                                                   |
| · |                                                                                                                                                           | all the members of the  board of directors of the company are interested parties, or none of them is  an independent   |
|   | director.                                                                                                                                                      |

 

Approvalby a majority of shareholders who are not interested in the transaction may notbe required, until the next annual shareholders’ meeting, for an interestedparty transaction if such transaction is substantially similar to transactionsconcluded by the company and the 

 

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interested party in theordinary course of business before such party became an interested party withrespect to the transaction.

 

Theapproval of interested party transactions is not required in the followinginstances:

 
| · |                                                         | the company has only  one shareholder that simultaneously performs the functions of the executive  body of the      |
|--------|--------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|
|   | company;                                                     |
|   |                                                         |                                                                                                                |
| · |                                                         | all shareholders of  the company are deemed interested in such transactions;                                        |
|   |                                                         |                                                                                                                |
| · |                                                         | the transactions arise  from the shareholders executing their preemptive rights to purchase newly  issued shares of |
|   | the company;                                                 |
|   |                                                         |                                                                                                                |
| · |                                                         | the transactions arise  from the repurchase, whether mandatory or not, by the company of its issued  shares;        |
|   |                                                         |                                                                                                                |
| · |                                                         | the company merges  with another company, and the latter owns more than three-fourths of the  voting capital        |
|   | stock of the company;  or                                    |
|   |                                                         |                                                                                                                |
| · |                                                         | the transactions that  are mandatory a company pursuant to Russian law and must be concluded on the  basis of       |
|   | fixed prices and  tariffs adopted by a competent state body. |

 

**MajorTransactions**

** **

TheFederal Law on Joint Stock Companies defines a “major transaction” as atransaction, or a number of interrelated transactions, involving theacquisition or disposal, or a possibility of disposal (whether directly orindirectly) of property having a value of 25% or more of the balance sheet valueof the

 

assets of a companydetermined under Russian accounting standards, with the exception oftransactions 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-quarters vote bya shareholders’ meeting.

 

**Changein Control**

** **

***Anti-takeover Protection***

*** ***

Russianlegislation provides as follows:

 

·      A person 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.

 

·      A person 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 which is not less than the pricedetermined based on a weighted market price of the shares, or on a pricesupplied by an independent appraiser if the shares have no or insufficienttrading history. From the moment of acquisition of 30% or more of the sharesuntil the moment of delivery of an offer to the security holders, the personmaking an offer and its affiliates will be able to register for quorum and voteonly 30% of the shares of the 

 

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company (regardless of the size of their actualholdings). These rules are also applied (or reapplied) to acquisitionsresulting in a person or a group of persons owning more than 50% and 75% of acompany’s outstanding shares.

 

·      A person 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

 

request of the holders of such shares or othersecurities, and may require such holders to sell such shares and othersecurities, at a price based on the prices of the preceding acquisition by theofferor.

 

·      An offer of the kind described in either of the preceding three paragraphs mustbe accompanied by a bank guarantee of payment. If the company is publiclytraded, prior notice of the offer must be filed with the FSFM; otherwise,notice must be filed with the FSFM no later than the date of the offer. TheFSFM may order amendments to the terms of the offer (including price) in orderto bring them into compliance with the rules.

 

·      Once such an offer has been made, competing offers for the same securities canbe made by third parties and, in certain circumstances, acceptance of theinitial offer may be withdrawn by the security holders who choose to acceptsuch competing 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.

 

Theabove rules may be supplemented through FSFM rulemaking, which may resultin a wider, narrower or more specific interpretation of these rules by thegovernment and judicial authorities, as well as by market participants.

 

***Approval of the Federal Antimonopoly Service***

*** ***

Pursuantto the Federal Law on Competition, acquisitions of voting stock capital of ajoint stock company, involving companies with a combined value of assets orannual revenues, exceeding a certain threshold under Russian AccountingStandards, or companies registered as having more than a 35% share of a certaincommodity market, and which would result in a shareholder (or a group of affiliatedshareholders) holding more than 25%, 50% or 75% of the voting capital stock ofsuch company, or in a transfer between such companies of assets or rights toassets, the value of which exceeds a certain amount, must be approved inadvance by the Federal Antimonopoly Service.

 

**Disclosureof Ownership**

** **

Aholder of our common shares is required to disclose information concerning itsholdings in the following cases:

 

·      the holder acquires 20% or more of our common shares;

 

·      the holder increases its percentage holding of our common shares to a level inexcess of 5% (or an integral multiple thereof) higher than 20% thereof; and

 

·      the holder 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.

 

EffectiveJuly 1, 2006, a holder of our common shares is required to publiclydisclose an acquisition of 5% or more of the outstanding common shares of thecompany, as well any change in the amount of common shares held by such holder,if as a result of such change the 

 

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percentage of commonshares held by the holder becomes greater or lesser than 5, 10, 15, 20, 25, 30,50 or 75 percent of the outstanding common shares of the company.

 

**Notificationof Foreign Ownership**

** **

Foreignpersons registered as individual entrepreneurs in Russia who acquire shares ina Russian joint stock company and foreign companies that acquire shares in aRussian joint stock company may need to notify the Russian tax authoritieswithin one month following such acquisition. However, the procedure ofnotifying the Russian tax authorities by foreign companies that are notregistered with such tax authorities at the time of their share acquisitionremains unclear.

 

**C.  Material Contracts**

** **

Thefollowing is a description of contracts that have been entered into by usand/or our subsidiaries or shareholders that may be material to our business.

 

**LoanAgreement relating to the Loan Participation Notes and Guarantees**

** **

On April 25, 2008, we entered into a syndicatedloan agreement with ING Bank N.V., ABN Amro N.V. and CALYON as mandated leadarrangers, pursuant to which mandated lead arrangers and syndicate lent to us aprincipal amount of $250 million on May 08, 2008. The loan matures onApril 25, 2011, and interest is payable by us quarterly in arrears at anannual rate of LIBOR+1.75%.

 

The above-mentioned loan is unconditionally andirrevocably guaranteed by Wimm-Bill-Dann and Wimm-Bill-Dann Beverages pursuantto guarantees dated April 25, 2008 entered into with ING Bank N.V. as theagent.

 

Both the loan agreement and the guarantees aregoverned by English law. In the loan agreement, we agreed to certain covenantsin respect of, among other things, liens, asset sales, transactions withaffiliates and related persons, change of control, mergers and similartransactions, limitation on dividends or other payments affecting oursubsidiaries and maintenance of certain ratios. In the guaranteesWimm-Bill-Dann and Wimm-Bill-Dann Beverages agreed to similar covenants.

 

**Ruble Bonds**

** **

On December 21, 2005, we issued five-year, 3.0million non-convertible ruble denominated notes at a face value of 1,000 rubleseach. The issue raised a total of approximately $104.2 million at the exchangerate as of December 31, 2005. The notes are redeemable by us onDecember 15, 2010. The issue was priced at par with a coupon of 9% payablesemi-annually.

 

In March and April 2008, WBD Foods issued Russianinterest-bearing, non-convertible, paid to the bearer bonds series 03 withnominal value 1,000 rubles per bond in the aggregate amount of 5.0 millionbonds, repayable on the 1820th day from the date of issuance. Thecoupon rate of the bonds was determined by the Board of Directors on the basisof a tender and constitutes 9.3% annually.

 

**Tetra PakAgreements**

** **

On January 1, 2008, Wimm-Bill-Dann (formerlyLianozovsky Dairy Plant) entered into a supply agreement to purchase packagesfor our milk and juice products from Tetra Pak CJSC. The contract terminates onDecember 31, 2008. The total amount of our contracted purchases isestimated at approximately €140.0 million, excluding VAT.

 

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**Amendedand Restated Partnership and Cooperation Agreement**

** **

Ourcurrent shareholders Gavril Yushvaev, Mikhail Dubinin, Sergei Plastinin,Alexander Orlov, David Iakobachvili, Mikhail Vishnyakov, Viktor Evdokimov andI.M. Arteks Holdings Limited are parties to an Amended and Restated Partnershipand Cooperation Agreement which requires the parties to vote the same way, aswell as:

 

*Independent Directors.  *The parties tothe agreement undertake to use their best efforts to ensure that a majority ofour directors are “independent.” A director is considered “independent” if thatperson is not:

 

·      our employee or an employee or director of any of our subsidiaries;

 

·      a party to the agreement;

 

·      an employee or director of a party to the agreement; a family member of a partyto the agreement; a person or entity controlled by a party to the agreement;any other 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

 

·      a person or entity controlled by any family member of a party to the agreementor a person or entity controlled by any employee or director of a party to theagreement.

 

*Voting.  *The parties to theagreement are required to vote all of our shares that they own in the same way.In order to determine how the parties will vote, the agreement requires them toattempt to agree unanimously on a single voting position on each item on theagenda for a shareholders’ meeting. If they are unable to do so, then thefollowing procedures are followed:

 

·      The parties will vote their shares as determined by parties holding atwo-thirds majority of the shares held by the parties;

 

·      If there is no two-thirds majority among the parties, then the parties willvote their shares consistent with the recommendation of the majority ofindividuals who are on our board of directors; and

 

·      If no voting position can be determined using the procedures noted above, thenthe parties will abstain from voting on that issue, in which case a quorum willnot be present under Russian law and the issue would fail to be adopted.

 

*Third-Party Beneficiaries.  *Beneficial ownersof our ADSs are third-party beneficiaries of the agreement and are entitled toenforce and bring actions in respect of the agreement. An action may only bebrought, however, if beneficial owners of ADSs constituting more than 50% ofour outstanding ADSs, excluding any ADSs held by the parties to the agreement,are parties to such action.

 

*Dispute Resolution.  *The governing lawof the agreement is the law of the State of New York. Any dispute, controversyor cause of action brought arising under the agreement will be settled byarbitration under the Commercial Arbitration Rules of the AmericanArbitration Association. Any cause of action brought by beneficial owners ofmore than 50% of the outstanding ADSs, excluding any ADSs held by parties tothe agreement, at the option of these owners, may be brought in arbitrationunder the Commercial Arbitration Rules of the American ArbitrationAssociation or may be litigated in the federal or state courts in the Boroughof Manhattan. The parties to the agreement expect to appoint CT CorporationSystem, 111 Eighth Avenue, New York, New York 10011, as agent for service ofprocess in New York.

 

*Term.  *The agreement may not beterminated until the earlier to occur of:

 

·      any party to the agreement owning all of our issued and outstanding shares;

 

·      we are liquidated pursuant to the laws of the Russian Federation; or

 

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·      January 16, 2004 (provided that a party / the parties give 30 days’prior written notice).

 

Uponthe occurrence of the first two events described above, the agreementautomatically terminates. Otherwise, the agreement continues in full force andeffect until terminated by any party to the agreement by giving 30 days’prior written notice to all other parties to the agreement and to us. See “Item3. Key Information—D. Risk Factors—Risks Relating to Our Business andIndustry—We are controlled by a group of shareholders whose interests couldconflict with those of the holders of our securities.”

 

**D.  Exchange Controls**

** **

TheFederal Law on Currency Regulation and Currency Control which came into effectas of June 18, 2004, sets forth certain restrictions on settlementsbetween residents of Russia with respect to transactions involving foreignsecurities (including ADSs), including requirements for settlement in Russianrubles.

 

**Repatriation of ExportProceeds**

 

Russian companies must repatriate 100% of theirreceivables from the export of goods and services (with a limited number ofexceptions concerning, in particular, certain types of secured financing)within seven days of the date on which they were received (also with a limitednumber of exceptions).

 

**Restrictions on theremittance of dividends, interest or other payments to non-residents**

 

TheFederal Law on Foreign Investments in the Russian Federation of July 9,1999, specifically guarantees foreign investors the right to repatriate theirearnings from Russian investments. However, the evolving Russian exchangecontrol regime may affect your ability to do so. Ruble dividends on common sharesmay be paid to the depositary or its nominee and converted into U.S. dollars bythe depositary for distribution to owners of ADSs without restriction. Also,ADSs may be sold by non-residents of Russia for U.S. dollars outside Russiawithout regard to Russian currency control laws as long as the buyer is not aRussian resident for currency control purposes. However, the ability to convertrubles into U.S. dollars is also subject to the availability of U.S. dollars inRussia’s currency markets. Although there is an existing market within Russiafor the conversion of rubles into U.S. dollars, including the interbankcurrency exchange and over-the-counter and currency futures markets, thefurther development of this market is uncertain. At present, there is no marketfor the conversion of rubles into foreign currencies outside of Russia and alimited emerging market in which to hedge ruble and ruble-denominatedinvestments.

 

**E.  Taxation**

** **

Thefollowing discussion describes the material United States federal and Russianincome and withholding tax consequences to you if you are a U.S. holder(generally, a “United States person,” as the term is defined in the UnitedStates Internal Revenue Code of 1986, as amended (the “Code”)) of common stockor ADSs and a resident of the United States for purposes of 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 tax treaty”)and are fully eligible for benefits under the United States-Russia income taxtreaty. Subject to certain provisions of the United States-Russia income taxtreaty relating to limitations on benefits, you generally will be a resident ofthe United States for treaty purposes that is entitled to treaty benefits ifyou are:

 

·      liable, under the laws of the United States, to U.S. tax (other than taxes inrespect only of income from sources in the United States or capital situatedtherein) by reason of your domicile, residence, citizenship, place ofincorporation, or any other similar 

 

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criterion (and, for income derived by a partnership,trust or estate, residence is determined in accordance with the residence ofthe person liable to tax with respect to such income); and

 

·      not also a resident of the Russian Federation for purposes of the UnitedStates-Russia income tax treaty.

 

Thebenefits under the United States-Russia income tax treaty discussed in thisdocument generally are not available to U.S. persons who hold ADSs or commonstock in connection with the conduct of a business in the Russian Federationthrough a permanent establishment as defined in the United States-Russia incometax treaty. Subject to certain exceptions, a U.S. person’s permanentestablishment under the United States-Russia income tax treaty is a fixed placeof business through which such person carries on business activities in theRussian Federation (generally including, but not limited to, a place ofmanagement, a branch, an office, and a factory). Under certain circumstances, aU.S. person may be deemed to have a permanent establishment in the RussianFederation as a result of activities carried on in the Russian Federationthrough agents of the U.S. person. This summary does not address the treatmentof holders described in this paragraph.

 

Thefollowing discussion is based on:

 

·      the Code, the Treasury regulations promulgated thereunder, and judicial andadministrative interpretations thereof;

 

·      Russian legislation; and

 

·      the United States-Russia income tax treaty (and judicial and administrativeinterpretations thereof);

 

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.

 

Webelieve, and the following discussion assumes, that for United States federalincome tax purposes, we were not a passive foreign investment company for thetaxable year ending in 2007, we will not be a passive foreign investmentcompany for the current taxable year and we will not become a passive foreigninvestment company in the future. However, passive foreign investment companydeterminations are made annually and may involve facts that are not within ourcontrol. If we were to be a passive foreign investment company, materiallyadverse tax consequences could result for investors who are “United Statespersons” as defined in the Code.

 

Thefollowing discussion is not intended as tax advice to any particular investor.It is also not a complete analysis or listing of all potential United Statesfederal or Russian income and withholding tax consequences to you of ownershipof common stock or ADSs. We urge you to consult your own tax adviser regardingthe specific United States federal, state, and local and Russian taxconsequences of the ownership and disposition of the common stock or ADSs underyour own particular factual circumstances.

 

**RussianIncome and Withholding Tax Considerations**

** **

TheRussian tax rules applicable to U.S. holders are characterized by significantuncertainties and limited interpretive guidance. Russian tax authorities haveprovided limited guidance regarding the treatment of ADS arrangements, andthere can be no certainty as to how the Russian tax authorities will ultimatelytreat those arrangements. In 2005 and 2006, the Russian Ministry of Financestated that ADS holders should be treated as the beneficial owners of theunderlying shares for purposes of the double tax treaty provisions applicableto 

 

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taxation of dividendincome from the underlying shares. However, double tax treaty relief isavailable only if, before the transfer of dividends to the depository, thelatter has provided the issuer with a list of ADS holders accompanied by eachholder’s tax residency certificate (confirmation of the country of taxresidence). It is currently unclear whether depositories will be willing orable to provide residency certificates for ADS holders or implement proceduresfor holders to benefit from applicable tax treaties. Thus, while a U.S. holdermay technically be entitled to benefit from the provisions of the UnitedStates-Russia income tax treaty, in practice such relief may be difficult orimpossible to obtain.

 

Russiantax law and procedures are also not well developed, and local tax inspectorshave considerable autonomy and often interpret tax rules without regard tothe rule of law. Both the substantive provisions of Russian tax law andthe interpretation and application of those provisions by the Russian taxauthorities may be subject to more rapid and unpredictable change than injurisdictions with more developed capital markets.

 

Currently,the Russian government is in the process of amending the Russian Tax Code, butit is unclear when this process will be completed and how U.S. holders would beaffected. As of January 1, 1999, Part 1 (General) of the Tax Codewent into effect. This law defines the general principles of taxation inRussia, defines the legal status of taxpayers and tax agencies and determinesgeneral rules of tax filings and tax control, as well as procedures forchallenging tax agencies. Part 1 also specifies all the taxes that can beimposed by federal and local authorities. Further, on January 1, 2001,Part 2 of the Tax Code went into effect, providing a description of themost significant taxes, and several additional chapters of the Tax Code as wellas significant amendments became effective during the subsequent years.

 

**Taxationof Dividends**

** **

Dividendspayable to U.S. holders generally will be subject to Russian withholding tax ata 15% rate for legal entities (including U.S. corporations, partnerships orother entities) and for individuals. This tax may be reduced to 5% or 10% underthe United States-Russia income tax treaty for U.S. holders; a 5% rate appliesfor U.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 Treaty Procedures.”

 

Ifthe 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 tax treatythen would be required to file claims for refund within three years with theRussian tax authorities. There is significant uncertainty regarding theavailability and timing of such refunds.

 

**Taxationof Capital Gains**

** **

U.S.holders generally should not be subject to any Russian income or withholdingtaxes in connection with the sale, exchange, or other disposition of ADSs orcommon stock 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 common stock by a U.S. holder that is alegal entity to Russian residents or persons other than Russian residents whoconduct a business in Russia through a permanent establishment or are taxregistered in Russia based on other grounds may be subject to Russian income orwithholding taxes. Specifically, the purchaser may be required to withhold 20%of the purchase price (or 24% of the gain if the seller can confirm the costbasis of the security in accordance with Russian rules) if more than 50% of ourassets consist of immovable property located in Russia. Regardless of theresidence of the purchaser, a U.S. holder that is a legal entity should not besubject to any Russian income or withholding taxes in connection with the sale,exchange, or other 

 

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disposition of ADSs ifimmovable property constitutes 50% or less of our assets or if ADSs are soldvia foreign exchanges where they are legally circulated.

 

Salesor other dispositions of ADSs or common stock by U.S. holders who areindividuals to Russian residents or persons other than Russian residents whoconduct business in Russia through a permanent establishment or are taxregistered in Russia based on other grounds may be subject to Russian income orwithholding taxes, and for such a sale by a U.S. holder, the purchaser may berequired to withhold 30% of any gain realized on the sale.

 

U.S.holders may be able to claim the benefits of a reduced rate of withholdingunder the United States-Russia income tax treaty on the disposition of commonstock or ADSs to Russian residents, or obtain a refund of any withheld amountsat rates different from those provided in the treaty, by relying on the UnitedStates-Russia income tax treaty and complying with the appropriate proceduresdescribed below.

 

**UnitedStates-Russia Income Tax Treaty Procedures**

** **

Undercurrent rules, to claim the benefit of a reduced rate of withholding under theUnited States-Russia income tax treaty, a non-resident generally must provideofficial certification from the U.S. tax authorities of eligibility for thetreaty benefits in the manner required by Russian law.

 

AU.S. holder may obtain the appropriate certification by mailing completedforms, together with the holder’s name, taxpayer identification number, the taxperiod for which certification is required and other applicable information tothe United States Internal Revenue Service. The procedures for obtainingcertification are described in greater detail in Internal Revenue ServicePublication 686 and in the instructions to Internal Revenue Service Form 8802.As obtaining the required certification from the Internal Revenue Service maytake at least six to eight weeks, U.S. holders should apply for suchcertification as soon as possible.

 

Iftax is withheld by a Russian resident on dividends or other amounts at a ratedifferent from that provided in the tax treaty, a U.S. holder may apply for atax refund by filing a package of documents with the Russian local taxinspectorate to which the withholding tax was remitted within three years fromthe withholding date for U.S. holders which are legal entities, and within oneyear from the end of the year in which the withholding occurred for individual U.S.holders. The package should include the appropriate form (1011DT (2002) fornon-dividend income and 1012DT (2002) for dividend income), confirmations ofresidence of the foreign holder (IRS Form 6166), a copy of the agreementor other documents substantiating the payment of income, documents confirmingthe beneficial ownership of the dividends recipient and the transfer of tax tothe budget. Under the provisions of the Tax Code, the refund of the tax shouldbe effected within one month after the submission of the documents. However,procedures for processing such claims have not been clearly established, andthere is significant uncertainty regarding the availability and timing of suchrefunds.

 

Neitherthe depositary nor us has or will have any obligation to assist an ADS holderwith the completion and filing of any tax forms.

 

**UnitedStates Federal Income Tax Considerations**

** **

Thefollowing is a general description of the material United States federal incometax consequences that apply to you if you are, for United States federal incometax purposes, a beneficial owner of ADSs or common stock who is a citizen orresident of the United States, a corporation (including any entity treated as acorporation for United States federal income tax purposes) created or organizedin or under the laws of the United States, any State thereof or the District ofColumbia, an estate the income of which is subject to U.S. tax regardless ofits source, or a trust, if a United States court can exercise primarysupervision over the administration of the trust and one or more United Statespersons can control all substantial trust decisions, or if the trust was inexistence on August 20, 1996 and has properly elected to 

 

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continue to be treatedas a United States person. If a partnership (including any entity treated as apartnership for United States federal income tax purposes) is a beneficialowner of ADSs or common stock, the United States federal income tax treatmentof a partner in the partnership will generally depend on the status of thepartner and the activities of the partnership. Since your United States federalincome and withholding tax treatment may vary depending upon your particularsituation, you may be subject to special rules not discussed below.Special rules will apply, for example, if you are:

 

·      an insurance company;

 

·      a tax-exempt organization;

 

·      a financial institution;

 

·      a person subject to the alternative minimum tax;

 

·      a person who is a broker-dealer in securities;

 

·      an S corporation;

 

·      an expatriate subject to Section 877 of the Code;

 

·      an owner of, directly, indirectly or by attribution, 10% or more of theoutstanding shares of the Company’s common stock; or

 

·      an owner holding ADSs or common stock as part of a hedge, straddle, syntheticsecurity or conversion transaction.

 

In addition, thissummary is generally limited to persons holding common stock or ADSs as“capital assets” within the meaning of Section 1221 of the Code and whosefunctional currency is the U.S. dollar. The discussion below also does notaddress the effect of any United States state or local tax law or foreign taxlaw.

 

Forpurposes of applying United States federal income and withholding tax law, aholder of an ADS should be treated as the owner of the underlying shares ofcommon stock represented by that ADS.

 

TheUnited States Treasury has expressed concerns that parties to whom ADSs arepre-released may be taking actions that are inconsistent with the claiming, byUnited States persons holding ADSs, of foreign tax credits for United Statesfederal income tax purposes. Such actions would also be inconsistent with theclaiming of the reduced rate of tax applicable to dividends received by certainnon-corporate United States persons, as described below. Accordingly, theanalysis of the creditability of Russian taxes described below, and theavailability of the reduced tax rate for dividends received by certainnon-corporate United States persons, could be affected by future actions thatmay be taken by the United States Treasury.

 

**Taxationof Dividends on Common Stock or ADSs**

** **

ForUnited States federal income tax purposes, the gross amount of a distribution,including any Russian withholding taxes, with respect to common stock or ADSswill be treated as a taxable dividend to the extent of our current andaccumulated earnings and profits, computed in accordance with United Statesfederal income tax principles. For taxable years beginning beforeJanuary 1, 2011, if you are a non-corporate taxpayer, such dividends maybe taxed at the lower applicable capital gains rate provided (1) certainholding period requirements are satisfied, (2) either (a) our ADSs continueto be listed on the New York Stock Exchange (or other national securitiesexchange that is registered under section 6 of the Securities Exchange Actof 1934, as amended, or the Nasdaq Stock Market) or (b) we are eligiblefor the benefits of the United States-Russia income tax treaty, and (3) weare not, for the taxable year in which the dividend was paid, or in thepreceding taxable year, a “passive foreign investment company.” Non-corporateU.S. holders are strongly urged to consult their own tax advisors as to theapplicability of the lower capital gains rate to dividends received withrespect to ADSs or shares of common stock. Distributions in excess of ourcurrent and 

 

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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 therules described above. If you are a corporation, you will not be allowed adeduction for dividends received in respect of distributions on common stock orADSs, which is generally available for dividends paid by U.S. corporations.

 

Ifa dividend distribution is paid in rubles, the amount includible in income willbe the U.S. dollar value of the dividend, calculated using the exchange rate ineffect on the date the dividend is includible in income by you, regardless ofwhether the payment is actually converted into U.S. dollars. Any gain or lossresulting from currency exchange rate fluctuations during the period from thedate the dividend is includible in your income to the date the rubles areconverted into U.S. dollars will be treated as ordinary income or loss. You maybe required to recognize foreign currency gain or loss on the receipt of arefund of Russian withholding tax pursuant to the United States-Russia incometax treaty to the extent the United States dollar value of the refund differsfrom the dollar equivalent of that amount on the date of receipt of theunderlying dividend.

 

Russianwithholding tax at the rate applicable to you under the United States-Russiaincome tax treaty should be treated as a foreign income tax that, subject togenerally applicable limitations and conditions, is eligible for credit againstyour U.S. federal income tax liability or, at your election, may be deducted incomputing taxable income. If, however, the holder of an ADS is not treated asthe owner of the underlying common stock represented by the ADS for U.S.federal income tax purposes, then Russian withholding tax would not be treatedas a foreign income tax eligible for credit as described in the precedingsentence. If Russian tax is withheld at a rate in excess of the rate applicableto you under the United States-Russia income tax treaty, you may not beentitled to credits for the excess amount, even though the procedures forclaiming refunds and the practical likelihood that refunds will be madeavailable in a timely fashion are uncertain.

 

ForUnited States foreign tax credit purposes, a dividend distribution will betreated as foreign source income and will generally be classified as “passivecategory income” but could, in the case of certain U.S. holders, constitute“general category income” for taxable years beginning after December 31, 2006.The rules relating to the determination of the foreign tax credit, ordeduction in lieu of the foreign tax credit, are complex and you should consultyour own tax advisors with respect to those rules.

 

**Taxationon Sale or Exchange of Common Stock or ADSs**

** **

Thesale of common stock or ADSs will generally result in the recognition of gainor loss in an amount equal to the difference between the amount realized on thesale and your adjusted basis in such common stock or ADSs. That gain or losswill be capital gain or loss if the common stock or ADSs are capital assets inyour hands and will be long-term capital gain or loss if the common stock orADSs have been held for more than one year. If you are an individual, suchrealized long-term capital gain is generally subject to a reduced rate ofUnited States federal income tax. Limitations may apply to your ability tooffset capital losses against ordinary income.

 

Depositsand withdrawals of common stock by you in exchange for ADSs will not result inthe realization of gain or loss for U.S. federal income tax purposes.

 

Gainrealized on the sale of common stock or ADSs will generally be treated as U.S.source income and therefore the use of foreign tax credits relating to anyRussian taxes imposed upon such sale may be limited. You are strongly urged toconsult your own tax 

 

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advisors as to theavailability of tax credits for any Russian taxes withheld on the sale ofcommon stock or ADSs.

 

**InformationReporting and Backup Withholding**

** **

Dividendsand proceeds from the sale or other disposition of common stock or ADSs thatare paid in the United States or by a U.S.-related financial intermediary willbe subject to U.S. information reporting rules and U.S. backup withholdingtax, unless you are a corporation or other exempt recipient. In addition, youwill not be subject to backup withholding if you provide your taxpayeridentification number and certify that no loss of exemption from backupwithholding has occurred. Holders that are not U.S. persons generally are notsubject to information reporting or backup withholding, but such holders may berequired to provide certification as to their non-U.S. status.

 

**F.  Dividends and Paying Agents**

** **

Notapplicable.

 

**G.  Statement by Experts**

** **

Notapplicable.

 

**H.  Documents on Display**

** **

Thedocuments that are exhibits to or incorporated by reference in this documentcan be read at the U.S. Securities and Exchange Commission’s public referencefacilities at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549.You may obtain information on the operation of the Public ReferenceRoom by calling the SEC at 1-800-SEC-0330 or, from outside the UnitedStates, at 1-202-942-8090. Copies may also be obtained from the SEC website atwww.sec.gov.

 

**I.  Subsidiary Information**

** **

Notapplicable.

 

## ***Item11.   Quantitative and Qualitative Disclosures about Market Risk***

## *** ***

Weare exposed to market risk from changes in both foreign currency exchange ratesand interest rates. Foreign currency exchange risks exist to the extent thatour revenues are primarily denominated in Russian rubles and our costs aredenominated in currencies other than Russian rubles and our foreign currencydenominated debt. We are subject to market risk deriving from changes ininterest rates, which may affect the cost of our financing. We do not usefinancial instruments such as foreign exchange forward contracts, foreigncurrency options, interest rate swaps and forward rate agreements, to managethese market risks, because the market for these types of financial instrumentsin Russia is not well developed and the costs of these instruments isrelatively high.

 

**InterestRate Risk**

** **

Ourinterest rate exposure results mainly from debt obligations. AtDecember 31, 2007, we had debt amounting to $578.9 million, whichcomprised variable-rate borrowings of $86.7 million and fixed-rateborrowings of $492.2 million. See also “Item 5. Operating and Financial Reviewand Prospects—E. Contractual Obligations.”

 

Thefollowing tables present our variable and fixed-rate debt obligations as ofDecember 31, 2007 by expected maturity dates and related weighted averageinterest rates.

 

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| ** **                   | ** ** | **Expected Maturity Date as of December 31, 2007** | ** ** |
|------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **Currency**                                                                          | ** ** | **200****8** | ** ** | **200****9** | ** ** | **20****10** | ** ** | **201****1** | ** ** | **201****2**** and********thereafter** | ** ** | **Total** | ** ** | **Fair********value** | ** ** | **Interest********rates at********December 31,********200****7** | ** ** |
| ** **                   | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Variable-rate loans(1)**   |       | Rubles                                                                                |       | $ | 86,734 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 86,734 |   | $ | 86,734 |   | 7.57 | % |
| **Total variable rate debt** |       |                                                                                  |       | $ | 86,734 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 86,734 |   | $ | 86,734 |   | 7.57 | % |

 

----

(1)           Our variable rate loans are linked to Mosprime rate

 
| ** **                 | ** ** | **Expected Maturity Date as of December 31, 2007** | ** ** |
|----------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                 | ** ** | **Currency**                                                                          | ** ** | **200****8** | ** ** | **200****9** | ** ** | **20****10** | ** ** | **201****1** | ** ** | **201****2**** and********thereafter** | ** ** | **Total** | ** ** | **Fair********value** | ** ** | **Interest********rates at********December 31,********200****7** | ** ** |
| ** **                 | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Fixed-rate  loan**       |       | Rubles                                                                                |       | $ | 17,605 |   | $ | 5,607 |   | $ | 9,095 |   | $ | 5,527 |   | $ | 10,101 |   | $ | 47,935 |   | $ | 41,228 |   | 5.17 | % |
|                       |       | U.S. dollars                                                                          |       | 8,913 |   | 5,248 |   | 968 |   | 176 |   |   |   | 15,305 |   | 15,305 |   | 4.47 | % |
|                       |       | Euro                                                                                  |       | 7,753 |   | 8,422 |   | 4,900 |   | 1,650 |   | 309 |   | 23,034 |   | 23,034 |   | 5.26 | % |
| **Fixed-rate  Notes**      |       | U.S. dollars                                                                          |       | 300,000 |   | — |   | — |   | — |   | — |   | 300,000 |   | 300,000 |   | 8.0 | % |
|                       |       | Rubles                                                                                |       | — |   | — |   | 105,922 |   | — |   | — |   | 105,922 |   | 108,836 |   | 9.0 | % |
| **Total  fixed rate debt** |       |                                                                                  |       | $ | 334,271 |   | $ | 19,277 |   | $ | 120,885 |   | $ | 7,353 |   | $ | 10,410 |   | $ | 492,196 |   | $ | 488,403 |   | 7.7 | % |

 

 During2007, our fixed rate debt increased to $492.2 million and our variablerate debt increased to $86.7 million as a result of our incurrence ofadditional short-term and long-term debt. See Notes 13, 14 and 15 to ourConsolidated Financial Statements included under “Item 18. FinancialStatements.”

 

Thefollowing tables present our variable and fixed-rate debt obligations as ofDecember 31, 2006 by maturity dates and related weighted average interestrates.

 
| ** **                   | ** ** | **Expected Maturity Date as of December 31, 2006** | ** ** |
|------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **Currency**                                                                          | ** ** | **200****7** | ** ** | **200****8** | ** ** | **20****09** | ** ** | **201****0** | ** ** | **201****1**** and********thereafter** | ** ** | **Total** | ** ** | **Fair********value** | ** ** | **Interest********rates at********December 31,********200****6** | ** ** |
| ** **                   | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Variable-rate loans(1)**   |       | Rubles                                                                                |       | $ | 83,753 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 83,753 |   | $ | 83,753 |   | 7.83 | % |
| **Total variable rate debt** |       |                                                                                  |       | $ | 83,753 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 83,753 |   | $ | 83,753 |   | 7.83 |  % |

 

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| ** **                 | ** ** | **Expected Maturity Date as of December 31, 2006** | ** ** |
|----------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                 | ** ** | **Currency**                                                                          | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011 and****t****hereafter** | ** ** | **Total** | ** ** | **Fair value** | ** ** | **Interest********rates at********December 31,********2006** | ** ** |
| ** **                 | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Fixed-rate  loan**       |       | Rubles                                                                                |       | $ | 43,276 |   | $ | 5,306 |   | $ | 5,117 |   | $ | 7,941 |   | $ | 6,149 |   | $ | 67,789 |   | $ | 67,789 |   | 7.54 | % |
|                       |       | U.S. dollars                                                                          |       | 8,129 |   | 6,254 |   | 5,243 |   | 962 |   | 155 |   | 21,013 |   | 21,013 |   | 4.11 | % |
|                       |       | Euro                                                                                  |       | 8,112 |   | 5,238 |   | 4,384 |   | 2,611 |   | 1,357 |   | 21,702 |   | 21,702 |   | 5.4 | % |
| **Fixed-rate  Notes**      |       | U.S. dollars                                                                          |       | — |   | 150,000 |   | — |   | — |   | — |   | 150,000 |   | 150,000 |   | 8.5 | % |
|                       |       | Rubles                                                                                |       | — |   | — |   | — |   | 98,742 |   | — |   | 98,742 |   | 98,742 |   | 9.0 | % |
| **Total  fixed rate debt** |       |                                                                                  |       | $ | 59,517 |   | $ | 167,068 |   | $ | 14,744 |   | $ | 110,256 |   | $ | 7,661 |   | $ | 359,246 |   | $ | 359,246 |   | 8.1 | % |

 

Our fixed rate debt increased by $41.1 to$359.2 million and our variable rate debt increased by $30.24 to$83.6 million as a result of our incurrence of additional short-term andlong-term debt. See Notes 13, 14 and 15 to our Consolidated FinancialStatements included under “Item 18. Financial Statements.”

 

**ForeignCurrency Risk**

** **

Ourforeign currency exchange risk exposure results from the fact that our revenuesare primarily denominated in Russian rubles and a significant portion of ourcosts is denominated in currencies other than Russian rubles and net monetaryliability position from our foreign currency denominated debt. Thus, we incurremeasurement gains as the Russian ruble appreciates against other currenciesand losses as the ruble depreciates against other currencies. Managementbelieves that monetary assets and liabilities denominated in foreigncurrencies, other then foreign currency-denominated debt, are not significantfrom a foreign currency risk perspective.

 

Asof December 31, 2007, our U.S. dollar debt position amounted to $315.3million and our euro debt position amounted to $23.0 million, compared to aU.S. dollar debt position of $171.0 million and euro debt position of$21.7 million as of December 31, 2006.

 
| ** **     | ** ** | **Expected Maturity Date as of December 31, 2007** | ** ** |
|----------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **     | ** ** | **Currency**                                                                          | ** ** | **200****8** | ** ** | **200****9** | ** ** | **20****10** | ** ** | **201****1** | ** ** | **201****2**** and********thereafter** | ** ** | **Total** | ** ** | **Fair ********value** | ** ** |
| ** **     | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Debt**       |       | Rubles                                                                                |       | $ | 104,339 |   | $ | 5,607 |   | $ | 115,017 |   | $ | 5,527 |   | $ | 10,101 |   | $ | 240,591 |   | $ | 236,798 |   |
|           |       | U.S. dollars                                                                          |       | 308,913 |   | 5,248 |   | 968 |   | 176 |   | 0 |   | 315,305 |   | 315,305 |   |
|           |       | Euro                                                                                  |       | 7,753 |   | 8,422 |   | 4,900 |   | 1,650 |   | 309 |   | 23,034 |   | 23,034 |   |
| **Total debt** |       |                                                                                  |       | $ | 421,005 |   | $ | 19,277 |   | $ | 120,885 |   | $ | 7,353 |   | $ | 10,410 |   | $ | 578,930 |   | $ | 575,137 |   |
|                |            |                                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **     | ** ** | **Expected Maturity Date as of December 31, 2006** | ** ** |
|----------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **     | ** ** | **Currency**                                                                          | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011 and********thereafter** | ** ** | **Total** | ** ** | **Fair********value** | ** ** |
| ** **     | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Debt**       |       | Rubles                                                                                |       | $ | 127,029 |   | $ | 5,306 |   | $ | 5,117 |   | $ | 106,683 |   | $ | 6,149 |   | $ | 250,284 |   | $ | 250,284 |   |
|           |       | U.S. dollars                                                                          |       | 8,129 |   | 156,524 |   | 5,243 |   | 962 |   | 155 |   | 171,013 |   | 171,013 |   |
|           |       | Euro                                                                                  |       | 8,112 |   | 5238 |   | 4,384 |   | 2,611 |   | 1,357 |   | 21,702 |   | 21,702 |   |
| **Total debt** |       |                                                                                  |       | $ | 143,270 |   | $ | 167,068 |   | $ | 14,744 |   | $ | 110,256 |   | $ | 7,661 |   | $ | 442,999 |   | $ | 442,999 |   |

 

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 During2007, the Russian ruble appreciated against the U.S. dollar and the euro. Weincurred a currency remeasurement gain of $18.1 million, which was comprised ofgains and losses from euro- and U.S. dollar denominated obligations,respectively, as well as remeasurement gains from our U.S. dollar-denominatednotes. For purposes of accounting for our U.S. dollar-denominated notes, weused the exchange rate as of December 31, 2007, which appreciated by 6.7%against the December 31, 2006 exchange rate resulting in a currencyremeasurement gain.

 

During2006, the Russian ruble appreciated against the U.S. dollar and the euro. Weincurred a currency remeasurement gain of $10.3 million, which was comprised ofgains and losses from euro- and U.S. dollar denominated obligations,respectively, as well as remeasurement gains from our U.S. dollar-denominatednotes. For purposes of accounting for our U.S. dollar-denominated notes, weused the exchange rate as of December 31, 2006, which appreciatednominally by 8.5% against the December 31, 2005 exchange rate resulting ina currency remeasurement gain.

 

Webelieve that the carrying amounts of cash and cash equivalents, accountsreceivable, accounts payable and short-term loans reported in the consolidatedbalance sheet approximate their fair values due to the short maturity of thoseinstruments.

 

Seealso “Item 3. Key Information—A. Selected Financial Data—Exchange Rates andInflation.”

 

## ***Item12.     Description of Securities Other than EquitySecurities***

## *** ***

Notapplicable.

 

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**PART II**

 

## ***Item13.     Defaults, Dividend Arrearages andDelinquencies***

 

None.

 

## ***Item14.     Material Modifications to the Rights of SecurityHolders and Use of Proceeds***

 

Notapplicable.

 

## ***Item15.    Controls and Procedures***

 

(a) Disclosure Controls and Procedures.

 

As required by Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, management has evaluated, with theparticipation of our chief executive officer and chief financial officer, theeffectiveness of our disclosure controls and procedures as of the end of theperiod covered by this report. Disclosure controls and procedures refer tocontrols and other procedures designed to ensure that information required tobe disclosed in the reports we file or submit under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in the rules andforms of the Securities and Exchange Commission. Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by us in our reports that wefile or submit under the Exchange Act is accumulated and communicated tomanagement, including our chief executive officer and chief financial officer,as appropriate to allow timely decisions regarding its required disclosure. Indesigning and evaluating our disclosure controls and procedures, managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management was required to apply its judgment inevaluating and implementing possible controls and procedures.

 

As described below, a material weakness was identifiedin our internal control over financial reporting. The Public Company AccountingOversight Board’s Auditing Standard No. 5 defines a material weakness as adeficiency, or combination of deficiencies, in internal control over financialreporting, such that there is a reasonable possibility that a material misstatementof the Company’s annual or interim financial statements will not be preventedor detected on a timely basis.  As aresult of the material weakness, our chief executive officer and chieffinancial officer have concluded that, as of December 31, 2007, the end ofthe period covered by this report, our disclosure controls and procedures werenot effective at a reasonable assurance level.

 

(b) Management’s Annual Report on InternalControl Over Financial Reporting

 

Management is responsible for establishing andmaintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) underthe Securities Exchange Act.

 

Internal control over financial reporting is a processdesigned by, or under the supervision of, our chief executive officer and chieffinancial officer and effected by our board of directors, management and otherpersonnel, to provide reasonable assurance to our management and the Board ofDirectors regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles and includes those policies and procedures that:

 

·                  pertain to the maintenance of records that in reasonable detailaccurately and fairly reflect the transactions and dispositions of our assets;

 

·                  provide reasonable assurance that transactions are recorded as necessaryto permit preparation of financial statements in accordance with generallyaccepted accounting

 

137

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principles, and that our receipts andexpenditures are being made only in accordance with authorizations of ourmanagement and members of our board of directors; and

 

·                  provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of our assets that could have amaterial effect on our financial statements.

 

Internal control over financial reporting cannotprovide absolute assurance of achieving financial reporting objectives becauseof its inherent limitations.  Internalcontrol over financial reporting is a process that involves human diligence andcompliance and is subject to lapses in judgment and breakdowns resultingfrom human failures. Internal control over financial reporting also can becircumvented by collusion or improper override. Because of such limitations,there is a risk that material misstatements may not be prevented or detected ona timely basis by internal control over financial reporting. However, theseinherent limitations are known features of the financial reporting process, andit is possible to design into the process safeguards to reduce, though noteliminate, this risk.

 

Management assessed the effectiveness of our internalcontrol over financial reporting as of December 31, 2007 in accordancewith the framework set forth in the report of the Treadway Commission’sCommittee of Sponsoring Organizations (COSO), “Internal Control—IntegratedFramework.”

 

As a result of management’s assessment of our internalcontrol over financial reporting as of December 31, 2007, managementconcluded that the following material weakness in our internal control overfinancial reporting existed:

 

*Our financial statement closing process, including transformation ofour statutory financial statements into U.S. GAAP consolidated financialstatements, contains deficiencies severe enough that material errors may occurand may not be detected on a timely basis by management in the normal course ofbusiness.*

* *

Similar toour assessment at December 31, 2006, the material weakness results fromthe fact that there is no comprehensive accounting system in place to supportthe consolidation of our financial statements and the transformation of thestatutory financial statements of our subsidiaries into U.S. GAAP. We also have not retained sufficient accounting personnel with theappropriate level of U.S. GAAP knowledge and experience to ensure thetimeliness and accuracy of both the interim and annual financial statementclosing processes. In addition, certain controls designed to ensure thecompleteness and accuracy of information communicated within the Company on atimely basis did not operate effectively.

 

Because of the existence of this material weakness,management has concluded that our internal control over financial reporting wasineffective as of December 31, 2007.

 

 The Company’sindependent registered public accountants, Ernst & Young LLC, auditedthe consolidated financial statements included in this Annual Report on Form 20-FThe effectiveness of the Company’s internal control over financial reportinghas been audited by Ernst & Young LLC as stated in their reportingappearing below, which expresses an adverse opinion on the effectiveness of theCompany’s internal control over financial reporting as of December 31,2007.

 

(c) Discussion of Remediation Activities

 

We have implemented and continue to implement measuresdesigned to remediate the material weakness and, in the short term, to mitigatethe potential adverse effects of this material weakness.  We are committed to continuing to improve ourinternal control processes

 

138

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and will continue to diligently review our financialreporting controls and procedures in order to ensure our compliance with therequirements of the Sarbanes-Oxley Act and the related rules promulgatedby the SEC.

 

Actionstaken and planned to be taken by management to improve the internal controlover financial reporting include hiring of additional senior level accountingpersonnel for our US GAAP department, improvement of thequarterly financial documentation provided to our US GAAP department by each ofour consolidated subsidiaries and operating facilities,enhancementof internal guidelines of the statutory and U.S. GAAP financial statementsclosing process, including individual procedures and controls, and otherprocedures, to improve the interimand annual financial statement closing process.

 

(d) Report of Independent Registered PublicAccounting Firm

 

**Report of Independent RegisteredPublic Accounting Firm**

** **

The Board of Directors and Shareholders of

 

Wimm-Bill-Dann Foods OJSC

 

We have audited Wimm-Bill-Dann Foods OJSC’s (the Company) internalcontrol over financial reporting as of December 31, 2007, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria).Wimm-Bill-Dann Foods OJSC’s management is responsible for maintaining effectiveinternal control over financial reporting, and for its assessment of theeffectiveness of internal control over financial reporting included in theaccompanying Management’s Annual Report on Internal Control over FinancialReporting.  Our responsibility is toexpress an opinion on the Company’s internal control over financial reportingbased on our audit.

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

139

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Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

A material weakness is a deficiency, or combination of deficiencies, ininternal control over financial reporting, such that there is a reasonablepossibility that a material misstatement of the company’s annual or interim financialstatements will not be prevented or detected on a timely basis. The followingmaterial weakness has been identified and included in management’s assessment.

 

*U.S. GAAP**Financial Statement Close Process*

* *

The Company has both design and operating deficienciesin the controls related to its U.S. GAAP financial statement close process,including transformation of the statutory financial statements into U.S. GAAP,which, in the aggregate, constitutes a material weakness.  The Company did not have sufficient andskilled accounting and finance personnel necessary to timely, consistently andappropriately identify, capture and analyze financially significant informationto close the Company’s books under U.S. GAAP.  Also, theCompany did not have in place a comprehensive accounting system forU.S. GAAP reporting purposes which ensures effective controls over thecompleteness and accuracy of its external reporting in accordance with U.S.GAAP.   Thismaterial weakness resulted in adjustments to several of the Company’ssignificant accounts and disclosures arising from the recording of non-routinetransactions and affecting fixed assets, intangibles assets, capital leaseobligations, and certain routine transactions including depreciation andinterest expense.  While this materialweakness did not result in individually material adjustments to the Company’sconsolidated financial statements, given the deficiencies identified in thefinancial statement close process, there is a reasonable possibility that a material misstatement of the Company’s consolidated financialstatements will not be prevented or detected on a timely basis.

 

This material weakness was considered in determiningthe nature, timing, and extent of audit tests applied in our audit of the 2007financial statements, and this report does not affect our report dated June 25,2008 on those financial statements.

 

In our opinion, because of the effect of the material weaknessdescribed above on the achievement of the objectives of the control criteria, Wimm-Bill-DannFoods OJSC has not maintained effective internal control over financialreporting as of December 31, 2007, based on the COSO criteria.

 

 
| /s/ ERNST & YOUNG LLC |
|--------------------------------|
|                           |
| Moscow, Russia                 |
|                           |
| June 25, 2008             |

 

(e) Changes in Internal Control Over FinancialReporting.

 

Management has evaluated, with the participation ofour chief executive officer and chief financial officer, whether any changes inour internal control over financial reporting that occurred during the periodcovered by this annual report have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.Other than the matters described in this Item 15, there have not been anychanges in internal control over financial reporting that occurred during 2007that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting. Management believes

 

140

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the measures they are taking to remediate the materialweakness will continue to have an impact on our internal control over financialreporting in future periods.

 

## ***Item16A.    Audit Committee Financial Expert***

## *** ***

OurBoard of Directors has determined that Guy de Selliers is an “audit committeefinancial expert” as defined in Item 16A of Form 20-F. Mr. deSelliers is independent in accordance with SEC Rule 10A-3.

 

## ***Item16B.    Code of Ethics***

## *** ***

InJuly 2005, our Board of Directors approved a Code of Ethics that appliesto our employees, including our principal executive officer, principalfinancial officer and principal accounting officer or controller, or personsperforming similar functions, which is posted on our website athttp://www.wbd.com/f_reports/corp_govern/. No waivers of the Code of Ethics havebeen granted.

 

## ***Item16C.   Principal Accountant Fees andServices***

## *** ***

Ernst &Young LLC has served as our independent public accountants for the fiscal yearsended December 31, 2007 and 2006, 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 2007 and 2006, respectively.

 
| ** **         | ** ** | **Year ended December 31,** | ** ** |
|--------------------|------------|--------------------------------------------|------------|
| ** **         | ** ** | **200****7**                               | ** ** | **200****6** | ** ** |
| ** **         | ** ** | **(in U.S. dollars)**            | ** ** |
| Audit Fees         |       | $                                          | 1,440,000  |   | $ | 1,013,096 |   |
| Audit-Related Fees |       | 147,000                                    |       | — |   |
| All Other Fees     |       | —                                     |       | 80,423 |   |
| Total              |       | $                                          | 1,587,000  |   | $ | 1,093,519 |   |

 

Nofees in respect of tax compliance, tax advice or tax planning were paid by usto Ernst & Young during the years ended December 31, 2007 and2006.

 

**AuditFees**

** **

Auditservices consisted of the audit of the consolidated financial statements as ofand for the years ended December 31, 2007 and 2006, the Russian statutoryaudit of stand-alone financial statements prepared in accordance with Russianaccounting principles of Wimm-Bill-Dann Foods OJSC as of and for the yearsended December 31, 2007 and 2006, reviews of the consolidated condensedfinancial statements for the three months ended March 31, 2007 and 2006,the six months ended June 30, 2007 and 2006 and the nine months ended September 30,2007 and 2006 and services performed by our external auditors in connectionwith our Audit Committee meetings and related communications, as well as withtheir review of this annual report on Form 20-F.

 

**Audit-relatedFees**

** **

Audit-relatedservices for the year ended December 31, 2007 consisted of servicesperformed by our external auditors in connection with the issuance of aeurobonds and review of prospectus for ruble bonds.

 

141

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**OtherFees**

** **

Otherservices for the years ended December 31, 2007 and 2006 mainly consistedof advisory services regarding compliance with the Sarbanes-Oxley Act of 2002.

 

**AuditCommittee Pre-Approval Policies and Procedures**

** **

TheSarbanes-Oxley Act of 2002 required that we implement a pre-approval processfor all engagements with our Independent Registered Public Accounting Firm. Incompliance with these requirements, our Audit Committee pre-approves theengagement terms and fees of Ernst & Young for all audit and non-auditservices. The Audit Committee pre-approved the engagement terms and fees ofErnst & Young for all audit and non-audit services for the fiscalyears ended December 31, 2007 and 2006.

 

## ***Item16D.   Exemption from the Listing Standards for Audit Committees***

## *** ***

Notapplicable.

 

## ***Item16E.    Purchases of Equity Securities by the Issuer andAffiliated Purchasers***

## *** ***

Nopurchases were made by or on behalf of us or any affiliated purchaser of sharesor other units of any class of our equity securities during the period coveredby this annual report.

 

142

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**PART III**

** **

## ***Item17.      Financial Statements***

## *** ***

Seeinstead “Item 18. Financial Statements.”

 

## ***Item18.      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,  2007 and 2006                                                    |       | F-3      |
|                                                                                                                  |       |     |
| Consolidated Statements of Income and Comprehensive  Income for the years ended December 31, 2007, 2006 and 2005 |       | F-5      |
|                                                                                                                  |       |     |
| Consolidated Cash Flow Statements for the years ended  December 31, 2007, 2006 and 2005                          |       | F-6      |
|                                                                                                                  |       |     |
| Consolidated Statements of Shareholders’ Equity for  the years ended December 31, 2007, 2006 and 2005       |       | F-8      |
|                                                                                                                  |       |     |
| Notes to the Consolidated Financial Statements                                                                        |       | F-9      |

 

143

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## ***Item19.     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.                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 1.5    |   | Amendment to the charter of Wimm-Bill-Dann Foods  OJSC (English Translation), approved May 30, 2006 is incorporated herein by  reference to Exhibit 1.5 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, 2006 on Form 20-F.                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 1.6    |   | Amendment to the charter of Wimm-Bill-Dann Foods  OJSC (English Translation), approved July 14, 2006 is incorporated herein by  reference to Exhibit 1.6 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, 2006 on Form 20-F.                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 1.7    |   | Amendment to the charter of Wimm-Bill-Dann Foods  OJSC (English Translation), approved October 23, 2006 is incorporated herein  by reference to Exhibit 1.7 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, 2006 on Form 20-F.                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 1.8    |   | Amendment to the charter of Wimm-Bill-Dann Foods  OJSC (English Translation), approved December 15, 2006 is incorporated  herein by reference to Exhibit 1.8 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, 2006 on Form 20-F.                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 1.9    |   | Amendment to the charter of Wimm-Bill-Dann Foods  OJSC (English Translation), approved July 30, 2007                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 1.10   |   | Amendment to the charter of Wimm-Bill-Dann Foods  OJSC (English Translation), approved September 03, 2007                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 1.11   |   | Amendment to the charter of Wimm-Bill-Dann Foods  OJSC (English Translation), approved December 17, 2007                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 1.12   |   | Amendment to the charter of Wimm-Bill-Dann Foods  OJSC (English Translation), approved March 24, 2008                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 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    |   | USD 250 mln Syndicated loan facility agreement dated  April 25, 2008 for OJSC WBD Foods arranged by ABN AMRO BANK N.V.,  CALYON, ING BANK N.V. as mandated lead arrangers with ING BANK N.V.  London branch as Agent.                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.1.1  |   | Guarantee dated April 25, 2008 created by OJSC  WBD as Guarantor in favour of ING BANK N.V.  London branch as Agent.                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.1.2  |   | Guarantee dated April 25, 2008 created by PJSC  WBD Beverages as Guarantor in favour of ING BANK N.V.  London branch as  Agent.                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.2    |   | Engagement Letter, dated June 24, 2008, by and  between CJSC Tetra Pak and OAO Wimm-Bill-Dann and Wimm-Bill-Dann Beverages.                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.3    |   | 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).                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.4    |   | Exchange Agreement No. B-02, dated  April 4, 2001, by and between Lianozovsky Dairy Plant and Mikhail  Vishnyakov is incorporated herein by reference to Exhibit 10.3 to Amendment  No. 2 to the                                                                                                                                                                                  |

 

144

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|   |   | Registration Statement on Form F-1  (Registration No. 333-14278).                                                                                                                                                                                                                          |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                 |
| 4.5    |   | Exchange Agreement No. B-03, dated  April 4, 2001, by and between Lianozovsky 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).        |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 4.6    |   | Exchange Agreement No. B-04, dated  April 4, 2001, by and between Lianozovsky 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).        |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 4.7    |   | Exchange Agreement No. B-05, dated  April 4, 2001, by and between Lianozovsky 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).       |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 4.8    |   | Exchange Agreement No. B-06, dated  April 4, 2001, by and between Lianozovsky 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).        |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 4.9    |   | Exchange Agreement No. B-07, dated  April 4, 2001, by and between Lianozovsky 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).     |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 4.10   |   | Exchange Agreement No. TsK-01, dated  April 5, 2001, by and between Lianozovsky 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).   |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 4.11   |   | Exchange Agreement No. TsK-02, dated  April 5, 2001, by and between Lianozovsky 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).     |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 4.12   |   | Exchange Agreement No. TsK-03, dated  April 5, 2001, by and between Lianozovsky 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).     |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 4.13   |   | Exchange Agreement No. TsK-04, dated April 5,  2001, by and between Lianozovsky 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).    |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 4.14   |   | Exchange Agreement No. TsK-05, dated  April 5, 2001, by and between Lianozovsky 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). |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 4.15   |   | Exchange Agreement No. TsK-06, dated  April 5, 2001, by and between Lianozovsky 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).     |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 4.16   |   | Exchange Agreement No. TsK-07, dated  April 5, 2001, by and between Lianozovsky 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).  |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 4.17   |   | 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).                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                 |
| 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.                                                                                                                                   |

** **

**145**

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** **

**SIGNATURES**

** **

The registrant herebycertifies that it meets all of the requirements for filing on Form 20-Fand that it has duly caused and authorized the undersigned to sign this annualreport on its behalf.

 
|                           | WIMM-BILL-DANN  FOODS OJSC |
|---------------------------|----------------------------|
|                      |                       |
|                      |                       |
| Date:  June 26, 2008 | By:                        | /s/  Tony D. Maher |
|                      | Name:                      | Tony  D. Maher |
|                      | Title:                     | Chief  Executive Officer |

 

146

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**Wimm-Bill-Dann Foods**

** **

**ConsolidatedFinancial Statements**

** **

**Years endedDecember 31, 2007 and 2006**

 

**Contents**

 
| Report of  Independent Registered Public Accounting Firm     | F-2 |
|--------------------------------------------------------------|-----|
| Consolidated  Financial Statements                           | F-1 |
| Consolidated  Balance Sheets                                 | F-3 |
| Consolidated  Statements of Income  and Comprehensive Income | F-5 |
| Consolidated  Statements of Cash Flows                       | F-6 |
| Consolidated  Statements of Shareholders’ Equity        | F-8 |
| Notes to Consolidated Financial Statements                   | F-9 |

 

F-1

----

 

**Report of Independent Registered Public Accounting Firm**

** **

The Board of Directors and Shareholders

Wimm-Bill-Dann Foods

 

We have audited the accompanying consolidated balance sheets ofWimm-Bill-Dann Foods, a Russian Open Joint Stock Company and subsidiaries(collectively “the Company”) as of December 31, 2007 and 2006, and the related consolidatedstatements of income and comprehensive income, shareholders’ equity, and cashflows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluation the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofWimm-Bill-Dann Foods and subsidiaries as of December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows foreach of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), Wimm-Bill-Dann Foods andsubsidiaries’ internal control over financial reporting as of December 31,2007, based on criteria established in Internal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated June 25, 2008 expressed an adverse opinion thereon.

 

ERNST & YOUNG LLC

 

Moscow, Russia

June 25, 2008

** **

**F-2**

----

** **

**Wimm-Bill-Dann Foods**

 

**ConsolidatedBalance Sheets**

 

*(Amounts in thousands of U.S. dollars, except share data)*

 
| ** **                                                                     | ** ** | **December 31,** | ** **    |
|--------------------------------------------------------------------------------|------------|-----------------------|---------------|
| ** **                                                                     | ** ** | **2007**              | ** **    | **2006** | ** ** |
| **ASSETS**                                                                     |       |                  |          |   |   |
| ** **                                                                     |       |                  |          |   |   |
| **Current assets:**                                                            |       |                  |          |   |   |
| Cash and cash equivalents                                                      |       | $                     | 33,452        |   | $ | 40,310 |   |
| Trade receivables, net (Note 4)                                                |       | 157,608               |          | 89,932 |   |
| Inventory (Note 5)                                                             |       | 261,254               |          | 174,074 |   |
| Taxes receivable                                                               |       | 65,689                |          | 51,161 |   |
| Advances paid                                                                  |       | 43,924                |          | 30,695 |   |
| Net investment in direct financing leases (Note 6)                             |       | 1,349                 |          | 2,095 |   |
| Deferred tax asset (Note 16)                                                   |       | 17,479                |          | 12,749 |   |
| Other current assets (Note 7)                                                  |       | 11,903                |          | 19,730 |   |
| **Total current assets**                                                       | ** ** | **592,658**           | ** **    | **420,746** | ** ** |
| ** **                                                                     | ** ** | ** **            | ** **    | ** ** | ** ** |
| **Non-current assets:**                                                        | ** ** | ** **            | ** **    | ** ** | ** ** |
| Property, plant and equipment, net (Note 9)                                    |       | 767,654               |          | 606,728 |   |
| Intangible assets, net (Note 8)                                                |       | 34,015                |          | 26,844 |   |
| Goodwill (Note 10)                                                             |       | 129,391               |          | 105,990 |   |
| Net investment in direct financing leases – non-current portion (Note  6) |       | 972                   |          | 1,673 |   |
| Long-term investments                                                          |       | 38                    |          | 25 |   |
| Deferred tax asset – non-current portion (Note 16)                        |       | 2,947                 |          | 8,737 |   |
| Other non-current assets (Note 11)                                             |       | 5,427                 |          | 5,193 |   |
| **Total non-current assets**                                                   | ** ** | **940,444**           | ** **    | **7****5****5,190** | ** ** |
| **Total****assets**                                                            | ** ** | **$**                 | **1,533,102** | ** ** | **$** | **1,175,936** | ** ** |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements.*

 

F-3

----

 
| ** **                                                                                                                      | ** ** | **December 31,** | ** **    |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|---------------|
| ** **                                                                                                                      | ** ** | **2007**              | ** **    | **2006** | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                   |       |                  |          |   |   |
|                                                                                                                            |       |                  |          |   |   |
| **Current liabilities:**                                                                                                        |       |                  |          |   |   |
| Trade accounts payable                                                                                                          |       | $                     | 130,729       |   | $ | 104,066 |   |
| Advances received                                                                                                               |       | 13,626                |          | 13,230 |   |
| Short-term loans (Note 13)                                                                                                      |       | 98,819                |          | 123,849 |   |
| Long-term loans, current portion (Note 13)                                                                                      |       | 6,455                 |          | 4,137 |   |
| Long-term  notes payable, current portion (Note 14)                                                                             |       | 300,000               |          | - |   |
| Taxes payable                                                                                                                   |       | 14,351                |          | 9,494 |   |
| Accrued liabilities (Note 12)                                                                                                   |       | 51,877                |          | 37,103 |   |
| Government grants – current portion (Note 17)                                                                              |       | 77                    |          | 1,422 |   |
| Other payables                                                                                                                  |       | 40,272                |          | 37,035 |   |
| **Total current liabilities**                                                                                                   | ** ** | **656,206**           | ** **    | **330,336** | ** ** |
| ** **                                                                                                                      | ** ** | ** **            | ** **    | ** ** | ** ** |
| **Long-term liabilities:**                                                                                                      | ** ** | ** **            | ** **    | ** ** | ** ** |
| Long-term loans (Note 13)                                                                                                       |       | 34,631                |          | 30,082 |   |
| Long-term notes payable (Note 14)                                                                                               |       | 105,922               |          | 248,742 |   |
| Other long-term payables (Note 15)                                                                                              |       | 17,372                |          | 20,905 |   |
| Government grants – long-term portion (Note 17)                                                                            |       | 974                   |          | 1,125 |   |
| Deferred taxes – long-term portion (Note 16)                                                                               |       | 31,011                |          | 28,275 |   |
| **Total long-term liabilities**                                                                                                 | ** ** | **189,910**           | ** **    | **329,129** | ** ** |
|                                                                                                                            |       |                  |          |   |   |
| **Total liabilities**                                                                                                           | ** ** | **846,116**           | ** **    | **659,4****65** | ** ** |
| ** **                                                                                                                      | ** ** | ** **            | ** **    | ** ** | ** ** |
| **Minority interest**                                                                                                           | ** ** | **13,862**            | ** **    | **18,977** | ** ** |
| ** **                                                                                                                      | ** ** | ** **            | ** **    | ** ** | ** ** |
| **Shareholders’ equity****:**                                                                                              | ** ** | ** **            | ** **    | ** ** | ** ** |
| Common stock: 44,000,000 shares authorized, issued and outstanding  with a par value of 20 rubles at December 31, 2007 and 2006 |       | 29,908                |          | 29,908 |   |
| Share premium account                                                                                                           |       | 164,132               |          | 164,132 |   |
| Accumulated other comprehensive income:                                                                                         |       |                  |          |   |   |
| Currency translation adjustment                                                                                                 |       | 110,171               |          | 69,169 |   |
| Retained earnings                                                                                                               |       | 368,913               |          | 234,285 |   |
| **Total shareholders’ equity**                                                                                             | ** ** | **673,124**           | ** **    | **497,494** | ** ** |
|                                                                                                                            |       |                  |          |   |   |
| **Total liabilities and shareholders’ equity**                                                                             | ** ** | **$**                 | **1,533,102** | ** ** | **$** | **1,175,936** | ** ** |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

F-4

----

 

**Wimm-Bill-Dann Foods**

 

**ConsolidatedStatements of Income and Comprehensive Income**

 

(*Amounts in thousands ofU.S. dollars, except share and per share data)*

 
| ** **                                                         | ** ** | **Year ended December 31****,** | ** **    |
|--------------------------------------------------------------------|------------|------------------------------------------------|---------------|
| ** **                                                         | ** ** | **2007**                                       | ** **    | **2006** | ** ** | **2005** | ** ** |
|                                                               |       |                                           |          |   |   |   |   |
| **Sales**                                                          | ** ** | **$**                                          | **2,438,328** | ** ** | **$** | **1,762,127** | ** ** | **$** | **1,394,590** | ** ** |
| ** **                                                         | ** ** | ** **                                     | ** **    | ** ** | ** ** | ** ** | ** ** |
| **Cost of sales**                                                  | ** ** | **(1,654,879**                                 | **)**         | **(1,194,159** | **)** | **(999,006** | **)** |
| ** **                                                         | ** ** | ** **                                     | ** **    | ** ** | ** ** | ** ** | ** ** |
| **Gross profit**                                                   | ** ** | **783,449**                                    | ** **    | **567,968** | ** ** | **395,584** | ** ** |
|                                                               |       |                                           |          |   |   |   |   |
| Selling and distribution expenses                                  |       | (387,853                                       | )             | (246,054 | ) | (191,990 | ) |
| General and administrative expenses                                |       | (180,922                                       | )             | (134,481 | ) | (109,642 | ) |
| Other operating expenses, net                                      |       | (704                                           | )             | (31,812 | ) | (6,457 | ) |
|                                                               |       |                                           |          |   |   |   |   |
| **Operating income**                                               | ** ** | **213,970**                                    | ** **    | **155,621** | ** ** | **87,495** | ** ** |
|                                                               |       |                                           |          |   |   |   |   |
| Financial income and expenses, net (Note 19)                       |       | (16,851                                        | )             | (15,480 | ) | (22,868 | ) |
|                                                               |       |                                           |          |   |   |   |   |
| **Income before provision for income taxes and minority interest** | ** ** | **197,119**                                    | ** **    | **140,141** | ** ** | **64,627** | ** ** |
|                                                               |       |                                           |          |   |   |   |   |
| Provision for income taxes (Note 16)                               |       | (54,302                                        | )             | (41,560 | ) | (30,712 | ) |
|                                                               |       |                                           |          |   |   |   |   |
| Minority interest                                                  |       | (2,769                                         | )             | (3,197 | ) | (3,649 | ) |
| **Net Income**                                                     | ** ** | **$**                                          | **140,048**   | ** ** | **$** | **95,384** | ** ** | **$** | **30,266** | ** ** |
|                                                               |       |                                           |          |   |   |   |   |
| **Other comprehensive income, net of tax**                         |       |                                           |          |   |   |   |   |
| Currency translation adjustment                                    |       | 41,002                                         |          | 39,403 |   | (14,139 | ) |
|                                                               |       |                                           |          |   |   |   |   |
| **Comprehensive income**                                           | ** ** | **$**                                          | **181,050**   | ** ** | **$** | **134,787** | ** ** | **$** | **16,127** | ** ** |
| **Earnings per share - basic and diluted:**                        | ** ** | **$**                                          | **3.18**      | ** ** | **$** | **2.17** | ** ** | **$** | **0.69** | ** ** |
| ** **                                                         | ** ** | ** **                                     | ** **    | ** ** | ** ** | ** ** | ** ** |
| Weighted average number of shares outstanding, basic and diluted   |       | 44,000,000                                     |          | 44,000,000 |   | 44,000,000 |   |

 

*The accompanying notes are an integral partof these consolidated financial statements.*

 

F-5

----

 

**Wimm-Bill-Dann Foods**

 

**Consolidated Statements of Cash Flows**

 

*(Amounts in thousands of U.S. dollars)*

 
| ** **                                                                                                                                                  | ** ** | **Year ended December 31,** | ** **  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                                                                                                                                  | ** ** | **2007**                                   | ** **  | **2006** | ** ** | **2005** | ** ** |
| **Cash flows from operating activities:**                                                                                                                   | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                  |       |                                       |        |   |   |   |   |
| **Net  Income**                                                                                                                                             | ** ** | **$**                                      | **140,048** | ** ** | **$** | **95,384** | ** ** | **$** | **30,266** | ** ** |
|                                                                                                                                                        |       |                                       |        |   |   |   |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:                                                                          |       |                                       |        |   |   |   |   |
| Minority  interest                                                                                                                                          |       | 2,769                                      |        | 3,197 |   | 3,649 |   |
| Depreciation  and amortisation                                                                                                                              |       | 86,574                                     |        | 62,329 |   | 53,435 |   |
| Foreign  currency loss (gain) relating to bonds payable, long-term payables,  investments in foreign subsidiaries, and fixed assets of foreign subsidiaries |       | (20,191                                    | )           | (13,660 | ) | 990 |   |
| Obsolescence  and net realizable value expense                                                                                                              |       | 544                                        |        | 601 |   | 1,077 |   |
| Provision  for doubtful accounts                                                                                                                            |       | 1,649                                      |        | 3,130 |   | 3,908 |   |
| Loss (gain)  on disposal of property, plant and equipment                                                                                                   |       | (4,633                                     | )           | 2,340 |   | 1,321 |   |
| Gain on sale  of subsidiary                                                                                                                                 |       | (978                                       | )           | — |   | — |   |
| Earned  income on net investment in direct financing leases                                                                                                 |       | (618                                       | )           | (706 | ) | (402 | ) |
| Deferred tax  charge/(benefit)                                                                                                                              |       | 4,893                                      |        | (6,672 | ) | 3,327 |   |
| Accrual of tax contingent liability                                                                                                                         |       | 862                                        |        | 1,028 |   | (800 | ) |
| Loss from  securities and disposal of long-term investments                                                                                                 |       | 11                                         |        | 86 |   | 1,786 |   |
| Write-off of tangible assets and intangible  assets                                                                                                         |       | 931                                        |        | 15,633 |   | — |   |
| Write-off of goodwill                                                                                                                                       |       | —                                     |        | 2,539 |   | — |   |
| Write-off of unrecoverable investments in  direct finance leases                                                                                            |       | 59                                         |        | 131 |   | — |   |
| Write-off of unrecoverable VAT                                                                                                                              |       | —                                     |        | 588 |   | — |   |
| Amortisation  of bonds issue expenses                                                                                                                       |       | 2,617                                      |        | 1,197 |   | 1,046 |   |
| **Changes  in operating assets and liabilities:**                                                                                                           |       |                                       |        |   |   |   |   |
| Inventory                                                                                                                                                   |       | (66,951                                    | )           | (15,255 | ) | (22,865 | ) |
| Trade receivables                                                                                                                                           |       | (61,638                                    | )           | (20,023 | ) | (2,636 | ) |
| Advances  paid                                                                                                                                              |       | (10,449                                    | )           | (16,224 | ) | 9,553 |   |
| Taxes  receivable                                                                                                                                           |       | (11,291                                    | )           | 8,187 |   | 15,082 |   |
| Other  current assets                                                                                                                                       |       | 2,721                                      |        | (5,549 | ) | (1,062 | ) |
| Other  long-term assets                                                                                                                                     |       | (26                                        | )           | 45 |   | — |   |
| Trade  accounts payable                                                                                                                                     |       | 17,001                                     |        | 21,713 |   | 3,649 |   |
| Advances  received                                                                                                                                          |       | (766                                       | )           | 1,400 |   | 1,880 |   |
| Taxes  payable                                                                                                                                              |       | 4,356                                      |        | 3,608 |   | 6,698 |   |
| Accrued  liabilities                                                                                                                                        |       | 10,694                                     |        | 14,710 |   | 2,816 |   |
| Other current payables                                                                                                                                      |       | (1,364                                     | )           | 6,152 |   | 678 |   |
| Other long-term payables                                                                                                                                    |       | (20                                        | )           | 4,045 |   | 541 |   |
| ** **                                                                                                                                                  | ** ** | ** **                                 | ** **  | ** ** | ** ** | ** ** | ** ** |
| **Total  cash provided by operating activities**                                                                                                            | ** ** | **$**                                      | **96,804**  | ** ** | **$** | **169,954** | ** ** | **$** | **113,937** | ** ** |

 

*The accompanying notes are an integral partof these consolidated financial statements.*

 

F-6

----

 
| ** **                                                                       | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Cash flows from investing activities:**                                        |       |                                       |       |   |   |   |   |
| Cash paid  for acquisition of subsidiaries, net of cash acquired                 |       | $                                          | (24,850    | ) | $ | (134,367 | ) | $ | (24,964 | ) |
| Proceeds from  subsidiary disposal, net of cash balances                         |       | 562                                        |       | — |   | — |   |
| Cash paid  for property, plant and equipment                                     |       | (189,049                                   | )          | (127,713 | ) | (72,805 | ) |
| Cash paid  for acquisition of investments                                        |       | —                                     |       | — |   | (71 | ) |
| Proceeds  from disposal of investments                                           |       | —                                     |       | — |   | 538 |   |
| Proceeds  from disposal of property, plant and equipment                         |       | 3,668                                      |       | 883 |   | 5,944 |   |
| Cash paid  for net investments in direct financing leases                        |       | (172                                       | )          | (1,496 | ) | (1,982 | ) |
| Cash  received from other long-term assets                                       |       | —                                     |       | 1,429 |   | — |   |
| Cash  returned (invested) from short-term bank deposits and other current assets |       | 6,800                                      |       | 33,106 |   | (31,817 | ) |
| **Net cash  used in investing activities**                                       | ** ** | **(203,041**                               | **)**      | **(228,158** | **)** | **(125,157** | **)** |
|                                                                             |       |                                       |       |   |   |   |   |
| **Cash flows from financing activities:**                                        |       |                                       |       |   |   |   |   |
| Proceeds from long-term notes payable, net  of debt issuance costs               |       | 147,909                                    |       | — |   | 106,000 |   |
| Short-term loans and notes, net                                                  |       | (33,946                                    | )          | 85,760 |   | (3,795 | ) |
| Repayment of long-term loans                                                     |       | (5,081                                     | )          | (21,414 | ) | (4,099 | ) |
| Proceeds from long-term loans                                                    |       | 6,778                                      |       | 30,214 |   | 1,636 |   |
| Repayment of long-term payables                                                  |       | (18,811                                    | )          | (19,416 | ) | (17,123 | ) |
| Repayment of long-term notes  payable                                            |       | —                                     |       | (52,719 | ) | — |   |
| Dividends paid                                                                   |       | (5,420                                     | )          | (24,336 | ) | — |   |
|                                                                             |       |                                       |       |   |   |   |   |
| **Total  cash provided by (used in) financing activities**                       | ** ** | **91,429**                                 | ** ** | **(1,911** | **)** | **8****2****,****619** | ** ** |
|                                                                             |       |                                       |       |   |   |   |   |
| Impact of  exchange rate differences on cash and cash equivalents                |       | 7,950                                      |       | 7,322 |   | (2,087 | ) |
| ** **                                                                       | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  increase********(decrease)  in cash and cash equivalents**                | ** ** | **(6,858**                                 | **)**      | **(52,793** | **)** | **69,312** | ** ** |
| **Cash and  cash equivalents, at beginning of the year**                         | ** ** | **40,310**                                 | ** ** | **93,103** | ** ** | **23,791** | ** ** |
| **Cash and  cash equivalents, at the end of the year**                           | ** ** | **$**                                      | **33,452** | ** ** | **$** | **40,310** | ** ** | **$** | **93,103** | ** ** |

 
| ** **                                                     | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **SUPPLEMENTAL  INFORMATION:**                                 |       |     |       |     |       |     |       |
| Income taxes  paid                                             |       | $        | 58,700     |     | $          | 53,451   |       | $ | 27,123 |   |
| Interest  paid                                                 |       | 38, 285  |       | 25,731   |       | 22,871   |       |
| Income taxes  offset with VAT receivables                      |       | 238      |       | 1,466    |       | 2,715    |       |
| Taxes other  than income taxes offset with VAT receivables     |       | 357      |       | 7,929    |       | 3,896    |       |
| Vendor  financed acquisitions of property, plant and equipment |       | 6,860    |       | 5,561    |       | 5,709    |       |
|                                                                |            |          |            |          |            |          |            |  |  |  |

 

*The accompanying notes are an integral partof these consolidated financial statements.*

 

F-7

----

 

**Wimm-Bill-Dann Foods**

 

**Consolidated Statements of Shareholders’ Equity**

 

*(Amounts in thousands of U.S. dollars, exceptshare amounts)*

 
| ** **                                                  | ** ** | ** **            | ** ** | ** **  | ** ** | ** **  | ** ** | **Accumulated**        | ** ** | ** **   | ** **  | ** **         | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-------------|------------|------------------------|------------|--------------|-------------|--------------------|------------|
| ** **                                                  | ** ** | ** **            | ** ** | ** **  | ** ** | **Share**   | ** ** | **other compre**  | ** ** | ** **   | ** **  | ** **         | ** ** |
| ** **                                                  | ** ** | **Common Stock** | ** ** | **premium** | ** ** | **hensive** | ** ** | **Retained**           | ** ** | ** **   | ** **  |
| ** **                                                  | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **account** | ** ** | **income (loss)** | ** ** | **earnings** | ** **  | **Total**          | ** ** |
| **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**        | ** ** |
| Net income                                                  | ** ** | —                | ** ** | —      | ** ** | —      |       | —                 |       | 95,384       | ** **  | **95,384**         | ** ** |
| Currency translation  adjustment                            | ** ** | —                | ** ** | —      | ** ** | —      |       | 39,403                 |       | —       | ** **  | **39****,4****03** | ** ** |
| Dividends on common stock  including income taxes of $3,270 | ** ** | —                | ** ** | —      | ** ** | —      | ** ** | —                 |       | (24,336      | )           | **(24,336**        | **)**      |
| ** **                                                  | ** ** | ** **            | ** ** | ** **  | ** ** | ** **  | ** ** | ** **             | ** ** | ** **   | ** **  | ** **         | ** ** |
| **Balances at December 31, 2006**                           | ** ** | **44,000,000**        | ** ** | **29,908**  | ** ** | **164,132** | ** ** | **69,169**             | ** ** | **234,285**  | ** **  | **4****97,494**    | ** ** |
| Net income                                                  | ** ** | —                | ** ** | —      | ** ** | —      |       | —                 |       | 140,048      | ** **  | **140,048**        | ** ** |
| Currency translation  adjustment                            | ** ** | —                | ** ** | —      |       | —      |       | 41,002                 |       | —       | ** **  | **41,002**         | ** ** |
| Dividends on common stock  including income taxes of $571   | ** ** | —                | ** ** | —      | ** ** | —      | ** ** | —                 |       | (5,420       | )           | **(5,420**         | **)**      |
| ** **                                                  | ** ** | ** **            | ** ** | ** **  | ** ** | ** **  | ** ** | ** **             | ** ** | ** **   | ** **  | ** **         | ** ** |
| **Balances at December 31, 2007**                           | ** ** | **44,000,000**        | ** ** | **$**       | **29,908** | ** **  | **$**      | **164,132**            | ** ** | **$**        | **110,171** | ** **         | **$**      | **368,913** | ** ** | **$** | **673,124** | ** ** |

 

*The accompanying notes are an integral partof these consolidated financial statements.*

 

F-8

----

 

**Wimm-Bill-Dann Foods**

 

**Notes to Consolidated Financial Statements**

 

**Years ended December 31, 2007, 2006 and 2005**

 

*(Amounts in thousands of U.S. dollars, exceptwhere otherwise stated)*

 

**1.**                   TheCompany

 

Wimm-Bill-Dann Foods (“WBD Foods” or “the Company”) is an open joint stock companyregistered in Russia. It is a holding company which, as of December 31, 2007,owned controlling interests in 37 manufacturing facilities in  Russiaand elsewhere in the Commonwealth of Independent States (“CIS”), as wellas distribution branches in 28 cities in Russia and elsewhere in the CIS. WBD Foods hasa strong and diversified brand portfolio with over 1,000 types of dairyproducts, and over 150 types of juice, nectars and still drinks.

 

**2.**                   Summaryof Significant 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”below).

 

Principlesof Consolidation

 

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 ofoperations reflecting these acquisitions have not been presented because theresults of operations of the acquired companies, either individually orcollectively, are not material to consolidated results of operations. All inter-company accounts and transactions areeliminated upon consolidation. Minority interests in the net assets and netresults of the Company’s subsidiaries are shown under “Minority interests” inthe accompanying consolidated balance sheets and statements of income andcomprehensive income.

 

F-9

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**Wimm-Bill-Dann Foods**

 

**Notes to Consolidated Financial Statements(continued)**

 

**2.**                   Summaryof Significant Accounting Policies (continued)

 

ComprehensiveIncome

 

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 endedDecember 31, 2007, 2006 and 2005 was $181,050, $134,787 and $16,127,respectively, and consists of net income and a currency translation adjustmentin the amount of $41,002, $39,403, and ($14,139), respectively.

 

TranslationMethodology

 

Startingfrom January 1, 2003, Russia is no longer considered a hyperinflationaryeconomy, therefore, the U.S. GAAP financial statements are prepared using thelocal currency, the Russian ruble, as the functional currency for WBD Foods andits Russian subsidiaries. Subsequent translation to the reporting currency, theU.S. dollar, is made in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 52. All assets and liabilities of the Company andits subsidiaries with functional currencies other than the U.S. dollar aretranslated into U.S. dollar equivalents at exchange rates as follows: (1) assetand liability accounts at the rate of exchange in effect on the balance sheetdate, (2) revenues and costs, income and expenses at the average exchange ratesfor the year, and (3) shareholders’ equity accounts at historical exchangerates. Translation gains or losses are recorded as a separate component ofshareholders’ equity, and transaction gains and losses are reflected in netincome.

 

Inrespect of Wimm-Bill-Dann Netherlands B.V., the U.S. dollar has been usedto prepare the financial statements as this is its functional currency. Thefinancial statements of Ukrainian, Kyrgyz, Usbekh, Kazakh and Georgian subsidiarieshave been prepared using the Ukrainian hryvnia, Kyrgyz som, Uzbek sum, Kazakhtenge and Georgian lari, respectively, as the functional currency. Translation(remeasurement) of domestic currency denominated financial statements into U.S.dollars has been performed in accordance with the provisions of SFASNo. 52.

 

Within theRussian Federation, official exchange rates are determined daily by the CentralBank of Russia (“CBR”). Market rates may differ from the official rates but thedifferences are, generally, within narrow parameters monitored by the CBR. Asof December 31, 2007 and 2006, the official rates of exchange were 24.55 rubles= 1 U.S. dollar and 26.33 rubles = 1 U.S. dollar, respectively. The translationof local currency denominated assets and liabilities into U.S. dollars for thepurposes of these financial statements does not indicate that the Company couldrealize or settle, in U.S. dollars, the reported values of these assets andliabilities. Likewise, it does not indicate that the Company could return ordistribute the reported U.S. dollar value of capital to its shareholders.

 

F-10

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**Wimm-Bill-Dann Foods**

 

**Notes to Consolidated Financial Statements (continued)**

 

**2.**                   Summary of Significant Accounting Policies(continued)

** **

ManagementEstimates

 

Thepreparation of the consolidated financial statements in conformity with U.S.GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Examples include estimates of allowance for doubtfulaccounts, obsolete inventory, and valuation allowance for deferred tax assets.Actual results could differ from those estimates.

 

Cash and CashEquivalents

 

Cashand cash equivalents represent cash on hand and in the Company’s bank accountsand short-term investments having original maturities of three months or less.

 

Trade Receivablesand Allowance for Doubtful Accounts

 

Tradereceivables are stated at their net realizable value which approximates theirfair value. The Company provides an allowance for doubtful accounts based onmanagement’s periodic review of accounts, including the delinquency of accountbalances. Delinquency status is based on contractual terms. The Companyevaluates the collectibility of its receivables at least quarterly, based uponvarious factors, including the financial condition and payment history of majorcustomers, an overall review of collections experience of other accounts andeconomic factors or events expected to affect the Company’s future collections.

 

Tradereceivables are written-off when evidence exists that they will not becollectible. The Company generally does not require collateral from its creditcustomers.

 

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**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**2.**                   Summary of Significant Accounting Policies(continued)

** **

Inventory

 

Inventories,including work-in-process, are valued at the lower of cost or market. Cost isthe price paid or the consideration given to acquire the asset. Cost isdetermined on the basis of weighted average cost. For processed inventories,cost is the sum of the expenditures and charges, direct and indirect, inbringing goods to their existing condition or location. It includes theapplicable allocation of production fixed and variable overhead costs. Marketis the current replacement cost, whether by purchase or by reproduction,limited to the estimated selling price less any costs of completion anddisposal (net realizable value) at the maximum level, and net realizable value,less an allowance for normal profit at the minimum level. Net realizable valueis the selling price in the ordinary course of business, less the costs ofcompletion, marketing, and distribution. Unrealizable inventory is fullyprovided for in the accompanying consolidated financial statements.

 

Value-AddedTaxes

 

Value-addedtaxes (“VAT”) related to sales are payable based upon invoices issued to thecustomer or collection of respective receivables. VAT incurred for purchasesmay be reclaimed, subject to certain restrictions, against VAT related tosales.

 

VATrelated to purchase transactions that are subject to offset against VAT payableafter the balance sheet dates are recognized in the balance sheets on a grossbasis.

 

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**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**2.**                   Summary of Significant Accounting Policies(continued)

** **

Property,Plant and Equipment

 

Property,plant and equipment are stated at historic acquisition cost, less accumulateddepreciation.

 

The acquisition cost of property, plant and equipment comprisesits purchase price, including import duties and non-refundable purchase taxesand any directly attributable costs of bringing the asset to its workingcondition and location for its intended use. Expenditures incurred after theassets have been put into operation, such as repairs and maintenance costs, arenormally expensed in the period the costs are incurred. In situations where itcan be clearly demonstrated that the expenditures have resulted in an increasein the future economic benefits expected to be obtained from the use of an itemof property, plant and equipmentbeyond its originally assessed standard of performance, the expenditures arecapitalized as an additional cost of property, plant and equipment. When assets are sold or retired, their cost andaccumulated depreciation are eliminated from the accounts and any gain or lossresulting from their disposal is included in other operating expenses of theconsolidated statement 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               |   | 10-50 years |   |
|-------------------------|--------|-------------|--------|
| Machinery and equipment |   | 3-25 years  |   |
| Computer hardware       |   | 3-12 years  |   |
| Other                   |   | 2-15 years  |   |

 

Constructionin progress comprises costs directly related to construction of property, plantand equipment. Construction in progress is depreciated once the property, plantand equipment are put into operation.

 

TheCompany capitalizes interest costs with respect to qualifying constructionprojects.

 

Assetsacquired under capital leases are included in property, plant, and equipmentand relate to machinery and equipment. Depreciation of capital lease assets isincluded in depreciation expense. The net present values of amounts due undercapital leases are recorded as liabilities and included in other payables andother long-term payables.

 

F-13

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**Wimm-Bill-Dann Foods**

 

**Notes to ConsolidatedFinancial Statements (continued)**

 

**2.**                   Summaryof Significant Accounting Policies (continued)

 

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, net. Initial direct costs are deferred and expensed overthe period in which the related revenue is recognized.

 

IntangibleAssets

 

Intangibleassets with determinable useful lives are amortized using the straight-linemethod over their 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.

 

Goodwill

 

Goodwillrepresents the purchase price for businesses acquired in excess of the fairvalue of identifiable net assets acquired. Goodwill is not amortized, butinstead tested for impairment at least annually or whenever indicators ofimpairment arise.

 

Incases where the fair value of the net assets acquired exceeds the purchaseprice, that excess  (negative goodwill)is allocated as a pro rata reduction of the amounts that otherwise would havebeen assigned to the identifiable assets acquired, excluding financial assetsother than investments accounted for by the equity method, assets to bedisposed of by sale, deferred tax assets and any current assets. If any excessremains after reducing to zero the amounts that otherwise would have beenassigned to those assets, that remaining excess is recognized as anextraordinary gain in the period in which the business combination iscompleted.

 

Impairment ofLong-Lived Assets

 

Whenevents and circumstances occur indicating that the carrying amount of along-lived asset (group) may not be recoverable, the Company estimates thefuture undiscounted cash flows expected to derive from the use and eventualdisposition of the asset (group). If the sum of the expected future cash flows(undiscounted and without interest charges) is less than the carrying amount ofthe long-lived asset (group), the Company would then calculate the impairmentas the excess of the carrying value of the asset (group) over the estimate ofits fair market value. Impairment loss is included in other operating expensesin the consolidated statement of income and comprehensive income.

 

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**Wimm-Bill-Dann Foods**

** **

**Notes to ConsolidatedFinancial Statements (continued)**

** **

**2.**                   Summary of Significant Accounting Policies (continued)

 

RevenueRecognition

 

Salesare recognized, net of VAT and discounts, when goods are shipped to customers. Atthe time of shipment, in accordance with the Company’s standard salesagreements, the title is transferred and the customer assumes the risk andrewards of ownership. This policy is consistent with the Russian Civil Code,which states that legal title transfers when a product is shipped to a customerunless specifically overridden by the sales agreement.

 

TheCompany offers sales volume discounts based on individual customer volumesacquired in a prior period. An accrual for such discounts is made at the end ofeach accounting period and is recognized as a reduction of revenue in theconsolidated statements of income and comprehensive income.

 

Shipping and Handling Expenses

 

Shippingand handling expenses incurred by the Company are reflected in selling anddistribution expenses in the accompanying consolidated statements of income andcomprehensive income. Shipping and handling expenses for the years endedDecember 31, 2007, 2006 and 2005 were $111,228, $73,565 and $52,995, respectively.

 

GovernmentGrants

 

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 depreciationexpense of the related long-term assets is recognized. Interest expenseincurred in government grant loan programs is recognized in financial incomeand expenses, net.

 

Debt IssuanceCosts

 

Debtissuance costs are capitalized and amortized using the straight line methodover the term of the related debt.

 

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**Wimm-Bill-Dann Foods**

** **

**Notes to ConsolidatedFinancial Statements (continued)**

** **

**2.**                   Summary of Significant Accounting Policies (continued)

** **

Income Tax

 

Deferredtax assets and liabilities are recognized for the expected future taxconsequences of existing differences between financial reporting and taxreporting bases of assets and liabilities, and loss or tax credit carryforwardsusing enacted tax rates expected to be in effect at the time these differencesare realized. A valuation allowance is provided when it is more likely than notthat some or all of the deferred tax assets will not be realized in the future.These evaluations are based on expectations of future taxable income andreversals of various taxable temporary differences.

 

AdvertisingCosts

 

Advertisingcosts are expensed as incurred, except for mass-media advertising which isexpensed the first time the advertising is shown. Advertising costs for theyears ended December 31, 2007, 2006 and 2005 were $102,409, $67,538 and$45,336, respectively.

 

Stock optionsplan

 

The Company followsthe provisions of Statement of Financial Accounting Standards No. 123(revised) “Share-Based Payment” (SFAS No. 123R), which requires allcompanies to measure compensation cost for all share-based payments (includingemployee stock options) at fair value. The fair value of share-based paymentawards is estimated on the date of grant using an option-pricing model. TheCompany has chosen to use the Black-Sholes Model as the option-pricing modeland the value of the portion of the award that is ultimately expected to vestis being recognized as expense on the straight-line basis over the requisiteservice periods.

 

Earnings per Share

 

Earningsper common share have been determined based upon the weighted average number ofshares outstanding during these periods. There are no potentially dilutivesecurities.

 

Concentration of Credit Risk

 

Financialinstruments which potentially expose the Company to concentrations of creditrisk consist primarily of cash in banks, short-term bank deposits and tradereceivables. 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 31,2007, 2006 and 2005, the Company had no other significant concentrations ofcredit risk. The Company does not usually require collateral from itscustomers.

 

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**Wimm-Bill-Dann Foods**

** **

**Notes to ConsolidatedFinancial Statements (continued)**

** **

**2.**                   Summary of Significant Accounting Policies (continued)

 

Fair Value ofFinancial Instruments

 

Thecarrying amounts of cash and cash equivalents, short-term bank deposits,accounts receivable, accounts payable and short-term loans reported in theconsolidated balance sheets approximate fair values due to the short maturityof those instruments. The fair value of the Company’s long-term ruble notes isestimated at $108,836 at December 31, 2007. The carrying value of U.S. dollarnotes, which matured in May 2008, approximates fair value at December 31, 2007.

 

SegmentReporting

 

SFASNo. 131, *Disclosures about Segments of an Enterpriseand Related Information*, requires that a business enterprise reportsfinancial and descriptive information about its reportable operating segments.WBD Foods currently manages its business as three major operating segments –dairy, beverages and baby foodproduction and distribution, and accordingly, reports segment information onthis basis.

 

ComparativeFigures

 

Wherenecessary, reclassifications have been made to the prior period consolidatedfinancial statements to conform to the presentation of the current period.

 

New and Recently Adopted Accounting Pronouncements

 

In July2006, the FASB issued Interpretation No. 48 (“FIN 48”) *Accountingfor Uncertainty in Income Taxes*, an interpretation of FASB StatementNo. 109*Accounting for Income Taxes*. FIN 48clarifies accounting for income taxes by prescribing the minimum recognitionthreshold a tax position is required to meet before being recognized in thefinancial statements. FIN 48 also provides guidance on derecognition,measurement, classification, interest and penalties, accounting in interimperiods, disclosure and transition. In addition, FIN 48 states that incometaxes should not be accounted for under the provisions of SFAS No. 5,Accounting for Contingencies. The Company adopted FIN 48 at the beginning ofthe fiscal year 2007. Upon adoption, there was no an effect to retainedearnings of the Company (Note 16).

 

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**Wimm-Bill-Dann Foods**

** **

**Notes to ConsolidatedFinancial Statements (continued)**

** **

**2.**                   Summary of Significant Accounting Policies (continued)

 

InSeptember 2006, the FASB issued SFAS No. 157, *Fair ValueMeasurements.*This Statement defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles(GAAP), and expands disclosures about fair value measurements. This Statementapplies under other accounting pronouncements that require or permit fair valuemeasurements, the Board having previously concluded in those accountingpronouncements that fair value is the relevant measurement attribute.Accordingly, this Statement does not require any new fair value measurements. TheCompany adopted the provisions of SFAS No. 157 in the first quarter 2008 whichhad no material impact on its financial statements upon adoption.

 

InFebruary 2007, the FASB issued SFAS No. 159, *TheFair Value Option for Financial Assets and Financial Liabilities **—Including anamendment of FASB Statement No. 115**.*ThisStatement permits entities to choose to measure many financial instruments andcertain other items at fair value. The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions. ThisStatement is effective as of the beginning of an entity’s first fiscal yearthat begins after November 15, 2007; however, early adoption is allowed. Theadoption of the provisions of SFAS No. 159 did not have an impact on theCompany’s results of operations, financial position or cash flows.

 

In December 2007, the FASB issued FAS 141(revised 2007), *Business combinations*— the replacement of FASBStatement No. 141, *Business Combinations.*ThisStatement amends the principles and requirements for how an acquirer recognizesand measures in its financial statements the identifiable assets acquired, theliabilities assumed, any non-controlling interest in the acquiree and thegoodwill acquired; and establishes disclosure requirements in relation tobusiness combinations. This Statement is effective for businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2008. Theeffect that SFAS No. 141 (R) has on the accounting for futurebusiness combinations is dependant on future acquisitions.

 

InDecember 2007, the FASB issued FAS 160, *Noncontrolling Interestsin Consolidated Financial Statements*— an amendment of ARB No. 51. ThisStatement amends ARB 51 and provides guidance for accounting for changes in aparent’s ownership interest and deconsolidation of a subsidiary and disclosurerequirements. This Statement is effective for fiscal years, and interim periodswithin those fiscal years, beginning on or after December 15, 2008. Earlieradoption is prohibited. The Company is assessing the effect of FAS No. 160 implementation.

 

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**Wimm-Bill-Dann Foods**

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**Notes to ConsolidatedFinancial Statements (continued)**

** **

**3.**                   BusinessesAcquired

** **

Acquisition of Minority Interests

 

Thechanges in minority interest during the years ended December 31, 2007 and 2006were as follows:

 
| **Balance at December 31, 2005**                                   | ** ** | **$**   | **24,619** | ** ** |
|--------------------------------------------------------------------|------------|---------|------------|------------|
| Acquisitions  by the Company of minority interests in subsidiaries |       | (12,906 | )          |
| Acquisition  of subsidiaries                                       |       | 2,446   |       |
| Minority  interest share in net income                             |       | 3,197   |       |
| Currency  translation adjustment                                   |       | 1,621   |       |
| **Balance at December 31, 200****6**                               | ** ** | **$**   | **18,977** | ** ** |
| Acquisitions  by the Company of minority interests in subsidiaries |       | (9,217  | )          |
| Acquisition  of subsidiaries                                       |       | 121     |       |
| Minority  interest share in net income                             |       | 2,769   |       |
| Currency  translation adjustment                                   |       | 976     |       |
| Other                                                              |       | 236     |       |
| **Balance at December 31, 200****7**                               | ** ** | **$**   | **13,862** | ** ** |

 

2007

 

InMarch-April 2007, WBD Foods acquired additional 4.71% interest in OchakovoDairy Plant for cash consideration of $3,312. As a result of this transaction,WBD Foods has a 98.46% interest in Ochakovo Dairy Plant. The purchase price inexcess of fair value of net assets acquired of $1,462 was recorded as goodwill.

 

In May2007, WBD Foods acquired additional 30.12% interest in Obninsk Dairy Plant OJSCfor cash consideration of $10,611. In November-December WBD Foods acquiredanother 3.39% interest for cash consideration of $1,266. After thesetransactions, WBD Foods has a 99.84% interest in OJSC Obninsk Dairy Plant OJSC.The purchase price in excess of fair value of net assets acquired of $6,661 and$754, respectively, was recorded as goodwill.

 

InNovember-December 2007, WBD Foods acquired an additional 13.24% interest inAngarskiy Dairy Plant OJSC for cash consideration of $830. As a result of thistransaction, WBD Foods has 96.6% interest in OJSC Angarskiy Dairy Plant OJSC. Thepurchase price in excess of fair value of net assets acquired of $788 wasrecorded as goodwill.

 

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**Wimm-Bill-Dann Foods**

 

**Notes to ConsolidatedFinancial Statements (continued)**

 

**3.****                  ****Businesses Acquired(continued)**

 

2006

 

In December 2006, WBD Foods acquired 0.26% of WBD OJSC, a subsidiary, from shareholders of WBD Foodsfor cash consideration of $812. Thepurchase price in excess of fair value of net assets acquired of $415 wasrecorded as goodwill.

 

In October 2006, WBD Foods acquired 30.35% of Nazarovskoe Milk OJSC, a subsidiary, fromminority shareholders for cash consideration of $1,982. The purchase price in excess of fair value ofnet assets acquired of $771 was recorded as goodwill.

 

In January 2006, WBD Foods acquired 20% of Moscow Baby Food Plant (“ZDMP”), a subsidiary, fromminority shareholders for cash consideration of $6,955. The fair value of net assets acquired in excessof purchase price of $4,192 was subsequently recorded as a reduction of thevalue of property, plant and equipment.

 

2005

 

In January 2005, WBD Foods acquired 10% of Sibirskoe Moloko dairy plant, a subsidiary, fromminority shareholders for cash consideration of $1,050. The purchase price in excess of fair value ofnet assets acquired of $355 was recorded as goodwill.

 

Business Combinations

 

2007

 

In July2007, WBD Foods acquired a 94.6% interest in Niva CJSC for cash considerationof $1,185. The acquired farm produces raw milk in the Krasnodar region. Thisacquisition allows the Company to reduce raw material expenses and become lessdependable on raw milk suppliers, as well as to ensure a steady supply of rawmilk to keep up with growth in production driven by increase in market demand.

 

Thefair value of net assets acquired in excess of the purchase price of $778 wassubsequently recorded as a reduction of the value of property, plant andequipment.

 

InOctober 2007, WBD Foods acquired a 100% interest in Gruzinskie Producty LLC forcash consideration of $1,100, of which $800 was paid at the acquisition dateand $300 in March 2008. The acquired company produces milk products and is thethird largest plant in Georgia. The acquisition is in line with Wimm-Bill-Dann’sdeclared strategy of growing its business by purchasing successful companieswith leading market positions and strong brand portfolios.

 

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**Wimm-Bill-Dann Foods**

** **

**Notes to ConsolidatedFinancial Statements (continued)**

** **

**3.****                  ****Businesses Acquired(continued)**

 

Thecash consideration paid for this acquisition was allocated to property, plantand equipment $964, intangible assets $11, goodwill $3,246 and current assets$26, less liabilities of $3,147.

 

2006

 

InSeptember 2006, the Company acquired 100% of****Surgut City Dairy Plant for cashconsideration of $4,536. The acquisition of Surgut Dairy Plant allows theCompany to gain a leading position in a promising region and continue itsexpansion in the markets of the Urals and Siberia. Having its own enterprise inSurgut, the company will be able to optimize its expenditure on logistics byreducing the need to transport products between regions. The fair value of netassets acquired in excess of purchase price of $617 was recorded as a reductionof the fair value of property, plant and equipment.

 

In November, 2006, the Company acquired 93.74% of****Ochakovo DairyPlant for cash consideration of $66,792. Ochakovo Dairy Plant is the fourthlargest dairy producer in Russia and one of the largest dairy enterprises inMoscow. The plant produces milk, sour cream, yogurts, cheese curds and otherdairy products under a strong brand portfolio (including brands such as 33Cows, Pastushok, Kremlin Products and Actilife). The acquisition of Ochakovo Dairy Plant allows the Company to increase its share of the Moscow dairymarket in volume and in value, to enrich brand portfolio and obtain a bettercooperation with key retailers and suppliers in Moscow and Moscow region.During the year subsequent the acquisition the Company finalized an allocationof purchase price as follows: property, plant and equipment $32,479, intangibleassets $12,562, long-term investments $11, goodwill $31,437, current assets$18,026, less liabilities $27,723.

 

InDecember 2006, the Company acquired 83.36% of Angarsky MilkPlant OJSC (Molka OJSC) for cash consideration of $4,908. The purchase of MolkaOJSC allows the Company to continue its expansion in the Siberian market. Byhaving its own enterprise in Irkutsk region, the company gains the ability tooptimize logistical expenditures by eliminating the need for long-distancetransport of products between regions. The cash consideration paid for thisacquisition was allocated to property, plant and equipment $1,923, long-terminvestments $2, goodwill $3,722, current assets $1,051, less liabilities$1,790.

 

InDecember 2006, the Company acquired 100% of Manros Group for cashconsideration of $51,336. Manros Group comprises of six companies of which fourare dairy production plants. Manros produces milk, sour cream, yogurts, cottagecheese, kefir and other dairy products under “Na zdorovie”, “Molochnaya Dolina”and “Vkusnika” brands. Theacquisition of Manros further strengthens the Company’s market position in thefast-growing Siberian region, where continued economic growth is translatinginto ever growing demand across our offering of healthy products aimed at theentire family. With the Manros acquisition the Company increased its marketshare in Siberia and the Far East, thus,

 

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**Wimm-Bill-Dann Foods**

** **

**Notes to ConsolidatedFinancial Statements (continued)**

** **

**3.****                  ****Businesses Acquired(continued)**

 

re-enforcingits leadership in the region. The cash consideration paid for this acquisitionwas allocated to property, plant and equipment $25,191, intangible assets$5,937, goodwill $37,053, non-current assets $240, current assets $10,365, lessliabilities $27,450.

 

2005

 

In July2005, the Company acquired 100% of Experimental Baby Food Plant LLC for cashconsideration of $3,527. Experimental Baby Food Plant LLC produces baby foodfrom raw fruits. The acquisition of Experimental Baby Food Plant LLC allows theCompany to increase its product portfolio in the baby food market segment andto keep up with anticipated growth in market demand. The fair value of netassets acquired in excess of purchase price of $2,335 was recorded as areduction of the value of property, plant and equipment.

 

In July2005, the Company acquired 66.3% of Obninsk Dairy Plant for cash considerationof $6,365. Obninsk Diary Plant owns several milk product brands and a milkproduct manufacturing facility. The acquisition of Obninsk Diary Plant allowsthe Company to increase its existing product and brand portfolio and establishits presence in Kaluga region to better meet anticipated growth in the localmarketplace. The cash consideration paid for this acquisition was allocated toproperty, plant and equipment $2,257, intangible assets $903, goodwill $1,091,current assets $2,898, less liabilities $784.

 

InOctober 2005, the Company acquired 100% of Essentuki 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 allocationwas completed by the Company in 2006. The cash consideration paid for thisacquisition was allocated to property, plant and equipment $2,066, intangibleassets $358, goodwill $3,171, current assets $446 less liabilities $536.

 

InDecember 2005, the Company acquired 63.53% of Nazarovskoe Milk OJSC for cashconsideration of $5,167. The acquired company is one of the major condensedmilk producers in Siberian and Far East regions. The acquisition of NazarovskoeMilk OJSC allows the Company to increase its existing product and brandportfolio and establish its presence in Krasnoyarsk region that possessesa high growth potential. The cash consideration paid for this acquisitionwas allocated to property, plant and equipment $4,482, goodwill $2,007, currentassets $1,798 less liabilities $3,120.

 

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**Wimm-Bill-Dann Foods**

** **

**Notes to ConsolidatedFinancial Statements (continued)**

** **

**3.****                  ****Businesses Acquired(continued)**

 

InDecember 2005, the Company acquired 100% of Pervouralsk City Dairy for cashconsideration of $119. The purchase price allocation was completed by theCompany in 2006. The purchase price in excess of fair value of net assetsacquired was recorded as goodwill in amount of $1,126.

 

InApril, July and September  2005, theCompany acquired 100%, 99.34% and 63.5% of Plemzavod Za Mir i Trud OJSC ,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 dependent 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 recorded as a reduction of the values of property, plant andequipment.

 

**4**.                   TradeReceivables, Net

 

Tradereceivables as of December 31, 2007 and 2006 were as follows:

 
| ** **                       | ** ** | **2007** | ** **  | **2006**   | ** ** |
|----------------------------------|------------|----------|-------------|------------|------------|
|                             |       |     |        |       |       |
| Trade receivables                |       | $        | 161,334     |       | $          | 97,010 |   |
| Allowance for doubtful  accounts |       | (3,726   | )           | (7,078     | )          |
| **Total trade receivables, net** | ** ** | **$**    | **157,608** | ** ** | **$**      | **89,932** | ** ** |

 

Thechanges in the allowance for doubtful accounts for the years ended December 31,2007, 2006 and 2005 were as follows:

 
| ** **                       | ** ** | **2007** | ** ** | **2006**   | ** ** | **2005**  | ** ** |
|----------------------------------|------------|----------|------------|------------|------------|-----------|------------|
|                             |       |     |       |       |       |      |       |
| Balance, beginning of period     |       | $        | 7,078      |       | $          | 5,126     |       | $ | 13,931 |   |
| Provision for doubtful  accounts |       | 1,649    |       | 3,130      |       | 3,908     |       |
| Write off of trade receivables   |       | (6,016   | )          | (2,027     | )          | (12,358   | )          |
| Currency translation  adjustment |       | 1,015    |       | 849        |       | (355      | )          |
| **Balance, end of period**       | ** ** | **$**    | **3,726**  | ** ** | **$**      | **7,078** | ** ** | **$** | **5,126** | ** ** |

 

F-23

----

 

**Wimm-Bill-Dann Foods**

 

**Notes to ConsolidatedFinancial Statements (continued)**

 

**5.**                   Inventory

 

Inventory asof December 31, 2007 and 2006 was as follows:

 
| ** **          | ** ** | **2007** | ** **  | **2006**   | ** ** |
|---------------------|------------|----------|-------------|------------|------------|
|                |       |     |        |       |       |
| Raw materials       |       | $        | 170,459     |       | $          | 101,274 |   |
| Work in progress    |       | 21,260   |        | 16,581     |       |
| Finished goods      |       | 69,535   |        | 56,219     |       |
| **Total inventory** | ** ** | **$**    | **261,254** | ** ** | **$**      | **174,074** | ** ** |

 

**6.**                   NetInvestment in Direct Financing Leases

 

Commencingfrom 1999, the Company announced a program called “Dairy Rivers of Russia” withthe purpose of ensuring a steady and reliable source of milk. Under thisprogram the Company acquired agricultural equipment and leased such equipmentto several farms. These transactions were classified as direct financingleases. The lease agreements vary from one to five years and provide a free ofcharge equipment transfer option at the end of the lease term. The leasereceivables are denominated in EURO, U.S. dollars and Russian rubles. Thelessees have the option to settle the receivable through the delivery of milksupplies to the Company based on a predetermined schedule. The settlement isbased on milk prices which are variable dependent upon prevailing marketprices.

 

F-24

----

 

**Wimm-Bill-Dann Foods**

** **

**Notes to ConsolidatedFinancial Statements (continued)**

** **

**6.**                   NetInvestment in Direct Financing Leases (continued)

 

Thefollowing lists the components of the net investment in direct financing leasesat December 31, 2007 and 2006:

 
| ** **                                   | ** ** | **2007** | ** ** | **2006**   | ** ** |
|----------------------------------------------|------------|----------|------------|------------|------------|
|                                         |       |     |       |       |       |
| Total future minimum lease  payments         |       | $        | 3,004      |       | $          | 4,808 |   |
| Less: Unearned income                        |       | (683     | )          | (1,040     | )          |
| **Net investment in direct  finance leases** | ** ** | **$**    | **2,321**  | ** ** | **$**      | **3,768** | ** ** |
| Current portion                              |       | 1,349    |       | 2,095      |       |
| Long-term portion                            |       | 972      |       | 1,673      |       |

 

AtDecember 31, 2007, total future minimum lease payments to be received for eachof the five succeeding fiscal years are as follows:

 
| ** **          | ** ** | **Years ended********December 31,** | ** ** |
|---------------------|------------|-----------------------------------------------|------------|
|                |       |                                          |       |
| 2008                |       | $                                             | 1,784      |   |
| 2009                |       | 791                                           |       |
| 2010                |       | 213                                           |       |
| 2011                |       | 109                                           |       |
| 2012                |       | 99                                            |       |
| 2013 and thereafter |       | 8                                             |       |
| ** **          | ** ** | **$**                                         | **3,004**  | ** ** |

 

F-25

----

 

**Wimm-Bill-Dann Foods**

** **

**Notes to ConsolidatedFinancial Statements (continued)**

** **

**7.**                   OtherCurrent Assets

 

Other current assets as of December 31, 2007and 2006 were as follows:

 
| ** **             | ** ** | **2007** | ** ** | **2006**   | ** ** |
|------------------------|------------|----------|------------|------------|------------|
|                   |       |     |       |       |       |
| Assets held for sale   |       | $        | 1,457      |       | $          | 4,007 |   |
| Restricted cash        |       | 1,970    |       | 9,467      |       |
| Other debtors, net     |       | 5,647    |       | 3,929      |       |
| Deferred expenses      |       | 1,770    |       | 1,750      |       |
| Other                  |       | 1,059    |       | 577        |       |
| **Total other assets** | ** ** | **$**    | **11,903** | ** ** | **$**      | **19,730** | ** ** |

 

F-26

----

 

**Wimm-Bill-Dann Foods**

** **

**Notes to ConsolidatedFinancial Statements (continued)**

** **

**8.**                   IntangibleAssets, Net

 

Intangibleassets as of December 31, 2007 and 2006 were comprised of the following:

 
| ** **                                 | ** ** | **2007**                        | ** ** | **2006**                      | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **Gross carrying  amount** | ** ** | **Accumulated  amortization** | ** ** | **Gross carrying  amount** | ** ** | **Accumulated  amortization** | ** ** |
|                                       |       |                            |       |                          |       |   |   |   |   |
| Intangible assets with determinable lives: |       |                            |       |                          |       |   |   |   |   |
| Financial accounting software              |       | $                               | 8,415      |                          | $          | (2,554 | ) | $ | 5,025 |   | $ | (1,172 | ) |
| Trademarks                                 |       | 5,639                           |       | (1,227                        | )          | 3,489 |   | (1,324 | ) |
| Supplier contracts                         |       | 155                             |       | (150                          | )          | 907 |   | (752 | ) |
| Others                                     |       | 2,459                           |       | (803                          | )          | 750 |   | (65 | ) |
| Intangible assets with indefinite lives:   | ** ** | ** **                      | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Trademarks                                 |       | 22,081                          |       | —                        |       | 19,986 |   | — |   |
| **Total intangible assets**                | ** ** | **$**                           | **38,749** | ** **                    | **$**      | **(4,734** | **)** | **$** | **30,157** | ** ** | **$** | **(3,313** | **)** |

 

Financial accounting software and suppliercontracts have a weighted average useful life of five years, and trademarkshave a weighted average useful life of six years.

 

Amortization expense during the years endedDecember 31, 2007, 2006 and 2005 amounted to $2,487, $1,564 and $752,respectively.

 

Amortization expense relating to the netcarrying amount of intangible assets at December 31, 2007 is estimated to be$2,767 in 2008, $2,767 in 2009, $2,697 in 2010, $962 in 2011 and $808 in 2012.

 

F-27

----

 

**Wimm-Bill-Dann Foods**

** **

**Notes to ConsolidatedFinancial Statements (continued)**

** **

**9**.                   Property,Plant and Equipment, Net

 

The net bookvalue of property, plant and equipment at December 31, 2006 and 2005 wascomprised of the following:

 
| ** **                                               | ** ** | **2007**  | ** **  | **2006**   | ** ** |
|----------------------------------------------------------|------------|-----------|-------------|------------|------------|
|                                                     |       |      |        |       |       |
| Buildings                                                |       | $         | 277,130     |       | $          | 233,166 |   |
| Machinery and equipment                                  |       | 660,847   |        | 511,905    |       |
| Computer hardware                                        |       | 18,315    |        | 22,973     |       |
| Other                                                    |       | 72,295    |        | 49,636     |       |
| Gross book value of property,  plant and equipment       |       | 1,028,587 |        | 817,680    |       |
| Accumulated depreciation                                 |       | (390,890  | )           | (296,332   | )          |
| Advances paid for property,  plant and equipment         |       | 27,106    |        | 32,484     |       |
| Construction in progress and  equipment for installation |       | 102,851   |        | 52,896     |       |
|                                                     |       |      |        |       |       |
| **Total property, plant and  equipment, net**            | ** ** | **$**     | **767,654** | ** ** | **$**      | **606,728** | ** ** |

 

The Company capitalized interest costs of$6,421, $519, and $410 during the years ended December 31, 2007, 2006 and 2005,respectively, with respect to qualified construction projects.

 

Depreciation expense during the years endedDecember 31, 2007, 2006 and 2005 amounted to $84,087, $60,765, and$52,683, respectively.

 

Theassets transferred to the Company upon privatization do not include the land onwhich the Company’s factories and buildings, comprising the Company’s principalmanufacturing facilities, are located. The Company has the option to purchasethis land upon application to the state registrator body or to continueoccupying this land under rental agreements. Russian legislation does notspecify an expiry date to this option. As at December 31, 2007 the Company hasnot filed any application to exercise the purchase option.

 

F-28

----

 

**Wimm-Bill-Dann Foods**

** **

**Notes to ConsolidatedFinancial Statements (continued)**

** **

**1**0.            Goodwill

 

Thechanges in the carrying amount of goodwill for each segment for the years endedDecember 31, 2007, 2006 and 2005 were as follows:

 
| ** **                       | ** ** | **Dairy** | ** **  | **Beverages** | ** ** | **Total** | ** ** |
|----------------------------------|------------|-----------|-------------|---------------|------------|-----------|------------|
| Balance at December 31, 2005     |       | $         | 25,358      |          | $          | 6,650     |       | $ | 32,008 |   |
| Acquisitions                     |       | 72,462    |        | —        |       | 72,462    |       |
| Write-off                        |       | (2,539    | )           | —        |       | (2,539    | )          |
| Currency  translation adjustment |       | 3,734     |        | 325           |       | 4,059     |       |
| Balance  at December 31, 2006    |       | $         | 99,015      |          | $          | 6,975     |       | $ | 105,990 |   |
| Acquisitions                     |       | 14,859    |        | 170           |       | 15,029    |       |
| Currency  translation adjustment |       | 7,856     |        | 516           |       | 8,372     |       |
|                             |       |      |        |          |       |      |       |
| **Balance at December 31, 2007** | ** ** | **$**     | **121,730** | ** **    | **$**      | **7,661** | ** ** | **$** | **129,391** | ** ** |

 

TheCompany recognized an impairment loss of $18.1 million in the year endedDecember 31, 2006, including $15.6 million related to fixed assets andintangible assets and $2.5 million related to goodwill (Novokuibyshevsk plant).The related deferred tax benefit amounted to $3.2 million.

 

Theimpairment loss charge was included in “Other Operating Expenses” line of theconsolidated statement of income and comprehensive income for the year endedDecember 31, 2006. This amount is attributable to operational segments asfollows: Dairy - $7.1 million, Beverages - $11.0 million.

 

**11.**            Other Non-Current Assets

 

Othernon-current assets at December 31, 2007 and 2006 were comprised as follows:

 
| ** **                                | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Debt issuance costs, net of  amortization |       | $          | 1,006      |       | $          | 1,448 |   |
| Advances                                  |       | 4,326      |       | 2,306      |       |
| Other                                     |       | 95         |       | 1,439      |       |
| **Total other assets**                    | ** ** | **$**      | **5,427**  | ** ** | **$**      | **5,193** | ** ** |

 

F-29

----

** **

**Wimm-Bill-DannFoods**

** **

**Notes toConsolidated Financial Statements (continued)**

** **

**12**.      Accrued Liabilities

** **

Accrued liabilities at December 31, 2007 and 2006 werecomprised as follows:

 
| ** **                                      | ** ** | **2007** | ** ** | **2006**   | ** ** |
|-------------------------------------------------|------------|----------|------------|------------|------------|
|                                            |       |     |       |       |       |
| Payroll related accruals                        |       | $        | 38,697     |       | $          | 28,483 |   |
| Interest accruals                               |       | 3,629    |       | 2,281      |       |
| Audit and other professional services  accruals |       | 2,681    |       | 829        |       |
| Marketing and advertising accruals              |       | 1,511    |       | 979        |       |
| Tax contingencies                               |       | 1,832    |       | 1,689      |       |
| Other accruals                                  |       | 3,527    |       | 2,842      |       |
| **Total accrued liabilities**                   | ** ** | **$**    | **51,877** | ** ** | **$**      | **37,103** | ** ** |

** **

**13.      Short-Term and Long-Term Loans**

** **

Short-term loans at December 31, 2007 and 2006 were asfollows:

 
| ** **                  | ** ** | **2007**               | ** ** | **2006**   | ** ** |
|-----------------------------|------------|------------------------|------------|------------|------------|
| ** **                  | ** ** | **No. of  loans** | ** ** | **Amount** | ** ** | **Weighted  average  interest  rate** | ** ** | **No. of  loans** | ** ** | **Amount** | ** ** | **Weighted  average  interest  rate** | ** ** |
| ** **                  | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Ruble denominated           |       | 24                     |       | $          | 97,514     |   | 7.13 | % | 24 |   | $ | 123,849 |   | 8.09 | % |
|                        |       |                   |       |       |       |   |   |   |   |   |   |   |   |
| U.S. dollar denominated     |       | 3                      |       | 1,305      |       | 7.75 | % |   |   | — |   | — |   |
|                        |       |                   |       |       |       |   |   |   |   |   |   |   |   |
| **Total  short-term loans** | ** ** | ** **             | ** ** | **$**      | **98,819** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | **123,849** | ** ** | ** ** | ** ** |

 

F-30

----

** **

**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**13.      Short-Term and Long-Term Loans** (continued)

** **

Long-term loans at December 31,2007 and 2006 were as follows:

 
| ** **                               | ** ** | **2007**               | ** ** | **2006**   | ** ** |
|------------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                               | ** ** | **No. of  loans** | ** ** | **Amount** | ** ** | **Weighted  average  interest  rate** | ** ** | **No. of  loans** | ** ** | **Amount** | ** ** | **Weighted  average  interest  rate** | ** ** |
| ** **                               | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| EURO denominated (maturity 2011-2012)    |       | 2                      |       | $          | 6,729      |   | 1.86 | % | 2 |   | $ | 7,698 |   | 1.89 | % |
|                                     |       |                   |       |       |       |   |   |   |   |   |   |   |   |
| Ruble denominated (maturity 2010 -2012)  |       | 26                     |       | 34,357     |       | 5.34 | % | 22 |   | 26,521 |   | 5.41 | % |
|                                     |       |                   |       |       |       |   |   |   |   |   |   |   |   |
| Total amount of  long-term borrowings    |       |                   |       | 41,086     |       |   |   |   |   | 34,219 |   |   |   |
|                                     |       |                   |       |       |       |   |   |   |   |   |   |   |   |
| Less current portion of  long-term loans |       |                   |       | (6,455     | )          |   |   |   |   | (4,137 | ) |   |   |
|                                     |       |                   |       |       |       |   |   |   |   |   |   |   |   |
| **Total  long-term loans**               | ** ** | ** **             | ** ** | **$**      | **34,631** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | **30,082** | ** ** | ** ** | ** ** |

 

Guarantees

 

At December 31, 2007 and 2006,WBD Foods and certain other major subsidiaries guaranteed certain short-termand long-term bank loans received by other subsidiaries of WBD Foods. Theaggregate amount of such guarantees equaled the carrying amount of therespective short-term and long-term loans.

 

Maturity of Long-Term Loans

 

The maturities of long-termloans outstanding at December 31, 2007 was as follows:

 
| ** **                 | ** ** | **Years ended  December 31,** | ** ** |
|----------------------------|------------|-----------------------------------------|------------|
|                       |       |                                    |       |
| 2008                       |       | $                                       | 6,455      |   |
| 2009                       |       | 7,089                                   |       |
| 2010                       |       | 10,835                                  |       |
| 2011                       |       | 6,368                                   |       |
| 2012                       |       | 10,339                                  |       |
| **Total  long-term loans** | ** ** | **$**                                   | **41,086** | ** ** |

##### *** ***

F-31

----

** **

**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**13.      Short-Term and Long-Term Loans (continued)**

** **

Collateral

 

Certain of the Company’sinventories and property, plant and equipment served as collateral for theshort-term and long-term loans from International Moscow Bank,Rosselkhozbankbank, Gazprombank, Uralsib Bank Nomos-Bank and Sberbank.

 

At December 31, 2007 and 2006the assets that served as collateral consisted of the following:

 

·                  Inventory in the amounts of $3,192 and $12,063,respectively;

 

·                  Property, plant and equipment with a net bookvalue of $78,008 and $95,608, respectively.

 

**14**.      Long-Term Notes Payable

** **

Notes payable issued by WBD Foods at December 31, 2007and 2006 were as follows:

 
| **Issuer**                | ** ** | **Currency** | ** ** | **2007**   | ** **        | **2006**   | ** ** |
|---------------------------|------------|--------------|------------|------------|-------------------|------------|------------|
| ** **                | ** ** | ** **   | ** ** | ** ** | ** **        | ** ** | ** ** |
| WBD Foods                 |       | U.S. dollar  |       | $          |  300,000     |       | $          |  150,000 |   |
| WBD Foods                 |       | Ruble        |       | 105,922    |              | 98,742     |       |
| ** **                | ** ** | ** **   |       | 405,922    |              | 248,742    |       |
| less current portion      |       |         |       | 300,000    |              | —     |       |
|                      |       |         |       |       |              | —     |       |
| **Total long-term notes** | ** ** | ** **   | ** ** | **$**      | ** 105,922** | ** ** | **$**      | ** 248,742** | ** ** |

** **

WBD Foods 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 loan (the “Loan”) to WBD Foods. The Loan bearsthe interest at an annual rate of 8.5%, payable semi-annually in arrears on May21 and November 21 of each year. The Loan matured and was fully repaid in May2008.

 

F-32

----

** **

**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**14**.      Long-Term Notes Payable(continued)

** **

Nine of WBD Foods’ subsidiaries unconditionally,irrevocably, jointly and severally guarantee its obligation under the Loan.

 

On February 6, 2007, UBS(Luxembourg) S.A. issued 7.5% Loan Participation Notes due 2008 for the solepurpose of funding a $150,000 loan (the “Loan”) to WBD Foods. The Loan bearsinterest at an annual rate of 7.5%, payable in two installments on November 14,2007 and May 14, 2008. The loan was fully repaid in May 2008.

 

The loan agreements contain a number of covenantsincluding requirements to maintain certain financial ratios.

 

WBD Foods Ruble Notes

 

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 ($122,219 at theexchange rate as of December 31, 2007 of which $16,297 have been repaid as ofDecember 31, 2007). The notes are redeemable by WBD Foods on December 15, 2010.The interest rate of the coupon is 9%. Interest is payable semi-annually inarrears commencing on June 21, 2006.

 

F-33

----

** **

**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**15.      Vendor Financing**

** **

The Company has certain vendorfinancing obligations included in other payables and other long-term payableswhich primarily represent payables for property, plant and equipment and werecomprised of the following as of December 31,2007 and 2006:

 
| ** **                                     | ** ** | **2007** | ** ** | **2006**   | ** ** |
|------------------------------------------------|------------|----------|------------|------------|------------|
| Vendors’ financing obligations, including |       |     |       |       |       |
| Current portion                                |       | $        | 15,731     |       | $          | 15,284 |   |
| Long-term portion                              |       | 17,372   |       | 20,905     |       |
| **Total vendor financing obligations**         | ** ** | **$**    | **33,103** | ** ** | **$**      | **36,189** | ** ** |

 

The Company has agreements withsuppliers of equipment, which provide financing for the periods ranging from 1to 9 years. As of December 31, 2007 and 2006, vendor financing obligations were$14,000 and $21,013, respectively, EURO 11,138 thousand and EURO 10,628 thousand, respectively (equivalent to $16,305 and$14,004 as of December 31, 2007 and 2006, respectively) and 68,678 thousandrubles and 30,858 thousand rubles, respectively (equivalent to $2,798 and$1,172 as of December 31, 2007 and 2006, respectively). This financing isprovided at interest rates of LIBOR plus 1.5%, EURIBOR plus 1.6%, and 10.0% forU.S. dollar, EURO and ruble denominated contracts, respectively. At December31, 2007 and 2006, property, plant and equipment, net amounting to $48,770 and$60,804 respectively, served as collateral under these financing agreements.

 

F-34

----

** **

**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**15.      Vendor Financing** (continued)

** **

The maturity of vendors financing obligationsoutstanding at December 31, 2007 was as follows:

 
| ** **                                     | ** ** | **Years ended  December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------------------------|------------|
| 2008                                           |       | $                                       | 17,300     |   |
| 2009                                           |       | 14,362                                  |       |
| 2010                                           |       | 4,941                                   |       |
| 2011                                           |       | 1,432                                   |       |
| 2012                                           |       | 42                                      |       |
| Total maturity of vendor financing obligations |       | 38,077                                  |       |
| Less: amount representing interest             |       | (4,974                                  | )          |
| **Total vendor financing  obligations**        | ** ** | **$**                                   | **33,103** | ** ** |

 

**1**6.      IncomeTax

** **

WBD Foods’ provision for income taxes for the yearsended December 31, 2007, 2006 and 2005 was as follows:

 
| ** **                            | ** ** | **2007** | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------------------|------------|----------|------------|------------|------------|------------|------------|
| Current income tax provision          |       | $        | 49,409     |       | $          | 48,232     |       | $ | 27,385 |   |
| Deferred income tax charge/(benefit)  |       | 4,893    |       | (6,672     | )          | 3,327      |       |
| **Total provision for income  taxes** | ** ** | **$**    | **54,302** | ** ** | **$**      | **41,560** | ** ** | **$** | **30,712** | ** ** |

 

WBD Foods’ statutory income tax rate was 24% for theperiods presented above.

 

Foreign current income taxprovisions for the years ended December 31, 2007, 2006 and 2005 were $2,068,$2,372 and $700, respectively.  Foreign deferredincome tax charge/(benefit) for the years ended December 31, 2007, 2006 and2005 were $69, $(258) and $637, respectively.

 

F-35

----

** **

**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**16.      IncomeTax (continued)**

** **

The reconciliation of the income tax provision using Russianstatutory income tax rate of 24% to the Company’s provision for income taxes isas follows:

 
| ** **                                                                          | ** ** | **2007** | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|------------|------------|
|                                                                                |       |     |       |       |       |       |       |
| Income before provision for income taxes                                            |       | $        | 197,119    |       | $          | 140,141    |       | $ | 64,627 |   |
| Russian statutory tax rate                                                          |       | 24       | %          | 24         | %          | 24         | %          |
| Income tax provision at Russian statutory rate                                      |       | 47,309   |       | 33,634     |       | 15,510     |       |
| Tax effect of expenses not deductible for national  statutory taxation purposes     |       | 12,758   |       | 10,829     |       | 12,341     |       |
| Tax effect of income not taxable for national  statutory taxation purposes          |       | (2,396   | )          | (2,172     | )          | (974       | )          |
| Tax effect of income tax privileges relating to  small business enterprises benefit |       | —   |       | —     |       | (275       | )          |
| Tax effect of income tax at different rates                                         |       | (947     | )          | (849       | )          | 470        |       |
| Increase (decrease) in valuation allowance                                          |       | (2,741   | )          | (370       | )          | 2,609      |       |
| Tax effect of other permanent differences                                           |       | 319      |       | 488        |       | 1,031      |       |
|                                                                                |       |     |       |       |       |       |       |
| **Provision for income taxes**                                                      | ** ** | **$**    | **54,302** | ** ** | **$**      | **41,560** | ** ** | **$** | **30,712** | ** ** |

 

Unusedcredits, such as profit tax privileges, may not usually be carried forwardunder Russian tax legislation.  Accordingly, tax credits are reflected in theCompany’s consolidated financial statements only to the extent and in the yearin which the credits are utilized.

 

F-36

----

** **

**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**16.      IncomeTax (continued)**

** **

Temporarydifferences between the tax bases of assets and liabilities and the respective carrying amounts in these consolidated financial statements give riseto the following deferred tax assets and liabilities at December 31, 2007and 2006:

 
| ** **                                                                               | ** ** | **2007**   | ** **  | **2006**   | ** ** |
|------------------------------------------------------------------------------------------|------------|------------|-------------|------------|------------|
| ** **                                                                               | ** ** | ** ** | ** **  | ** ** | ** ** |
| Deferred tax assets/(liabilities) arising  from tax effect of:                           |       |       |        |       |       |
| Losses carried forward                                                                   |       | $          | 4,546       |       | $          | 8,541 |   |
| Intangible assets                                                                        |       | 602        |        | 867        |       |
| Property, plant and equipment                                                            |       | 2,534      |        | 8,646      |       |
| Allowance for doubtful accounts                                                          |       | 4,857      |        | 4,883      |       |
| Obsolescence and net realizable value  inventory write off and other accrued liabilities |       | 3,431      |        | 2,448      |       |
| Payroll related accruals                                                                 |       | 6,849      |        | 4,265      |       |
| Accrued liabilities                                                                      |       | 2,999      |        | 576        |       |
| Future period expenses                                                                   |       | —     |        | 466        |       |
| Other                                                                                    |       | 41         |        | 146        |       |
| Gross deferred tax asset                                                                 |       | 25,859     |        | 30,838     |       |
| Less valuation allowance for deferred tax  asset                                         |       | (4,356     | )           | (7,097     | )          |
| Deferred tax asset net of valuation allowance                                            |       | 21,503     |        | 23,741     |       |
| Intangible assets                                                                        |       | (5,229     | )           | (5,035     | )          |
| Property, plant and equipment                                                            |       | (23,877    | )           | (22,183    | )          |
| Investments in direct finance lease                                                      |       | (2,661     | )           | (2,896     | )          |
| Debt issuance costs                                                                      |       | (241       | )           | (348       | )          |
| Other                                                                                    |       | (80        | )           | (68        | )          |
| Gross deferred tax liability                                                             |       | (32,088    | )           | (30,530    | )          |
| **Net deferred tax liability**                                                           | ** ** | **$**      | **(10,585** | **)**      | **$**      | **(6,789** | **)** |
| Balance sheet classification is as follows:                                              | ** ** | ** ** | ** **  | ** ** | ** ** |
| Current deferred tax asset                                                               |       | $          | 17,479      |       | $          | 12,749 |   |
| Long-term deferred tax asset                                                             |       | 2,947      |        | 8,737      |       |
| Long-term deferred tax liability                                                         |       | (31,011    | )           | (28,275    | )          |

 

F-37

----

** **

**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**16.      IncomeTax (continued)**

** **

Inthe context of the Company’s current structure, tax losses and current taxassets of the different subsidiaries may not be set off against current taxliabilities and taxable profits of other subsidiaries and, accordingly, taxesmay accrue even where there is a net consolidated tax loss. Therefore, deferredtax assets of one subsidiary of the Company are not offset against deferred taxliabilities of another subsidiary. As at December 31, 2007 and 2006, avaluation allowance has been recorded for deferred tax assets in the amounts of$4,356 and $7,097, respectively as it is not more likely than not thatsufficient taxable profit will be available to offset the deductible temporarydifferences to which these assets relate.

 

For statutory income tax purposes, WBD Foods and itssubsidiaries had accumulated tax losses of $18,809 which may be carried forwardfor use against future taxable income, of which $272 and $265 expire in theperiod 2009-2010 and $1,608, $6,468, $1,141, $2,113, $6,942 expire in theperiod 2013-2017, respectively. The accumulated tax losses of the Russiansubsidiaries were used starting from the year 2007.

 

F-38

----

** **

**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**16.      IncomeTax (continued)**

** **

Starting from January 1, 2007, the Company adopted theprovisions of FIN 48 (Note 2). The Company recognizes interest accrued relatedto unrecognized tax benefits and penalties, if any, in interest expense.Currently, the tax years ended December 31, 2005, 2006 and 2007 remainedsubject to examination by Russian, Ukraine, Kazakh, Uzbek and Georgian tax authorities,and the years ended December 31, 2006 and 2007 remained subject to examinationby Kyrgyz tax authorities.  Thereconciliation of the total amounts of unrecognized tax benefit for the yearended December 31, 2007 is presented in the table below:

 
| **Balance as of January 1, 2007**                                                                                                                                                   | ** ** | **$**  | ** 894** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------|---------------|------------|
| The gross amounts of the increase (decreases)  in unrecognized tax benefits, included in income tax expense in the  accompanying consolidated statement of income and comprehensive income, as a  result of: |       |   |          |
| Increase of tax positions taken during the  current period                                                                                                                                                   |       | 642    |          |
| Decrease of tax positions taken during the  current period                                                                                                                                                   |       | (127   | )             |
| Increase of tax positions taken during a  prior period                                                                                                                                                       |       | 349    |          |
| Decrease of tax positions taken during a  prior period                                                                                                                                                       |       | (873   | )             |
| Amount of decreases in the unrecognized tax  benefits as a result of resolution through litigation — prior periods                                                                                      |       | (354   | )             |
| Foreign currency translation adjustment                                                                                                                                                                      |       | 48     |          |
| **Balance as of December 31, 2007**                                                                                                                                                                          | ** ** | **$**  | **579**       | ** ** |

 

The total unrecognized tax benefit as of December 31,2007 amounts to $579, which includes $414 of unrecognized tax benefits that, ifrecognized, would affect the effective income tax rate in any future periods.

 

**17**.      Government Grants

** **

In 1993-1999 Moscow Baby Food Plant (“ZDMP”) receivedcapital grants from the 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. Theconditions of the grants are that ZDMP must continue to use the relatedproperty, plant and equipment for baby food production. Management believesthat it has complied with this condition and will continue to comply in thefuture.

 

F-39

----

** **

**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**17.      GovernmentGrants (continued)**

** **

Themovement in capital government grants during the years ended December 31, 2007,2006 and 2005 was as follows:

 
| Balance at December 31, 2004                                        |       | $      | 7,485     |       |
|---------------------------------------------------------------------|------------|--------|-----------|------------|
| Amortization                                                        |       | (2,107 | )         |
| Currency translation  adjustment                                    |       | 15     |      |
| Balance at December 31, 2005                                        |       | 5,393  |      |
| Amortization                                                        |       | (2,507 | )         |
| Decrease of government grants due to minority  interest acquisition |       | (646   | )         |
| Currency translation  adjustment                                    |       | 307    |      |
| Balance at December 31,  2006                                       |       | 2,547  |      |
| Amortization                                                        |       | (1,612 | )         |
| Currency translation  adjustment                                    |       | 116    |      |
| **Balance at December 31,  2007**                                   | ** ** | **$**  | **1,051** | ** ** |
| Short-term portion                                                  |       | 77     |      |
| Long-term portion                                                   |       | 974    |      |

 

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.

 

WBD Foods did not receive any grants during the yearsended December 31, 2007 and 2006.

 

**18.       Shareholders’ Equity**

** **

In accordance withRussian corporate laws, earnings available for dividends are limited toprofits, denominated in domestic currency, after certain deductions. At theannual shareholders’ meeting on June 28, 2007, dividends per common share weredeclared for 2006 in the amount of 3.18 Russian rubles per common share whichat the date of the meeting were equivalent to $0.12.

 

F-40

----

** **

**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**19.     **Financial Income and Expenses, net

** **

Financialincome and expenses, net for 2007, 2006, and 2005 were comprised of thefollowing:

 
| ** **                                    | ** ** | **2007** | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------|------------|----------|------------|------------|------------|------------|------------|
|                                          |       |     |       |       |       |       |       |
| Interest expense                              |       | $        | 34,988     |       | $          | 27,898     |       | $ | 23,388 |   |
| Interest income                               |       | (2,952   | )          | (4,372     | )          | (1,569     | )          |
| Foreign currency gains, net                   |       | (18,120  | )          | (10,288    | )          | (1,231     | )          |
| Bank charges                                  |       | 2,912    |       | 2,070      |       | 1,983      |       |
| Other financial expense, net                  |       | 23       |       | 172        |       | 297        |       |
| **Total financial income and  expenses, net** | ** ** | **$**    | **16,851** | ** ** | **$**      | **15,480** | ** ** | **$** | **22,868** | ** ** |

** **

**20.     ****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 consolidated statements of income andcomprehensive income. Pension costs amounted to $32,466, $26,270 and $20,282 in2007, 2006 and 2005, respectively. WBD Foods has no other pension obligations.

 

F-41

----

** **

**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**21.      Segment**Information

** **

The Company’s major reportable business segments aredairy,****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.

 

Management evaluates segment performance based onsegment profit or loss before minority interests and deferred taxes. Transfersbetween segments are made at values that approximate market values.

 

###### **Operating Segments – yearended December 31, 2007**

 
| ** **                                                                | ** ** | **Dairy**     | ** **    | **Beverages** | ** ** | **Baby  Food** | ** ** | **Common and  corporate  assets/expenses** | ** ** | **Intersegment  receivables/  payables** | ** ** | **Consolidated** | ** **  |
|---------------------------------------------------------------------------|------------|---------------|---------------|---------------|------------|----------------|------------|-------------------------------------------------|------------|------------------------------------------|------------|------------------|-------------|
| ** **                                                                | ** ** | ** **    | ** **    | ** **    | ** ** | ** **     | ** ** | ** **                                      | ** ** | ** **                               | ** ** | ** **       | ** **  |
| Total sales                                                               |       | $             | 1,853,840     |          | $          | 414,117        |       | $                                               | 171,753    |                                     | —     |             | —      |   | $ | 2,439,710 |   |
| Inter segment sales                                                       |       | (1,382        | )             | —        |       | —         |       | —                                          |       | —                                   |       | (1,382           | )           |
| **Sales  to external customers**                                          | ** ** | **1,852,458** | ** **    | **414,117**   | ** ** | **171,753**    |       | —                                          |       | —                                   | ** ** | **2,438,328**    | ** **  |
| Cost of sales                                                             |       | (1,311,383    | )             | (249,260      | )          | (94,236        | )          | —                                          |       | —                                   |       | (1,654,879       | )           |
| **Gross  profit**                                                         | ** ** | **541,075**   | ** **    | **164,857**   | ** ** | **77,517**     |       | —                                          |       | —                                   | ** ** | **783,449**      | ** **  |
| Operating expenses                                                        |       | (362,642      | )             | (123,989      | )          | (31,860        | )          | (50,988                                         | )          | —                                   |       | (569,479         | )           |
| **Operating  income (loss)**                                              | ** ** | **178,433**   | ** **    | **40,868**    | ** ** | **45,657**     | ** ** | **(50,988**                                     | )          | —                                   | ** ** | **213,970**      | ** **  |
| Financial income and  expense, net and current provision for income taxes |       | (36,651       | )             | (4,198        | )          | (12,625        | )          | (12,786                                         | )          | —                                   |       | (66,260          | )           |
| **Net  segment profit (loss)**                                            | ** ** | **$**         | **141,782**   | ** **    | **$**      | **36,670**     | ** ** | **$**                                           | **33,032** | ** **                               | **$**      | **(63,774**      | **)**       | **—** | ** ** | **$** | **147,710** | ** ** |
| Deferred income tax  expense                                              |       |          |          |          |       |           |       |                                            |       |                                     |       | (4,893           | )           |
| Minority interest                                                         |       |          |          |          |       |           |       |                                            |       |                                     |       | (2,769           | )           |
| **Net  income**                                                           |       |          |          |          |       |           |       |                                            |       |                                     | ** ** | **$**            | **140,048** | ** ** |
| **Segment  total assets**                                                 | ** ** | **$**         | **1,195,861** | ** **    | **$**      | **280,103**    | ** ** | **$**                                           | **73,391** | ** **                               | **$**      | **163,617**      | ** **  | **$** | **(179,870** | **)** | **$** | **1,533,102** | ** ** |
| **Expenditure  for property, plant and equipment**                        | ** ** | **$**         | **134,568**   | ** **    | **$**      | **21,548**     | ** ** | **$**                                           | **28,177** | ** **                               | **$**      | **8,369**        | ** **  | **$** | **—** | ** ** | **$** | **192,662** | ** ** |
| **Depreciation  and amortization**                                        | ** ** | **$**         | **67,322**    | ** **    | **$**      | **14,071**     | ** ** | **$**                                           | **3,563**  | ** **                               | **$**      | **1,618**        | ** **  | **$** | **—** | ** ** | **$** | **86,574** | ** ** |

 

F-42

----

** **

**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**2**1.                   SegmentInformation (continued)

** **

###### **Operating Segments – yearended December 31, 2006**

 
| ** **                                                                | ** ** | **Dairy**     | ** **  | **Beverages** | ** ** | **Baby  food** | ** ** | **Common and  corporate  assets/expenses** | ** ** | **Intersegment  receivables/  payables** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|---------------|-------------|---------------|------------|----------------|------------|-------------------------------------------------|------------|------------------------------------------|------------|------------------|------------|
| ** **                                                                | ** ** | ** **    | ** **  | ** **    | ** ** | ** **     | ** ** | ** **                                      | ** ** | ** **                               | ** ** | ** **       | ** ** |
| Total sales                                                               |       | $             | 1,339,621   |          | $          | 324,074        |       | $                                               | 117,152    |                                     | $          | —           |       | — |   | $ | 1,780,847 |   |
| Inter  segment sales                                                      |       | (18,720       | )           | —        |       | —         |       | —                                          |       | —                                   |       | (18,720          | )          |
| **Sales  to externalcustomers**                                           | ** ** | **1,320,901** | ** **  | **324,074**   | ** ** | **117,152**    | ** ** | **—**                                      | ** ** | **—**                               | ** ** | **1,762,127**    | ** ** |
| Cost  of sales                                                            |       | (917,813      | )           | (209,630      | )          | (66,716        | )          |                                            |       | —                                   |       | (1,194,159       | )          |
| **Gross profit**                                                          | ** ** | **403,088**   | ** **  | **114,444**   | ** ** | **50,436**     | ** ** | **—**                                      | ** ** | **—**                               | ** ** | **567,968**      | ** ** |
| Operating  expenses                                                       |       | (243,943      | )           | (105,712      | )          | (18,116        | )          | (44,576                                         | )          | —                                   |       | (412,347         | )          |
| **Operating income (loss)**                                               | ** ** | **159,145**   | ** **  | **8,732**     | ** ** | **32,320**     | ** ** | **(44,576**                                     | **)**      | **—**                               | ** ** | **155,621**      | ** ** |
| Financial  income and expense, net and current provision for income taxes |       | (39,809       | )           | (3,900        | )          | (8,688         | )          | (11,315                                         | )          | —                                   |       | (63,712          | )          |
| **Net segment profit (loss)**                                             | ** ** | **$**         | **119,336** | ** **    | **$**      | **4,832**      | ** ** | **$**                                           | **23,632** | ** **                               | **$**      | **(55,891**      | **)**      | **—** | ** ** | **$** | **91,909** | ** ** |
| Deferred  income tax benefit                                              |       |          |        |          |       |           |       |                                            |       |                                     |       | 6,672            |       |
| Minority  interest                                                        |       |          |        |          |       |           |       |                                            |       |                                     |       | (3,197           | )          |
| Net  income                                                               |       |          |        |          |       |           |       |                                            |       |                                     | ** ** | **$**            | **95,384** | ** ** |
| **Total assets**                                                          | ** ** | **$**         | **915,244** | ** **    | **$**      | **214,706**    | ** ** | **$**                                           | **90,122** | ** **                               | **$**      | **128,683**      | ** ** | **$** | **(172,819** | **)** | **$** | **1,175,936** | ** ** |
| **Expenditure  for property, plant and equipment**                        | ** ** | **$**         | **93,322**  | ** **    | **$**      | **13,474**     | ** ** | **$**                                           | **19,356** | ** **                               | **$**      | **3,811**        | ** ** | **$** | **—** | ** ** | **$** | **129,963** | ** ** |
| **Depreciation  and amortization**                                        | ** ** | **$**         | **46,849**  | ** **    | **$**      | **11,515**     | ** ** | **$**                                           | **3,010**  | ** **                               | **$**      | **955**          | ** ** | **$** | **—** | ** ** | **$** | **62,329** | ** ** |

###### ** **

F-43

----

** **

**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**2**1.                   SegmentInformation (continued)

** **

###### **Operating Segments – yearended December 31, 2005**

 
| ** **                                                                | ** ** | **Dairy**     | ** **  | **Beverages** | ** ** | **Baby  food** | ** ** | **Common and  corporate  assets/expenses** | ** ** | **Intersegment  receivables/  payables** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|---------------|-------------|---------------|------------|----------------|------------|-------------------------------------------------|------------|------------------------------------------|------------|------------------|------------|
| ** **                                                                | ** ** | ** **    | ** **  | ** **    | ** ** | ** **     | ** ** | ** **                                      | ** ** | ** **                               | ** ** | ** **       | ** ** |
| Total sales                                                               |       | $             | 1,005,774   |          | $          | 303,147        |       | $                                               | 87,839     |                                     | $          | 3                |       | $ | — |   | $ | 1,396,763 |   |
| Inter segment sales                                                       |       | (2,173        | )           | —        |       | —         |       | —                                          |       | —                                   |       | (2,173           | )          |
| **Sales to externalcustomers**                                            | ** ** | **1,003,601** | ** **  | **303,147**   | ** ** | **87,839**     | ** ** | **3**                                           | ** ** | **—**                               | ** ** | **1,394,590**    | ** ** |
| Cost of sales                                                             |       | (750,663      | )           | (193,846      | )          | (54,480        | )          | (17                                             | )          | —                                   |       | (999,006         | )          |
| **Gross profit**                                                          | ** ** | **252,938**   | ** **  | **109,301**   | ** ** | **33,359**     | ** ** | **(14**                                         | **)**      | **—**                               | ** ** | **395,584**      | ** ** |
| Operating expenses                                                        |       | (177,672      | )           | (88,078       | )          | (11,593        | )          | (30,746                                         | )          | —                                   |       | (308,089         | )          |
| **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 income tax  expense                                              |       |          |        |          |       |           |       |                                            |       |                                     |       | (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-44

----

** **

**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**2**1.                   SegmentInformation (continued)

** **

For the years ended December 31, 2007, 2006, and 2005,approximately 93%, 93%, and 92%

 

of sales were generated in and sold to customers inRussia. As of December 31, 2007 and 2006, the long-lived assets of the Companylocated in Russia comprised to $757,672 and $591,718, respectively.

 

**22.     **Share-based Awards

** **

In 2006 the Company established stock option plan fora number of its executives.

 

The exercise price of the options equals the averagesales price of the stock over the 90 days period preceding each annual grant.Each tranche vests one-third annually over a three year period and can besettled in cash. The contractual terms of options are three to five years fromgrant date.

 

Since April 1, 2007, a long-term incentive plan fortop management was approved by the Board of Directors. According to thisprogram a certain number of senior management are rewarded with Stock AppreciationRights (“SAR”) linked to the price of the Company’s ADR.  Commencing April 1, 2007 all outstandingstock options were converted into SARs on the following basis: 1 stock option =1 SAR.

 

The exercise price of SARs is determined as theaverage market value of ADR of the Company over the period January 1stto the date prior to the Board meeting at which the prior year U.S. GAAPStatements are approved. The exercise price of SARs granted in 2007 was $64.09.Each tranche vests one-third annually over a three year period and is settledin cash. The contractual terms of SARs are five years from grant date.

 

F-45

----

** **

**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**22.     **Share-based Awards (continued)

** **

Asummary of the changes in the Company’s share-based awards is presented below:

 
| ** **                            | ** ** | **Share-based  awards  ‘000** | ** ** | **Weighted  average exercise  price, U.S. dollar** | ** ** |
|---------------------------------------|------------|------------------------------------|------------|-------------------------------------------------------------------|------------|
| **Outstanding at December 31,  2005** | ** ** | **—**                         | ** ** | **—**                                                        | ** ** |
| Granted                               |       | 225                                |       | $                                                                 | 26.84      |   |
| Canceled                              |       | —                             |       | —                                                            |       |
| Forfeited                             |       | —                             |       | —                                                            |       |
| Exercised                             |       | —                             |       | —                                                            |       |
| **Outstanding at December 31,  2006** | ** ** | **225**                            | ** ** | **$**                                                             | **26.84**  | ** ** |
| Granted                               |       | 363                                |       | $                                                                 | 64.09      |   |
| Canceled                              |       | —                             |       | —                                                            |       |
| Exercised                             |       | 8                                  |       | 39.29                                                             |       |
| Forfeited                             |       | 5                                  |       | 63.86                                                             |       |
| **Outstanding at December 31,  2007** | ** ** | **575**                            | ** ** | **$**                                                             | **49.86**  | ** ** |

 

TheCompany expensed $15,951 and $2,205 for all share-based awards for the twelvemonths ended December 31, 2007, and 2006, respectively, and none in 2005.

 

Asof December 31, 2007, there was approximately $43,084 of total unrecognizedcompensation cost related to non-vested SARs awards.  The cost is expected to be recognized over aweighted-average requisite service period of 1.91 years.

 

Theestimated weighted average fair value of the share based awards as of December31, 2007 was $84.72 and $41.24 as of December 31, 2007 and 2006, respectively.As of December 31, 2007, 67,000 SARs granted were vested and exercisable.  As of December 31, 2006, no share basedawards were vested or exercisable.

 

Theintrinsic value of the SARs exercised during 2007 was $566.

 

Inaccordance with SFAS No. 123R, the awards have been accounted for as aliability and, as such, the awards’ fair value is remeasured at each reportingdate until the date of settlement.

 

F-46

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** **

**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**22.     **Share-based Awards (continued)

** **

The determination of fair value of share-based awardson the date of grant and each subsequent reporting date, using an optionvaluation model, is affected by the Company’s stock price as well asassumptions regarding a number of complex and subjective variables. Thesevariables include, but are not limited to, the expected stock price volatilityover the term of the awards and projected employee SARs exercise behaviors.

 

A summary of the assumptions used in the applicationof the Black-Sholes option valuation model as of the grant dates in the periodof twelve months ended December 31, 2007 were as follows:

 
| ** **                  | ** ** | **2007**    | ** ** | **2006**        | ** ** |
|-----------------------------|------------|-------------|------------|-----------------|------------|
| Volatility (1)              |       | 44.46%      |       | 32.28% - 36.55% |       |
| Risk-free interest rate (2) |       | 6.07%-6.08% |       | 6.10% - 6.18%   |       |
| Dividend yield (3)          |       | 0.41%       |       | 0.77% - 1.53%   |       |
| Expected life (years) (4)   |       | 3 years     |       | 3 years         |       |

 

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(1)       The volatility is based on historicalvolatility of the Company’s common stock over the same term as the expectedterm of the award.

 

(2)        The risk-free rate is based on the RussianFederation Government Bond with expected term similar to the expected term ofthe award.

 

(3)        The dividend yield is based on expectedannual dividends per share and the share price as of the grant date.

 

(4)        The expected life is based on the contractualterm of the share based awards and assumption that the share based awards willbe exercised after the vesting period but before end of contractual term.

 

F-47

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** **

**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**23. Related Parties**

** **

Milk Suppliers

 

During 2007, 2006 and 2005 the Company purchasedmilk from certain milk supplying companies, which are controlled by members ofits control group of shareholders, amounting to $17,473, $12,175 and $4,493,respectively. As of December 31, 2007 and 2006 accounts payable to thesemilk-supplying companies in respect of milk received amounted to $410 and $373,respectively.

 

AlfaStrahovanie

 

Since 2006 one of the members of WBD Foods’ Board ofDirectors was also a member of the Board of Directors of insurance companyAlfaStrahovanie. Insurance services received from AlfaStrahovanie in 2007 and2006 amounted to approximately $1,048 and $660, respectively. As of December31, 2007 and 2006 accounts payable to AlfaStrahovanie in respect to theseservices amounted to $119 and $284.

 

*Current Shareholders*

 

*During 2007 the Company provided for security services inthe amount of $246 to certain shareholders. As of December 31, 2007 the accountreceivable in respect of these services amounted to $204.*

* *

*During 2006, WBD Foods acquired 0.26% interest in WBD OJSCfrom current shareholders for $812 (see Note 3.)*

* *

Echo of Moscow

 

*Through 2006 one of the members of WBD Foods’ Boardof Directors was also a member of the Board of Directors in broadcastingcompany Echo of Moscow. Advertising services received from Echo of Moscow in2006 amounted to approximately $116. As of December 31, 2006 advances paid toEcho of Moscow in respect to these services amounted to $1.*

* *

**24.Commitments and Contingencies**

** **

Russian Environment andCurrent Economic Situation

 

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

 

F-48

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** **

**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**24. Commitments andContingencies** (continued)

** **

Taxation

 

Russian tax,currency and customs legislation is subject to varying interpretations, andchanges, which can occur frequently.  Management’s interpretation of suchlegislation as applied to the transactions and activity of the Group may bechallenged by the relevant regional and federal authorities.  Recentevents within the Russian Federation suggest that the tax authorities aretaking a more assertive position in its interpretation of the legislation andassessments and as a result, it is possible that transactions and activitiesthat have not been challenged in the past may be challenged.

 

As such, significantadditional taxes, penalties and interest may be assessed. It is not practicalto determine the amount of unasserted claims that may manifest, if any, or thelikelihood of any unfavorable outcome. Fiscal periods remain open to review bythe authorities in respect of taxes for three calendar years proceeding theyear of review. Under certain circumstances reviews may cover longer periods.

 

Overall, managementbelieves that the Group has paid or accrued all taxes that are applicable as atDecember 31, 2007. Where uncertainty exists, the Group has accrued taxliabilities based on management’s best estimate of the probable outflow ofresources embodying economic benefits, which will be required to settle theseliabilities. Possible liabilities for non-income tax contingencies and incometax contingencies other than those that meet the more-likely-then-notrecognition threshold, identified by management at the balance sheet date asthose that can be subject to different interpretations of the tax laws andregulations are not accrued in the consolidated financial statements.

 

During the period 2004 to March 31, 2005 certainsubsidiaries of WBD Foods utilized small business enterprises income taxbenefits which were available under Russian income tax legislation being inforce before January 1, 2002. The Company estimates that the tax savings to theCompany for the period 2004 to March 31, 2005 in respect of these income taxbenefits amounted to approximately $1,663. Should the Russian tax authoritiesquestion the appropriate use of these benefits by WBD Foods’ subsidiaries forthe year 2004, and January – March 2005, issue a claim and prove successful inthe court, they would be entitled to recover the amount claimed, together withpenalties amounting to 20% of such amount and interest at the rate of 1/300thof the Central Bank of Russia rate, equating to 0.033% as of December 31,2007, 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.

 

F-49

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** **

**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**24. Commitments andContingencies** (continued)

** **

TransferPricing

 

Russian transfer pricing rules entered into force in1999, giving Russian tax authorities the right to control prices fortransactions between related entities and certain other types of transactionsbetween independent parties, such as foreign trade transactions or transactionswith 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.

 

Supply of PackagingMaterials

 

The majority of the Company’s packaging materials arepurchased from one supplier. There can be no assurance that, in the event of aloss of this supplier or unfavorable developments in the business practices ofthis supplier, substantially all of the current levels of packaging materialscould be purchased at comparable, or nearly comparable, prices on theinternational market.

 

Capital commitments

 

As of December 31, 2007, our capital commitmentsamounted to $66.4 million.

 

Operating leases

 

During the years ended December 31 2007, 2006 and 2005the Company was not involved in any non-cancelable operating leasesarrangements.  The operating leaseexpenses for the years were as follows: $8,956, $7,504 and $2,077,respectively.

 

Litigations and claims

 

The Company is involved in various other claims andlegal proceedings arising in the normal course of business. While these claimsmay seek substantial damages against the Company and are subject to uncertaintyinherent in any litigation, management does not believe that the ultimateresolution of such matters will have a material adverse impact on the Company’soperating results or financial condition.

 

F-50

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** **

**Wimm-Bill-Dann Foods**

** **

**Notes to Consolidated FinancialStatements (continued)**

** **

**25. Subsequent Events**

** **

In March and April 2008, the Company placed third seriesof bonds on the Moscow Inter-bank Currency Exchange (MICEX). The bonds, with atotal nominal value of 5 billion rubles ($203.7 million at the exchange rate asat December 31, 2007), have a maturity of five years and coupons are paid on ahalf-yearly basis. The interest rates for both coupons in the first year areequal and amount to 9.30% annually and the rates for subsequent coupons will beset hereinafter based on the market conditions. The issue includes built-in1-year put option. The funds from the placement will be directed towardsrefinancing and the development of the Company.

 

OnApril 25, 2008, the Company signed an agreement to borrow a 3-year $250,000dual tranche syndicated loan. The availability period of the 1sttranche includes the date of agreement and to May 21, 2008; the 2nd-the date of agreement and 3 months after. The Loan bears interest at an annual rate of LIBOR plus 1.75%, payableevery three months.  The loan agreement contains a number ofcovenants including requirements to maintain certain financial ratios.

 

The proceedsof the facility will be used for the refinancing and general corporatepurposes.

 

F-51

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