**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

----

**Form 20-F**

**o**                                   Registration Statement pursuant toSection 12(b) or (g) of the Securities Exchange Act of 1934

**or**

**x**                                 Annual report pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934 for the fiscal year endedDecember 31, 2006

**or**

**o**                                   Transition report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934

**or**

**o**                                   Shell company report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934

**Commissionfile number: 1-31232**

----

**WIMM-BILL-DANN FOODS OJSC**

(Exact name of Registrantas specified in its charter)

**RUSSIAN FEDERATION**

(Jurisdiction ofincorporation or organization)

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

(Address of principalexecutive offices)

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

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

 

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

**NONE**

(Title of Class)

Securities for which thereis a reporting obligation pursuant to Section 15(d) of the Act:

**NONE**

(Title of Class)

Indicate the number ofoutstanding shares of each of the issuer’s classes of capital or common stockas of the close of the period covered by the annual report.

44,000,000 shares of commonstock, par value 20 Russian rubles each, as of December 31, 2006.

14,405,337 AmericanDepositary Shares, each representing one share of common stock, as of December 31,2006.

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

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

If this report is an annual or transition report,indicate by check mark if the registrant is not required to file reportspursuant to Section 13 or 15(d) of the Securities Exchange Act of1934.

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

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days.

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

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):
| Large accelerated filer: o | Accelerated filer: x | Non-accelerated filer: o |
|----------------------------|----------------------|--------------------------|

Indicate by check mark which financial statement itemthe registrant has elected to follow:

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

If this is an annual report, indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

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

----

(1)             Listed, not for trading or quotation purposes, but onlyin connection with the registration of ADSs pursuant to the requirements of theSecurities and Exchange Commission

 

----

| **CAUTIONARY STATEMENT  REGARDING FORWARD-LOOKING STATEMENTS** |                                                                          | 3      |
|----------------------------------------------------------------|-------------------------------------------------------------------------------|--------|
| **PART I**                                                |                                                                          | 4      |
| Item 1.                                                        | Identity of Directors,  Senior Management and Advisors                        |   | 4 |
| Item 2.                                                        | Offer Statistics and  Expected Timetable                                      |   | 4 |
| Item 3.                                                        | Key Information                                                               |   | 4 |
| Item 4.                                                        | Information on Our Company                                                    |   | 40 |
| Item 4A.                                                       | Unresolved Staff Comments                                                     |   | 76 |
| Item 5.                                                        | Operating and Financial  Review and Prospects                                 |   | 76 |
| Item 6.                                                        | Directors, Senior Management  and Employees                                   |   | 103 |
| Item 7.                                                        | Major Shareholders and  Related Party Transactions                            |   | 112 |
| Item 8.                                                        | Financial Information                                                         |   | 113 |
| Item 9.                                                        | Offer and Listing Details                                                     |   | 115 |
| Item 10.                                                       | Additional Information                                                        |   | 116 |
| Item 11.                                                       | Quantitative and Qualitative  Disclosures about Market Risk                   |   | 138 |
| Item 12.                                                       | Description of Securities  Other than Equity Securities                       |   | 141 |
| **PART II**                                               |                                                                          | 142    |
| Item 13.                                                       | Defaults, Dividend  Arrearages and Delinquencies                              |   | 142 |
| Item 14.                                                       | Material Modifications to  the Rights of Security Holders and Use of Proceeds |   | 142 |
| Item 15T.                                                      | Controls and Procedures                                                       |   | 142 |
| Item 16A.                                                      | Audit Committee Financial  Expert                                             |   | 145 |
| Item 16B.                                                      | Code of Ethics                                                                |   | 145 |
| Item 16C.                                                      | Principal Accountant Fees  and Services                                       |   | 146 |
| Item 16D.                                                      | Exemption from the Listing  Standards for Audit Committees                    |   | 146 |
| Item 16E.                                                      | Purchases of Equity  Securities by the Issuer and Affiliated Purchasers       |   | 146 |
| **PART III**                                              |                                                                          | 147    |
| Item 17.                                                       | Financial Statements                                                          |   | 147 |
| Item 18.                                                       | Financial Statements                                                          |   | 147 |
| Item 19.                                                       | Exhibits                                                                      |   | 148 |
|                                                                |                                                                               |        |  |  |

 

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

----

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

2

----

**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

Matters discussed in this document may constituteforward-looking statements. The Private Securities Litigation Reform Act of1995 provides safe harbor protections for forward-looking statements in orderto encourage companies to provide prospective information about theirbusinesses. Forward-looking statements include statements concerning plans,objectives, goals, strategies, future events or performance, and underlyingassumptions and other statements, which are other than statements of historicalfacts.

We desire to take advantage of the safe harborprovisions of the Private Securities Litigation Reform Act of 1995 and areincluding this cautionary statement in connection with this safe harbor legislationand other relevant laws. This document and any other written or oral statementsmade by us or on our behalf may include forward-looking statements, whichreflect our current views with respect to future events and financialperformance. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,”“forecast,” “project” and similar expressions identify forward-lookingstatements. Forward-looking statements appear in a number of places including,without limitation,

“Item 3. Key Information—D. Risk Factors,” “Item 4.Information on Our Company” and “Item 5. Operating and FinancialReview and Prospects,” and include statements regarding: strategies, outlookand growth prospects; future plans and potential for future growth; liquidity,capital resources and capital expenditures; growth in demand for our services;economic outlook and industry trends; developments of our markets; the impactof regulatory initiatives; and the strength of our competitors.

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

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

3

----

**PART I**

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

Not applicable.

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

Not applicable.

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

**A.**                SelectedFinancial Data

Theselected consolidated and combined financial data set forth below atDecember 31, 2006, 2005, 2004, 2003 and 2002 and for the years then endedhave been derived from our audited financial statements prepared in accordancewith U.S. GAAP. The selected consolidated and combined financial data should beread in conjunction with our Consolidated Financial Statements as ofDecember 31, 2006 and 2005 and for the years ended December 31, 2006,2005, and 2004 included under “Item 18. Financial Statements” and“Item 5. Operating and Financial Review and Prospects.”

| ** **                                                      | ** ** | **For the years ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Statement of Operations Data:**                               |       |                                                          |       |   |   |   |   |   |   |   |   |
| Sales                                                           |       | 1,762,127                                                     |       | 1,394,590 | (1) | 1,183,986 |   | 938,459 |   | 824,734 |   |
| Cost of sales                                                   |       | (1,194,159                                                    | )          | (999,006 | ) | (858,767 | ) | (665,104 | ) | (579,707 | ) |
| Gross profit                                                    |       | 567,968                                                       |       | 395,584 |   | 325,219 |   | 273,355 |   | 245,027 |   |
| Selling and distribution  expenses                              |       | (246,054                                                      | )          | (191,990 | ) | (173,433 | ) | (140,746 | ) | (109,527 | ) |
| General and  administrative expenses                            |       | (134,481                                                      | )          | (109,642 | ) | (92,816 | ) | (75,973 | ) | (62,955 | ) |
| Other operating expenses                                        |       | (31,812                                                       | )          | (6,457 | ) | (6,047 | ) | (7,481 | ) | (6,497 | ) |
| Operating income                                                |       | 155,621                                                       |       | 87,495 |   | 52,923 |   | 49,155 |   | 66,048 |   |
| Financial income and  expenses, net                             |       | (15,480                                                       | )          | (22,868 | ) | (14,618 | ) | (15,273 | ) | (14,131 | ) |
| Income before provision  for income taxes and minority interest |       | 140,141                                                       |       | 64,627 |   | 38,305 |   | 33,882 |   | 51,917 |   |
| Provision for income  taxes(2)                                  |       | (41,560                                                       | )          | (30,712 | ) | (12,170 | ) | (10,717 | ) | (14,249 | ) |
| Minority interest                                               |       | (3,197                                                        | )          | (3,649 | ) | (3,161 | ) | (2,012 | ) | (1,922 | ) |
| Net income                                                      |       | 95,384                                                        |       | 30,266 |   | 22,974 |   | 21,153 |   | 35,746 |   |
| Earnings per share—basic and diluted:                      |       |                                                          |       |   |   |   |   |   |   |   |   |
| Income from continuing  operations                              |       | 2.17                                                          |       | 0.69 |   | 0.52 |   | 0.48 |   | 0.83 |   |
| Income from discontinued    operations                          |       | —                                                        |       | — |   | — |   | — |   | — |   |
| Net income                                                      |       | 2.17                                                          |       | 0.69 |   | 0.52 |   | 0.48 |   | 0.83 |   |
| Dividends per share(3)                                          |       | 0.55                                                          |       | — |   | — |   | — |   | — |   |
| Weighted average number  of shares outstanding                  |       | 44,000,000                                                    |       | 44,000,000 |   | 44,000,000 |   | 44,000,000 |   | 43,063,014 |   |
| **Other Data:**                                                 |       |                                                          |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                            |       | 129,963                                                       |       | 75,110 |   | 72,639 |   | 107,186 |   | 136,100 |   |
| Cash provided by (used  in) operating activities                |       | 167,252                                                       |       | 113,937 |   | 71,720 |   | 29,940 |   | (6,863 | ) |
| Cash used in investing  activities                              |       | (228,158                                                      | )          | (125,157 | ) | (73,808 | ) | (95,142 | ) | (122,677 | ) |
| Cash (used in) provided by financing activities                 |       | 1,359                                                         |       | 82,619 |   | (16,159 | ) | 73,399 |   | 152,600 |   |

----

(1)          Where necessary, correspondingfigures have been adjusted to conform with changes in the presentation of thecurrent period. Previously, we classified as sales revenue amounts from salesof 

4

----

non-milk inventory andservices; related expenses were included in the cost of sales. Commencing 2006,we began classifying such items in other operating expenses. Prior net salesand cost of sales have been reclassified accordingly for comparative periodspresented in the accompanying financial statements. This change inclassification has no effect on previously reported net income.

(2)          Provision for incometaxes includes the tax benefit in our juice business relating to the smallenterprise tax legislation.

(3)          Dividendspaid in 2006 are attributable as follows: $0.17 per share—for years 2002-2004,$0.08 per share—for three months ended March 31, 2006, $0.30 per share—fornine months ended September 30, 2006.

| ** **                                       | ** ** | **At December 31,** | ** ** |
|--------------------------------------------------|------------|-------------------------------|------------|
| ** **                                       | ** ** | **2006**                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Balance Sheet Data:**                          |       |                          |       |   |   |   |   |   |   |   |   |
| Total assets                                     |       | 1,175,936                     |       | 920,557 |   | 796,088 |   | 743,885 |   | 589,093 |   |
| Total net assets                                 |       | 497,494                       |       | 387,043 |   | 370,916 |   | 324,618 |   | 282,884 |   |
| Total debt(1)                                    |       | 442,999                       |       | 371,646 |   | 283,168 |   | 283,442 |   | 186,039 |   |
| Total liabilities                                |       | 659,465                       |       | 508,895 |   | 407,845 |   | 398,099 |   | 284,660 |   |
| Total liabilities and  shareholders’ equity |       | 1,175,936                     |       | 920,557 |   | 796,088 |   | 743,885 |   | 589,093 |   |

----

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

**Exchange Rates andInflation**

Thefollowing tables show, for the periods indicated, certain information regardingthe exchange rate between the ruble and the U.S. dollar, based on datapublished by the Central Bank of Russia. These rates may differ from the actualrates used in the preparation of our financial statements and other financialinformation appearing herein.

| ** **                       | ** ** | **Rubles per U.S. dollar** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| ** **                       | ** ** | **High**                                  | ** ** | **Low** | ** ** | **Average(1)** | ** ** | **Period  End** | ** ** |
| **Year ended December 31,** |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| 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 |   |   |
| 2002                             |       | 31.86                                     |       | 30.14 |   |   | 31.39 |   |   |   | 31.78 |   |   |

----

(1)          Theaverage of the exchange rates on the last business day of each full monthduring the relevant period.

| ** **         | ** ** | **Rubles per U.S. dollar**                | ** ** |
|--------------------|------------|----------------------------------------------------------|------------|
| ** **         | ** ** | **    High    ** | ** ** | **    Low    ** | ** ** |
| May 2007      |       |                                                     | 25.92      |   |   |   | 25.69 |   |   |
| April 2007    |       |                                                     | 26.01      |   |   |   | 25.69 |   |   |
| March 2007    |       |                                                     | 26.24      |   |   |   | 25.97 |   |   |
| February 2007 |       |                                                     | 26.55      |   |   |   | 26.16 |   |   |
| January 2007  |       |                                                     | 26.58      |   |   |   | 26.45 |   |   |
| December 2006 |       |                                                     | 26.39      |   |   |   | 26.18 |   |   |

 

5

----

On June 5, 2007, the exchange rate between theruble and the U.S. dollar was 25.89 rubles per $1.00.

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

| ** **                        | ** ** | **Inflation  rate** | ** ** |
|-----------------------------------|------------|---------------------|------------|
| **Year  ended December 31,** |       |                |       |   |   |
| 2006                              |       |                | 9.7        | % |   |
| 2005                              |       |                | 10.9       | % |   |
| 2004                              |       |                | 11.7       | % |   |
| 2003                              |       |                | 12.0       | % |   |
| 2002                              |       |                | 15.1       | % |   |

----

Source: Central Bank of Russia.

Effective from January 1, 2003, Russia no longermet the criteria for a highly inflationary economy. Inflation continued to slowdown in Russia in the period from January 1, 2004 till now days. Inflationdynamics were affected by several factors resulting both to internationalenergy and oil market prices and to administrative decisions and controllingfactors of Bank of Russia.

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). In2006, 2005 and 2004, the ruble appreciated in real terms against the U.S.dollar.

| ** **                                                                               | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Inflation(1)                                                                             |       | 9.7      | %          | 10.9     | %          | 11.7     | %          |
| Nominal  appreciation/(depreciation) of the ruble relative to the U.S. dollar(1)(2) |       | 4.0      | %          | 1.9      | %          | 6.5      | %          |
| Real appreciation of the  ruble relative to the U.S. dollar(2)                           |       | 10.7     | %          | 10.8     | %          | 15.1     | %          |

----

(1)          Source: Central Bank ofRussia.

(2)          Forpurposes of calculating the interest rate of our U.S. dollar-denominated notes,we used the Russian ruble/U.S. dollar exchange rates at December 31, 2006,2005 and 2004, which appreciated/(depreciated) at the rates of 8.5%, (3.7)% and6.1%, respectively.

**B.**               Capitalizationand Indebtedness

Not applicable.

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

Not applicable.

**D.**              RiskFactors

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

*We have described the risks and uncertainties that ourmanagement believes are material, but these risks and uncertainties may not bethe only ones we face. Additional risks and uncertainties, including those we*

6

----

*currently are not aware of or deem immaterial, mayalso result in decreased operating revenues, increased operating expenses orother events that could result in a decline in the value of our ADSs.*

**Risks Relating toBusiness 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 emergingmarkets such as the Russian Federation should be aware that these markets aresubject to greater risks than more developed markets, including in some casessignificant legal, economic and political risks. Investors should also notethat emerging economies, such as the economy of the Russian Federation, aresubject to rapid change and that the information set out herein may becomeoutdated relatively quickly. Accordingly, investors should exercise particularcare in evaluating the risks involved and must decide for themselves whether,in light of those risks, their investment is appropriate. Generally, investmentin emerging markets is only suitable for sophisticated investors who fullyappreciate the significance of the risks involved and investors are urged toconsult their own legal and financial advisors before making an investment inour securities.

**Risks Relating toOur Business and Industry**

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

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

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

Our expansion strategy depends, in part, on fundinggrowth in additional markets, on our ability to identify attractiveopportunities in markets that will grow and on our ability to manage theoperations of acquired or newly established businesses. Should growth declinein our existing markets, not increase as anticipated in markets in which wehave recently acquired or established businesses, or not increase in marketsinto which we subsequently expand, our geographic expansion strategy may not besuccessful and our business and profitability may suffer.

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

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

7

----

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

***We cannot assureyou of the successful integration of existing or newly acquired businesses. Ifwe fail to integrate our businesses successfully, our rate of expansion couldslow and 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 successfulin realizing any of the anticipated benefits of the companies that we are nowin the process of integrating or that we may acquire in the future. If we donot realize these benefits, our financial condition, results of operations andprospects could be materially adversely affected.

We also may acquire orestablish businesses in countries that may represent new operating environmentsfor us and which may be located a great distance from our headquarters inMoscow. We may thus have less control over the activities of these companiesand may face more uncertainties with respect to the operational and financialneeds of these businesses, which may hinder our integration efforts.

***Rapid growth andexpansion may cause us difficulty in obtaining adequate managerial andoperational resources, restricting our ability to expand successfully 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, as well as the responsibilities of management, have increased as aresult of this growth, placing significant strain on our managerial andoperational resources. Our future operating results depend, in significantpart, upon the continued contributions of our management and technicalpersonnel.

We will need tocontinue to improve our operational and financial systems and managerial controlsand procedures to keep pace with our growth. We will also have to maintainclose coordination among our logistical, technical, accounting, finance,marketing and sales personnel. Management of growth will require, among otherthings:

·       theability to integrate new acquisitions into our operations;

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

8

----

·       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 manageour growth successfully could have a material adverse effect on our business,financial condition and results of operations.

***There are materialweaknesses in our internal control over financial reporting and we may not beable to remedy these material weaknesses or prevent future material weaknesses.If we fail to do so there is a more than remote likelihood that a materialmisstatement of the annual or interim statements will not be prevented ordetected.***

The materialweaknesses in our internal control over financial reporting as identified byour management for the year ended December 31, 2006 are summarized below:

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

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

Notwithstanding the stepswe have taken and continue to take that are designed to remediate each materialweakness identified above, we may not be successful in remediating thesematerial weaknesses in the near or long term and we may not be able to preventother material weaknesses in the future. Any failure to maintain or implementrequired new or improved internal control over financial reporting, or anydifficulties we encounter in their implementation, could result in additionalsignificant deficiencies or additional material weaknesses, failure to meet ourperiodic reporting obligations or result in material misstatements in ourfinancial statements. Any such failure could also adversely affect the resultsof periodic management evaluations and annual auditor attestation reportsregarding the effectiveness of our internal control over financial reportingrequired under Section 404 of the Sarbanes-Oxley Act of 2002.Management assessment has been done by WBD as of December 31, 2006, but ithas not been audited by our independent registered public accounting firm, aswe are subject to exemptions provided by SEC filing #33-8730A ofAugust 9, 2006. The existence of a material weakness could result inerrors in our financial statements that could result in a restatement of financialstatements, cause us to miss our reporting deadlines and cause investors tolose confidence in our reported financial information, leading to a decline inthe price of our ordinary Shares and ADSs. See “Item 15T. Controls andprocedures” for additional information.

***To comply with therequirements of***Section 404 of the Sarbanes-Oxley Actof 2002, we have incurred and will continue to incur significant costs andresources, including senior management time, from our operating businesses,which could materially adversely affect our business, results of operations andprospects.

Section 404 of the Sarbanes-Oxley Act and theSEC’s and the PCAOB’s regulations thereunder require that our managementevaluate the effectiveness of our internal control over financial reporting onan annual basis and disclose any material weaknesses in our internal controlover financial reporting. In addition, commencing in our annual report for thefiscal year ended December 31, 2007, to be filed in 2008, our independentregistered public accounting firm will be required to audit management’sevaluation as well as our internal control over financial reporting. We havealready incurred and will continue to incur costs and resources, including timeof senior management, to design, maintain and evaluate internal control overfinancial reporting under these rules. Senior management time will necessarilybe diverted 

9

----

from running our business.These costs are especially high for us primarily due to the diversity andgeographic location of our businesses. For these reasons, the costs involved inattempting to achieve Section 404 compliance could have a material adverseeffect on our business, financial condition, results of operation andprospects.

We are taking steps to refine our internal controlover financial reporting directed to correct the material weaknesses pursuantto Section 404 of the Sarbanes-Oxley Act, and the efficacy of the steps wehave taken to date and the steps we are still in the process of completing issubject to continued management review supported by confirmation and testing bymanagement and by our internal auditors, as well as audit committee oversight.As a result, additional changes are continued to be made to our internalcontrol over financial reporting.

We developed a documentation of our statutory and U.S.GAAP financial statements closing process. Currently, we are in the process ofimproving internal guidelines and strengthening individual procedures andcontrols over the reporting process. We continue to improve U.S. GAAPcapabilities of our professional staff engaged in the financial statementspreparation process by hiring accounting personnel who are receiving or havereceived ACCA-qualification, with experience at other NYSE-listed Russiancompanies and at Big Four accounting firms. Further, we plan to continuearranging training seminars for our accounting staff, including various U.S.GAAP trainings.

In****additionwe have a special department established as part of internal controldepartment, devoted to strengthening our systems of internal control overfinancial reporting in an effort to comply with Section 404 of theSarbanes-Oxley Act of 2002. As of March 2007, this department wascomprised of three employees developing the internal controls methodology andthree employees tasked with implementing the procedures as they are developed.The department is based out of our Moscow headquarters, with additionalinternal controllers at regional subsidiaries.

***Increased competition among juice producers in Russia mayadversely affect our results of operations.***

Although juice consumptionin Russia continues to increase, our juice product sales volume decreased in2004 and 2005 due to vigorous market competition from other domestic producersand increased activity by foreign producers. Although our juice sales increasedin 2006 by 6.9% compared to 2005, continued and/or increased competition amongjuice producers in Russia may cause future decline in the sales volumes of ourjuice products, as well as affect our juice prices and profit margins and,consequently, may materially adversely affect our results of operations. “SeeItem 4. Information on Our Company—B. Business—Business Overview—Beverageproducts and brands—Market trends and competition” for additional informationregarding 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 forlow-price juice products, primarily in the regions outside of Moscow andSt. Petersburg where per capita household incomes are generally lower, putpressure on juice prices in 2004, 2005 and 2006. In addition, raw materials requiredfor juice production, such as juice concentrate and sugar, are internationalcommodities and are subject to international price fluctuations, and we haveexperienced significant increases in the cost of these commodities in 2005 and2006. The prices for sugar and juice concentrate, especially orange, haveincreased 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.

10

----

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

Railway transportation is one of our principal meansof transporting supplies and juice and water products to our facilities andcustomers. Currently, the Russian government sets rail tariffs and may furtherincrease these tariffs as it did in 2004, 2005 and 2006.

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

***Our inability todevelop and maintain awareness of new brands, products and product categoriescould significantly inhibit our future growth and profitability.***

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

In addition, developingand maintaining brand awareness of our brands in a cost effective manner iscritical to informing and educating the public about our current and futureproduct offerings and is an important element in attracting new consumers.Successful promotion of our brands will depend largely on the effectiveness ofour marketing efforts and on our ability to provide reliable and usefulproducts and services at competitive prices. Brand promotion activities may notyield increased operating revenues, and even if they do, such operatingrevenues may not offset the operating expenses we incur in building our brands.Furthermore, our ability to attract new consumers and retain existing consumersdepends, in part, on our ability to maintain what we believe to be ourfavorable brand image. Our failure to successfully and efficiently promote andmaintain our brands may limit our ability to attract new consumers and retainour existing consumers and materially adversely affect our business, financialcondition, results of operations and prospects.

***If we do notcontinue to be an efficient producer in a highly competitive environment,particularly in relation to purchases of our packaging and raw materials, or aneffective advertiser in a highly inflationary media environment, our results ofoperations will suffer.***

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

11

----

fluctuations, and weexperienced significant increases in raw milk, sugar and concentrate pricesduring 2004, 2005 and 2006.

Our success also dependson our continued ability to be an effective advertiser in a market where mediainflation on leading national television channels exceeded 30% in 2006. Asubstantial increase in the prices of any of the foregoing, which we may not beable to pass on to customers through price increases, or a protractedinterruption in supply with respect to packaging or raw materials, could have amaterial adverse effect on our financial condition and results of operations.See “Item 4. Information on Our Company—B. Business—Business Overview.”

***We may be unable tocontinue to add products and greater production capacity in faster growing andmore profitable categories.***

The food industry’s growthpotential is constrained by population growth and growth in personal income.Our success 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 internal technicalintegration 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.

***Our inability toaddress the seasonal difference between the demand for dairy products and thesupply of raw milk and the increasing prices of raw milk could result in asignificant increase in our production costs, reducing our profitability.***

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

In addition, the averageweighted raw milk purchase price increased for us in ruble terms byapproximately 17% in 2004, 14% in 2005 and 7% in 2006. The price increases aredue, in part, to the raw milk shortages caused by the ongoing decline of dairycattle in Russia. These increases adversely affected our dairy product profitmargins in 2004, 2005 and 2006, and continued increases in raw milk pricescould further reduce our profitability. The shortage of high quality raw milk,coupled with the raw milk price increases, may also limit our ability to expandour production of high margin value-added dairy products. See “Item 5.Operating and Financial Review and Prospects—D. Trend Information” foradditional information.

***In the event thatthe Moscow City Government were to reduce significantly the prices or theamount of products it purchases from our baby food business, then our revenuesand profits from this business could be reduced.***

In 2005 and 2006, babyfood purchased from us by the Moscow City Government comprised approximately36% and 33% respectively of the total sales revenue of our baby food segment.We supply these products to the Moscow City Government pursuant to a tenderheld on a yearly basis. In the event that we were to lose a tender, or theMoscow City Government was to reduce significantly the prices or the amount ofproducts it purchases from our baby food business, and we were unable to findalternative purchasers, then our revenues and profits from this business couldbe reduced, which could have a material 

12

----

adverseeffect on our financial condition and results of operations. We discuss thesale and distribution of products produced at the Moscow Baby Food Plant in “B.Business—Business Overview.”

***Our substantialreliance on independent retailers and independent distributors for thedistribution of our products could lower our turnover and reduce ourcompetitiveness.***

We sell our products either directly to retailers,including supermarkets, grocery shops and restaurants, or to independentdistributors for resale to retail outlets. We expect sales to retailers andindependent distributors to continue to represent a significant portion of ourrevenues. Our operations and distribution costs could be affected by theincreasing consolidation of these entities, particularly as these customersbecome more sophisticated and attempt to force lower pricing and increasedpromotional programs. For example, in the spring of 2001, several Russiansupermarket chains formed a loose alliance which publicly announced itsintention not to purchase our products. Although these supermarket chains nowpurchase our products, they may not continue to do so, and they or othersupermarket chains may attempt a similar consolidation of market power in thefuture. In addition, two of Russia’s largest supermarket chains, Perekryostokand Pyatyorochka, 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 Turkish retailer Ramenka, Germanretailer Metro and French retailer Auchan, have also opened stores in ourmarkets, which will put further pressure on prices.

We also compete with otherbrands for shelf space in retail stores, whilst marketing focus by ourindependent distributors and retailers is also split between a number ofproducers. Our independent distributors and retailers also offer otherproducts, including their own brands, that compete directly with our products.In addition, retailers in Russia typically charge food and beverage producers,including us and our competitors, for shelf space. If independent distributorsand retailers give higher priority to other brands, purchase less of, or evenrefuse to buy, our products, seek substantial discounts, charge unreasonableprices for shelf space, fail to offer sufficient shelf space, or devoteinadequate promotional support to our brands, it could lower our turnover andreduce 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 meet the standards and requirements of applicable legislationgoverning the import of food products into the importing country. However, wedo not have control over independent distributors, who have, in some cases,attempted to export our products to countries where such products did not meetthe requirements of applicable legislation. Any consequent recalls of ourproducts and the associated negative publicity may adversely affect ourreputation and materially adversely affect our results of operations.

***We do not carry thetypes of insurance coverage customary in more economically developed countriesfor a business of our size and nature, and a significant event could result insubstantial property loss and inability to rebuild in a timely manner or atall.***

We maintain insurance against some, but not all,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 tobe available to us on commercially reasonable terms. In the event that asignificant event were to affect one of our facilities, we could experiencesubstantial property loss and significant disruptions in production, for whichwe would not be compensated. Additionally, depending on the severity of theproperty damage, we may not be able to rebuild damaged property in a timelymanner or at all. We do not maintain separate funds or otherwise set 

13

----

aside reserves for thesetypes of events. 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 liability claims in theevent that consumption of our products results in illness, injury or death, andwe cannot assure you that we will not experience any material product liabilitylosses in the future. Although we maintain insurance coverage for productliability, such coverage may be insufficient in the event of a claim. Moreover,certain of our smaller production facilities are currently not covered byproduct liability insurance. In addition, if any of the products we haveproduced are determined to be unsuitable for consumption, we may be required toparticipate in a recall involving such products.

Additionally, although wehave made and will continue to make capital and other expenditures to complywith environmental requirements, in 2005 and 2006 we did not incur materialcapital expenditures for environmental controls. For a more detailed discussionof our insurance coverage see “Item 4. Information on Our Company—B. BusinessOverview—Insurance.”

***If transactions ofmembers of our group of companies and their predecessors-in-interest were to bechallenged on the basis of non-compliance with applicable legal requirements,the remedies in the event of any successful challenge could include theinvalidation of such transactions or the imposition of other liabilities onsuch group members.***

Members of our group, ortheir predecessors-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 be inadequate tosupport our future growth.***

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

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

Our ability to maintainour competitive position and to implement our business strategy is dependent toa large degree on the services of our senior management team and other keypersonnel. Moreover, competition in Russia for personnel with relevantexpertise is intense due to the small number of qualified individuals and, as aresult, we attempt to structure our compensation packages in a mannerconsistent with the evolving standards of the Russian labor market. We are notinsured against the detrimental effects to our business resulting from the lossor dismissal of our key personnel. The loss or decline in the services ofmembers of our senior management team or an inability to attract, retain andmotivate qualified key personnel could have a material adverse effect on ourbusiness, financial condition and results of operations.

14

----

***We may not be ableto protect our intellectual property rights adequately, resulting in materialharm to our financial results and ability to develop our business.***

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

***Failure of severalof our brand names and images, for which trademarks are currently being sought,to be awarded trademark protection could negatively affect our marketing plans,resulting in increased advertising expenses and a material adverse effect onour financial results.***

As of December 31,2006, we had 81 pending trademark applications in Russia and 18 pendingtrademark applications abroad. We are also in the process of contesting therejection for registration of a number of our trademarks in countries outsideof Russia. If our pending applications are not granted trademark status, wewill have limited ability to defend these brand names or images from use byothers, significantly reducing the value of any advertising using these brandnames or images. This will negatively affect our marketing plans for theproducts that utilize these brand names or images, and may require us todevelop a different marketing approach for these products, resulting inincreased advertising expenses and adversely affecting our financial results.See “Item 4. Information on Our Company—B. Business Overview—Current Operations—Trademarksand Patents.”

***If we are unable toobtain adequate funding, we may have to limit our operations substantially,which could have a material adverse effect on our business, prospects andresults of operations.***

We continue to makesignificant capital expenditures, particularly in connection with the expansionof our existing operations, upgrades of existing facilities, enhancing ourinfrastructure, including building new warehouses and acquisitions of newcompanies. For the fulfillment of our capital spending plans, excludingexpenditures for acquisitions, we spent approximately $72.6 million in2004, $75.1 million in 2005 and $130.0 million in 2006. We spent approximately$5.3 million in 2004, $24.3 million in 2005 and $137.3 million in2006 for acquisitions. However, we may not be able to meet our planned capitalspending needs in the future in the event of the following potentialdevelopments:

·       a lack of externalfinancing sources;

·       changes in the terms ofexisting financing arrangements;

·       slower than anticipatedgrowth in demand for our products;

·       slower than anticipatedrevenue growth;

·       regulatory developments; or

·       a deterioration in theRussian economy.

To meet our financingrequirements, we may need to attract additional equity or debt financing.Russian companies are limited in their ability to issue shares in the form ofADSs or other depositary receipts due to Russian securities regulations, which,until 2005, generally provided that no more than 40% of a Russian company’sshares may be circulated abroad through depositary receipt programs. Thislimitation was subsequently decreased to 35%. Our ADS and GDS programs togetheraccount for 40% of our outstanding shares (this amount was approved by theRussian securities regulator based on the prior 

15

----

limitand is not required to be reduced to 35%). As a result, we are currently unableto raise additional equity financing through the issuance of depositaryreceipts. The Russian government or its agencies may also impose otherrestrictions on international securities offerings by Russian issuers. Any ofthe foregoing factors may limit the amount of capital available to meet ouroperating requirements. If we cannot obtain adequate funds to satisfy ourcapital requirements, we may need to limit our operations significantly, whichcould have a material adverse effect on our business, results of operations andprospects.

***We are controlledby a group of shareholders whose interests could conflict with those of theholders of our securities.***

As of June 5, 2007 to our knowledge,approximately 47.58% of our outstanding common stock was owned by our foundingshareholders. This group has acted in concert since our establishment and,since 1997, pursuant to a Partnership and Cooperation Agreement, amended andrestated January 16, 2002, which requires the parties to vote the sameway. This group continues and will continue to be bound by this agreement tovote as a block until any member of the group elects to withdraw from the agreement.This agreement gives them control over us and the ability to elect a majorityof the directors, appoint management and approve certain actions requiring theapproval of a majority of our shareholders.

If not otherwise required by law, resolutions at a shareholders’meeting will be adopted by a simple majority in a meeting at which shareholdersholding more than half of the issued share capital are present or represented.Accordingly, as long as the group continues to hold, directly or indirectly,the majority of our shares and act in concert pursuant to the Partnership andCooperation Agreement, they will have the power to control the outcome of mostmatters to be decided by vote at a shareholders’ meeting and the appointment ofthe majority of directors and removal of directors. The group will also be ableto control or significantly influence the outcome of any vote on, among otherthings, any proposed amendment to our charter, reorganization proposal,proposed substantial sale of assets or other major corporate transactions.Thus, the group can take actions that may conflict with the interest of holdersof our ADSs.

Members of our controlling group of shareholders alsohave interests in other companies, some of which conduct business with us. Weare not aware of any related party transactions that are being carried out onpreferential terms, but cannot exclude the possibility of related partytransactions that may potentially result in the conclusion of transactions onterms less favorable than could be obtained in arm’s length transactions.

According to its latestpublic statements and 13D filing, Groupe Danone, together with itssubsidiaries, holds a 13.7% stake in Wimm-Bill-Dann Foods OJSC, which allowedGroupe Danone to nominate its candidate Jacques Vincent, Vice-President,authorized CEO, to our board of directors. The election of a director nominatedby Groupe Danone may present a conflict of interest between Wimm-Bill-DannFoods OJSC and Groupe Danone, which is one of our main competitors. All the nomineeswill be voted on by our shareholders at the General Meeting of Shareholdersscheduled for the end of June. Groupe Danone has never had a representative onour board, although its stake enables it to secure one seat.

***Recently adoptedchanges in Russian law will limit the amount of advertising time permitted ontelevision, which could increase our advertising expenses and have a materialadverse effect on our sales and results of operations.***

The new Federal Law on Advertising which came intoforce on July 1, 2006, limits the amount of time that a broadcaster maydevote to advertising to 15% of total broadcasting time per day and 20% in anygiven hour. From January 1, 2008, advertising will be further limited tono more than 15% in any given hour of broadcasting time.

As a result of this new law, the amount of availableadvertising time will decrease. In turn, the reduction in available advertisingtime is likely to lead to increased costs to advertisers for purchasing 

16

----

advertising time due to anincreased demand for available time slots and a drive by media outlets torecover their losses from the decreased volume of advertising time they arepermitted to sell. We expect the greatest price increases to affect televisionadvertising, particularly during primetime.

The new law also imposescertain restrictions on advertising that may require us to adjust some of ouradvertising campaigns. We are among the Russia’s top advertisers. According toGallup, we were the third largest advertiser in 2004, the ninth largestadvertiser in 2005 and the twelfth largest advertiser in 2006. In 2005 and2006, 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% in2006. Our 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 and general increases inmarketing costs. Despite this mediainflation, we were able to obtain volume discounts and endeavored to manage thecost increases more effectively. Imposition of the new law, coupled withoverall media inflation in Russia, is likely to increase our advertisingexpenses. The increased cost of advertising, along with the decreasedavailability of advertising time slots, may also lead to a decrease in ourtelevision advertising which, consequently, may have a material adverse effecton our sales and results of operations.

***One or more of oursubsidiaries could be forced into liquidation on the basis of formal non-compliancewith certain requirements of Russian law, which could materially adverselyaffect our business, financial condition, results of operations and prospects.***

Certain provisions of Russian law may allow a court toorder liquidation of a Russian legal entity on the basis of its formalnon-compliance with certain requirements during formation, reorganization orduring its operation. There have been cases in the past in which formaldeficiencies in the establishment process of a Russian legal entity ornon-compliance with provisions of Russian law have been used by Russian courtsas a basis for liquidation of a legal entity. For example, in Russian corporatelaw, negative net assets calculated on the basis of Russian accountingstandards as at the end of the second or any subsequent year of a company’soperation, can serve as a basis for a court to order the liquidation of thecompany, upon a claim by governmental authorities. Many Russian companies havenegative net assets due to very low historical asset values reflected on theirRussian accounting standards balance sheets; however, their solvency, *i.e*., their ability to pay debts as they come due, is nototherwise adversely affected by such negative net assets.

Fourteen of oursubsidiaries have negative net assets. These subsidiaries, taken together, arematerial to our operations. We believe that, as long as these subsidiariescontinue to fulfill their obligations, the risk of their liquidation isminimal. However, we have taken and continue to take certain steps to remedythis situation and reduce the number of subsidiaries with negative net assets.We are also in the process of integrating the newly acquired businesses andrestructuring our subsidiaries, which we expect will reduce the number of subsidiarieswith negative net assets. While we understand that a Moscow court liquidated acompany with negative net assets in 2002, we are not aware of any situationwhere a Russian company has been liquidated pursuant to this legislation if ithas met all of its obligations, as each of these subsidiaries has. Therefore,we believe that this risk is remote and have not included it as a contingencyin the notes to our financial statements which appear elsewhere in thisdocument. However, weaknesses in the Russian legal system create an uncertainlegal environment, which makes the decisions of a Russian court or agovernmental authority difficult, if not impossible, to predict. If involuntaryliquidation were to occur, then we may be forced to reorganize the operationswe currently conduct through the affected subsidiaries. Any such liquidationcould lead to additional costs, which could materially adversely affect ourbusiness, financial condition, results of operations and prospects.

17

----

***In the event thatdeficiencies or ambiguities in privatization legislation are successfullyexploited to challenge our ownership in our privatized subsidiaries and we areunable to defeat these challenges, we risk losing our ownership interest in thesubsidiaries or their assets, which could materially adversely affect ourbusiness, financial condition, results of operations and prospects.***

Our business includes a number of privatized companiesin Russia and other countries of the former Soviet Union, and our acquisitionstrategy will likely involve the acquisition of additional privatizedcompanies. To the extent that privatization legislation is vague, inconsistentor in conflict with other legislation, including conflicts between federal andlocal privatization legislation, many privatizations are vulnerable tochallenge, including selective challenges. For instance, a series ofpresidential decrees issued in 1991 and 1992 that granted to the Moscow CityGovernment the right to adopt its own privatization procedures were subsequentlyheld to be invalid by the Constitutional Court of the Russian Federation, whichruled, in part, that the presidential decrees addressed issues that were thesubject of federal law. While this court ruling, in theory, did not require anyimplementing actions, the presidential decrees were not officially annulled byanother presidential decree until 2000. In the event that any title to, or ourownership stakes in, the privatized companies acquired by us, are subject tochallenge as having been improperly privatized and we are unable to defeat thisclaim, we risk losing our ownership interest in the company or its assets,which could materially affect our business and results of operations. Inparticular, as we own a substantial number of our other subsidiaries throughWimm-Bill-Dann, (formerly Lianozovsky Dairy plant) and as Wimm-Bill-Dannconstitutes the majority of our production capacity, its loss would materiallyadversely affect our prospects, business and results of operations.

In addition, under Russianlaw, transactions in shares may be invalidated on many grounds, including asale of shares by a person without the right to dispose of such shares, breachof interested party and/or major transactions rules and failure toregister the share transfer in the securities register. As a result, defects inearlier transactions in shares of our subsidiaries (where such shares wereacquired from third parties) may cause our title to such shares to be subjectto challenge. Additionally, of the 98.02% of the Lianozovsky Dairy Plant and98.91% of the Tsaritsino Dairy Plant which we owned, 15% of each were acquiredin separate investment tenders held by the Department of State and MunicipalProperty of the Moscow City Government. Under the legislation governing such tenders,a tender is not valid unless at least two participants submit bids. In theinvestment tenders for the Lianozovsky Dairy Plant and the Tsaritsino DairyPlant, the only two participants were entities which were under common control,an arguable violation of this requirement. In the event that the Russiangovernment authorities were successfully to maintain that these tenders werenot duly held since the participants were under common control, we could lose15% of our stakes in the Lianozovsky Dairy Plant and the Tsaritsino DairyPlant, materially adversely affecting our results of operations.

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

18

----

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

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

In addition, the new Sanitary Rules on Children’sFood Products, which became effective on June 1, 2005, disallowcertain tax benefits we formerly enjoyed in relation to some of our baby foodproducts.

We are also subject toregional legislation and regulations. For example, in February 2007, theMoscow government enacted regulations on the voluntary labeling of foodscontaining genetically modified organisms, or GMO. While GMO labeling is notobligatory, it may be treated as such by the regional authorities in Moscow. Inthis case, we will be required to label our products as not geneticallymodified and incur additional expenses in relation to this requirement.

***Increased domesticproduction by our foreign competitors could reduce our competitive advantagesagainst them, which would have a material adverse effect on our market shareand results of operations.***

A number of our foreigncompetitors, such as Danone, Parmalat, Lactalis, Campina, Ehrmann, Onken andPascuale, have been investing and continue to invest in domestic productionfacilities, while others, such as Coca-Cola, have acquired domestic producers.These investments and acquisitions reduce the competitive advantages that wehave over foreign competitors without domestic production capability. Acontinuation of this trend may result in increased competition for qualifiedpersonnel and higher labor costs, and would have a material adverse effect onour business and 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.

***If the FederalAntimonopoly Service were to conclude that we acquired or created a new companyin contravention of antimonopoly legislation, it could impose administrativesanctions and require the unwinding of such transactions, which could have amaterial adverse effect on our business and results of operations.***

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

19

----

***Furtherrestrictions on our business which is categorized as a monopoly, or theextension of monopoly status to***our other businesses, could result inthe regulation of our prices and restriction of our commercial activities,materially adversely affecting our results of operations.

Under Russian legislation,the Federal Antimonopoly Service may categorize a company as a dominant forcein a market. Our baby food business is categorized as a monopoly in Moscow andthe Moscow region, placing restrictions on our ability to increase our profitmargins for that business. Any ruling that any of our other businesses are amonopoly could result in the regulation of our prices and restrictions on ourcommercial activities. The imposition of government-determined pricescould, in turn, result in competitive disadvantages and a significant declinein revenues. Additionally, restrictions on expansion or government-mandatedwithdrawal from regions or markets would adversely affect our plans forexpansion and could reduce our market share.

***In the event thatour minority shareholders or minority shareholders of our subsidiaries were tochallenge successfully past or future interested party transactions, or do notapprove interested party transactions or other matters in the future, theinvalidation of such transactions or failure to approve such matters could havea material adverse effect on our business, financial condition, results ofoperations or prospects or the value of the***shares and ADSs.

We own less than 100% of the equity interests in someof our subsidiaries. In addition, certain of our wholly owned subsidiaries havehad other shareholders in the past. We and our subsidiaries in the past havecarried out, and continue to carry out, transactions which may be considered tobe “interested party transactions” under Russian law, requiring approval bydisinterested directors, disinterested independent directors or disinterestedshareholders depending on the nature of the transaction and parties involved.See “Item 10. Additional Information—B. Charter and Certain Requirements ofRussian Legislation—Interested Party Transactions.” The provisions of Russianlaw defining which transactions must be approved as “interested partytransactions” are subject to different interpretations. We cannot assure youthat our and our subsidiaries’ applications of these concepts will not besubject to challenge by former and current shareholders. Any such challenges,if successful, could result in the invalidation of transactions, which couldhave a material adverse effect on our business, financial condition, results ofoperations or prospects and the value of the shares and ADSs.

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

Over the past several years, we have sought and continueto seek to acquire minority stakes in our subsidiaries with the aim ofacquiring 100% interests in each of our key subsidiaries. For example, inJanuary 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 inSeptember 2003 

20

----

from minority shareholdersfor a cash consideration of $3.1 million increasing our beneficial ownership to 96.5%.

We are in the process ofconsolidating our businesses and merging certain subsidiaries into Wimm-Bill-Dann(formerly Moscow-based Lianozovsky Dairy Plant). In this context, we arere-organizing our legal entities, which may trigger a legal requirement that weredeem shares on shareholders’ demand. According to amendments to the FederalLaw on Joint Stock Companies, which came into effect on July 1, 2006,a holder of more than 95% of shares in an open joint stock company has theright to buy out the remaining shares from the minority shareholders for a cashconsideration equal to the amount determined by an independent appraiser. Thenew amendments also require a person purchasing 30%, 50%, 75% or more shares inan open joint stock company to offer to other shareholders of this entity tosell their shares at a price not less than the acquisition price of therespective stake. Pursuant to this requirement, in 2007 we bought a 4.66% stakein Ochakovo Dairy Plant for a cash consideration of $3.2 million and 0.60%of ordinary shares and 1.16% of preferred shares in Nazarovo Dairy Plant for acash consideration of approximately $0.1 million for both stakes. While noadditional demands have been made for us to buy out minority shareholders, wemay face additional buy-out demands in the future.

**Risks Relating toOur Financial Condition**

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

The Russian economy hasbeen characterized by high rates of inflation. As we tend to experienceinflation-driven increases in certain of our costs, including salariesand rents, which are sensitive to rises in the general price level inRussia, our costs in U.S. dollar terms will rise. In this situation, due tocompetitive pressures, we may not be able to raise the prices we charge for ourproducts and services sufficiently to preserve operating margins. Accordingly,high rates of inflation in Russia could increase our costs and decrease ouroperating margins.

***Servicing andrefinancing our indebtedness will require a significant amount of cash. Ourability to generate cash or obtain financing depends on many factors beyond ourcontrol.***

We have a substantial amount of outstandingindebtedness, primarily consisting of the liabilities we have in connectionwith our $150 million loan participation notes due 2008 and our second$150 million loan participation notes due 2008, our ruble bonds, bank loans andobligations under equipment financing. As of December 31, 2006 ourconsolidated total debt was approximately $443.0 million, of which $61.7 millionwas secured by equipment or inventory.

Among other things, increased levels of indebtedness,and particularly increases in the level of secured indebtedness, couldpotentially: (1) limit our ability to obtain additional financing;(2) limit our flexibility in planning for, or reacting to, changes in themarkets in which we compete; (3) place us at a competitive disadvantagerelative to our competitors with superior financial resources; (4) lead toa partial or complete loss of control over our key subsidiaries or properties;(5) render us more vulnerable to general adverse economic and industryconditions, (6) require us to dedicate all or a substantial part of ourcash flow to service our debt; and (7) limit or eliminate our ability topay dividends.

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

21

----

We may not be able togenerate sufficient cash flow or access international capital markets or incuradditional indebtedness to enable us to service or repay our indebtedness or tofund our other liquidity needs. We may need to refinance all or a portion ofour indebtedness, including our two $150 million loan participation notesdue 2008 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 our business,financial condition, results of operations and prospects.

***Covenants in ourdebt agreements restrict our ability to borrow, invest and engage in variousactivities, which could impair our ability to expand or finance our futureoperations.***

Our short-term andlong-term debt agreements, including the loan agreements relating to our two$150 million loan participation notes due 2008 contain covenants thatimpose operating and financial restrictions on us and our subsidiaries. Theserestrictions significantly limit, and in some cases prohibit, among otherthings, our and certain of our subsidiaries’ ability to incur additional debt,provide guarantees, create liens on assets or enter into business combinations.Failure to comply with these restrictions would constitute a default under ourdebt agreements, including the loan agreements relating to our two$150 million loan participation notes due 2008 and any of our other seniordebt containing cross-default provisions could become immediately due andpayable, which would materially adversely affect our business, financialconditions and results of operations. In addition, some of our debt agreementscontain provisions which permit our lenders to require us to repay our debt tothem in the event of a deterioration in our financial condition.

***We may not have theability to raise the funds necessary to finance a prepayment of certain of ouroutstanding indebtedness in case of a change of control event.***

The terms of the loan agreements relating to our two$150 million loan participation notes due 2008 as well as some of ourother debt agreements require that we prepay the outstanding debt upon theoccurrence of certain change of control events. A change of control event willgenerally be triggered at such time as any person acting alone or together withother persons (excluding several of our major shareholders acting individuallyor as a group): (i) is or becomes interested, directly or indirectly, inthe aggregate of more than 50% of our capital stock with voting power, or(ii) has or acquires the right to appoint or remove a majority of ourBoard of Directors, or (iii) has or acquires control of a majority of ourvoting rights, in each case, in circumstances where, solely as a result of anysuch event as specified by the relevant rating agencies, a rating decline (asfurther described in the loan agreements relating to our two $150 millionloan participation notes due 2008) would result.

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

***Mergers of oursubsidiaries may cause their indebtedness to be accelerated, and our inabilityto effect certain mergers within our group of companies may prevent us fromoptimizing our tax rate and result in increased taxes.***

As Russian tax regulationsdo not allow Russian companies 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 

22

----

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, ourinability 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.

***Devaluation of theruble and other currencies we trade in against the U.S. dollar could increaseour costs and reduce our operating revenues.***

A significant portion of ourcosts, expenditures and liabilities, including costs of packaging, juiceconcentrate and certain other raw materials, as well as capital expendituresand borrowings (including our two $150 million loan participation notes due2008, are either denominated in, or closely linked to, the U.S. dollar, while substantially all of our operatingrevenues are denominated in rubles. As a result, the devaluation of the rubleagainst the U.S. dollar can adversely affect us by increasing our costs inruble terms. Additionally, if the ruble declines against the U.S. dollar andprice increases cannot keep pace, we could have difficulty repaying orrefinancing our U.S. dollar-denominated indebtedness, including ournotes. The devaluation of the ruble also results in losses in the value ofruble-denominated assets, such as ruble deposits.

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

***Our cash holdings are exposed to devaluation.***

There are only a limited number of ruble-denominatedinstruments in which we may invest our excess cash. Any balances maintained inrubles will give rise to losses if the ruble devalues against the U.S. dollar.

Additionally, Russiancompanies must repatriate 100% of offshore foreign currency earnings to Russia.In 2005, Russian companies were required to convert 10% of those earnings intorubles within seven days of receipt. This conversion requirement was abolishedin April 2006.

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

In the past, Russian currency regulations imposedvarious restrictions on operations involving foreign currencies in an attemptto 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 substantially all of our debt are denominated andpayable in various foreign currencies.

Russian legislationcurrently permits the conversion of rubles into foreign currency. However, themarket in Russia for the conversion of rubles into foreign currencies islimited and may not continue to exist. Anydelay or other difficulty in converting rubles into a foreign currency to makea payment or delay in or restriction on the transfer of foreign currency couldlimit our ability to meet our payment and debt obligations, which could resultin the loss of suppliers, acceleration of debt obligations and cross-defaultsand, consequently, have a material adverse effect on our business, financialcondition and results of operations.

23

----

***Some of ourcustomers, debtors and suppliers may fail to pay us or to comply with the termsof their agreements with us which could adversely affect our results ofoperations.***

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

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

***If the variousinitiatives we have used to reduce our tax burden are successfully challengedand/or our ability to recover VAT and take advantage of certain tax benefitsare disallowed by the Russian tax authorities, we may face significant lossesassociated with the assessed amount of tax underpaid and related interest andpenalties, which would have a material impact on our financial condition andresults of operations.***

We have used various initiatives to reduce our taxburden and several of our tax initiatives have been challenged by the Russiantax authorities. There have also been press reports of instances in which theRussian tax authorities have successfully challenged structures similar tothose 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 impact on our financial condition and results ofoperations.

In addition, during 2006,the tax authorities found some suppliers dealing with certain of oursubsidiaries (e.g., Moscow Baby Food Plant OJSC, Trading Company Wimm-Bill-DannCJSC, Wimm-Bill-Dann OJSC, Ochakovo Dairy Plant OJSC) 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, they are not able to scrutinizethoroughly every aspect of each supplier’s business, including whether thesupplier is in full compliance with respect to its tax duties. As a result ofthese alleged breaches by certain of our suppliers, the tax authorities haverefused to reimburse VAT paid by our subsidiaries in an amount totalingapproximately $1,037,652 for services rendered and goods provided by suchsuppliers. They also refused to discount profit tax paid by our subsidiaries tosuch suppliers. We filed a claim in court seeking reimbursement for theVAT paid by our subsidiary Ochakovo Dairy Plant OJSC and have won this case inthe court of the first instance. Although the tax authorities have not appealedthis decision we can not exclude that they will appeal it in the future. Wehave also filed three claims in court seeking reimbursement for the VAT paid byour subsidiaries Trading Company Wimm-Bill-Dann CJSC and Ochakovo Dairy PlantOJSC, but the court of first instance has not yet ruled on the case. Althoughwe continue to provide the results of our due diligence of our suppliers to therelevant Russian authorities, we cannot exclude the possibility that some ofthese suppliers could be recognized as negligent by the tax authorities.

24

----

***The elimination ofa tax privilege from which we currently benefit and/or a successful challengeby the tax authorities of our use of this tax privilege would materiallyadversely affect our results of operations.***

Our juice producing subsidiaries have benefited fromsmall enterprise tax legislation. If we had not taken advantage of this benefitin 2003, 2004 and 2005, our tax expenses would have increased by$3.0 million, $1.2 million and $0.3 million, respectively. Thistax benefit was eliminated as of January 1, 2002. However, under theamended legislation, our small enterprises that were formed prior toJanuary 1, 2002 were able to continue and did continue to use this benefitfor two years from the date on which they were formed, and in the third andfourth years after they were formed, income tax was levied at a rate of 25% and50% of the income tax rate, respectively. Although none of our subsidiariescurrently takes advantage of the small enterprise tax benefits, we cannotguarantee that the tax authorities may not retroactively challenge previous taxbenefits enjoyed by our subsidiaries pursuant to small enterprise taxlegislation. Such challenges, if successful, could materially adversely affectour results of operations.

Our use of the small enterprise tax exemption has alsobeen subject in the past to challenge by the Russian tax authorities.

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

While we believe that oursubsidiaries have in the past complied with the rules relating to thesmall enterprise tax exemption, the Russian tax authorities may in the futuremake additional claims against our subsidiaries challenging their use of thisexemption. These claims could be significantly larger than the claim describedabove, and the resulting losses could have a material adverse effect on ourfinancial condition and results of operations.

***We are only able toconduct banking transactions with a limited number of creditworthy Russianbanks, as the Russian banking system remains underdeveloped, and anotherbanking crisis could place severe liquidity constraints on our business,materially adversely affecting our business, financial position and results ofoperations.***

Russia’s banking and other financial systems are notwell developed or regulated, and Russian legislation relating to banks and bankaccounts is subject to varying interpretations and inconsistent application.The August 1998 financial crisis resulted in the bankruptcy andliquidation of many Russian banks and almost entirely eliminated the developingmarket for commercial bank loans. Although the Central Bank of Russia has themandate and authority to suspend banking licenses of insolvent banks, manyinsolvent banks still operate. Most Russian banks also do not 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 Russian bankingsector, combined with the deterioration in the credit profile of the loanportfolios 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.

25

----

We have also experienced problems with transmittingtax payments through certain Russian banks and, as a result, are experiencingdifficulties with the Russian tax authorities. For example, in 2004 and 2005,our subsidiaries Wimm-Bill-Dann Purchaser, Ramenskoe Moloko and TsaritsinoDairy Plant each received a tax assessment from the Russian tax authorities fortax arrears totaling approximately $100,000, $100,000 and $750,000,respectively. Each of these tax assessments resulted from the failure of the subsidiaries’banks to transfer tax payments to the state budget upon receiving the relevantpayment orders. We challenged these assessments and, in each instance, theassessments were declared invalid by Russian Arbitration Courts. Nevertheless,in May 2005, the tax authorities issued a new tax assessment in the amountof $750,000 against the Tsaritsino Dairy Plant relating to the tax payment thatwas the subject of their prior $750,000 assessment. The tax authoritiessubsequently filed a tax claim in the Moscow Arbitration Court, though theyreduced the amount of the claim to $510,000. The Moscow Arbitration Court ruledin our favor with respect to this claim, a decision which was thereafter upheldon appeal in the Ninth Arbitration Appeals Court, as well as on appeal in theMoscow District Arbitration Court. In addition, in April, May andJune 2006 several of our subsidiaries received demands and assessmentsfrom the tax authorities in an aggregate amount of $6,928,531 again for thefailure of their banks to transfer tax payments to the state budget uponreceiving the relevant payment orders. In response, we have filed claimsseeking the invalidation of these tax demands and assessments with the MoscowArbitration Court, in some cases, and directly with the tax authorities inothers. In addition, with respect to ZAO Lianozovsky, a court of third instanceupheld a prior decision invalidating the tax authorities’ claim that ZAOLianozovsky was acting in bad faith. In June 2006, Wimm-Bill-Dann receiveda new assessment from the Russian tax authorities in the amount ofapproximately $90,000, which an appeal court has also held as invalid. However,the tax authorities may challenge this decision in a court of third instance.In October 2006, our subsidiary ZAO ProPP filed a claim seeking theinvalidation of the tax authorities’ demand that ZAO ProPP was acting in badfaith for the failure of its bank to transfer tax payments to the state budget.A court of third instance ruled in our favor with respect to this claim. InMay 2007, our subsidiary Grande-V received tax demands in the amount ofapproximately $528,300. We have filed a claim with the tax authorities, as wellas in court, seeking to recognize these demands as invalid. In April 2007,our subsidiary Podmoskovnoe Moloko received an assessment from the taxauthorities for approximately $2,475 and, as a result, we filed a claim incourt seeking to recognize this assessment as invalid. The court of firstinstance ruled in our favor; however, this decision could be appealed by thetax authorities in a court of second instance. As of May 2007, we havesuccessfully challenged all of the tax authorities’ claims, demands andassessments and have only two pending lawsuits in respect of our subsidiaries’failure to transmit tax payments through certain Russian banks (*i.e*., Podmoskovnoe Moloko and Grande-V). Although theRussian courts, including the appeal courts, have ruled in our favor withrespect to the invalidation of the tax authorities’ claims and assessments forthe failure of our subsidiaries’ banks to transfer tax payments, it is likelythat the Russian tax authorities will continue to appeal these decisions.

While the Russian Tax Code provides that a taxpayer isdeemed to have paid a tax when the corresponding payment order is received bythe taxpayer’s bank, recent press reports 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 to transfersuch payment. Russian courts often rule in favor of the Russian taxauthorities in such cases.

Our management believesthat our subsidiaries have complied with their tax payment obligations, and weintend to challenge any further appeals by the tax authorities of the foregoingassessments or any additional similar assessments in court. However, if a courtwas to rule in the Russian tax authorities’ favor, these subsidiariesand/or other of our subsidiaries that have faced similar problems would be liablefor the amount of the assessments and potentially for interest and penalties onsuch amounts, and could potentially be liable for significant additionalamounts.

26

----

***Vaguely draftedRussian transfer pricing***rules and lack of reliable pricinginformation may impact our business results of operations.

Russian transfer pricing rules effective since1999 give Russian tax authorities the right to control prices for transactionsbetween related entities and certain other types of transactions betweenunrelated parties, such as foreign trade transactions or transactions withsignificant price fluctuations if the transaction price deviates by more than20% 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. To date, there has been no formal guidance(although some court practice is already available) as to how these rules willbe applied. Nonetheless, Russian tax authorities have paid particular attentionto transfer pricing rules in their recent audits of Russian companies.

Due to the uncertainties in interpretation of transferpricing legislation, the tax authorities may challenge our prices and makeadjustments which could affect our tax position. If such tax adjustments becomeeffective, our results of operations could be materially adversely affected. Inaddition, we could face significant losses associated with the assessed amountof underpaid prior tax and related interest and penalties.

In addition, a number ofdraft amendments to the transfer pricing law have recently been introducedwhich, if implemented, would considerably toughen the existing law. Theproposed changes, among other things, may shift the burden of proving marketprices from the tax authorities to the taxpayer, cancel the existing permitteddeviation threshold and introduce specific documentation requirements forproving market prices. Moreover, in the event that a transfer pricingadjustment is assessed by Russian tax authorities, the Russian transfer pricingrules do not provide for an offsetting adjustment to the relatedcounterparty in the transaction that is subject to adjustment.

**Risks Relating to ourShares and ADSs and the Trading Market**

***Because thedepositary may be considered the beneficial holder of the shares underlying theADSs, these shares may be arrested or seized in legal proceedings in Russiaagainst the depositary.***

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

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

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

27

----

***Voting rights withrespect to the shares represented by our ADSs are limited by the terms of thedeposit agreement for the ADSs and relevant requirements of Russian law.***

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

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

In addition, althoughsecurities regulations expressly permit the depositary to split the votes withrespect to the shares underlying the ADSs in accordance with instructions fromADS holders, there is little court or regulatory guidance on the application ofsuch regulations, and the depositary may choose to refrain from voting at all unlessit receives instructions from all ADS holders to vote the shares in the samemanner. ADS holders may thus have significant difficulty in exercising votingrights with respect to the shares underlying the ADSs. There can be noassurance that holders and beneficial owners of ADSs will (i) receivenotice of shareholder meetings to enable the timely return of votinginstructions to the depositary, (ii) receive notice to enable the timelycancellation of ADSs in respect of shareholder actions or (iii) be giventhe benefit of dissenting or minority shareholders’ rights in respect of anevent or action in which the holder or beneficial owner has voted against,abstained from voting or not given voting instructions.

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

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

·       variations in our operatingresults and other food and beverage companies;

·       variations in national andindustry growth rates;

·       actual or anticipatedannouncements of technical innovations or new products or services by us or ourcompetitors;

·       changes in governmentallegislation or regulation;

·       general economic conditionswithin our business sector or in Russia; or

·       extreme price and volumefluctuations on the Russian stock market.

28

----

In addition, no more than35% of a Russian company’s shares may be circulated abroad through depositaryreceipt programs, such as ADS and GDSs. Our ADS and GDS programs, however,together account for 40% of our outstanding shares (this amount was approved bythe Russian securities regulator based on the prior limit and is not requiredto be reduced to 35%). As a result, we are currently unable to raise additionalequity financing through the issuance of depositary receipts. This restrictionmay also limit the liquidity of our ADSs and their trading price.

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

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

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

Under Russian law, dividends paid to a non-residentholder of shares generally will be subject to Russian withholding tax at a rateof 15% for legal entities and organizations and at a rate of 30% 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 taxauthorities clarify whether it is permitted under Russian law to withholdRussian withholding tax in respect of dividends a company pays to thedepositary at a lower rate than the domestic rate applicable to such payments(currently 15%), we intend to withhold Russian withholding tax at the domesticrate applicable to such dividends, regardless of whether the Depositary (thelegal owner of the shares) or an ADS holder would be entitled to reduced ratesof Russian withholding tax under the relevant income tax treaty if it were thebeneficial owner of the dividends for purposes of that treaty. Although non-residentADS holders may apply for a refund of a portion of the amount so withheld by usunder the relevant income tax treaty, no assurance can be made that the Russiantax authorities will grant any refunds See “Item 10. Additional Information—E.Taxation—Russian Income and Withholding Tax Considerations” for additionalinformation.

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

Under Russian tax legislation, gains realized bynon-resident legal entities or organizations from the disposition of Russianshares and securities, as well as financial instruments derived from suchshares, such as the ADSs, may be subject to Russian profits tax or withholdingincome tax if immovable property located in Russia constitutes more than 50% ofour assets. However, no procedural mechanism currently 

29

----

exists to withhold andremit this tax with respect to sales made to persons other than Russian companiesand foreign companies with a registered permanent establishment in Russia.Gains arising from the disposition at foreign stock exchanges of the foregoingtypes of securities listed on these exchanges by foreign holders who are legalentities or organizations are not subject to taxation in Russia.

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

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

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

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

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

There is no treaty betweenthe United States and the Russian Federation providing for reciprocalrecognition and enforcement of foreign court judgments in civil and commercialmatters. These limitations may deprive you of effective legal recourse forclaims related to your investment in the ADSs. The deposit agreement providesfor actions brought by any party thereto against us to be settled byarbitration in accordance with the Commercial Arbitration Rules of theAmerican Arbitration Association, provided that any action under the U.S.federal securities laws or the rules or regulations promulgated thereundermay, but need not, be submitted to arbitration. The Russian Federation is aparty to the United Nations (New York) Convention on the Recognition andEnforcement of Foreign Arbitral Awards, but it may be difficult to enforcearbitral awards in the Russian Federation due to a number of factors, includingthe inexperience of Russian courts in international commercial transactions,official and unofficial political resistance to enforcement of awards againstRussian companies in favor of foreign investors and Russian courts’ inabilityto enforce such orders and corruption.

***The lack of acentral and rigorously regulated share registration system in Russia may resultin improper record ownership of our shares, including the shares underlying theADSs.***

Ownership of Russian joint stock company shares (or,if the shares are held through a nominee or custodian, then the holding of suchnominee or custodian) is determined by entries in a share register and isevidenced by extracts from that register. Currently, there is no centralregistration system in Russia. Share registers are maintained by the companiesthemselves or, if a company has more than 50 shareholders or so elects, bylicensed registrars located throughout Russia. Regulations have been issuedregarding the licensing conditions for such registrars, as well as theprocedures to be followed by 

30

----

both companies maintainingtheir own registers and licensed registrars when performing the functions ofregistrar. In practice, however, these regulations have not been strictlyenforced, and registrars generally have relatively low levels of capitalizationand inadequate insurance coverage. Moreover, registrars are not necessarilysubject to effective governmental supervision. Due to the lack of a central andrigorously regulated share registration system in Russia, transactions inrespect of a company’s shares could be improperly or inaccurately recorded, andshare registration could be lost through fraud, negligence, official andunofficial governmental actions or oversight by registrars incapable ofcompensating shareholders for their misconduct. This creates risks of loss notnormally associated with investments in other securities markets.

In March 2007, theFederal Service for the Financial Markets, or the FSFM, terminated the licenseof three top managers of our registrar, the Central Moscow Depository. Managersof Russian depositaries and registrars are required by law to be licensed bythe FSFM, and their failure to do so can result in the depository orregistrar’s own license being terminated. While the FSFM reversed its decisionto terminate the Central Moscow Depository managers’ licenses inApril 2007, it is possible that the FSFM may take similar action seekingto terminate the managers’ or our registrar’s licenses in the future.

***Russian thin capitalization rules could affectour ability to deduct interest on certain borrowings.***

Russian thincapitalization rules limit the amount of interest that can be deducted bya Russian company on debt payable to non-resident shareholders. UntilJanuary 1, 2006, these rules applied only to loans issued to aRussian company by a foreign company owning directly or indirectly more than20% of the share capital of the Russian company. However, thin capitalizationrules that came into effect on January 1, 2006 extend the rules’application to debt issued to a Russian company by another Russian company thatis affiliated with such foreign company, as well as to debt issued to a Russiancompany which is secured by such foreign company or such affiliated Russiancompany. It is not yet fully clear how these new rules will be applied inpractice by the Russian tax authorities.

**Risks Relating tothe Russian Federation**

**Economic Risks**

***The Russian economyis less stable than those of most Western countries and could adversely affectour business and the value of the***shares and ADSs.

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

·       significantdeclines in gross domestic product;

·       hyperinflation;

·       anunstable currency;

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

·       aweak banking system providing limited liquidity to domestic enterprises;

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

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

·       widespreadtax evasion;

·       growthof a black and gray market economy;

31

----

·       pervasivecapital flight;

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

·       significantincreases in unemployment and underemployment; and

·       theimpoverishment of a large portion of the population.

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

Recently, the Russianeconomy has been showing positive trends, such as the increase in the grossdomestic product, a stable ruble, strong domestic demand, rising real wages anda reduced rate of inflation; however, these trends may not continue or may beabruptly reversed.

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

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

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

***Fluctuations in theglobal economy could materially adversely affect the Russian economy and the valueof the***shares and ADSs.

The Russian economy isvulnerable to market downturns and economic slowdowns elsewhere in the world.As has happened in the past, financial problems or an increase in the perceivedrisks associated with investing in emerging economies could dampen foreigninvestment in Russia and Russian businesses could face severe liquidityconstraints, further materially adversely affecting the Russian economy.Additionally, because Russia produces and exports large amounts of oil, theRussian economy is especially vulnerable to the price of oil on the worldmarket and a decline in the price of oil could slow or disrupt the Russianeconomy or undermine the value of the ruble against foreign currencies. Recentmilitary conflicts and international terrorist activity have also significantlyimpacted oil and gas prices, and pose additional risks 

32

----

to theRussian economy. Russia is also a major producer and exporter of metal productsand its economy is vulnerable to fluctuations in world commodity prices and theimposition of tariffs and/or antidumping measures by the United States, theEuropean Union or by other principal export markets.

**Political andSocial Risks**

***Political andgovernmental instability could materially adversely affect our business, financialcondition, results of operations and prospects and the value of the shares andADSs.***

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

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

***Conflict betweencentral and regional authorities and other conflicts could create an uncertainoperating environment, hindering our long-term planning ability.***

The Russian Federation is a federation of 86sub-federal political units, consisting of republics, territories, regions,cities of federal importance and autonomous regions and districts. Thedelineation of authority and jurisdiction among the members of the RussianFederation and the federal government is, in many instances, unclear andremains contested. Lack of consensus between the federal government and localor regional authorities often results in the enactment of conflictinglegislation at various levels and may lead to further political instability. Inparticular, conflicting laws have been enacted in the areas of privatization,land legislation and licensing. Some of these laws and governmental andadministrative decisions implementing them, as well as certain transactionsconsummated pursuant to them, have in the past been challenged in the courts,and such challenges may occur in the future. This lack of consensus hinders ourlong-term planning efforts and creates uncertainties in our operatingenvironment, both of which may prevent us from effectively and efficientlyimplementing our business strategy.

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

33

----

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

The political and economicchanges in Russia in recent years have resulted in a significant dislocation ofauthority. The local and international press have reported that significantorganized criminal activity has arisen, particularly in large metropolitancenters. Property crime in large cities has increased substantially. Inaddition, the local press and international press have reported high levels ofcorruption, including the bribing of officials for the purpose of initiatinginvestigations by government agencies. Press reports have also describedinstances in which government officials engaged in selective investigations andprosecutions to further the commercial interests of government officials orcertain individuals. Additionally, some members of the Russian media regularlypublish disparaging articles in return for payment. The depredations oforganized or other crime, demands of corrupt officials or claims that we havebeen involved 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.

***Social instabilitycould increase support for renewed centralized authority, nationalism orviolence and thus materially adversely affect our business, financialcondition, results of operations and prospects.***

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

**Legal Risks**

***Weaknesses relatingto the legal system and legislation create an uncertain environment forinvestment and for business activity in Russia.***

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

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

·       conflictinglocal, regional and federal rules and regulations;

·       thelack of judicial and administrative guidance on interpreting legislation;

·       therelative inexperience of judges and courts in interpreting legislation;

·       lackof independent judiciary;

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

·       poorlydeveloped bankruptcy procedures that are subject to abuse.

The recent nature of muchof Russian legislation, the lack of consensus about the scope, content and paceof economic and political reform and the rapid evolution of the Russian legalsystem in ways that may not always coincide with market developments place theenforceability and underlying constitutionality of laws in doubt and results inambiguities, inconsistencies and anomalies. In addition, Russian legislation 

34

----

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 assureyou that regulators, judicial authorities or third parties will not challengeour internal procedures and by-laws or our compliance with applicable laws,decrees and regulations.

***Failure to complywith existing laws and regulations or the findings of government inspections,or increased governmental regulation of our operations, could result insubstantial additional compliance costs or various sanctions which couldmaterially 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, decreesor regulations, and we may be unable to refute such conclusions or remedy theviolations. Our failure to comply with existing laws and regulations or thefindings of government inspections or to obtain all approvals, authorizationsand permits required for our operations may result in the imposition of finesor penalties or more severe sanctions including the suspension, amendment ortermination of our permits, or in requirements that we cease certain of ourbusiness activities, or in criminal and administrative penalties applicable toour officers. Any such decisions, requirements or sanctions, or any increase ingovernmental regulation of our operations, could increase our costs andmaterially adversely affect our business, financial condition, results ofoperations and prospects.

We believe that our current legal and environmentalcompliance programs adequately address these concerns and that we are insubstantial compliance with applicable laws and regulations. However, as theregulations 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, underrelevant Russian legislation, Russian regulatory agencies can impose varioussanctions for violations of environmental standards. These sanctions mayinclude civil and administrative penalties applicable to a company and criminaland administrative penalties applicable to its officers. Also, in the course,or as a result, of an environmental investigation, regulatory authorities canissue an order halting part or all of the production at a plant which hasviolated environmental 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.

35

----

***Lack of developedcorporate and securities laws and regulations in Russia may limit our abilityto attract future investment.***

The regulation andsupervision of the securities market, financial intermediaries and issuers areconsiderably less developed in Russia than, for example, in the United Statesand Western Europe. Securities laws, including those relating to corporategovernance, disclosure and reporting requirements, have only recently beenadopted, whereas laws relating to anti-fraud safeguards, insider tradingrestrictions and fiduciary duties are rudimentary. In addition, the Russiansecurities market is regulated by several different authorities, which are oftenin competition with each other. These include:

·       theFSFM;

·       theMinistry of Finance;

·       theFederal Antimonopoly Service;

·       theCentral Bank of Russia; and

·       variousprofessional self-regulatory organizations.

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

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

***The judiciary’slack of independence,***its relative inexperience and occasionalabuse of discretion and the difficulty in enforcing court decisions could preventus or you from obtaining effective redress in a court proceeding.

The independence of the judicial system and itsimmunity from economic, political and nationalistic influences in Russia cannot be guaranteed. The court system is underfunded. Judges and courts aregenerally 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 Russianjudicial system can be slow or unjustifiably swift. Enforcement of court orderscan in practice be very difficult in Russia. Additionally, court claims areoften used in furtherance of political and commercial aims or infighting. Wemay be subject 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 alsoextend to property rights. During Russia’s transformation from a centrallyplanned economy to a market economy, legislation has been enacted to protectprivate property against expropriation and nationalization. However, theseprotections may not be enforced in the event of an attempted expropriation ornationalization. Expropriation or nationalization of any of our entities, theirassets or portions thereof, potentially without adequate compensation, wouldhave a material adverse effect on our business, financial condition, results ofoperations and prospects.

36

----

***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.

Governmental authorities in Russia have a high degreeof discretion and, at times, act selectively or arbitrarily, without hearing orprior notice, and sometimes in a manner that is inconsistent with legislationor influenced by political or commercial considerations. Selective or arbitrarygovernmental actions have reportedly included the denial or withdrawal oflicenses, sudden and unexpected tax audits and claims, criminal prosecutionsand civil actions. Federal and local government entities have also usedordinary defects in matters surrounding share issuances and registration aspretexts for court claims and other demands to invalidate such issuances andregistrations or to void transactions. Moreover, the government also has thepower in certain circumstances, by regulation or government act, to interferewith the performance of, nullify or terminate contracts. Standard &Poor’s, has expressed concerns that “Russian companies and their investors canbe subjected to government pressure through selective implementation of regulationsand legislation that is either politically motivated or triggered by competingbusiness groups.” In this environment, our competitors may receive preferentialtreatment from the government, potentially giving them a competitive advantageover us.

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

***Shareholderliability under Russian legislation could cause us to become liable for theobligations of our subsidiaries.***

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

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

·       theeffective parent gives obligatory directions to the effective subsidiary.

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

37

----

***Shareholder rights provisions under Russian law***impose significantadditional obligationson us.

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

·       areorganization;

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

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

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

***Because there islittle minority shareholder protection in Russia, your ability to bring, orrecover in, an action against us will be limited.***

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

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

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

***Characteristics ofand 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 environmentin Russia historically has been complicated by the often contradictory taxlegislation. This uncertainty potentially exposes us to significant fines andpenalties and enforcement measures despite our best efforts at compliance, andcould result in a greater than expected tax burden and the suspension ortermination of our licenses. Generally, taxes payable by Russian companies aresubstantial and numerous. These taxes include, among others:

·       incometaxes;

38

----

·       VAT;

·       unifiedsocial tax; and

·       propertytax.

There have recently been significant changes to theRussian taxation system, including a number of changes to various chapters ofthe Tax Code. Among the most recent changes are significant amendments to thechapters on VAT and on the profit tax effective as of January 1, 2006, aswell as the changes to Part One of the Tax Code (tax administrationprovisions) effective as of January 1, 2007.

Since tax legislation is subject to frequent change,some sections and regulations enacted under the Tax Code are comparatively new,and interpretation of these regulations is often unclear or nonexistent.Taxpayers and the Russian tax authorities often interpret tax laws differentlywhilst the Russian tax authorities’ interpretation of tax laws rarely favorstaxpayers. In some instances, the Russian tax authorities have applied new interpretationsof tax laws retroactively. There is no established precedent or consistentcourt practice in respect of these issues. Taxpayers often have to resort tocourt proceedings to defend their positions against the tax authorities. Recentevents within the Russian Federation suggest that the tax authorities may betaking a more assertive position in their interpretations of the legislationand 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 a numberof authorities, each of which may impose fines, penalties and interest charges.Generally, in an audit taxpayers are subject to inspection with respect to thethree calendar years which immediately proceeded the year in which the audit iscarried out. Previous audits do not completely exclude subsequent claimsrelating to the audited period because Russian tax law authorizes upper-leveltax inspectorates to review the results of tax audits conducted by subordinatetax inspectorates. In addition, in July 2005, the Russian Constitutional Courtissued a decision that allows the statute of limitations for tax liabilities tobe extended beyond the three-year term set forth in the tax laws if a courtdetermines that a taxpayer has obstructed or hindered a tax audit. Because noneof the relevant terms is defined, tax authorities may have broad discretion toargue that a taxpayer has “obstructed” or “hindered” an audit and ultimatelyseek penalties beyond the three-year term.

In October 2006, the Supreme Arbitration Court of theRussian Federation introduced a new concept of “unjustified tax benefit” whichis defined mainly by reference to specific examples of such tax benefits (*e.g.* absence of business purpose) and which may lead todisallowance thereof for tax purposes. There is currently no practice orguidance from the tax authorities or courts for interpreting this new concept;however, it is likely that the tax authorities will actively seek to apply thisconcept when challenging in courts tax positions taken by taxpayers. Althoughthe intent of the court when introducing the concept of “unjustified taxbenefit” was to combat abuse of tax law, in practice, there is no assurancethat the tax authorities will not seek to apply this concept in a broader sensethan may have been intended by the court. In addition, a recent pronouncementby a Russian court in December 2006 indicates a trend within the judicialsystem to broaden the application of criminal responsibility for taxviolations.

Also there is no concept of a tax group in Russia, norcan a consolidated filing be made by Russian companies for tax purposes.Therefore, Russian companies and each of their Russian subsidiaries pay theirown Russian taxes and may not surrender profits or losses to other group companiesfor tax purposes. In addition, payments of dividends between two Russiancompanies are currently subject to a withholding income tax of 9% at the timethey are paid out of profits, although the effective rate of this tax may belower than 9% if the company paying the dividends has received, in the same ora preceding tax period, dividends from other Russian companies. This may giverise to additional tax liabilities and inefficiencies.

39

----

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

**Other Risks**

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

We have sourced certaininformation contained in this document from third parties, including privatecompanies and Russian government agencies, and we have relied on the accuracyof this information without independent verification. The official data publishedby Russian federal, regional and local governments may be substantially lesscomplete or researched than those of Western countries. Official statistics mayalso be produced 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.

***Item 4.***           Information on OurCompany

**A.**                Historyand Development

We trace our history back to 1992, when a group ofindividuals formed an enterprise which began leasing a production line at theLianozovsky 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 perceivedhigher quality and novelty and, since its introduction, the “Wimm-Bill-Dann”name has become a brand name recognized in a substantial percentage of Russian households.

To take advantageof the opportunities arising from the privatization of Russian state-ownedassets, our current shareholders then began acquiring shares in the LianozovskyDairy Plant in Moscow, and continued to expand their juice product enterprises.Following their acquisition of a majority stake in the Lianozovsky Dairy Plantin 1995, they added dairy products to their portfolio, thus becoming a dairyand juice producer. Our growth has been accomplished, in part, throughsignificant acquisitions, including the following:

·       In1995, we acquired majority control of the Lianozovsky Dairy Plant (renamed intoWimm-Bill-Dann in 2006);

·       In1996 and 1997, we acquired majority stakes in the Moscow Baby Food Plant, theTsaritsino Dairy Plant and the Ramenskiy Plant (renamed into Wimm-Bill-DannBeverages in 2007);

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

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

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

40

----

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

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

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

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

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

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

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

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

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

·       InJuly 2005, we acquired 66.3% control of the Obninsk Dairy Plant in theKaluga region;

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

·       InOctober 2005, we acquired a 100% interest in the Essentuki Mineral Water Plantat CMW (Caucasian Mineral Waters) in the town of Essentuki in the Stavropolregion;

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

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

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

·       InSeptember 2006, we acquired a 100% interest in the Surgut City Dairy Plant inWestern Siberia;

·       InNovember 2006, we acquired 93.74% control of the Moscow-based dairy producerOchakovo;

·       InDecember 2006, we acquired 100% control of the Omsk-based dairy producerManros-M; and

·       InDecember 2006, we acquired 83.36% control of Angarsky Dairy Plant (MOLKA), oneof the largest dairy enterprises in Irkutsk region. 

Our operations arecurrently organized into three separately reported segments: dairy products,beverages, baby food, all operating under the umbrella of our holding company,Wimm-Bill-Dann Foods OJSC, which was incorporated on May 31, 2001. Inaddition, at the end of 2004, we created a separately managed non-core businessunit called “Agro” for the purpose of buying and managing a select number ofdairy farms in certain Russian regions. “Agro” is currently reported as part ofour dairy division.

In order to improve our corporate structure andmanagement, as well as to reduce our expenses, we commenced the reorganizationof our subsidiaries in April and May 2007 with the merger of 14 of oursubsidiaries (Tsaritsyno 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 (formerlyLianozovsky Dairy Plant). We are planning to merge some other of oursubsidiaries into Wimm-Bill-Dann during 2007. 

41

----

We completed our initial public offering onFebruary 14, 2002 and listed our shares of common stock, represented byAmerican Depositary Shares, or ADSs, on the New York Stock Exchange under thesymbol “WBD.” Each ADS represents one underlying share of our common stock.

According to Standard & Poor’s global scale, ourcorporate credit rating is B+, and Moody’s Investors Service ranks ourCorporate Credit rating as B1. In March 2007, Moody’s Investors Serviceupgraded our Eurobond Debt rating from B2 to B1 with a positive outlook. In May2006, Standard & Poor’s Governance Services announced the upgrade of our CorporateGovernance Score (CGS) from 7 to 7+, which makes our score the highest inRussia. 

Our legal name isWimm-Bill-Dann Foods OJSC, and we are incorporated as an open joint stockcompany under the laws of the Russian Federation and registered with the MoscowInter-District Inspectorate No. 39 of the Russian Ministry of Taxes andDuties under the state registration number 1037700236738. We operate in theRussian Federation and the CIS under a number of different trademarks and brandnames, as more fully described below in “—B. Business Overview—CurrentOperations—Our products and brands.” Our business objectives, set forth inArticle 4 of our charter, include the production and sale of foodproducts, including milk and sour milk products, mineral water, fruit andvegetable juices and beverages and children’s food. Our head office is locatedat 16 Yauzsky Boulevard, Moscow 109028, Russian Federation, and our telephonenumber is +7 495-105-5805. We maintain a website at http://www.wbd.com. Theinformation on our website is not a part of this report. We have appointed CTCorporation System, 111 Eighth Avenue, New York, New York 10011, as ourauthorized agent for service of process for any suit or proceeding arising outof or relating to our shares, ADSs, or the deposit agreement.

**B.**               BusinessOverview

We are one of the Russia’s largest manufacturers of foodproducts. Our reportable business segments in 2006 were dairy, beverage andbaby food products. In 2006, the dairy segment accounted for 75.0% of oursales, the beverages segment, which includes juice and bottled mineral water,accounted for 18.4% of our sales and the baby food segment accounted for 6.6%of our sales. 

Since our founding in 1992, we have become the marketleader in Russia in the dairy market and one of the market leaders in the juicemarket. In the dairy market, according to an AC Nielsen study of 24 majorcities located throughout Russia, including Moscow and St. Petersburg, we werethe market leader at the end of 2006 with a 34% market share in terms of value.In the Russian juice market, according to a Business Analytica survey of all ofRussia, we had a 19% market share in terms of value at the end of 2006. 

We currently have 36 manufacturing facilities inRussia, Ukraine, Kyrgyzstan, and Uzbekistan, as well as distribution centers in24 cities throughout Russia and the CIS. As of March 2007 we employed 19,582people.

We offer our consumers a full range of quality brandeddairy, juice, water and baby food products, using carefully selected raw materials,modern production technology and strict quality control. All of our productsare made according to our own recipes and reflect our understanding of consumerdemand.

Our principal dairyproducts include:

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

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

·       Cheeseproducts, including hard yellow and processed cheese.

42

----

Our principalbeverage products include:

·       Juiceand nectars produced from juice concentrate;

·       Enrichedjuice-based drinks;

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

·       Bottlednatural mineral water.

Our baby foodproducts include:

·       Liquiddairy products for infants under the age of three;

·       Juicesfor infants under the age of three;

·       Meat,fish, poultry, fruit, vegetable and dairy purees for infants under the age ofthree; and

·       Productsfor pregnant women and nursing mothers.

**Business Strategy**

Our strategy is driven by clearly defined businessarchitecture. In March 2007, our senior management, after extensiveconsultation, approved a concise strategic approach for the company aimed atmeeting our qualitative and quantitative goals over monthly, quarterly, annualand multi-year time horizons. This approach does not mark a departure from ourlonger term strategic vision, rather it lends greater clarity and defines thesteps to be taken following the important restructuring work implemented during2006. The vision is that by 2010 we should be Russia’s leading fast-movingconsumer goods (FMCG) company with leading key profit ratios for the industry.

Our strategy reflects ourmission and is driven by a vision of where the company should be in the future.The mission, as articulated during 2006, is to help the entire family livehealthier by enjoying our nutritious and delicious food and beverage productsevery day throughout their lives.

**Business Goals**

Our business goals for 2010 represent the keyindividual elements needed to achieve this vision. By this date, our goal is tobe recognized by both consumers and all key Russian regulators as the leadingfood company in terms of health and nutrition and for our top ten brands byrevenue to be among the top-50 FMCG brands in Russia. At the sametime, we intend to undertake an accelerated process of innovation with the aimof increasing revenues by 2010. 

In addition, we will seekto further strengthen our corporate image and to become one of the most desiredemployers of choice in Russia. Finally, by 2010, we will aim to achieve betterroute-to-market execution, with greater control over how products are sold atthe outlet level. 

**Business Strategies**

In order to meetthese goals, our strategy is focused on key elements that are relevant acrossall of our business units as well as departments serving the group as a whole,including Marketing, Human Resources, Research and Development and CorporateCommunications. These key elements are as follows: 

·       **Investing in marketing to build brand equity.**   We intendto increase our marketing activities and focus sponsorship on sports and activelifestyle to promote the health and wellness values of our brands.

43

----

·       **Investing in the sales team and route-to-market (RTM) control.**   Wewill seek to increase our sales force, with consolidated key account teams focusingon large and growing retail chain customers and an increased focus on training.We have defined our merchandizing standards and are starting to implement themin the markets where we are present. **Driving marginimprovements through optimal brand, pack and price mix.** We willstudy changing consumer price elasticity in order to adapt the right approachto brand, packaging type and size as well as price. New, higher marginpackaging will be introduced with investment focused on higher margin brands. 

·       **Driving lowest appropriate cost and protecting quality.**   Wewill regularly audit retailers to ensure quality and provide detailed qualityspecifications for each stock-keeping unit (SKU). We will seek to continue toimprove plant efficiency and reduce logistics costs. We also intend to continueto buy out minority shareholdings and consolidate legal entities to create amore efficient and streamlined company. 

·       **Accelerating innovation, new category entry and acquisitions.**   Wewill seek to continue to enter new and innovative categories and segmentsoffering profitable growth consistent with our mission . We also intend tocontinue our policy of acquiring successful dairy companies across Russia andthe CIS and we will carefully study opportunities for selective acquisitions ofother food companies. Finally, we will continually assess the attractivenessand potential for entry into new geographic areas.

·       **Strengthening human resource capability.**   We operate inboth maturing markets, such as Moscow and St Petersburg, and emerging markets,such as Russia’s regions and the CIS. We will strive to develop our humanresource capability at all levels to attract and retain talented executiveswith experience in developed and emerging markets worldwide. At the same time, weare dedicated to developing our considerable human resource capacity within thecompany. This entails promoting talented people within the organization andproviding them with experience in other parts of the business and otherregions. We seek to provide ongoing opportunities for our employees to learnnew skills through training and continued education in our CorporateUniversity. A yearly appraisal process allows managers to understand what isexpected from them, provides a forum for dialogue and an opportunity to discusscareer planning. Improved corporate communications is also helping centralmanagement communicate the company’s plans and goals to employees across thebusiness and build a more unified corporate culture. We understand thatmotivated and well-informed employees are directly responsible for our success.

**Current Operations**

**Dairy industry**

***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 oncombined data from Comcon, AC Nielsen and Goskomstat, that per capitaconsumption of packaged dairy products in Russia was 60.8, 65.9 and 70.3 litersper year in 2004, 2005 and 2006, respectively, levels that are relatively lowcompared to the majority of European countries. The demand for dairy productsremained relatively stable in the aftermath of the 1998 Russian financialcrisis and the ensuing decline in per capita income, as dairy products aregenerally considered to be staple consumer goods. Additionally, increasing percapita income following 1998 has positively affected dairy consumption,particularly of higher-priced products such as yogurt and dessert dairyproducts. We estimate that per capita consumption of traditional packaged dairyproducts in Russia increased 6% to 56.9 kg in 2006 from 53.7 kg in 2005.We believe that packaged dairy product consumption levels will continue toincrease at a solid pace in Russia as the consumption of bulk liquid milkdecreases due to increasing per capita incomes, the growing desire and demandfor sterilized milk and the greater convenience of 

44

----

packagedproducts. Although consumption of bulk liquid milk, which generally consists ofunpackaged milk sold in markets to consumers who bring their own packaging, hasbeen decreasing in Russia, it is still relatively common. 

----

Source: Company

Since its first widespreadcommercial appearance in Russia in the early 1990s, yogurt’s popularity hasincreased. For instance, the consumption of such products as drinkable yogurt,functional foods/drinks and flavored milk is relatively high among certaingroups of consumers and comparable with milk consumption levels. However, theper capita consumption of the above products remains relatively low, althoughwe believe that this segment of the dairy market has a high growth potential asincomes in Russia grow. 

----

Source: R-TGI Comcon, asof the second quarter of 2006

45

----

According to our estimates, annual per capitaconsumption of yogurt and dairy desserts in Russia increased to about 8.4kilograms in 2006 from 7.5 kilograms in 2005, reflecting an increase of 11%.

According to our estimates, annual cheese consumption(yellow, white and processed) in Russia increased by 8.7% to 5.0 kilograms percapita in 2006 from 4.6 kilograms per capita in 2005. We believe that cheeseconsumption levels will continue to grow due to increasing per capita incomesand the greater variety of cheese products available to Russian consumers.

***Production.******  ***Milkproduction and processing in Russia declined dramatically during the 1990s dueto the general state of the Russian economy, a lack of raw materials due, inpart, to the slaughter of dairy cows necessitated by a shortage of feed, and asharp increase 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.

The result of this decline was a drop in processingvolumes and an increased reliance upon imported dairy products. While thefinancial crisis of 1998 aided Russian producers to some extent, as it pushedimported foods out of the Russian market, it also caused difficulties forRussian companies that depended on imported materials for production. Ingeneral, producers that were able to limit their exposure to fluctuations inthe value of the ruble and to establish links with Russian suppliers survivedthe crisis and took leading positions in the marketplace. The milk processingsector, however, still remains fragmented, and currently includes over 1,500large, medium and small enterprises, according to IKAR (the Institute of theAgricultural Market). There is evidence, though, that the process ofconsolidation is continuing, with the less efficient producers going out ofbusiness or being acquired by larger companies. For example, our competitor Unimilkacquired various dairy plants in the course of 2005-2006 throughoutRussia, including Tommas, Rosa, Cheboksarsky M.K., Solti, Permmoloko.

Additionally, foreign, particularly European,producers have recognized the potential for growth in the demand in Russia formilk, yogurt and dairy desserts and are investing in the Russian market. Anumber of European producers, such as Danone, Parmalat, Campina, Lactalis andEhrmann, produce dairy products in Russia, principally in the Moscow region,and comprise our principal competition in the yogurt and dairy dessert segmentof the dairy market. The dessert market is growing at higher rates than thetraditional dairy market. It is also developing to cater to changing consumertastes with more attention being paid to fresh health and wellness products.

We have made significantinvestments in the development of our own farms and also establishing long-termrelationships with third party raw milk suppliers. These steps help us toaddress the problem of raw milk deficits and increase the quality of the rawmilk we purchase. The government has also started a large scale program aimedat the revival of the agricultural sector in Russia, which we see as animportant development.

**Juice and MineralWater industries**

***Consumption.******  ***Before theearly 1990s, consumption of juice products in Russia was limited. Juiceproducts manufactured in the Soviet Union included only vegetable juices andfruit juices 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 Russianincomes and a significant increase in the cost of juice products due to theincrease in the ruble cost of imported juice packaging and ingredients. WhileRussian juice consumption has recovered from the effects of the 1998 financialcrisis, it is still relatively low compared to most European countries.

46

----

Thefollowing table shows annual per capita juice product consumption in liters inRussia and selected European countries in 2006:

| **Country** | ** ** | ** ** | ** ** | **2006** | ** ** |
|-------------|------------|------------|------------|----------|------------|
| Hungary     |       |       | 48         |     |       |
| Germany     |       |       | 41         |     |       |
| Netherland  |       |       | 38         |     |       |
| UK          |       |       | 36         |     |       |
| Poland      |       |       | 35         |     |       |
| France      |       |       | 24         |     |       |
| Bulgaria    |       |       | 20         |     |       |
| Russia      |       |       | 18         |     |       |
| Italy       |       |       | 14         |     |       |

----

Source: Euromonitor, 2006

We estimate annual per capita juice productconsumption in Russia in 2006, 2005 and 2004 to be approximately 18 liters, 16liters and 14 liters, respectively.

Consumption of bottled water in Russia is now on parwith juice consumption. According to Business Analytica, per capita consumptionof bottled water in Russia in 2006 was 21 liters per year. This figure issignificantly lower than consumption levels elsewhere in Europe. For example,according to Euromonitor, current per capita consumption of bottled water inthe United Kingdom is close to 30 liters per year, and over 140 liters per yearin Italy and France.

***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 1998 financialcrisis caused a majority of the foreign companies to leave the market, and alsoforced a majority of Russian producers to decrease or discontinue juiceproduction.

The juice product market began recovering in 1999, andsince then, has experienced significant increases in sales volume, stimulatedby rising Russian incomes and an increased interest in health issues, as wellas by the advertising efforts of juice producing companies.

Additionally, a number ofRussian producers that survived the 1998 financial crisis managed torestructure their production facilities using Western technologies and tostrengthen their market positions. In 2006, according to a Business Analyticasurvey of Total Urban Russia (cities with the population of over 100,000 people),the four largest Russian producers had an 84% share of the juice market.Russian producers often use cheaper domestic inputs and modern packagingtechnologies, and they increasingly promote their brands on a national scale.The industry is now experiencing consolidation, as demonstrated by the increasein acquisition activity. According to the Business Analytica survey, during2006, there were more than 100 brands of juice products in the Russian juicemarket, though 10 of them accounted for 78% of the market. The bottled watermarket in Russia is characterized by a large number of brands, including localbrands that are strong in the regions where they are produced. In addition, theleading brands in Moscow differ from those with leading market shares in manyof the regions outside of Moscow. According to Business Analytica, in 2006, thetop ten bottled water producers in Russia had jointly a 73% market share inMoscow and a 68% market share in the ten largest cities of Russia in terms ofvalue. This difference is largely due to the prominence of local or regionalproducers in certain regions outside of Moscow whose water products are lessexpensive than those of national brands. The joint Moscow market share of thetwo largest international bottled water providers, Pepsi and Coca-Cola,decreased from 29.2% in 2005 to 28.5% in 2006 in terms of value, according toBusiness Analytica. Coca-Cola became the market 

47

----

leaderin terms of market share in Moscow in 2006 followed by Pepsi and domesticproducer Shishkin Forest.

**Baby Food industry**

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

·       powdered formula andcereals;

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

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

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

According to our estimates, approximately 75 - 80% ofthe dairy products consumed by children aged 0 - 3 years in Russia areadult food products, with specialized baby foods comprising only 20 - 25% ofthe dairy products consumed in this age group.

From 2003 to 2006, the baby food market in Russia grewby 56% in terms of volume, according to our estimates. Three regions of Russiacurrently account for over 70% of nationwide baby food product sales, includingthe Central region (including Moscow), the Northwest region (including St.Petersburg) and the Volga region, according to our estimates.

In 2006, the Russian government launched a nationwideprogram aimed at improving the health of the nation and increasing the birthrate, which we believe could have a positive impact on the baby food marketover the next five years. Within the framework of the program, mothers getadditional compensation for the birth of their second child. More and moreRussian women go back to work shortly after giving birth. Many of them rely onready-to-eat baby food.

***Production.******  ***The baby foodmarket emerged in Russia in the early 1990s with a government plan to buildapproximately 110 production sites throughout the country to develop baby foodproducts such as meat, fruit, vegetable, grain and fish purees and variousdairy products. Although only a small number of these government-sponsoredproduction sites have since been built, domestic and foreign producers of babyfood started to acquire production facilities in Russia in the second half ofthe 1990s. Since 2000, the baby food market has grown substantially withadditional types of products being introduced and increased consumption due tothe increasing birth rate in Russia.

Today, both Russian and foreign producers are presentin the market, with foreign producers generally operating in each of the fourmain product categories and Russian producers generally operating in individualcategories.

In the individual product categories, foreignproducers currently dominate the powdered formula and cereals market, whiledomestic producers hold leading positions in the liquid dairy products andsupplemental infant food market.

48

----

**Our products andbrands**

Ourdairy, beverage and baby food products accounted for 75.0%, 18.4% and 6.6% ofour net sales in 2006, respectively. Our principal geographic market is Russia,with Moscow being the most significant one. The following table sets forth ourannual consolidated net sales, the proportion of consolidated net salesaccounted for by our main business lines, our reported annual productionvolumes and their growth rates:

| ** **                             | ** ** | **2006**   | ** ** | **2005(1)** | ** ** | **2004** | ** ** |
|----------------------------------------|------------|------------|------------|-------------|------------|----------|------------|
| **Dairy  products**                    |       |       |       |        |       |     |       |   |   |
| Sales (in million  USD)                |       | 1,321      |       |        | 1,004      |     |       | 818 |   |
| Annual sales  growth (% year on year)  |       | 31.6       | %          |        | 22.6       | %        |       | 33.5 | % |
| Percent of total  sales                |       | 75.0       | %          |        | 72.0       | %        |       | 69.1 | % |
| Sales volume (in  th. tons)            |       | 1,354      |       |        | 1,195      |     |       | 1,099 |   |
| Annual volume  growth (% year on year) |       | 13.2       | %          |        | 8.7        | %        |       | 14.4 | % |
| **Beverage  products**                 | ** ** | ** ** | ** ** | ** **  | ** ** |     | ** ** | ** ** | ** ** |
| Sales (in million  USD)                |       | 324        |       |        | 303        |     |       | 301 |   |
| Annual sales  growth (% year on year)  |       | 6.9        | %          |        | 0.7        | %        |       | 9.3 | % |
| Percent of total  sales                |       | 18.4       | %          |        | 21.7       | %        |       | 25.4 | % |
| Sales volume (in  million liters)      |       | 447        |       |        | 436        |     |       | 463 |   |
| Annual volume  growth (% year on year) |       | 2.5        | %          |        | (5.7       | )%       |       | (3.3 | )% |
| **Baby  food products**                | ** ** | ** ** | ** ** | ** **  | ** ** |     | ** ** | ** ** | ** ** |
| Sales (in million  USD)                |       | 117        |       |        | 88         |     |       | 65 |   |
| Annual sales  growth (% year on year)  |       | 33.5       | %          |        | 35.9       | %        |       | 40.7 | % |
| Percent of total  sales                |       | 6.6        | %          |        | 6.3        | %        |       | 5.5 | % |
| Sales volume (in  th. tons)            |       | 66         |       |        | 58         |     |       | 50 |   |
| Annual volume  growth (% year on year) |       | 14.7       | %          |        | 15.5       | %        |       | 8.9 | % |
| **Total net sales (in million  USD)**  | ** ** | **1,762**  | ** ** | ** **  | **1,395**  |     | ** ** | **1,184** | ** ** |

----

(1)          Previously,the Company classified as sales revenue amounts from sales of non-milkinventory and services; related expenses were included in the cost of sales.Commencing 2006, the Company began classifying such items in other operatingexpenses. Prior net sales and cost of sales have been reclassified accordinglyfor comparative periods presented in the accompanying financial statements.This change in classification has no effect on previously reported net income.

49

----

**Dairy products andbrands**

Ourprincipal dairy product lines, types of products, principal brands, and theirapproximate percentage of our total dairy revenue in 2006, 2005 and 2004 are asfollows:

| **Product line**       | ** ** | ** **                                                                                                                                                                         | ** ** | **Types of products**                                                                                                         | ** ** | **Main brands** | ** ** | **Approximate  percentage of  total dairy  revenue in  2006** | ** ** | **Approximate  percentage of  total dairy  revenue in  2005** | ** ** | **Approximate  percentage of  total dairy  revenue in  2004** |
|-----------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|
| Traditional  products       |       | Sterilized and  pasteurized milk, concentrated milk, butter, cream, traditional sour-milk  products such as kefir, cottage cheese, soft cottage cheese, sour cream, milk  porridge |       | “Little House in the Village”,  “Happy Milkman”,“M”, “Kuban Cow”, “Bio-Max” |       | 58.2%                |       | 57.4%                                                                        |       | 56.0%                                                                        |
| Yogurts and dairy  desserts |       | Traditional and  drinking yogurt and dairy desserts, including mousse, fruit-flavored milk and  kefir, puddings and flavored cottage cheese                                        |       | “Neo”, “Chudo”,                                                                                                     |       | 36.3%                |       | 36.9%                                                                        |       | 39.5%                                                                        |
| Cheese                      |       | Traditional cheese  products                                                                                                                                                       |       | “Lamber”, “Happy  Milkman”                                                                                          |       | 5.5%                 |       | 5.7%                                                                         |       | 4.5%                                                                         |

 

50

----

TheRussian market for packaged dairy products has several defined market segments.It can also be divided into non-branded and branded products, althoughnon-branded products generally cover only the low segment of the market. Ourbranding policy is designed to ensure we reach customers in most of thesegments with the right mix of brands, brand images, products and packagingformats. We support strong national brands, as well as local brands which arewell established in 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:

| **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 |       | “NEO”                                                                                    |       |                                  |       |                            |       |                                    |
| Upper-middle and  middle |       | Enough money to  buy major household appliances                                              |       | “Little House in  the Village”,  “33 Cows”, “Na Zdorovye”       |       | “Chudo”                     |       | “Bio-Max”             |       | “Lamber”                      |
| Middle and  lower-middle |       | Enough money to  buy food and clothing, but not enough to buy major household appliances     |       | “Happy Milkman,”  “Slavyanochka,” “Kubanskaya Cow” and “M” |       | “Frugurt,” “Lada” |       | “Our Doctor”          |       | “Happy Milkman”               |
| Econom                   |       | Enough money for food  only                                                                  |       | “Zavetny Bidonchik”,  “Pastushok”                                              |       |                                  |       |                            |       |                                    |

 

In general, we seek to maintain at least one brandwithin most dairy market segments, and we intend to develop new brands toexpand our coverage of attractive segments. In 2003 we launched the premium“NEO” brand and the mass-market “Zavetny Bidonchik”. We expanded our “NEO”brand in 2004 and 2005 to offer a broader selection of products in thisattractive premium segment. In 2006, we entered a totally new category of“fresh chocolate”, distributed through cold chain and sold on the cold shelf,with a premium brand “Morand”.

***Market trends andcompetition.***   The Russian dairy market hasbeen growing in the last three years. According to our estimates, the totalmarket for packaged dairy products in Russia was 8.7 billion liters in2004, 9.4 billion liters in 2005 and 10.1 billion liters in 2006. Webelieve that consumption may continue to increase at a more moderate pace, asrising household incomes in Russia may tend to bring about higher proteinconsumption and preferences for yogurt and dessert 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 lives,including sterilized milk.

Though some measure of consolidation is occurring inthe Russian dairy industry, the milk processing sector in Russia remainsfragmented and currently includes over 1,500 large, medium and smallenterprises, according to Institute for Agricultural Market Studies (IKAR). Dueto the high degree of 

51

----

fragmentation, the marketis very price competitive. From 2000 to the present, we have expanded ourdistribution service, reduced our sales to wholesalers, increased our sales toretailers and increased advertising. We also remain committed to our regionalexpansion strategy and are constantly widening our regional product offeringsas consumer spending is growing steadily in the regions. Cutting costs andimproving the quality of our products remain our main focus areas. We believethat these strategies have increased public awareness of our products andhelped us expand our market share. We have also increased our production ofvalue-added products available in attractive and convenient packaging.

In the dairy market, according to an AC Nielsen studyof 24 major cities, including Moscow and St. Petersburg, we were themarket leader at the end of 2006 with a 34% market share in value terms. In thetraditional dairy market, we lead the market with a 33% market share in valueterms. In the enriched dairy market, our share was approximately 29% in valueterms at the end of 2006. In yogurts and desserts, we were the market leaderwith almost 44% in value terms.

In traditionaldairy, we compete primarily with local producers, such as Unimilk, VoronezhskyM.K. (Molvest), as well as with a number of smaller regional producers. Inenriched dairy, we compete primarily with Groupe Danone. In yogurts anddesserts and, to some extent, in products for children, we compete with foreignproducers such as Danone, Campina and Ehrmann who continue to invest in theirbusinesses in Russia. We view the following producers as our primarycompetitors:

·       *Groupe Danone*, a French company which is the most activeforeign producer in Russia and aggressively promotes its products. It has adairy plant in the Volga region where it produces yogurts, as well as a dairyplant in the Moscow region. Its domestically produced and imported products aresold under the Danone brand name across Russia through its own distributionnetwork. According to the AC Nielsen study of 24 cities, in 2006, Danone had a21% market share in yogurts and desserts and a 15% overall share of the Russiandairy market in value terms.

·       *Unimilk*, the second largest dairy holding company in Russia.Unimilk has over 20 dairy production facilities in Russia and two in Ukraine.Its largest production facility, the St. Petersburg-based Petmol, produces awide range of dairy products. According to the AC Nielsen study of 24 cities,in 2006, Unimilk had a 13% market share in traditional dairy, a 5% market sharein yogurts and desserts and an 11% overall share of the Russian dairy market invalue terms.

·       *Ehrmann*, a German company producingyogurts at its plant located in the Moscow region. Its brand names Ehrmigurt,Yogurtovich, Fruktovich and Uslada were developed specifically for Russianconsumers. According to the AC Nielsen study of 24 cities, Ehrmann had a 7%market share in yogurts and desserts in 2006 in value terms.

·       VoronezhskyM.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 3% market share in traditional dairyand a 2% overall share of the Russian dairy market in value terms.

·       Campinais an international co-operative dairy company that specializes in productionof milk, yogurt and desserts. Its main brand names are Campina, Fruttis,Nezhniy, Stupinskoe and Yogho!. According to the AC Nielsen study of 24 cities,Campina had a 9% market share in yogurts and desserts in 2006 and a 2% overallshare of the Russian dairy market in value terms.

Recent trends also indicate that industryconsolidation may lead to the emergence of larger domestic producers, whichcould become our significant competitors.

Foreign dairy manufacturers generally have largepromotional budgets and advanced production know-how, allowing them to offerquality and innovative products, and strong distribution networks. Whileforeign manufacturers generally tended in the past to focus on niche markets,usually in the premium 

52

----

segment, they are nowincreasingly offering products to an average Russian consumer with an averageincome. For example, Danone owns two plants in Russia and has introducedseveral of its yogurt brands into the Russian market, some of which weredeveloped specifically for Russian consumers. In April 2005, Danoneannounced the opening of new production lines at its factory near Chekov in theMoscow region, which increased the factory’s capacity to 250,000 metric tons.Dutch company Campina also owns a dairy plant in Russia that produces freshyogurts and yogurts with a long shelf life, and announced plans in 2005 toexpand its production of dairy beverages in the Moscow region, increasingCampina’s total investments in Russia to over $100 million. In addition, theGerman companies Ehrmann and Onken produce yogurt at Russian plants, and Onkenlaunched its own dairy production factory in Russia in 2003. Foreign cheeseproducers also launched production facilities in 2003, including French companyLaktalis and 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 milk products sector.

We believe that we have several important competitiveadvantages that will allow us to maintain a leading position in the Russiandairy market: strong and diversified brands, stable access to raw milk, a broaddistribution network, new product development focus, modern production assetsand technology, access to external capital and a strong management team. Wealso benefit from our strong regional production base, while our foreigncompetitors must generally transport their yogurts and premium segment dessertsfrom Moscow to the regions, which is costly and logistically complex.

We intend to takeadvantage of these strengths through our strategy of promoting brand awarenessand loyalty with an emphasis on product quality, as well as by continuing ourefforts to focus on developing new products equal to or better in quality thanthose offered by Western producers.

**Beverage productsand brands**

Our beverage products consist of juice and bottledmineral water products. In 2006, juice products made up 96% of beverages saleswith bottled mineral water accounting for 4%.

Our juices are produced primarily at the RamenskiyPlant in Moscow (renamed to Wimm-Bill-Dann Beverages in 2007) and at Fruktopakin Tula, and we have also installed juice lines at our dairy productionfacilities in Vladivostok, Novosibirsk and at the Tsaritsino Dairy Plant inMoscow. Our mineral water is produced at our two plants in the Essentuki area.

53

----

Ourprincipal beverage product lines and types of products and brands are asfollows:

| **Product Line**                                   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                   | ** ** | **Brands and Types of Products** |
|----------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|
| Juice and nectars  produced from juice concentrate |       | ·  “J-7,” covering 13 kinds of fruit and  berry juices and nectars

·  “100% Gold,” covering 9 kinds of fruit and  berry 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 7 kinds of  berry-juice based drinks and 3 kinds of berry compote                                                                                                                                                                                                                                                                       |
| Mineral water                                      |       | ·  “Essentuki,” covering 3 kinds of therapeutic  mineral water (Essentuki #4, #17 and #20)

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

 

54

----

Productsin the juice market tend to be branded and, as with the dairy market, there areseveral defined segments. However, the market segmentation tends to fall alongdifferent lines than in the dairy market, primarily due to the tendency fordairy products to be considered food staples. We have positioned our portfolioof juice and nectar brands so that we have at least one of our brands in eachof the four juice market segments, with two or three brands in particularlycompetitive segments. The following chart illustrates our estimates of thecurrent market segment positioning for our major brands, as well as a generaldescription of the purchasers which each market segment covers:

| **Segment**  | ** ** | ** **                                                                                                                                                                       | ** ** | **General  Purchaser  Characteristics** | ** ** | **Juice and  nectars  produced from  juice  concentrate** | ** ** | **Traditional  berry-  juice-based  drinks** | ** ** | **Other juice-  based drinks** | ** ** | **Mineral water** |
|--------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------|------------|-------------------|
| Upper-middle |       | ·  Aged 20-45

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

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

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

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

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

 

In 2004, we introduced new packaging and marketingapproaches for “J-7” brand products, including a change from Tetra Brikand Tetra Slim to Tetra Prizma and the launch of PET packaging. When launched,the new products with PET bottle packaging were unique for the Russian market.We also launched a new product under our “Lovely Garden” brand in 2004 called“Lovely Garden—10 Vitamins.” In 2005, we released “J-7 Bio,” a prebioticdrink sold in PET bottles. We also began selling berry compotes under the“Wonder Berry” brand at the end of 2005, and began producing 3 types of mors, atraditional Russian berry drink, under the “Lovely Garden” brand. We also beganproducing “J7” and “100% Gold” juices and nectars in 1.5 liter formats, and“Lovely Garden” juices and nectars in 2.0 liter containers. In 

55

----

2006, we added a new 0.425liter container to the “Lovely Garden” range, and began selling certain juicesand nectars in PET bottles. We also began producing “100% Gold” juices andnectars in 0.5 liter formats.

Our main water brand is produced at factories fromunderground wells in the Essentuki area of Russia. Our mineral water productsare positioned in the upper-middle segment of the market and cater to consumerswho prefer bottled natural mineral water to purified or ordinary tap water. In2005, we merged our water and juice businesses into a single “beverages”business unit to further reduce costs and benefit from natural synergies.

In August 2003, we acquired underground wells anda factory that produces “Essentuki” mineral water and acquired an additionalEssentuki mineral water plant in October 2005. Essentuki brand water is mineralwater from the Essentuki area of Russia, which is known for its mineral watersand spas. Essentuki was a famous Soviet brand, and is still one of Russia’sbest known mineral water brands. It is produced and bottled by severalmanufacturers in the Essentuki area in recognizable 0.54 liter dark greenbottles long associated with the brand. We also produce Essentuki in 1.5 literplastic bottles. We remain committed to expanding our Essentuki productioncapacity.

Although there is no significant history ofconsumption of non-aerated bottled drinking water in Russia, the situation ischanging due to environmental factors. There is a rising interest in bottleddrinking water in Russia, especially in large cities such as Moscow. Themineral water market is expanding not only in terms of production volumes, butalso in terms of the number of brands. Moreover, the number of Russian premiumbrands is growing, while the share of imported brands is declining.

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

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

***Market trends andcompetition.******  ***The Russian juice market grew steadilyfrom the time of the dissolution of the Soviet Union until the 1998 financialcrisis, following which there was a significant decrease in consumption fromwhich the market had substantially recovered by 2000. The total market forjuice products, defined as the total consumption of domestically produced andimported products, increased to 2,515 million liters in 2006, according toBusiness Analytica, from 2,191 million liters in 2005. We believe thatrising household incomes in Russia and the increasing preference for juice overfresh fruit, which generally accompanies increased incomes, will encourage theconsumption of vitamin-rich, value-added products with different tastes andnutritional characteristics. For example, according to Business Analytica, in Moscow,which enjoys higher average per capita incomes than most other parts of Russia,the average consumption of juice in 2006 was approximately 44 liters percapita, as opposed to national per capital consumption of approximately19 liters per capita. The most dynamic growth in recent years has been inthe lower-middle price bracket, which we expect will continue to drive marketgrowth in the foreseeable future.

The markets for juice products in Moscow, the Moscowregion and St. Petersburg are relatively mature compared to other regions ofRussia, and are expected to exhibit relatively modest growth rates in thefuture, with particular growth expected in the upper-middle product segment. Webelieve that significant growth opportunities lie in the regions of Russia. Inmany of them juice is still a novelty and we believe that with rising householdincomes there will be a growing demand for lower-middle juice 

56

----

offerings. The operatingenvironment has been challenging since the 1998 financial crisis. Competitivepressures have intensified because of the low purchasing power of householdsoutside of Moscow and St. Petersburg and the rising number of domesticproducers. We initially responded to this competitive challenge by introducingtwo new brands, one targeted at the middle-market price segment and the otherat the mass-market price segment. In addition, we have been revising our juicedistribution network, reducing the number of distributors we work with andmaintaining relationships with distributors having direct distributioncapabilities. We believe that, together with the launch of new products, theincreased share of higher-priced products in our product mix, increasedadvertising, new packaging and increased production capacity, these strategieswill increase public awareness of our products and our sales, which will allowus to expand our market share at acceptable prices.

In the Russian juice market, according to a BusinessAnalytica survey of all of Russia, we had a 19% market share in value terms at theend of 2006.

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

·       *Multon* is based in**St. Petersburg and, according toBusiness Analytica, had a 21.1% market share in Russia at the end of 2006. Its“Rich,” “Kind” and “Niko” brands entered the Moscow market in 1998 and sincethen have gained significant market shares primarily through aggressive pricingpolicies and advertising. Multon was purchased by Coca-Cola in 2005.

·       *Lebedyansky* is based in the Lipetsk region and, according toBusiness Analytica, had a 28% market share in Russia at the end of 2006. Its“Tone,” “I,” “Fruit Garden” and other brands have become well-known amongRussian consumers. Lebedyansky recently acquired a majority stake in Progress,a juice concentrate producer. Lebedyansky raised over $150 million in itsinitial public offering in Russia in 2005.

·       *Nidan* is a Novosibirsk-based Russian company that, accordingto Business Analytica, had a 15.6% market share in Russia during 2006.

The market for mineralwater is characterized by rising consumption, as well as many local brands thatare strong in their respective home regions. According to Business Analytica,the total market for bottled water in Russia increased to 2,970 million litersin 2006 from 2,380 million liters in 2005. Russian bottled water producersdominated the market, with a 67% market share in terms of value, while theshare of the two market leaders, PepsiCo and Coca-Cola, accounted for 33%,according to a Business Analytica survey of Russia’s 10 largest cities in 2006.According to the same survey, we were among the top ten water producers inRussia, with a 2.7% market share by value. The market growth in recent yearshas been driven mainly by the increased consumption of bottled water sold inlarge packaging, which is consumed for drinking, as well as cooking purposes.We believe that this market will continue to expand in the coming years due tothe growing per capita income in Russia and increasing concern among thepopulation over food and water quality.

**Baby food productsand brands**

Our baby food products, sold under the “Agusha” brand,include liquid dairy baby food, juice, purees and products for pregnant andnursing women. These products are mainly produced at the Moscow Dairy Baby FoodPlant and at the Kursk Baby Food Plant as of late spring 2007. In 2006, babyfood products comprised 6.6% of our total sales.

In 2005, we created a separate baby food segment.Prior to 2005, baby food was part of our dairy segment.

We are currently developing our baby food division byfocusing on regional expansion and increased production. We also plan to launchnew products, as well as expand the range of the existing ones.

57

----

To further our development strategy, we acquired theKursk Baby Food Plant in July 2005 and have overhauled it throughout 2006and early 2007. The plant sources certain of its raw materials from its ownfruit orchards, and our acquisition of the plant will allow us to expand ourbaby food product range to include fruit and vegetable purees.

***Market trends andcompetition.******  ***The baby food market in Russia hasbeen experiencing dynamic growth in recent years, supported by improved marketconditions, including rising average incomes, more stringent governmentregulation of baby food production and the introduction of various state-supportedsocial programs aimed at improving domestic birth rates and providing maternityassistance. As a result of these improved conditions and increased consumerdemand, domestic production of baby food products has increased over the lastfew years, with certain of Russia’s major juice and dairy producers increasingtheir production capacity and introducing new baby food brands. Foreignproducers are also active in the market and, similar to the dairy and juicemarkets, several such producers have begun to focus on establishing localproduction capacity in Russia. We believe that market consolidation is likelyover the next several years, with the largest foreign and domestic baby foodproducers acquiring smaller regional producers in order to increase theirproduction capacity. In addition, we believe continued market growth will leadto the emergence of product price segments similar to those in the juice anddairy markets. Given the existing low per capita consumption of productsspecifically produced for babies and the fact that spending on such productsincreases as family incomes grow, we see this market segment as providing anopportunity for growth. Another factor driving the growth of the Russian babyfood market is the increase in the number of infants aged four and under by3.5% in 2005 and by 2.5% in 2006.

We were the market leader in dairy products for kidsand infants in Russia in 2006, with 63% value share, followed by Petmol (partof Unimilk, Tyoma brand) with 25% value share. Nestlé and Nutricia were themarket leaders for powdered formula and cereals, with 46% and 34% value sharesin powdered formula and 19% and 28% value shares in cereals, respectively. Thepreceding market share data is in value terms and based on MEMRB RetailTracking Services’ latest research. Local producers of baby food products arealso active in regional markets, the largest of which are the Zelenodolsk BabyFood Dairy Plant, Ekaterinburg Dairy No. 1, Novosibirsk Dairy and RatmirTver Dairy.

Among the leading producers of baby food products inRussia are foreign producers such as Nestlé, Nutricia, Heinz and Hipp, whichgenerally operate in all of the main baby food categories, as well as domesticproducers such as us, Nutritek, Azov KDP, MK Tikhoretsky and Lebedyansky, whichgenerally operate in select baby food product categories. According to MEMRB,the foregoing producers held an approximately 78% market share in the Russianbaby food market during 2004 in terms of value. According to our estimates, themarket share of foreign producers declined in 2005 and 2006, while the marketshare of domestic producers increased. However, sales of baby food products inRussia increased during this period for both foreign and domestic producers dueto the overall growth in the market.

In addition to our“Agusha” brand, other brands competing in the infant liquid dairy productsmarket include baby food brands “Rastishka” “Tema”, “Prince”, “Nasten`ka” andothers. In the supplemental infant foods category, we compete with brandsincluding ”Azov,” “Vinni” and “FrutoNyanya.” In the cereals category, ourmain competitors consist of brands from foreign producers, including Nutricia,Kolinska, Podravka and Heinz. The main producer of baby drinking water isZelnogradsky Istochnik, producing under the “Malyshka” brand.

**New ProductDevelopment**

For a leading consumer goods company operating in anever more competitive marketplace, we rely on the process of innovation inorder to strengthen our market position and win market share in other segments.A high technology research and development capability is a crucial competitiveadvantage for us and a key to our long-term profitability growth.

58

----

Our Research and Development (R&D) base, employingmore than 40 people, is located at Lianozovsky Dairy Plant in Moscow, thecompany’s flagship enterprise and one of the largest and one of the besttechnically equipped dairy production facilities in Europe. R&D creates andtests new products for the company’s Dairy, Beverages and Baby Food Units,working closely with production across the company. Since 2006, with thecreation of the new post of Head of Marketing and Innovation, R&D isworking even more closely with Marketing to combine intelligence and researchabout changing consumer habits and patterns to develop new products across allthree main business units. 

Innovations can include enriched versions of existingproducts, new formats and packaging for popular products—changing how they areconsumed—and wholly new products for the Russian market. New packagingtechnology can turn a product into a convenient snack or meal, such as “HappyMilkman” kasha with a spoon. All of these innovations are aimed at providinghigher margin goods for the company and nutritious, convenient and tasty foodsfor the consumer.

Looking forward, new product development is beingconducted in line with the company’s mission to provide healthy, high-qualityand safe foods for the entire family. Functional foods, products aimed at womenand convenience products for busy lifestyles are key areas of focus. Thedepartment is working to develop new, enriched products that deliver addednutrition through the use of biologically active ingredients that help deliveressential nutrients. In Baby Food, R&D is focused on the development of new linesof meat and vegetable containing foods, as we look to expand our strong marketposition in this still developing market segment.

Much of our new product development effort over thepast three years has focused on higher-margin, value-added yogurt and dessertproducts to help ensure that we can offer products that match the quality andvariety offered by our main foreign competitors in Russia. At present, we arefocused on the development of value-added dairy products oriented towardsRussian consumers, taking into consideration the general deficit of micro- andmacro-nutrients in the diets of the average Russian consumer. 

An example of a value-added innovation is our new lineof chilled truffles, “Morand”, launched in October 2006. It is the first lineof fresh chocolate launched in Russia and contains fresh cream. Aimed at thepremium end of the confectionary market, the truffles are sold in the chilledsection of supermarkets. 

We also continued to actively develop our cheeseproducts and enriched dairy products during 2005 and 2006. We also expanded ourcheese production, introducing new brands and varieties. For example, weintroduced a wide selection of processed cheese products under our “HappyMilkman” brand, as well as hard cheese products sold under the new “Lamber”brand, including a creamy hard yellow cheese product. In addition, in 2005, welaunched a new line of “5 Grain” yogurts and cottage cheese products, a lowlactose milk under the “Bio-Max” brand, a fruit smoothie drink “La Fruit” and anew yogurt product sold with a plastic spoon to enable easy consumptionanywhere both under the “Chudo” brand. 

In 2006, we launched a new kefir called “Effective”under the Bio-Max brand. In addition, in 2006, we launched rice pudding underthe “Happy Milkman’’ brand.

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

In 2006 we launched a newproduction line at the Kursk Baby Food Plant for juices and fruit purees. Inthe first quarter of 2007 we launched new Agusha product ranges, including meatand fish purees containing essential vitamins and minerals and made fromGM-free ingredients. 

59

----

**Advertising andMarketing**

Brand building and marketing have always been at thecore of our business. Since the early 1990’s, we have built brands intohousehold names in Russia and the CIS, from the J7 brand of juice to one ofRussia’s first yogurts under the Chudo brand to Agusha, a popular baby foodbrand. 

Our marketing strategy is aimed at turning our leadingportfolio of brands into even stronger competitive advantage. We will aim toaccelerate product innovation based on a deeper understanding of consumers andfaster reaction to new trends in the marketplace. As the cost of advertising onRussian television continues to rise, we will concentrate on larger and moreefficient campaigns to reach target consumer audiences.

Investment in some 10 power brands in 2007 is aimed atincreasing their average selling price and market share, while achieving theright product mix. We believe that even our most successful brands still haveconsiderable untapped potential.

In juice, the J-7 brand has seen radical changes in2007, with a new, targeted advertising campaign, new packaging and new pricingstructure.

Instead of viewing products within the context of asingle market niche, all of our power brands are today being positioned on thebasis of health and wellness, reflecting our mission and the emerging trendtoward healthier lifestyles visible today in Russia. We see each brand as areflection of our broader corporate identity, with our label on every product aimedat conveying a consistent message of quality, tastiness and health.

In addition, the scientific potential of the Researchand Development (R&D) division and consumer knowledge have been broughttogether, with R&D reporting to marketing. The innovation process has beenaccelerated with a focus on value-added, functional foods.

Our advertising and marketing expendituresof $54.3 million in 2004, $57.9 million in 2005 and $76.2million in 2006 constituted 4.6%, 4.1% and 4.3% of net sales,respectively. Though we are, in some instances, able to obtain volumediscounts, we expect these expenditures, as a percent of net sales, to increasesignificantly due to market competition and annual media inflation. Accordingto Gallup, in Russia, we were the third largest advertiser in 2004 and theninth largest advertiser in 2005, and the twelfth largest advertiser in2006.

We plan to continue to allocate the bulk of ouradvertising budget to a limited group of strategic brands which are highlyranked in their respective markets. We also plan to continue our aggressiveadvertising and marketing of selected new products.

We have also built brandawareness through charitable work and sponsored events. For example, in 2004,2005 and 2006, we sponsored the “Tefi” National Television Awards program. Forseveral years, we have sponsored International Charity Foundation eventsbenefiting orphans through its “Hope Around the World” program. We also supportseveral other charitable organizations and serve as a trustee of the CharityFoundation for Special Grants, which was headed by the late MstislavRostropovich, a prominent Russian musician.

**Sales andDistribution**

In 2006, we made substantial investments in our Salesand Distribution (S&D) function as part of a long-term commitment toimprove our “route-to-market” and enhance the management of our supply chain.

Today, Russia’s retail landscape is in the midst of atransformation. International and domestic food retail chains, the familiar retailmodel in Western countries, have expanded, replacing more traditional 

60

----

outlets such as openmarkets and kiosks. According to a Business Analytica retail audit in Russiancities with 100,000 plus population, at the end of 2006, modern format foodretailers, including supermarkets, hypermarkets and discounters, accounted foraround 25% of all retail food and beverage spending. By 2010, modernformats are expected to account for nearly 35% of all retail food spending inRussia. 

In Moscow, the country’s largest single market, thisratio is considerably higher and in the last few years, foreign and domesticretail chains have focused on expanding in large regional cities, in particulartargeting fast-growing but under-served regions such as the Urals and Siberia.At the same time, the absolute size of the retail market continues to growevery year, with Russia’s regional markets seeing the fastest growth. Accordingto Russia’s federal Rosstat statistics agency, total retail sales grew byaround 13% year-on-year in 2006 for Russia as a whole. 

We attempt to meet the changing and increasing demandsof our customers by planning appropriate stock levels and reasonable deliverytimes consistent with achieving the optimal economics of distribution. In orderto achieve these objectives, we have developed a network of distributioncenters and trade offices throughout Russia and other countries of the CIS.Specifically, we had 14 dairy distribution centers by the end of 2006. Thisnumber had reached 20 by the end of March 2007. We also had 15 beverage tradeaffiliates that provide us with a broad national presence and facilitate thesale of our products in populous regions and in certain regions where we do notown production facilities. These distribution centers function as distributionpoints in their respective regions, and also coordinate certain local trademarketing. We also sell our products directly from our production facilities.

A key part of our strategy is to enhance control over the“route-to-market” and collaborate successfully with retailers to ensure keybrands are well positioned in retail outlets, priced correctly and maintainedat the same high quality as when they left the factory. Investment in our ownfleet of cold-chain delivery vehicles represents a substantial upfront cost,but ensures better control and flexibility over deliveries of perishable dairyproducts. Across the company, improvements are being made to the supply chainto reduce costs, maintain quality and tightly track products from the factoryto the consumer. 

During 2006, we increasedthe number of sales representatives and focused on the development and trainingof Key Account Management teams to service key retail customers and takeadvantage of new opportunities for merchandizing. We are also developing ourmerchandising standards and setting up showrooms for our sales personnel anddistributors to showcase our brands and provide a template for merchandizingstrategies. 

**Distribution**

Due to different consumption patterns and productcharacteristics, our dairy, baby food and beverages businesses requiredifferent distribution strategies. We have therefore built two distributionsystems: one for our dairy and baby food, and the other one for beverageproducts, although we use the same marketing approach in each business and takeadvantage of synergies between the systems to the extent possible.

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

Our infant dairy products produced by the Moscow BabyFood Plant are also purchased by the Moscow City Government, which, in turn,distributes them through specialized milk kitchens located around Moscow andthe Moscow region. In 2005 and 2006, the Moscow City Government purchased 36% and33% respectively of our total baby food sales. The baby food product salesvolume distributed through 

61

----

the milk kitchens has beendecreasing while, at the same time, the volume of commercial sales hasincreased. For a description of the risk relating to our reliance on the MoscowCity Government to purchase our infant dairy products, see “Item 3. KeyInformation—D. Risk Factors—Risks Relating to Our Business and Industry—In theevent that the Moscow City Government were to reduce significantly the pricesor the amount of products it purchases from our baby food business, then ourrevenues and profits from this business could be reduced.”

Our beverage products havelonger shelf lives than dairy products, which allows us to distribute theseproducts to customers across the country. We have established a broaddistribution network, with distribution centers in all key Russian cities withpopulations of more than one million and representative offices and salesagents in smaller regions. Typically, a distribution center includes sales andmarketing personnel dedicated to serving each customer group separately, andaccounting and logistics personnel. 

**Customer base andpricing**

Reflecting the manysales channels present in Russia’s regional markets, we rely on a variety ofthem, including independent distributors and wholesalers, supermarket chains,small- and medium-sized grocery stores, open air markets, pavilions and restaurants.However, as the share of chain retailers grows, our strategy has been toincrease the share of our own direct distribution to retail clients, whilemaintaining long-standing, often exclusive relationships with independentdistributors in specific market segments and geographic areas.

***Independent distributors.******  ***As apercentage of our total sales during 2006, in terms of product value, we sold 63%of our dairy products, 79% of our beverage products and 46% of our baby foodproducts through large networks of independent distributors. The process iscontrolled by our sales personnel. 

·       Allof our dairy distributors in Moscow are exclusive to us and do not distributethe dairy products of our competitors. We also implemented a segmentationprogram among the Moscow distributors whereby each distributor controls thedistribution of a particular segment or segments of the dairy product marketand distributes in accordance with our unified pricing scheme. 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.

·       Asof December 31, 2006, our beverage product distribution network consistedof 15 affiliate offices throughout Russia. We have reduced the number ofdistributors we work with and broadened the scope of sales made through thedistributors to include sales to sub-distributors, wholesalers and smallretailers. In Moscow, our independent distributors act principally aslogistical coordinators, as our sales representatives work directly with retailoutlets and other customers in making sales but rely on the distributors toexecute the orders through delivery and payment collection. Outside of Moscow,we rely more heavily on our independent distributors to make sales in additionto coordinating payment and delivery logistics. Some of our beveragedistributors have teams devoted exclusively to the sale and distribution of ourproducts, with such teams compensated by us and the relevant distributor.

·       Anumber of independent distributors with whom we work purchase both dairy,beverage and baby food products from us. We offer our independent distributorscertain discounts off our base prices. A long-term tariff plan is developedwith each independent distributor that provides the terms of the discount anddeferred payment plans. The terms of these tariff plans may be adjusted fromtime to time based on the performance of a distributor.

62

----

·       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. TheLianozovsky Dairy Plant computer center launched its Internet order system inJanuary 2000, and all orders by our dairy product distributors in Moscowand the Moscow region are now placed through the Internet. In 2001, we startedto use an automated order system with all of our independent distributors whopurchase our products in large volumes, and in 2002, we began using thisautomated order system with our smaller independent 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.

***Supermarket chains.******  ***As apercentage of total sales in 2006, in terms of product value, we sold 29% ofour dairy products, 14% of our beverage products and 21% of our baby foodproducts to supermarket chains in Russia. We believe that the importance ofthese customers will continue to grow in the coming years. Our approach tosupermarket chains is to increase our share in this sector by becoming thesupplier of choice to the major retailers by developing key supplier relationshipsand improving customer service standards. We also sell our products towholesaler Metro, whose customers are mainly small- and medium-sized businessesthat purchase our products in bulk for resale or everyday business use. 

While relationships with supermarket chains arecurrently beneficial for us, we expect that the growth of certain chains andconsolidation of market power may increase the bargaining power of some ofthese customers. For example, some Russian supermarket chains have, from time totime, created informal alliances in an attempt to obtain greater pricediscounts from manufacturers. We do not intend to seek or sustain inefficientsales volumes and may withdraw from unprofitable business relationships. See“Item 3. Key Information—D. Risk Factors—Risks Relating to OurBusiness and Industry—Our substantial reliance on independent retailers andindependent distributors for the distribution of our products could lower ourturnover and reduce our competitiveness.”

***Other sales.******  ***We sell our juiceproducts directly to certain airlines, restaurants, schools, hotels and otherestablishments, while our baby food products are sold to milk kitchens inMoscow pursuant to the terms of a Moscow City Government tender. As apercentage of total sales in 2006, in terms of product value, we sold 5.3% ofour dairy products, 5.2% of our beverage products and 33% of our baby foodproducts to these other customers.

**Transportation**

We sell from our plantwarehouses, distribution centers or through direct delivery. We deliver ourproducts to customers directly using third-party truck and railway deliveryservices and our own truck fleet. We do not charge our customers a delivery feefor the shipment of products to our regional distribution centers, though adelivery fee may be assessed for the delivery to a customer from suchdistribution centers.

**Export program**

We began exporting our juice products, in particularour “Wonder Berry” traditional berry-juice drinks, to Western markets in 1999,mainly focusing on Russian communities abroad. We selected this product becauseof its distinctiveness and the opportunity it presented to take advantage ofthe expansion of the red-berry juice market in Europe.

We currently export our juice products to the UnitedStates, Canada, Australia, Germany, France, Israel, Latvia, Estonia andLithuania. Our juice products are distributed in these countries throughindependent distributors and are sold in various national and multinationalretail chains. Our products are 

63

----

also exported and soldthrough various sales channels in CIS countries such as Georgia, Armenia andMoldova, and we further developed our distribution channels, marketing effortsand sales in Belarus during 2006. We also export our “Essentuki” mineral water,principally to the United States, Canada and Moldova. Our beverages exportsales totaled $2.6 million in 2004, $3.0 million in 2005, and $3.3 millionin 2006.

We export dairy products to Belarus, Azerbaijan,Georgia, Moldova, Turkmenistan and Armenia. Our dairy products are distributedin these countries through independent distributors, and our dairy export salestotaled $2.5 million in 2004, $4.2 million in 2005 and $8.6 million in 2006.

At the end of 2005, the Tsaritsino Dairy Plantreceived a license to export dairy products to the EU. During the licensingprocess, all of the plant’s equipment and production, technological and controlprocesses were inspected to ensure compliance with international norms andstandards. The Lianozovsky Dairy Plant received a similar license in 2004and currently exports dairy products to the Baltic States and Germany.

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

In exporting our productsto a country, we attempt to meet the applicable legislation governing theimport of food products into the country. Independent distributors have, insome cases, attempted to export products to other countries that did not meetapplicable legislation. 

**Production and rawmaterials**

**Productionefficiency and quality**

Our Quality System (QS) is a clearly defined set ofprocedures that work together to ensure quality process control and qualityassurance. 

Our QS undertakes Supplier Assessment audits to ensuresuppliers provide materials that meet our exacting quality standards. Thisincludes raw materials for making our products, packaging and equipment. Our expertswork with existing and prospective suppliers to ensure their goods candemonstrate compliance with our quality, safety and performance standards.Suppliers are graded and assigned Key Production Indicators (KPIs) basedon the criteria of product quality, delivery, cost and responsiveness. Thiswork not only ensures suppliers meet our standards but helps make them moreefficient, lowering our input costs.

The QS plays a critical role in ongoing technologicalintegration across all of our factories and trading groups. In the DairyBusiness Unit, where we have invested substantially since 2003 in modernizingacquired production facilities, quality control experts have led theUnification Project, aimed at establishing tight coordination of themanufacturing process at many of our geographically distant plants. Consistentmanufacturing procedures and technology mean plants operating thousands ofkilometers apart can make products with consistently high and uniform taste andquality.

We have our own certified research laboratory with ateam of scientists and experts. Samples of all our primary ingredients andsamples of our final products undergo microbiological analysis and in-depthtesting. In addition, we have laboratories at all of our plants that performquality checks on our products at all stages, including quality checks on theraw milk supplied by dairies to us, the materials at our production facilitiesand the finished products in our warehouses.

64

----

The Trade QS measures the quality of the product andpackaging in the marketplace itself. Under a system being launched in 2007, tradesampling and laboratory analysis match products against our specifications andprovide a Quality Index calculation determining whether a product meets thehigh standards set by us for our consumers. 

In developing new types of products, we cooperateclosely with the Institute of Nutrition of the Russian Academy of MedicalSciences, Moscow State University of Food Production, Moscow State Universityof Applied Biotechnology, All-Russian Institute of Dairy Industry and theGFL-Laboratory in Berlin, Germany. This cooperation has provided our employeeswith scientific advice, solutions to technical problems and on-site training.We also work closely with several multinational raw material and additive suppliersin order to benefit from their collective technical expertise in relation toour new product development and evolving quality standards.

In addition, our researchers and quality controlexperts work closely with Russian federal bodies and their regional and localdepartments, such as the Sanitary and Epidemiological Inspectorate and thecountry’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 for allparticipants.

In addition to compliance with the relevant Russianquality standards, we attempt to ensure that our products conform to thequality standards of organizations such as the World Health Organization,l’Association Francaise de Normalisation and the Food and AgriculturalOrganization, as well as the regulations of the European Union. We are also amember of the International Federation of Fruit Juice Producers, the RussianUnion of Juice Manufacturers and the Russian Dairy Union. Additionally, weassist relevant Russian government agencies in initiating and developingcorresponding regulations for the Russian market.

To improve the feedback and receive queries from thecustomers a nation-wide toll-free hot-line was developed and implemented. Thenumber is printed on our packaging for all of our products.

We have been upgrading and expanding our facilitieswith advanced technological engineering. Our significant investments inmanufacturing have helped enable our products to compete with those of leadingdomestic and international manufacturers. For example, at the Lianozovsky andTsaritsino Dairy Plants, we installed new equipment improving the quality ofraw milk used in production; at the Timashevsk Dairy Plant, we installed anautomatic system controlling production processes; and at the Vladivostok DairyPlant, we modernized the water purification system. Additionally, thereconstruction of the Moscow Baby Food Plant and installation of new productionlines there have allowed us to improve the quality of the products produced atthis plant. All the lines at the Moscow Baby Food Plant are now equipped withaseptic technology. The method of ultrafiltration we use at this plant also allowsus to produce a children’s cheese paste which retains its most beneficialnutrient, serum protein, giving it a higher nutritional value than similarproducts manufactured at other dairy plants.

During 2005, we continued to modernize the Lianozovskyand Tsaritsino Dairy Plants by upgrading acceptance workshops, broadened ourcheese production capacity at the Rubtsovsk Dairy Plant in order to satisfy thegrowing demand for our hard cheese products and added a new production line forporridges and processed cheese at the Timashevsk Dairy Plant. At the TsaritsinoDairy Plant, we installed new production lines for yogurt in unique packagingwith a spoon attached and a new production line for a smoothie beverage soldunder our new “La Fruit” brand. At the Vladivostok Dairy Plant, we installedthree juice production lines to produce “Lovely Garden” and “J-7” juiceproducts.

During 2006, we installed a new innovative line offruit preparation that allows us to improve the quality of jams used in ourproducts. A unique technology for aseptic dairy-based sauce production wasdeveloped and implemented at Lianozovsky Dairy Plant. A new filling line withtunnel autoclave was 

65

----

installed at the KurskBaby Food Plant. New technologies for purification of raw juice were implementedat Rameskoye. 

We are currently startingthe installation of new production lines and upgrading of the existing ones atour newly acquired plants, Ochakovskiy Dairy Plant, Manros and Angarsky DairyPlant (MOLKA). These renovations are expected to be completed by the end of2007

**Food raw materials**

The main rawmaterials we use in our production include the following:

·       rawmilk, which we generally obtain from domestic farmers;

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

·       bacteriacultures, which we generally import;

·       flavorings,which we generally import;

·       sugar,which we generally import;

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

·       otheringredients such as frozen fruits, aromas and stabilizers.

The prices of each of the foregoing raw materials aregenerally volatile. 

Our purchasing policy is to build long-term strategicrelationships with the suppliers-partners. We have focused on developingpartnerships with established leaders in the field of local and global foodproduction, including the leading Russian and international sugar, fruitconcentrates and purees, powder milk, frozen fruits and ingredientsproducers. 

We purchase almost all of our raw materials from theproducers and do not engage in a significant amount of barter transactions. Wepurchase certain raw materials such as bacteria cultures, juice concentratesand flavors from foreign manufacturers when products of appropriate quality arenot available locally. 

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

***“Milk Rivers”program.***   We have strengthened our positionin the dairy market by developing our own network of raw material suppliers, insignificant part through investments that support agricultural producers. Ourinvestment in these programs totaled $1.9 million in 2005 and $1.3 millionin 2006.

In the summer of 1999, we merged and formalized theseprograms under our “Milk Rivers” program, through which we provide localdairies with trade loans, feed, and leased combines and milking andrefrigeration equipment. In selecting farms to participate in this program, wechoose only those that seek to increase the quality of their products and raisethe productivity of their herds. We also look for producers that can helpbalance out the seasonality in raw milk production volumes.

Under the Milk Rivers program, we have rented advancedmilking, feed production, feed-chopping and refrigeration equipment for periodsfrom three to eight years for agricultural enterprises located in the 

66

----

Moscow and other regions,including Voronezh, Nizhny Novgorod, Ufa, Novosibirsk, Krasnodar and Altai. Thelease receivables are offset with milk supplies based on a predeterminedschedule during the lease term. The lease receivables are denominated in U.S.dollars and Russian rubles. Equipment leased out to farms includes milking andrefrigeration equipment for accelerated milk cooling and the temporary storageof milk at farms and other technical devices that increase the productivity offarms. The type of equipment provided depends on the needs of each particularfarm. We have also set up a service center to assist the participants inkeeping the leased equipment in good repair.

Under the Milk Rivers program, we also provide loansto Milk Rivers dairy producers for the purchase of dairy cattle. We have also offeredseminars and lectures to our Milk Rivers program participants to help themimprove the quality of the milk they produce.

We plan to eventually expand the scope of this programto 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.

We believe that providingdairies with wholesome, well-balanced compound animal fodder is essential forincreasing the productivity of dairy herds, especially in the winter. We havebeen working with select farms and fodder producers since 1999. As with theMilk Rivers program, payment for the fodder is made with milk supplies. Theoffset milk price is in a range which approximates average cash prices formilk.

**Seasonality**

The demand for our dairy products is significantlyhigher during the winter months, when Russian raw milk production is at itslowest. Conversely, during the summer months, we generally experience depresseddemand for dairy products, while raw milk production is at its peak. To addressthese seasonal demands, we have commenced and expanded the production of powdermilk at some of our dairy production facilities for use in production duringthe winter months, and currently produce powder milk at five of our plants:Buryn Powder Milk Plant, Karasuk Dairy Plant, Annino Dairy Plant, VeidelevkaDairy Plant and Tuimazy Dairy Plant.

The demand for our juice products traditionally peaksduring April through May and in December. We believe that the highdemand during April through May is related to the public’s heighteneddesire for vitamin-rich food and drink products during the transition fromwinter to spring, and the high demand in December is related to increasedjuice consumption during the holidays.

The demand for both dairy and juice products in southernRussia rises in the summer due to an increase in the number of tourists.

Sales of certain baby foodproducts are affected by seasonal factors. In particular, sales of juice andpurees for babies are typically 10-15% higher during the summer months, whilesales of liquid dairy baby products are typically 5-8% lower in the summer due,in part, to the fact that many Russians travel to the countryside for vacationsin the summer and are unable to transport such products, which have short shelf lives.

67

----

**Packaging**

Our principalpackaging raw materials include materials needed for packaging our dairy andjuice products, consisting mainly of five groups:

·       asepticpaper 

·       nonasepticpaper

·       plastics(PP, PE, Polysterene and others)

·       foils

·       corrugatedboard

Our main supplier of composed material for theproduction of milk and juice carton containers is Tetra Pak, the world leaderin manufacturing equipment and materials for aseptic packaging of liquidfood products. 

Tetra Pak supplied approximately 60% of our totalpackaging materials in 2006 (including carton, plastic, foil and othermaterials), and we are substantially dependent upon this packaging supplier tomeet our requirements. 

As a major Russian consumer of Tetra Pak products, wehave annual contracts with Tetra Pak, which supplies us from its Russian plantsas well as from its other European plants. See Note 27 to our ConsolidatedFinancial Statements included under “Item 18. Financial Statements.”

We have established similar relationships with companiessuch as SIG Combibloc (aseptic paper for juice and milk) and Elopak (nonasepticpaper).

As part of our strategy to increase locally producedraw materials, we are developing relationships with Russian manufacturers ofpackaging materials, in particular with companies such as Gofra, Polimer,Formoline, Formaplast, Eximpack, Lukoil-Neftekhim and Planet Thermoforning. 

We focus on twomain areas building our procurement strategy:

·       standardizationof specifications for raw materials and packaging allowing group purchasing

·       strategicrelationships with key group-wide suppliers

These two factors areaimed at allowing us to benefit from economies of scale, which we believe willlead to enhanced effectiveness and cost optimization.

**Trademarks andPatents**

We have registered brandnames and trademarks throughout Russia and in other countries. We keep track ofour intellectual property and monitor the protection of our brand names andinstances of copyright infringement in Russia and the CIS. The extent to whichwe seek protection of our trademarks outside of Russia and the CIS depends onthe significance of the brand and jurisdiction concerned. The brand nameslisted above under “—Our products and brands—Dairy products and brands” and“—Our products and brands—Beverage products and brands,” which we haveregistered in Russia, are material to us. We also own several licenses, patentsand proprietary recipes, know-how and technologies related to our products andprocesses. See “Item 3. Key Information—D. Risk Factors—Risks Relating to OurBusiness and Industry—We may not be able to protect our intellectual propertyrights adequately, resulting in material harm to our financial results andability to develop our business” for a description of the risks related to theprotection of our trademarks.

68

----

**Insurance**

We maintainproperty insurance coverage for our 19 major Russian facilities, including Wimm-Bill-DannFoods, Wimm-Bill-Dann, Tsaritsino Dairy Plant, Moscow Baby Food Plant, OchakovoDairy Plant, Ramenskiy Plant, Timashevsk Dairy Plant, Obninsk Dairy Plant,Annino Dairy Plant, Ufa Dairy Plant, Siberian Dairy Plant, Vladivostok DairyPlant, Nizhny Novgorod Dairy Plant, Rubtsovsk Dairy Plant, Pervouralsk DairyPlant, Healing Springs, Valdai Springs Water Plant, Baltic Milk, Kiev DairyPlant, Kharkov Dairy Plant, Buryn Dairy Plant, Bishkeksut, Toshkent Dairy Plantand our warehousing facility Roselectrocenter. Insurance coverage is on “AllRisks” basis covering buildings of 15 plants and Roselectrocenter warehouse,equipment at 18 facilities for the total sum of $485.2 million. We haveinsurance for business interruption at 14 major manufacturing facilities with thetotal coverage of $421.7 million

We haveproduct liability insurance with $1 million liability coverage per insurancecase within the territory of Russia and the CIS countries, $2.5 millionliability coverage per insurance case worldwide except for the territory ofRussia and the CIS countries with the cumulative coverage of $5 million for 26 facilitiesin Russia. 

See “Item 3. KeyInformation—D. Risk Factors—Risks Relating to Our Business and Industry—We donot carry the types of insurance coverage customary in other more economicallydeveloped countries for a business of our size and nature, and a significant eventcould result in substantial property loss and inability to rebuild in a timelymanner or at all.” See Note 29 to our Consolidated Financial Statementsincluded under “Item 18. Financial Statements.”

**Environmental andProduct Liability**

We are subject to the requirements of environmentallaws and regulations. While we devote resources designed to maintain compliancewith these requirements, we cannot assure you that we operate at all times incomplete compliance with all such requirements. We could be subject topotentially significant fines and penalties for any noncompliance that mayoccur. 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 and prospects.”

We also face an inherentbusiness risk of exposure to product liability claims in the event thatconsumption of our products results in personal illness or death, and we cannotassure you that we will not experience any material product liability losses inthe future. In addition, if any of the products we have produced are determinedto be unsuitable for consumption, we may be required to participate in a recallinvolving such products. We have not had any significant historical experienceof such claims and are unaware of any potential unasserted claims. See “Item 3.Key Information—D. Risk Factors—Risks Relating to Our Business andIndustry—Failure to comply with existing laws and regulations or the findingsof government inspections, or increased governmental regulation of ouroperations, could result in substantial additional compliance costs or varioussanctions which could materially adversely affect our business, financialcondition, results of operations and prospects” and “Item 3. Key Information—D. Risk Factors—RisksRelating to Our Business and Industry—Independent distributors may export ourproducts to countries where such products do not meet the requirements ofapplicable legislation. The consequent recalls of our products and the associatednegative publicity may adversely affect our reputation in the RussianFederation, the CIS and abroad, and adversely affect our results ofoperations.”

69

----

**Regulation**

Production, sale anddistribution of food and beverages in the Russian Federation are regulated bygeneral civil legislation and by special legislation that includes qualitystandards and various safety and sanitary rules.

**Government EntitiesInvolved**

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

*TheMinistry of Health Protection and Social Development.**  *This Ministry is authorized toissue regulations in various areas, including with respect to sanitary andepidemiological safety and consumer rights protection. The Ministry supervisesand coordinates its subordinate bodies, including, among others, the FederalService for Supervision in the Area of Protection of Consumer Rights and HumanWelfare.

*TheFederal Service for Supervision in the Area of Protection of Consumer Rightsand Human Welfare.**  *ThisService is the principal federal body authorized to supervise sanitary andepidemiological issues in the Russian Federation. The Service enforcessanitary-epidemiological rules (which include sanitary rules, sanitarystandards and hygienic requirements), monitors the sanitary conditions ofproduction sites and equipment, fulfillment of sanitary standards for rawmaterial and finished product storage at manufacturing plants, compliance withsanitary standards for the storage and sale of food products, their quality andsafety at wholesale and retail outlets and businesses catering to the public.The Service also carries out inspections of sellers’ premises.

*TheFederal Agency for Technical Regulation and Metrology.**  *This Agency manages governmentproperty in the sphere of technical regulation and metrology. On a temporarybasis, until such functions are transferred to other federal authorities, theAgency oversees compliance with obligatory general and industrial standards.This Agency is subordinated to the Ministry of Industry and Energy.

*The Federal Service for Veterinaryand Fito-Sanitary Supervision.**  *This Service supervises thesanitary safety of raw food materials used in the production of food productsand beverages where such raw food materials are derived from animals. ThisService is subordinated to the Ministry of Agriculture.

**Applicable Food andHealth Legislation**

Russian legislation regulating quality and safety offood and beverages includes the following acts:

*TheFederal Law on Quality and Safety of Food Products*establishesa general 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.

*TheFederal Law on the Sanitary Epidemiological Well Being of People*requiresfood products and beverages, and the raw materials used in their production, tomeet certain sanitary standards and health requirements and to have no harmfuleffects. Products that do not conform to sanitary rules and healthrequirements and represent a danger to consumers must be withdrawn immediatelyfrom production or sale. As a result, the fulfillment of sanitary standards andhealth requirements is an obligatory condition for the production, import andsale of food and beverage products in the Russian Federation.

*TheFederal Law on Technical Regulation*provides for thedevelopment, enactment, application and enforcement of obligatory technicalrequirements and the development of voluntarily standards relating to 

70

----

manufacturing processes,operations, storage, transportation, selling and utilization. Amendments tothis law, dated May 1, 2007, provide for the adoption of obligatory technicalrequirements on the safety of food products by January 1, 2010. Until suchtechnical requirements are developed and adopted, the existing standards aremandatory to the extent they are necessary to secure the protection of safetyand health, environmental protection and consumers’ rights.

*TheGovernmental Regulation on Monitoring of Quality and Safety of Food Productsand Health of People**establishes a procedure for supervisingand monitoring the quality and safety of food products.*

*TheGovernment Regulation on State Registration of New Food Products, Materials andGoods* provides for the obligatory state registrationof certain food products, including mineral water, baby food and dairy productsenriched with vitamins and/or other microelements. Food producers intending todevelop and offer a new food product to the public are required to file anapplication for the product’s state registration and incorporation into the StateRegister of Permitted Food Products. Such applications are reviewed by theFederal Service for Supervision in the Area of Protection of Consumer Rightsand Human Welfare (together with the Federal Service for Veterinary andFito-Sanitary Supervision with respect to products derived from animals) within40 days of their filing.

*TheRegulation for the Conduct of Sanitary-Epidemiological Examinations of Products***establishes procedures for thesanitary-epidemiological examination of products. Government bodies thatmonitor sanitary and health issues conduct sanitary-epidemiologicalexaminations of samples of each product and issue a conclusion as to whethersuch product satisfies the prescribed requirements. Products that have notundergone a hygienic evaluation may not be produced, shipped, used, sold orcertified.

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

In addition, food productsmay be subject to regulation by regional authorities. For instance, the MoscowGovernment approved a series of regulations relating to the use of GMO in foodproducts aimed at informing customers about such use and providing preferencesto manufacturers who do not use GMO. In particular, in February 2007, theMoscow Government issued a decree recommending that manufacturers refrain frommarketing GMO products in Moscow and establishing a voluntary GMO labelingsystem.

**RegistrationRequirements**

Certain food and beverage products (such as children’sproducts, dietary foods, milk products enriched by vitamins and/or othermicroelements, additives to food and food products manufactured usingtechnologies that have never been applied in the Russian Federation) must beregistered with the Russian government if they are either manufactured inRussia or imported into Russia for the first time. The regulation makes itillegal to manufacture, import or circulate products that are subject to stateregistration but have not been registered.

The productregistration process includes:

·       Anexamination 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 toproducts manufactured in Russia, an examination of the manufacturing conditionsof such products;

·       Registrationof the product, its manufacturer and supplier with the State Register of FoodProducts maintained by the Federal Agency for Health Protection and SocialDevelopment; and

71

----

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

The state registration ofproducts is carried out by the Federal Service for Supervision in the Area ofProtection of Consumer Rights and Human Welfare (together with the FederalService for Veterinary and Fito- Sanitary Supervision with respect to productsderived from animals).

**Certification**

The certification ofproducts and services is currently regulated by the Federal Law on TechnicalRegulation. Product certification is a procedure whereby an agency authorizedby the government confirms that a product complies with technical regulations,standards and requirements. Milk products, juice, certain water products andother beverages are subject to mandatory certification. Conformity symbolsevidencing that the manufacturer has undergone certification procedures arerequired to be printed on a product’s packaging. Failure to mark a product witha required conformity symbol carries possible administrative sanctions.

**Bulk Purchase ofRaw Milk**

A supplier of raw milkmust provide a certificate stating that the farm from which it originated haspassed a health inspection. Milk bought in bulk must also conform torequirements with respect to temperature, color, sedimentation, content ofneutralizers, heavy metals, density, protein content, fat content, alcoholcontent and other characteristics.

**Production andTransportation**

Laboratory employees and technical specialists mustverify that the condition of equipment, implements, raw materials and packagingconform to sanitary requirements. For example, in the course of manufacturing,microbiological tests must be conducted of samples of raw materials, packagingand products. Products are tested for their content of chemical pollutants,toxins, medicinal and hormonal preparations, radionuclides and pathogenicmicroorganisms. They are also tested to identify bacteria, yeast and moldcontent, and to determine their sterility and the effectiveness of the pasteurizationprocess. Products are also examined to determine the amounts of certainnutrients they contain, including protein, fat, vitamins and carbohydrates. Inaddition, the cleanliness of the factory, storage conditions and employees mustbe monitored.

Food products andbeverages must be transported in specially equipped vehicles, for whichsanitary registration documents must have been issued.

**Packaging Materialand Labeling Requirements**

Manufacturers and suppliers of all types of packagingmaterials used in the production of dairy and juice products must providecertificates of conformity and sanitary-epidemiological certificates forpackaging materials showing that the packaging materials are permitted and safefor contact with the food products.

The Law on the Protectionof Consumers’ Rights and the Law on Quality and Safety of Food Productsdetermine the scope and format of the information that should be made availableto consumers. According to these laws and other applicable national standards, thepackaging of finished products must contain the following information: the nameof the product, information regarding its certification, conditions of use (ifnecessary), contraindications (if any), preservatives and food additives, netmass or volume, ingredients, nutritional value, conditions of storage, shelflife, name and address of the manufacturer and other information. The law alsoauthorizes a wide range of government and public agencies to monitor 

72

----

producers’compliance with the requirements of the law and imposes sanctions and penaltiesif such requirements are not met.

**SpecialRequirements for Children’s Dairy Products**

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

Under the SanitaryRules 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.

**Competition andPricing**

The Federal AntimonopolyService is the governmental agency that regulates the prevention and limitationof monopolistic activity and the support of competition in the market. TheFederal Law on the Protection of Competition prohibits the abuse of a dominantposition to limit competition. Our subsidiary, the Moscow Baby Food Plant, hasbeen included in the register of entities holding a significant share of themarket. Inclusion in this register does not impose additional reporting orother requirements on us; however, because of our significant position, theFederal Antimonopoly Service monitors our activities and we are required tonotify the Federal Antimonopoly Service and/or apply for its prior approval forthe acquisition of other companies.

73

----

**C.**               OrganizationalStructure 

The following table sets out ourprimary production subsidiaries, their countries of incorporation and ouraggregate beneficial ownership interest and voting interest in each subsidiary asof June 5,2007. 

| **Plant**                                                           | ** ** | ** ** | ** ** | **Beneficial  Ownership** | ** ** | **Voting  Interest** | ** ** | **Country of  Incorporation** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|---------------------------|------------|----------------------|------------|------------------------------------|------------|
| Wimm-Bill-Dann Plant(1)                                             |       |       | 97.93      | %                         |       | 97.93                | %          | Russian Federation                 |       |
| Annino Dairy Plant                                                  |       |       | 100        | %                         |       | 100                  | %          | Russian Federation                 |       |
| Karasuk Dairy Plant                                                 |       |       | 93.80      | %                         |       | 93.80                | %          | Russian Federation                 |       |
| Wimm-Bill-Dann Ukraine(2)                                           |       |       | 98.50      | %                         |       | 98.50                | %          | Ukraine                            |       |
| Moloko Veidelevki                                                   |       |       | 100        | %                         |       | 100                  | %          | Russian Federation                 |       |
| Buryn Powder Milk Plant                                             |       |       | 76.00      | %                         |       | 76.00                | %          | Ukraine                            |       |
| Tuymazinskiy Dairy Plant                                            |       |       | 85.00      | %                         |       | 85.00                | %          | Russian Federation                 |       |
| Bishkek Dairy Plant                                                 |       |       | 96.10      | %                         |       | 96.10                | %          | Kyrgyz Republic                    |       |
| Gulkevichy Dairy Plant                                              |       |       | 52.27      | %                         |       | 52.27                | %          | Russian Federation                 |       |
| Kharkov Dairy Plant                                                 |       |       | 99.94      | %                         |       | 99.94                | %          | Ukraine                            |       |
| WBD Toshkent                                                        |       |       | 100        | %                         |       | 100                  | %          | Republic of Uzbekistan             |       |
| Obninsk Dairy Plant                                                 |       |       | 96.45      | %                         |       | 96.45                | %          | Russian Federation                 |       |
| Ochakovo Dairy Plant                                                |       |       | 98.40      | %                         |       | 98.40                | %          | Russian Federation                 |       |
| Surgut City Dairy Plant                                             |       |       | 100        | %                         |       | 100                  | %          | Russian Federation                 |       |
| Angarsky Dairy Plant (MOLKA)                                        |       |       | 83.36      | %                         |       | 83.36                | %          | Russian Federation                 |       |
| Krutinsky Creamery Plant                                            |       |       | 100        | %                         |       | 100                  | %          | Russian Federation                 |       |
| Manros-M                                                            |       |       | 100        | %                         |       | 100                  | %          | Russian Federation                 |       |
| Bolsherechensk Dairy Plant                                          |       |       | 79.78      | %                         |       | 79.78                | %          | Russian Federation                 |       |
| Pavlogradsky Dairy Plant                                            |       |       | 56.78      | %                         |       | 56.78                | %          | Russian Federation                 |       |
| **Beverage plants**                                                 |       |       |       |                      |       |                 |       |                               |       |
| Wimm-Bill-Dann Beverages(3)                                         |       |       | 96.68      | %                         |       | 96.68                | %          | Russian Federation                 |       |
| Valdai Springs Water Plant                                          |       |       | 100        | %                         |       | 100                  | %          | Russian Federation                 |       |
| Essentuki Mineral Water Plant at CMW (Caucasian Mineral  Waters)(4) |       |       | 100        | %                         |       | 100                  | %          | Russian Federation                 |       |
| **Farms**                                                           |       |       |       |                      |       |                 |       |                               |       |
| Trud                                                                |       |       | 93.26      | %                         |       | 93.26                | %          | Russian Federation                 |       |
| Atamanskoe Farm                                                     |       |       | 99.53      | %                         |       | 99.53                | %          | Russian Federation                 |       |
| Plemzavod Za Mir and Trud                                           |       |       | 100        | %                         |       | 100.00               | %          | Russian Federation                 |       |
| Zavety Ilyicha                                                      |       |       | 99.59      | %                         |       | 99.59                | %          | Russian  Federation                |       |

----

(1)          Formerly LianozovskyDairy Plant. In April and May 2007, the following subsidiaries were merged intoWimm-Bill-Dann: Tsaritsyno 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, KurskBaby Food Plant, Moscow Baby Food Plant, Timashevsk Dairy Plant and VladivostokDairy Plant. On March 5, 2007, we sold Novokuibyshevskmoloko—our Samararegion-based subsidiary. See Note 34 to our Consolidated FinancialStatements.

(2)          Formerly Kiev DairyPlant No 3

(3)          Formerly Ramensky DairyPlant

(4)          Oursubsidiary Healing Springs was merged into Essentuki Mineral Water Plant at CMW

74

----

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

We currently manufacture our products at 36 productionfacilities, including 29 plants that principally produce dairy products, twobaby food plants, two plants that produce exclusively juice products and threewater production plants. We have made substantial investments to maintain andenhance quality, lower costs and increase productivity. Over 2004, 2005 and2006, we invested approximately $277.7 million in the modernization of ourexisting production facilities and $151.7 million in the acquisitions of newproduction assets. Our main production plants are capable of managing theproduction of a diverse and evolving product range, enabling us to adaptquickly to changes in consumer demand on a seasonal basis or otherwise. We havecompleted the main phase of our extensive modernization program and have beguncost cutting programs at all of our plants.

We also review our production headcount with the aimof enhancing productivity. Sales per production employee, calculated on thebasis of our total headcount (excluding newly acquired dairy plants—Surgut,Manros-M, Ochakovo, and Angarsky Dairy Plant (MOLKA)), which is a commonmeasure of productivity used in the food industry, was $138,300 per employee in2004, $142,815 per employee in 2005 and $162,994 per employee in 2006.

In 2006 we started working with an internationalmanagement consulting firm on a training and business-process optimizationprogram at the Lianozovsky Dairy Plant and Moscow Baby Food Plant in an effortto increase asset utilization, to cut costs, and to raise labor productivity.As a result, we were able to reduce our employee headcount during 2006,excluding the plants we acquired during the second half of 2006, where thereduction of headcount is still in process.

Thefollowing table contains data regarding our main production facilities. 

| ** **                                                                | ** ** | **Year of  Acquisition**(1) | ** ** | **Year of  Building** | ** ** | **Number of  Production  Lines** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------|------------|---------------------------------------|------------|
| **Moscow and Moscow region**                                              |       |                             |       |                       |       |                                  |       |   |   |   |   |   |   |
| Wimm-Bill-Dann(2)                                                         |       |                             | 1995       |                       |       |                                  | 1989       |   |   |   | 186 |   |   |
| 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       |   |   |   | 5 |   |   |
| Tuimazy Dairy  Plant                                                      |       |                             | 2002       |                       |       |                                  | 1958       |   |   |   | 9 |   |   |
| 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 |   |   |
| **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 thepurchase of more than 50% of the issued share capital. Only plants acquired byus as of December 31, 2006 are included in this table.

75

----

(2)          Formerly Lianozovsky Dairy Plant. In April andMay 2007, 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, KurskBaby Food Plant, Moscow Baby Food Plant, Timashevsk Dairy Plant and VladivostokDairy Plant. On March 5, 2007, we sold Novokuibyshevskmoloko—ourSamara region-based subsidiary. See Note 34 to our Consolidated FinancialStatements.

(3)          Formerly Ramensky DairyPlant

(4)          Formerly Kiev DairyPlant *No* 3

As of December 31, 2006 and 2005 the assets that served ascollateral consisted of the following:

·       Inventory in the amounts of $12.1 million and $3.4 million, respectively;

·       Property, plant and equipment with a net book value of $34.8 million and$9.4 million, respectively;

·       Further,property, plant and equipment amounting to $33.1 million and $47.7 million,respectively, served as collateral under the vendor financing agreements.

***Item 4A.****                  UnresolvedStaff Comments*

None.

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

*The following discussion of our financial conditionand results of operations should be read in conjunction with our ConsolidatedFinancial 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 Statement Regarding Forward-Looking Statements.” Our ConsolidatedFinancial Statements are expressed in U.S. dollars and prepared in accordancewith accounting principles generally accepted in the United States (“U.S.GAAP”).*

**A.**                OperatingResults

**Overview**

We are one of the largest Russian manufacturers ofdairy and juice products, with sales of $1,762.1 million, $1,394.6 millionand $1,184.0 million in 2006, 2005 and 2004, respectively. Our reportablebusiness segments in 2006 were dairy products, beverage products and baby foodproducts. In 2006, the dairy segment accounted for 75.0% of our sales, thebeverages segment, which includes juice and bottled mineral water products,accounted for 18.4% of our sales and the baby food segment accounted for 6.6%of our sales. In 2005, the dairy segment accounted for 72.0% of our sales, thebeverages segment accounted for 21.7% of our sales and the baby food segmentaccounted for 6.3% of our sales. Our principal geographic market is Russia,which approximately accounted for 93%, 92% and 94% of our sales in 2006, 2005and 2004, respectively. However, we also have production facilities in Ukraine,Kyrgyzstan and Uzbekistan.

In 2006, our net income increased to $95.4 millionfrom $30.3 million in 2005, an increase of 215.2%, and sales increased by26.4%, including sales increases of 31.6%, 6.9% and 33.4% in the dairy,beverages and baby food segments, respectively. By volume, dairy segment saleswere higher by 13.2%, beverages segment sales increased by 2.5% and baby foodsales increased by 14.7%.

76

----

In the dairy segment, our gross margin in 2006improved primarily due to higher average selling prices due to general priceincreases, a more favorable product mix, ruble appreciation and a moderateincrease in the cost of raw milk compared to prior years. Gross margindecreased in the beverages segment primarily due to certain changes in thestructure of our sales which lead to a faster increase of cost of sales thanthe average price increase. Gross margin was higher in the baby food segment.This was driven primarily by volume growth, as Russia’s baby food marketcontinues to grow rapidly in both value terms and geographic reach and also dueto a moderate increase in the cost of raw milk compared to prior years, higheraverage selling prices as a result of general price increases and a shift inour product mix to include more value-added products. Our selling anddistribution expenses increased in 2006 as compared to 2005 in absolute termsand also as a percentage of sales, from 13.8% to 14.0%. In particular, ourtransportation, personnel and advertising costs were higher in 2006 as a resultof our regional expansion program.

Over the past three years, we have been constructingnew capacity, modernizing existing capacity and making strategic acquisitions.Our capital expenditures (excluding acquisitions) in 2006, 2005 and 2004 were$130.0 million, $75.1 million and $72.6 million, respectively.Expenditures for acquisitions of subsidiaries in 2006, 2005 and 2004 totaled$137.3 million (exclusive of advances made in 2006 for acquisitions completedin 2007), $24.3 million (exclusive of advances made in 2005 foracquisitions completed in 2006 but including advances made in 2004 foracquisitions made in 2005) and $5.3 million (exclusive of advances made in2004 for acquisitions completed in 2005), respectively.

As of December 31,2006, we had a total of $443.0 million in outstanding debt (consisting ofnotes, vendor financing for property, plant and equipment and loans). Of ourtotal indebtedness as of December 31, 2006, 43.5% was denominated in U.S. dollarsand euros and 56.6% was denominated in rubles.

**OperationalHighlights for 2006**

Below is a summary of our operational highlights for2006 and beginning of 2007:

2006
| April     |   | Tony Maher was appointed  Chief Executive Officer and Chairman of the Management Board. He replaced  Sergei Plastinin, one of Wimm-Bill-Dann’s founders and CEO of the company  since 1992. Mr. Maher brings more than 30 years of experience at  Coca-Cola companies to his new position. |
|-----------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| May       |   | Standard &  Poor’s Governance Services announced the upgrade of our Corporate Governance  Score (CGS) from 7 to 7+ (from 7.3 to 7.7 accordingly on the Russian national  scale). The upgrade makes the company’s rating the highest in Russia.                                    |
| May       |   | Board recommended  the payment of dividends for the financial years 2002-2004 in the  amount of RUR4.60 (approximately US$0.17) per share, as well as for the first  quarter of 2006 in the amount of RUR2.27 (approximately US$0.08) per share.                                                     |
| September |   | New Head of  Beverages Business Unit, Silviu Popovici, appointed. Mr. Popovici has  extensive experience in sales, marketing, operations and general management  with global companies Bristol-Myers Squibb and Coca-Cola in Romania, Russia  and Ukraine.                                      |
| September |   | We acquired 100%  stake in Surgut City Dairy Plant. The acquisition allows us to strengthen our  presence in the wider target markets of the Urals and Siberia.                                                                                                                                      |

77

----

 
| November |   | Group Head of  Marketing and Innovation, Grant Winterton, appointed. This new senior  position underscores our strategic focus on marketing. Along with directing  the marketing heads of the Dairy, Beverages and Baby Food Units,  Mr. Winterton also oversees the Research and Development division, in  order to ensure new product development is aligned with market expectations  and demand.                                                                                                                                                                                         |
|----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| November |   | Certain  shareholders in our controlling group of shareholders, some of whom are  members of our board of directors, completed  a secondary offering of common stock on the Russian stock market. Russian  and foreign institutional investors acquired 4,400,000 local common shares of  Wimm-Bill-Dann Foods (or 10% of the outstanding shares) in an underwritten  public offering. The company did not sell any shares in, or receive any of  the proceeds from, the offering. The shares were offered to the market within  a US$36 to US$39 per share range, and sold at US$37.5 per share. |
| November |   | We acquired a  93.74% stake in Moscow-based Ochakovo Dairy Plant, the fourth largest dairy  producer in Russia and one of the largest dairy enterprises in Moscow.                                                                                                                                                                                                                                                                                                                                                                                                                                |
| December |   | We acquired 100%  of Omsk-based dairy producer Manros, the largest independent dairy product  manufacturer in Siberia and Russia’s Far East. The deal reflects our strategy  of acquiring successful companies with leading market positions in their  respective regions, possessing strong brand portfolios.                                                                                                                                                                                                                                                                               |
| December |   | In December, at  Wimm-Bill-Dann’s Extraordinary General Meeting of Shareholders, the board  recommended the payment of dividends for the 9 months of 2006 in the amount  of RUR 7.86 (approximately US$0.30) per share.                                                                                                                                                                                                                                                                                                                                                                      |
| December |   | We acquired an  83.36% stake in MOLKA dairy plant in Irkutsk region, an important milk  processing enterprise in Eastern Siberia, one of our key target markets.                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

**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. The loan agreement contains a number of covenants,  including requirements to maintain certain financial ratios. |
| March    |   | We sold our 87.13% stake in Novokuibyshevsk Dairy Plant,  which was impaired in the third quarter of 2006. This transaction brought the  overall number of our production facilities to 36.                                                                                                                                                                                                                                      |
| 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.                                                                                                              |

78

----

 
| 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. |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| May   |   | On May 29, 2007, we acquired an additional 30.12%  stake in the founding capital of Obninsk Dairy Plant OJSC, 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.                                                                                                                                                                        |

 

**Results ofOperations**

The following tablesummarizes the results of our operations for the years ended December 31,2006, 2005 and 2004:

| ** **                           | ** ** | **        2006        ** | ** ** | **% of  sales** | ** ** | **        2005        ** | ** ** | **% of  sales** | ** ** | **        2004        ** | ** ** | **% of  sales** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                           | ** ** | **(in thousands)**                                                                                  | ** ** | ** **           | ** ** | **(in thousands)**                                                                                  | ** ** | ** **           | ** ** | **(in thousands)**                                                                                  | ** ** | ** **           | ** ** |
| Sales                                |       |                                                                                                     | $          | 1,762,127            |       |                                                                                                     | 100.0      |                 |       | $                                                                                                        | 1,394,590  |                 |       | 100.0 |   |   | $ | 1,183,986 |   |   | 100.0 |   |
| including:                           |       |                                                                                                     |       |                 |       |                                                                                                     |       |                 |       |                                                                                                     |       |                 |       |   |   |   |   |   |   |
| Dairy                                |       |                                                                                                     | 1,320,901  |                 |       | 75.0                                                                                                     |       |                 | 1,003,601  |                                                                                                     |       | 72.0                 |       |   | 818,279 |   |   | 69.1 |   |
| Beverages                            |       |                                                                                                     | 324,074    |                 |       | 18.4                                                                                                     |       |                 | 303,147    |                                                                                                     |       | 21.7                 |       |   | 301,050 |   |   | 25.4 |   |
| Baby Food                            |       |                                                                                                     | 117,152    |                 |       | 6.6                                                                                                      |       |                 | 87,839     |                                                                                                     |       | 6.3                  |       |   | 64,657 |   |   | 5.5 |   |
| Cost of sales                        |       |                                                                                                     | (1,194,159 | )                    |       | 67.8                                                                                                     |       |                 | (999,006   | )                                                                                                        |       | 71.6                 |       |   | (858,767 | ) |   | 72.5 |   |
| Gross profit                         |       |                                                                                                     | 567,968    |                 |       | 32.2                                                                                                     |       |                 | 395,584    |                                                                                                     |       | 28.4                 |       |   | 325,219 |   |   | 27.5 |   |
| Selling and  distribution expenses   |       |                                                                                                     | (246,054   | )                    |       | 14.0                                                                                                     |       |                 | (191,990   | )                                                                                                        |       | 13.8                 |       |   | (173,433 | ) |   | 14.6 |   |
| General and  administrative expenses |       |                                                                                                     | (134,481   | )                    |       | 7.6                                                                                                      |       |                 | (109,642   | )                                                                                                        |       | 7.9                  |       |   | (92,816 | ) |   | 7.8 |   |
| Other operating expenses             |       |                                                                                                     | (31,812    | )                    |       | 1.8                                                                                                      |       |                 | (6,457     | )                                                                                                        |       | 0.5                  |       |   | (6,047 | ) |   | 0.5 |   |
| Operating income                     |       |                                                                                                     | 155,621    |                 |       | 8.8                                                                                                      |       |                 | 87,495     |                                                                                                     |       | 6.3                  |       |   | 52,923 |   |   | 4.5 |   |
| Financial income  and expenses, net  |       |                                                                                                     | (15,480    | )                    |       | 0.9                                                                                                      |       |                 | (22,868    | )                                                                                                        |       | 1.6                  |       |   | (14,618 | ) |   | 1.2 |   |
| Provision for  income taxes          |       |                                                                                                     | (41,560    | )                    |       | 2.4                                                                                                      |       |                 | (30,712    | )                                                                                                        |       | 2.2                  |       |   | (12,170 | ) |   | 1.0 |   |
| Minority interest                    |       |                                                                                                     | (3,197     | )                    |       | 0.2                                                                                                      |       |                 | (3,649     | )                                                                                                        |       | 0.3                  |       |   | (3,161 | ) |   | 0.3 |   |
| Net Income                           |       |                                                                                                     | $          | 95,384               |       |                                                                                                     | 5.4        |                 |       | $                                                                                                        | 30,266     |                 |       | 2.2 |   |   | $ | 22,974 |   |   | 1.9 |   |
| Volume                               |       |                                                                                                     |       |                 |       |                                                                                                     |       |                 |       |                                                                                                     |       |                 |       |   |   |   |   |   |   |
| Dairy (th. tons)                     |       |                                                                                                     | 1,354      |                 |       |                                                                                                     |       |                 | 1,195      |                                                                                                     |       |                 |       |   | 1099 |   |   |   |   |
| Beverages (th. liters)               |       |                                                                                                     | 447        |                 |       |                                                                                                     |       |                 | 436        |                                                                                                     |       |                 |       |   | 463 |   |   |   |   |
| Baby Food (th.  tons)                |       |                                                                                                     | 66         |                 |       |                                                                                                     |       |                 | 58         |                                                                                                     |       |                 |       |   | 50 |   |   |   |   |

 

79

----

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

**Sales**

Salesincreased by 26.4% to $1,762.1 million in 2006 from $1,394.6 millionin 2005. The dairy business was our largest segment, representing 75.0% ofsales in 2006 compared to 72.0% in 2005.

| ** **        | ** ** | **Year ended December 31,**                           | ** ** |
|-------------------|------------|----------------------------------------------------------------------|------------|
| ** **        | ** ** | **     2006     ** | ** ** | **% of  sales** | ** ** | **     2005     ** | ** ** | **% of  sales** | ** ** |
| ** **        | ** ** | **(in thousands)**                                              | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Dairy products    |       |                                                                 | $          | 1,320,901 |   |   | 75.0 |   |   | $ | 1,003,601 |   |   | 72.0 |   |
| Beverage products |       |                                                                 | 324,074    |   |   | 18.4 |   |   | 303,147 |   |   | 21.7 |   |
| Baby food         |       |                                                                 | 117,152    |   |   | 6.6 |   |   | 87,839 |   |   | 6.3 |   |
| Other             |       |                                                                 | 0          |   |   | 0.0 |   |   | 3 |   |   | 0.0 |   |
|              |       |                                                                 | $          | 1,762,127 |   |   | 100.0 |   |   | $ | 1,394,590 |   |   | 100.0 |   |

 

Sales in our dairy segment increased by 31.6% to$1,320.9 million in 2006 from $1,003.6 million in 2005. We sold1,353.5 thousand tons of dairy products in 2006 and 1,195.3 thousandtons of dairy products in 2005. The average selling price increased by 16.2%from $0.840 per kilogram in 2005 to $0.976 per kilogram in 2006 driven by afavorable sales mix, incremental ruble price increases and ruble appreciation.Our improved dairy sales were driven by our increased presence in the regionsof Russia and the CIS, especially in Siberian and Southern Russia, the additionof new products to our portfolio and further optimization of our productportfolio, the launch of new product lines and increased marketing activities.

Sales in our beverages segment increased by 6.9% to$324.1 million in 2006 from $303.1 million in 2005. We sold447.0 million liters of juice and water in 2006 and 436.2 millionliters of juice and water in 2005. The average selling price increased by 4.3%from $0.695 per liter in 2005 to $0.725 per liter in 2006, primarily due toincremental ruble price increases and ruble appreciation, partially offset bychanges in our product mix in favor of lower priced brands.

Sales in our baby food segment increased by 33.4% to$117.2 million in 2006 from $87.8 million in 2005. We sold 66.3 thousand tonsof baby food products in 2006 and 57.8 thousand tons in 2005. The averageselling price increased by 16.3% from $1.520 per kilogram in 2005 to $1.768 perkilogram in 2006 driven by incremental ruble price increases, rubleappreciation and a change in our product mix favoring value-added products. Ourimproved baby food sales were driven by the addition of new products to ourportfolio and increased sales in new regions.

In 2006, 67% of ourrevenues came from sales outside of the Moscow region in other parts of Russiaand the CIS. Regional sales represented 71%, 63% and 22% of dairy, beveragesand baby food segment revenues in 2006. Over the last two years, we havefocused on sales growth in the regions through the expansion of ourdistribution and production capabilities in various regions, as well as certainCIS countries.

80

----

**Cost of Sales**

Costof sales primarily consists of expenses relating to raw materials (raw milk fordairy and baby food products, concentrates for juices and packaging materialsfor all products), which accounted for 82.6% and 83.7% of our total cost ofsales in 2006 and 2005, respectively. The table below sets forth these costsfor 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 and2005 but decreased as a percentage of sales to 56.0% in 2006 from 60.0% in2005, 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 in2006, whereas 78.0% of these costs were ruble-denominated and 22% were hard-currency-denominatedin 2005. In the baby food segment, 65.6% of our raw material costs wereruble-denominated and 34.4% were hard-currency-denominated in 2006, whereas67.0% 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 in absolute terms by36.9% in 2006 as compared to 2005. The average number of production personnelincreased in 2006 by 10.7% to 10,811 (excluding newly acquired dairy plants,Surgut, Manros, Ochakovo, and MOLKA) compared to 9,766 in 2005 mainly due to increasedutilization of manufacturing facilities and the related growthof production volumes in 2006.

Production personnel costs per employee increased by21.3% to $6,212 in 2006 from $5,123 in 2005(including the dairy farmemployees). This was mainly driven by manning reduction initiative whichcommenced in the end of 2006, with subsequent compensatory payments reported in2006, as well as increased 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 in absolute terms by 37.8% in2006 due to larger production and warehousing facilities, as well as anincrease in production volumes and electricity and gas tariffs.

Goods for resale includevarious dairy products that we purchase from independent producers and resell.

81

----

**Gross Profit**

Our gross profit increased by 43.6% to$568.0 million in 2006 from $395.6 million in 2005. Our gross marginincreased to 32.2% in 2006 from 28.4% in 2005.

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

Despite additional cost control measures undertaken in2006, gross margin in our beverages segment decreased to 35.3% in 2006 from36.1% in 2005. This decrease was primarily due to higher sugar and concentratecosts, a shift in our product mix in favor of lower margin products and, as aresult, a faster increase of cost of sales than of the average price.

Gross margin in our babyfood segment increased to 43.1% in 2006 from 38.0% in 2005 mainly due toincreased selling prices and a shift in our product mix in favor of highermargin, value-added products.

**Selling andDistribution Expenses**

Sellingand distribution expenses increased by 28.2% between 2006 and 2005. As apercentage of sales, selling and distribution expenses increased to 14.0% in2006 from 13.8% in 2005. Our selling and distribution expenses in 2006 and 2005were 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 2006by 31.5% or $18.3 million in absolute terms, and increased by 0.2% as apercentage of sales to 4.3% in 2006 from 4.1% in 2005. The increase in expenseswas due to our continued investments into major brand promotions, mediainflation on Russia’s leading national television channels, which, in 2006,reached 35% and general increases in marketing costs. Despite this mediainflation, we were able to obtain volume discounts and manage the costincreases more effectively. In 2006 and 2005, television advertising expensesrepresented more than half of our advertising budget.

Personnel expenses increased by 17.4% in 2006 ascompared to 2005. The average number of employees in our selling anddistribution department decreased to 5,355 in 2006 from 5,713 in 2005 due tothe development of our branch network in 2006. Our payroll cost per employeeincreased 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 performancebased reward system implementation in 2006. Our personnel costs as a percentageof sales decreased to 3.2% in 2006 from 3.4% in 2005.

82

----

Shipping and handling costs, which primarily consistof external transportation costs, increased by 38.8% in 2006 as compared to2005. Our transportation expenses as a percentage of sales slightly increasedto 4.2% in 2006 from 3.8% in 2005. The increase in transportation costs wasmainly due to the expansion of our sales volumes in the regions and increasedtransportation tariffs.

In particular, ruble tariffs for railwaytransportation, which accounted for more than half of the total beveragestransportation expenses, increased by 14.0%, which slightly exceeded inflation.

We continued to maintaincontrol of our bad debt expenses, which remained stable at 0.2% as a percentageof sales in 2006. See “B. Liquidity and Capital Resources—Critical AccountingPolicies and Estimates—Allowance for Doubtful Accounts” below.

**General andAdministrative Expenses**

Generaland administrative expenses increased by 22.7% in 2006 as compared to 2005, anddecreased as a percentage of sales to 7.6% in 2006 from 7.9% in 2005. Our generaland administrative expenses in 2006 and 2005 were as follows:

| ** **                                 | ** ** | **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 theaverage number of employees decreased to 3,159 in 2006 compared to 3,478 in2005. Our average cost per employee increased by 38.0% to $24,532 in 2006 fromabout $17,778 in 2005 (excluding newly acquired dairy plants—Surgut, Manros, Ochakovo,and MOLKA), 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 servicesincreased by 88.7% in 2006 compared to 2005, primarily due to theincreased  restructuring costs, strategicbusiness consulting costs, costs associated with improving professional skillsof our employees and general increases in audit-related fees, as well as compliancecosts with respect to the Sarbanes-Oxley Act of 2002.

Depreciation expenseincreased by 26.3% from $5.7 million to $7.2 million, reflectingcapital expenditures made to support our expansion into the regions of Russiaand the CIS.

**Operating Income**

Operating income increasedby 77.9% to $155.6 million in 2006 from $87.5 million in 2005. As apercentage of sales, operating income increased to 8.8% in 2006 from 6.3% in2005. As discussed above, the increase in operating income was primarily due tothe improvement in the gross margin as a result of cost control procedures. Ourmajor acquisitions also contributed to the improvement of our operating income.

83

----

**Financial Incomeand Expenses**

Financialincome 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 comparedto 2005. This was mainly due to the increased interest rate payable on ourvariable rate 3,000,000 non-convertible ruble notes issued inDecember 2005, as well as an overall increase in our debt.

We received interest income of $4.4 million fromfree cash management in 2006 compared to $1.6 million in 2005.

In 2006, we incurred totalcurrency remeasurement gains of $10.3 million, which comprised of gainsand losses from U.S. dollar-denominated notes and Euro-denominated loanrespectively. For accounting purposes for our U.S. dollar-denominated notes, weused the exchange rate as of December 31, 2006, which depreciatednominally by 8.5% against the December 31, 2005 exchange rate resulting ina currency remeasurement gains.

**Provision forIncome Taxes**

Ourprovision for income taxes for the years ended December 31, 2006 and 2005was 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 provisionscomprise current income tax charges of $48.2 million in 2006 and$27.4 million in 2005, and a deferred tax benefit of $6.7 million in2006 and the expense of $3.3 million in 2005. Deferred tax benefits and chargesarise on temporary differences between the bases of computing income underdomestic tax principles and U.S. GAAP.

In 2006, our effective income tax rate was 29.7%compared to the Russian statutory income tax rate of 24.0% and, in 2005, oureffective income tax rate was 47.5% compared to the Russian statutory incometax rate of 24.0%. This decrease in 2006 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 2006, comparedto 2005.

Had we not taken advantageof the small enterprise tax benefit, our income tax expense would have beenhigher by $1.3 million in 2004 and by $0.3 million in 2005. The income taxbenefit for small enterprises was abolished from January 1, 2002, exceptthat the benefit continues to be available to 

84

----

enterprisesthat were established before July 1, 2001. See “Item 3. Key Information—D.Risk Factors—Risks Relating to Our Financial Condition—The elimination of a taxprivilege from which we currently benefit and/or a successful challenge by thetax authorities of our use of this tax privilege would materially adverselyaffect our results of operations.”

**Minority Interest**

The minority interestreflects the net income and losses of our subsidiaries that are attributable tothe minority shareholders in those subsidiaries. In 2006, net profitsattributable to minority shareholders of our subsidiaries decreased to$3.2 million from $3.6 million in 2005. Most of the minority expensesare attributable to the dairy segment, which had minority expenses of $1.9million in 2006, while most of minority expenses of $3.6 million in 2005 and$2.9 million in 2004 were attributed to Moscow Baby Food Plant. The $0.4million decrease in 2006 was partially offset by the other minority interest onlosses.

**Net Income**

Net income increased in2006 to $95.4 million (5.4% of sales) from $30.3 million (2.2% ofsales) in 2005, primarily as a result of the increase in operating income andfinancial income explained above, which was partially offset by an increase inincome tax expense.

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

**Sales**

Salesincreased by 17.8% to $1,394.6 million in 2005 from $1,184.0 millionin 2004. The dairy segment was our largest business segment, representing 72.0%of sales in 2005 compared to 69.1% in 2004.

| ** **        | ** ** | **Year ended December 31,** | ** ** |
|-------------------|------------|--------------------------------------------|------------|
| ** **        | ** ** | **2005**                                   | ** ** | **% of  sales** | ** ** | **2004** | ** ** | **% of  Sales** | ** ** |
| ** **        | ** ** | **(in thousands)**                    | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Dairy products    |       |                                       | $          | 1,003,601 |   |   | 72.0 |   |   | $ | 818,279 |   |   | 69.1 |   |
| Beverage products |       |                                       | 303,147    |   |   | 21.7 |   |   | 301,050 |   |   | 25.4 |   |
| Baby food         |       |                                       | 87,839     |   |   | 6.3 |   |   | 64,657 |   |   | 5.5 |   |
| Other             |       |                                       | 3          |   |   | 0.0 |   |   | 0 |   |   | 0.0 |   |
|              |       |                                       | $          | 1,394,590 |   |   | 100.0 |   |   | $ | 1,183,986 |   |   | 100.0 |   |

 

Sales in our dairy segment increased by 22.6% to$1,003.6 million in 2005 from $818.3 million in 2004. The salesgrowth was made up of selling price increases of 12.8% in U.S. dollar terms andsales volume growth of 8.8%. We sold 1,195 thousand tons of dairy productsin 2005 and 1,099 thousand tons of dairy products in 2004. The averageselling price increased by 12.8% from $0.745 per kilogram in 2004 to $0.840 perkilogram in 2005 driven by incremental ruble price increases and rubleappreciation. Our improved dairy sales were driven by our increased presence inthe regions of Russia and CIS, especially in southern and northwest Russia, theaddition of new products to our product portfolio and further optimization ofour product portfolio, the launch of new product lines and increased marketingactivities.

Sales in our beverages segment increased by 0.7% to$303.1 million in 2005 from $301.1 million in 2004. We sold436.2 million liters of juice and water in 2005 and 462.6 millionliters of juice and water in 2004. The sales volume decrease of 5.7% was due tothe highly competitive environment. The average selling price increased by 6.8%from $0.651 per liter in 2004 to $0.695 per liter in 2005, primarily due toincremental ruble price increases and ruble appreciation, partially offset bycontinuing changes in our product mix in favor of lower priced brands

85

----

Sales in our baby food segment increased by 35.9% to$87.8 million in 2005 from $64.7 million in 2004. The sales growth was made upof selling price increases of 17.6% in U.S. dollar terms and sales volumegrowth of 15.5%. We sold 57.8 thousand tons of baby food products in 2005 and50.1 thousand tons in 2004. The average selling price increased by 17.6% from$1.293 per kilogram in 2004 to $1.520 per kilogram in 2005 driven byincremental ruble price increases, ruble appreciation and a change in theproduct mix favoring value-added products. Our improved baby food product saleswere driven mainly by expanding our presence in the Moscow region.

In 2005, approximately 62%of our revenues came from sales in the regions of Russia and the CIS. Bysegment, regional sales represented 66%, 63% and 19% of dairy, beverages andbaby food segment revenues in 2005, respectively. Over the last two 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.

**Cost of Sales**

Costof sales primarily consists of expenses relating to raw materials (raw milk fordairy and baby food products, concentrates for juices and packaging materialsfor all products), which accounted for 71.6% and 72.5% of our total cost ofsales in 2005 and 2004, respectively. The table below sets forth these costsfor both 2005 and 2004:

| ** **                     | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                   | ** ** | **%** | ** ** | **2004** | ** ** | **%** | ** ** |
| ** **                     | ** ** | **(in thousands)**                    | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Raw materials                  |       |                                       | $          | 836,404 |   |   | 83.7 |   |   | $ | 726,934 |   |   | 84.6 |   |
| Personnel                      |       |                                       | 50,030     |   |   | 5.0 |   |   | 44,283 |   |   | 5.2 |   |
| Depreciation and  amortization |       |                                       | 41,921     |   |   | 4.2 |   |   | 34,577 |   |   | 4.0 |   |
| Utilities                      |       |                                       | 21,222     |   |   | 2.1 |   |   | 17, 378 |   |   | 2.0 |   |
| Goods for resale               |       |                                       | 16,724     |   |   | 1.7 |   |   | 6,663 |   |   | 0.8 |   |
| Other                          |       |                                       | 32,705     |   |   | 3.3 |   |   | 28,932 |   |   | 3.4 |   |
| Total cost of sales            |       |                                       | $          | 999,006 |   |   | 100.0 |   |   | $ | 858,767 |   |   | 100.0 |   |

 

Raw material costs increased by 15.1% between 2005 and2004 but decreased as a percentage of sales to 60.0% in 2005 from 61.4% in2004, primarily due to the increase in selling prices. Raw material costs as apercentage of dairy sales were lower (62.8% in 2005 compared to 64.5% in 2004)because of the increases in selling prices, which outpaced the increase in rawmilk prices. Raw material costs as a percentage of baby food segment salesslightly decreased to 44.7% in 2005 from 45.3% in 2004 for the same reason. Rawmaterial costs as a percentage of beverages segment sales decreased to 55.0% in2005 from 56.5% in 2004 due to certain cost control measures undertaken in2005, including more cost efficient purchasing.

In the dairy segment, 78.0% of our raw material costswere ruble-denominated and 22.0% were hard-currency-denominated in 2005,whereas 77.0% of these costs were ruble-denominated and 23.0% werehard-currency denominated in 2004. In the baby food segment, 33.0% of rawmaterial costs were hard-currency-denominated and 67% were ruble-denominated in2005, whereas 66% of these costs were ruble-denominated and 34% werehard-denominated in 2004. In the beverages segment, substantially all of ourraw material costs were hard-currency-denominated in 2005 and 2004.

Personnel expenses increased in absolute terms by13.0% in 2005 as compared to 2004. The average number of production personnelincreased to 9,766 in 2005 from 8,561 in 2004 mainly from our acquisitions ofdairy farms in late 2004 and 2005. Production personnel costs per employee(excluding the dairy farm employees, which are reported as other operatingexpenses) increased to $5,849 in 2005 from $5,173 in 2004 due to salaryincreases in line with the inflation rate in Russia.

86

----

Depreciation and amortization increased by 21.3% from$34.6 million in 2004 to $41.9 million in 2005, reflecting thesignificant capital expenditures we have been making to increase our productioncapacity by improving our facilities and overall infrastructure.

Utility costs increased in absolute terms by 22.1% in2005 due to larger production and warehouse facilities, as well as an increasein production volume and electricity and gas tariffs.

Goods for resale includevarious dairy products that we purchase from independent producers and resell.

**Gross Profit**

Our gross profit increased by 21.6% to$395.6 million in 2005 from $325.2 million in 2004. Our gross marginincreased to 28.4% in 2005 from 27.5% in 2004.

Gross margin in our dairy segment increased to 25.2%in 2005 from 24.4% in 2004 due to the increase in selling prices, which waspartially offset by further increases in raw milk prices.

Gross margin in our beverages segment increased to36.1% in 2005 from 33.8% in 2004. This increase was primarily due to theadditional cost control measures undertaken in 2005, such as the implementationof more cost efficient purchasing and economy of scales realized following theconsolidation of our juice and water business units.

Gross margin in our babyfood segment increased to 38.0% in 2005 from 37.2% in 2004, mainly due toincrease in selling prices and a shift in our product mix in favor of highermargin, value-added products.

**Selling andDistribution Expenses**

Sellingand distribution expenses increased by 10.7% between 2005 and 2004. As apercentage of sales, selling and distribution expenses decreased to 13.8% in2005 from 14.6% in 2004. Our selling and distribution expenses in 2005 and 2004were as follows:

| ** **                               | ** ** | **Year ended  December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                               | ** ** | **(in thousands)**                | ** ** |
| Advertising and  marketing               |       | $                                      | 57,936     |   | $ | 54,298 |   |
| Personnel                                |       | 47,665                                 |       | 43,831 |   |
| Shipping and  handling                   |       | 52,995                                 |       | 45,938 |   |
| Bad debt expense                         |       | 3,908                                  |       | 3,722 |   |
| Materials and  supplies                  |       | 10,446                                 |       | 8,447 |   |
| Warehouse                                |       | 9,525                                  |       | 8,937 |   |
| Other                                    |       | 9,515                                  |       | 8,260 |   |
| Total selling and  distribution expenses |       | $                                      | 191,990    |   | $ | 173,433 |   |

 

Advertising and marketing expenses increased in 2005by $3.6 million, or 6.7% in absolute terms, and decreased by 0.5% inrelation to sales, to 4.2% in 2005 from 4.6% in 2004. The increase in expenseswas due to our continued investments into major brand promotions, mediainflation on Russia’s leading national television channels which, in 2005,reached 28% and general increases in marketing costs. Despite this media inflation,we were able to obtain volume discounts and manage the cost increases moreeffectively. In 2005 and 2004, television advertising expenses represented morethan half of our advertising budget.

Personnel expenses increased in absolute terms by 8.7%in 2005 as compared to 2004. The average number of employees in our selling anddistribution department decreased to 5,713 in 2005 from 6,008 in 

87

----

2004 as we optimized ourdistribution network in the regions. Our payroll cost per employee increased by14.4% to $8,343 in 2005 from approximately $7,295 in 2004 due to increasedbonuses paid to our sales personnel, as well as wage inflation. Our personnelcosts as a percentage of sales decreased to 3.4% in 2005 from 3.7% in 2004.

Shipping and handling costs, which primarily consistof external transportation costs, increased by 15.4% in 2005 as compared to2004. Our transportation expenses as a percentage of sales decreased to 3.8% in2005 from 3.9% in 2004. This increase was mainly due to the expansion of oursales volumes in the regions and increased transportation tariffs.

In particular, ruble tariffs for railwaytransportation, which accounted for more than half of the total beveragestransportation expenses, increased by 17.7%, which exceeded inflation by 1.8times. Our efforts to control costs and optimize routes resulted in a 0.1%decrease in transportation costs as a percentage of sales.

We continued to controlour bad debt expenses, which remain stable at 0.3% as a percentage of sales in2005. See “B. Liquidity and Capital Resources—Critical Accounting Policies andEstimates—Allowance for Doubtful Accounts” below.

**General andAdministrative Expenses**

Generaland administrative expenses increased by 18.1% in 2005 as compared to 2004, andincreased as a percentage of sales to 7.9% in 2005 from 7.8% in 2004. Ourgeneral and administrative expenses in 2005 and 2004 were as follows:

| ** **                                 | ** ** | **Year ended  December 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                | ** ** |
| Personnel                                  |       | $                                      | 61,830     |   | $ | 53,250 |   |
| Taxes other than  income tax               |       | 13,194                                 |       | 11,782 |   |
| Audit, consulting  and legal fees          |       | 5,567                                  |       | 4,655 |   |
| Depreciation                               |       | 5,711                                  |       | 4,576 |   |
| Materials and  supplies                    |       | 3,268                                  |       | 3,226 |   |
| Communication  costs                       |       | 2,880                                  |       | 2,331 |   |
| Rent                                       |       | 2,177                                  |       | 2,268 |   |
| Other                                      |       | 15,015                                 |       | 10,728 |   |
| Total general and  administrative expenses |       | $                                      | 109,642    |   | $ | 92,816 |   |

 

Personnel expenses increased by 16.1%, while theaverage number of employees increased to 3,478 in 2005 compared 3,140. Ouraverage cost per employee increased by 4.8% to $17,778 in 2005 from $16,960 in2004, which is slight when taking into account wage inflation throughout Russiaand especially in Moscow, where our head office is located.

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

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

88

----

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

**Operating Income**

Operating income increasedby 65.3% to $87.5 million in 2005 from $52.9 million in 2004. As apercentage of sales, operating income increased to 6.3% in 2005 from 4.5% in2004. As discussed above, the increase in operating income was primarily due toimprovement in the gross margin as a result of cost control procedures. Thefarm operations also contributed to the improvement of our operating income.

**Financial Incomeand Expenses**

Financialincome and expenses comprised the following:

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

 

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

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

In 2005 we incurred totalcurrency remeasurement gains of $1.2 million, which comprised of gains andlosses from Euro- and U.S. dollar-denominated obligations, respectively, aswell as remeasurement gains from our operations in Ukraine. For purposes ofaccounting for our U.S. dollar-denominated notes, we used the exchange rate asof December 31, 2005, which depreciated nominally by 3.7% against theDecember 31, 2004 exchange rate resulting in a currency remeasurementloss. On the other hand, as the value of the ruble increased against the Euro,our Euro-denominated obligations resulted in currency remeasurement gains. Withrespect to ruble-denominated liabilities of our Ukrainian subsidiary, weincurred currency remeasurement gains due to the depreciation of the rubleagainst the Ukrainian hryvna.

**Provision forIncome Taxes**

Ourprovision for income taxes for the years ended December 31, 2005 and 2004was as follows:

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

 

89

----

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

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

**Minority Interest**

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

**Net Income**

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

**B.**               Liquidityand Capital Resources

**CapitalRequirements**

We need capital tofinance the following:

·       repayment of debt;

·       capital expenditures,consisting of purchases of property, plant and equipment;

·       acquisitions; and

·       dividendpayouts.

90

----

We anticipate that therepayment of long-term debt including Loan Participation Notes, capitalexpenditures and acquisitions will represent the most significant use of fundsfor several years to come. In 2006, we continued to purchase property, plantand equipment in order to increase production capacity and to improveinfrastructure at our new and existing subsidiaries in anticipation of theexpected further growth in the Russian economy and rising incomes.

**CapitalExpenditures**

Our total capital expenditures in 2006, excludingacquisitions, amounted to $130.0 million, including new vendor credits.Capital expenditures in our dairy segment amounted to $93.3 million and relatedto the improvement 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 $13.5 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 $19.4 million and related mainly to the modernization ofour recently acquired Kursk Baby Food Plant. Our corporate and common capitalexpenditures, including those relating to IT infrastructure and software,totaled $3.8 million.

Ourcapital expenditures, excluding acquisitions, for the period from 2004 to 2006are set forth in the following table:

| ** **                         | ** ** | **Year ended  December 31,** | ** ** | ** ** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2006**                               | ** ** | **2005**   | ** ** | **2004** | ** ** | **Total** | ** ** |
| ** **                         | ** ** | **(in millions)**                 | ** ** |
| Dairy segment                      |       | 93.3                                   |       | 59.9       |       | 57.1 |   | 210.3 |   |
| Beverages segment                  |       | 13.5                                   |       | 12.9       |       | 8.8 |   | 35.2 |   |
| Baby food segment                  |       | 19.4                                   |       | 1.8        |       | 5.1 |   | 26.3 |   |
| Corporate and  common expenditures |       | 3.8                                    |       | 0.5        |       | 1.6 |   | 5.9 |   |
| Total capital  expenditures        |       | 130.0                                  |       | 75.1       |       | 72.6 |   | 277.7 |   |

 

As of December 31,2006, our capital commitments amounted to $10.0 million mainly for constructionprojects. As of March 31, 2007, we had capital commitments ofapproximately $30.0 million, primarily for construction projects at ourproduction sites and purchase of equipment. We plan to finance our capitalcommitments through operating cash flow.

91

----

**Acquisitions ofSubsidiaries and Purchase of Minority Stakes**

During2006, 2005 and 2004, we made a number of acquisitions for the totalconsideration of $137.3 million, $24.3 million and $5.3 million, respectively.The goal of these acquisitions was to expand into new markets, strengthen ouroperational presence in the regions of Russia and the CIS and to purchaseminority stakes. The following table summarizes our acquisitions in the last threeyears:

| ** **                                                                           | ** ** | **Direct ownership  interest  acquired, %** | ** ** | **Cash cost of  investment** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                           | ** ** | ** **                                            | ** ** | **(in thousands)**                | ** ** |
| **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** |   |   |
| **2004**                                                                             |       |                                                  |       |                                   |       |   |   |   |   |
| Tsaritsino Dairy  Plant (purchase of minority stake)                                 |       |                                                  | 6          |                                   |       |   | $ | 3,406 |   |   |
| Atamanskoe                                                                           |       |                                                  | 88.4       |                                   |       |   | 904 |   |   |
| Ramenskiy Plant  (purchase of minority stake)                                        |       |                                                  | 25         |                                   |       |   | 534 |   |   |
| Fruktopak  (formerly Depsona) (purchase of minority stake)                           |       |                                                  | 5          |                                   |       |   | 129 |   |   |
| Other                                                                                |       |                                                  | various    |                                   |       |   | 344 |   |   |
| **Total**                                                                            |       |                                                  |       |                                   | ** ** | ** ** | **$** | **5,317** |   |   |

 

See “Item 4. Informationon Our Company” for more information on our acquired businesses and Note 4to our Consolidated Financial Statements included elsewhere herein. In additionto the acquisitions mentioned above, as of December 31, 2006, we alsoissued a cash advance for the further purchases of minority stakes in certainof our legal entities, which are not included in the summary table above.

**Capital Resources**

We generally rely onoperating cash flows and debt issuance to finance capital expenditures andacquisitions. In addition, we finance a portion of our equipment purchasesthrough vendor financings. The 

92

----

availabilityof external financing is influenced by many factors, including our financialposition and market conditions. Under certain circumstances, we may be requiredto repay certain 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**

Ourdebt consists of notes, bank loans and vendor financing for property, plant andequipment, of which 81% are at fixed rates. The following table summarizes ourdebt position as of December 31, 2006 and 2005:

| ** **                                 | ** ** | **At December 31,  2006** | ** ** | **At December 31,  2005** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                                 | ** ** | **(in thousands)**             | ** ** |
| Long-tem debt,  including current portion: |       |                                |       |                                |       |   |   |   |   |
| Notes                                      |       |                                | $          | 248,742                             |       |   |   | $ | 304,024 |   |   |
| Bank loans                                 |       |                                | $          | 34,219                              |       |   |   | $ | 5,647 |   |   |
| Vendor financing                           |       |                                | $          | 36,189                              |       |   |   | $ | 42,421 |   |   |
| Total                                      |       |                                | $          | 319,150                             |       |   |   | $ | 352,092 |   |   |
| Short-term debt                            |       |                                | $          | 123,849                             |       |   |   | $ | 19,554 |   |   |
| Total debt(1)                              |       |                                | $          | 442,999                             |       |   |   | $ | 371,646 |   |   |
| **Denominated in:**                        |       |                                |       |                                |       |   |   |   |   |
| U.S. dollars                               |       |                                | $          | 171,013                             |       |   |   | $ | 180,689 |   |   |
| Euro                                       |       |                                | $          | 21,702                              |       |   |   | $ | 15,081 |   |   |
| Rubles                                     |       |                                | $          | 250,284                             |       |   |   | $ | 175,876 |   |   |

----

(1)          In November and December 2006,we raised $120.5 million in short-term loans primarily to finance ouracquisitions.

Our debt matures as follows:

| **Year**            | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
|---------------------|------------|------------|------------|-------------------------|------------|
| 2007                |       |       | 143,270    |                    |       |
| 2008                |       |       | 167,068    |                    |       |
| 2009                |       |       | 14,744     |                    |       |
| 2010                |       |       | 110,256    |                    |       |
| 2011 and thereafter |       |       | 7,661      |                    |       |

 

**Notes**

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

On May 21, 2003, UBS (Luxembourg) S.A. issued8.5% Loan Participation Notes due 2008 for the sole purpose of funding a $150million loan to WBD Foods. The loan will mature on May 21, 2008 and bearsinterest at an annual rate of 8.5%, payable semi-annually in arrears on May 21and November 21 of each year. Two of our subsidiaries unconditionally,irrevocably, jointly and severally guarantee our obligation under the loan. Theloan agreement contains a number of covenants including requirements tomaintain certain financial ratios.

On February 06, 2007,UBS (Luxembourg) S.A. issued 7.5% Loan Participation Notes due 2008 for thesole purpose of funding a $150 million loan to WBD Foods. The loan will matureon May 14, 2008 and bears interest at an annual rate of 7.5%, payable intwo installments on November 14, 2007 and 

93

----

May 14, 2008.The loan agreement contains a number of covenants including requirements tomaintain certain financial ratios.

***Ruble Notes***

On December 21, 2005, WBD Foods issued 3 millionnon-convertible ruble denominated notes at a face value of 1,000 rubles each.The offering raised a total of 3 billion rubles ($113.9 million at the exchangerate as of December 31, 2006). The notes are redeemable by WBD Foods on December 15,2010. The interest rate of the coupon is 9%. Interest is payable semi-annuallyin arrears commencing on June 21, 2006.

**Bank Loans**

Substantially all of ourlong-term bank loans as of December 31, 2006 consisted of ruble andeuro-denominated loans from Sberbank, Russian Agricultural Bank and Moscow CityGovernment at interest rates ranging from 3.3% to 6.2%. Our short-term debtbalance as of December 31, 2006 consisted of subsidized loans fromAlfa-bank and the Moscow City Government at interest rates ranging from 3.5% to3.8%. We also had loans from the International Moscow Bank, Raiffaisenbank andAlfa-bank at interest rates ranging from 7.8% to 9.1%. Our newly acquiredManros and Molka plants have unsubsidized loans at interest rates ranging from9.3% to 14.0%.

**Vendor Finance**

We have agreements withsuppliers of equipment which provide financing for the periods ranging from 1to 9 years. As of December 31, 2006 and 2005, vendor financing obligationswere $21.0 million and $29.7 million, respectively, EURO 10.6 million andEURO 10 million (equivalent to $14.0 million and $11.9 million as of December 31,2006 and 2005, respectively) 30.9 million rubles and 23.2 million rubles(equivalent to $1.2 million and $0.8 million as of December 31, 2006 and2005, respectively). This financing is provided at interest rates of LIBOR plus1.5%, EURIBOR plus 1.5% and 14.0% for U.S. dollar, EURO and ruble denominatedcontracts, respectively. The majority of equipment financing is provided by onesupplier, Tetra Pak. As of December 31, 2006 and 2005, property, plant andequipment amounting to $33.1 million and $47.7 million, respectively, served ascollateral under these financing agreements.

**Cash Flows**

Asummary of our cash flows from continuing operations is as follows:

| ** **                                                        | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                        | ** ** | **(in thousands)**                    | ** ** |
| Cash provided by  operating activities                            |       | $                                          | 167,252    |   | $ | 113,937 |   | $ | 71,720 |   |
| Cash used in  investing activities                                |       | (228,158                                   | )          | (125,157 | ) | (73,808 | ) |
| Cash provided  (used in) by financing activities                  |       | 1,359                                      |       | 82,619 |   | (16,159 | ) |
| Impact of  exchange rate differences on cash and cash equivalents |       | 6,754                                      |       | (2,087 | ) | 1,774 |   |
| Net increase  (decrease) in cash                                  |       | (52,793                                    | )          | 69,312 |   | (16,473 | ) |
| Cash paid for acquisition of property, plant and  equipment       |       | $                                          | (127,713   | ) | $ | (72,805 | ) | $ | (68,103 | ) |
| Cash paid for  acquisition of subsidiaries, net of cash acquired  |       | (134,367                                   | )          | (24,964 | ) | (6,697 | ) |
| Vendor financed  acquisitions of property, plant and equipment    |       | 5,561                                      |       | 5,709 |   | 7,335 |   |

 

94

----

In 2006, we financed our capital expenditures andacquisitions exclusively through operating cash flows.

We spent $228.2 million on our investment activitiesin 2006, including acquisitions of property, plant and equipment of $127.7million, acquisitions of subsidiaries of $134.4 million and investments indirect financing leases of $1.5 million, offset by $33.1 million proceeds fromreturn of short-term bank deposits, $0.9 million proceeds from disposal of property,plant and equipment and $1.4 million proceeds from other long-term assets.

Vendor financed acquisitions of property, plant andequipment totaled $5.6 million in 2006 compared to $5.7 million in 2005because of an overall reduction in our vendor financed capital expenditures,including the improvement of packaging facilities. Instead, we are shifting ourcapital expenditures towards construction and installation projects, which aretypically not vendor-financed.

Net cash provided byoperating activities in 2006 was $167.3 million, compared to$113.9 million in 2005. The increase in 2006 was due to profitable growthand better management of our working capital, including a reduction of taxreceivables balance.

**Working Capital**

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

As of December 31, 2006, our cash and cashequivalents balance was $40.3 million, of which $39.2 million wasruble-denominated and $1.1 million were euro and U.S. dollar-denominated. Weused cash to repay our ruble notes redeemable on April 11, 2006 and partlyfinance acquisitions in the fourth quarter of 2006. Our working capital balancewas $90.4 million. Our working capital position as of December 31, 2006decreased compared to $199.9 million as of December 31, 2005primarily due to an increase in trade accounts payable and short-term loans,outpacing trade receivables and inventory growth. We believe that our workingcapital is sufficient for our present requirements.

Tax receivables decreased by $10.3 million to $51.2million as of December 31, 2006 from $61.5 million as of December 31,2005. Tax receivables represent VAT and other taxes owed to us by the statebudget. The decrease as of December 31, 2006 was primarily due to ourrecovery of certain VAT receivables from the state budget for previous years.Under existing tax legislation, we are able to offset this VAT against incometaxes and other taxes payable to the state budget and to recover from the statebudget. We are taking all legally available steps, including filing litigationclaims, to facilitate the recovery of tax receivables from the state budget. In2006, $31.2 million in VAT tax was recovered from the state budget in cash and$9.4 million was reimbursed by an offset. We also received $1.97 million fromthe tax authorities as interest that was accrued on the amount of VAT notrefunded within the established time limit.

Trade accounts payables increased to $104.1 million atDecember 31, 2006 from $65.8 million at December 31, 2005. Tradepayables turnover averaged 26 days as of December 31, 2006 and24 days as of December 31, 2005.

Trade receivables increased from $60.0 million asof December 31, 2005 to $89.9 million as of December 31, 2006 afterthe allowance for bad debts of $7.1 million, as compared to $5.1 millionas of December 31, 2005. Trade receivables turnover averaged 16 days as ofDecember 31, 2006 and 16 days as of December 31, 2005.

Inventory increased from$130.6 million as of December 31, 2005 to $174.1 million as of December 31,2006. Turnover of inventory in days as of December 31, 2006 amounted to 47days, as compared to 56 days as of December 31, 2005. The increase ininventory levels was mainly due to an increase in our stock of 

95

----

finishedgoods as a result of adding Manros and Ochakovo dairy plants to our balancesheet at the end of 2006.

**Credit RatingDiscussion**

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

Ourcredit ratings as of the date of this document are as follows:

| **Rating Agency**              | ** ** | ** ** | ** ** | **Company’s rating** | ** ** | **Long-Term Debt Rating** | ** ** | **Outlook/Watch** | ** ** |
|-------------------------------------|------------|------------|------------|--------------------------------|------------|-------------------------------------|------------|-------------------|------------|
| Moody’s(1)                     |       |       | B1    |                           |       |                                | B1    |              |       |   | positive |   |   |
| Standard &  Poor’s(2) |       |       | B+         |                           |       |                                | B+         |              |       |   | positive |   |   |

----

(1)          Rated on March 29,2007.

(2)          Rated on December 23,2005.

The two loan agreementsrelating to each of our two $150 million loan participation notes due 2008contain, in each case, provisions requiring, subject to certain conditions, ourprepayment of the loan in full in the event that a change in control or mergerresults in a decline in our credit ratings

**Critical AccountingPolicies and Estimates**

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

**Estimates andassumptions**

The preparation of the consolidated financialstatements in conformity with U.S. GAAP requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities atthe date of the consolidated financial statements and the reported amounts ofrevenues and expenses during the reporting period. Examples include estimatesof provisions for bad and doubtful accounts, obsolete inventory, and valuationallowance for deferred tax assets. Actual results could differ from thoseestimates.

96

----

**Allowance forDoubtful Accounts**

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

**Accounting forIncome Taxes**

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

**Inventory Valuation**

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

**Depreciationperiods for property, plant and equipment**

Depreciation periods ofproperty, plant and equipment are based on estimated useful lives of relatedassets. The adoption of depreciation periods requires judgment in determiningappropriate estimated useful lives over which the related assets will beutilized. In estimating useful lives, we consider factors such as ourhistorical experience and the industry, manufacturers’ estimates, anticipateduse and our maintenance policies. As these factors change, management estimatesmay change and we could be required to reassess depreciation periods forproperty, plant and equipment and consider impairment.

**Impairment ofGoodwill and Long-Lived Assets**

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

For purposes ofdetermining goodwill recognition, we perform a review for possible impairmentof goodwill at least on an annual basis at the reporting unit level. If thefair value of the reporting unit is less 

97

----

than thecarrying amount of the reporting unit including goodwill, we would thencalculate the impairment loss as the excess of the carrying value of thegoodwill over its implied fair value, which is to be recognized in same manneras the amount of goodwill is recognized in a business combination.

**AccountingPronouncements Issued But Not Yet Adopted**

In July 2006, the Financial Accounting Standard Board(“the FASB”) issued FASB Interpretation No. 48 (“FIN 48”) Accounting forUncertainty in Income Taxes, an interpretation of SFAS No. 109, Accounting forIncome Taxes. FIN 48 clarifies the accounting for income taxes by prescribingthe minimum recognition threshold a tax position is required to meet beforebeing recognized in the financial statements. FIN 48 also provides guidance onderecognition, measurement, classification, interest and penalties, accountingin interim periods, disclosure and transition. In addition, FIN 48 clearlyscopes out income taxes from Financial Accounting Standards Board Statement No.5, “Accounting for Contingencies”. 

The adoption of the provisions of FIN 48 did not havematerial impact on our financial position and results of operations. 

In February 2006, the FASB issued “Statement ofFinancial Accounting Standard” (SFAS) No. 155 “Accounting for CertainHybrid Financial Instruments,” which amends SFASs No. 133, “Accounting forDerivative Instruments and Hedging Activities,” and No. 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities.” 

This Statement resolves issues addressed in Statement133 Implementation Issue No. D1, “Application of Statement 133 toBeneficial Interests in Securitized Financial Assets.”

SFAS No. 155 permits fair value remeasurement forany hybrid financial instrument that contains an embedded derivative thatotherwise would require bifurcation, clarifies which interest-only strips andprincipal-only strips are not subject to the requirements of Statement 133,establishes a requirement to evaluate interests in securitized financial assetsto identify interests that are freestanding derivatives or that are hybridfinancial instruments that contain an embedded derivative requiring bifurcationand clarifies that concentrations of credit risk in the form of subordinationare not embedded derivatives. SFAS No. 155 amends Statement 140 toeliminate the prohibition on a qualifying special purpose entity from holding aderivative financial instrument that pertains to a beneficial interest otherthan another derivative financial instrument. These provisions of SFASNo. 155 are effective for all financial instruments acquired or issuedafter the beginning of an entity’s first fiscal year that begins afterSeptember 15, 2006. The adoption of the provisions of SFAS No. 155 isnot expected to have an impact on our results of operations, financial positionor cash flows.

In March 2006, the FASB issued SFAS No. 156,Accounting for Servicing of Financial Assets, which amends SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishmentsof Liabilities. 

This Statement requires that all separately recognizedservicing assets and servicing liabilities be initially measured at fair value,if practicable. This Statement permits, but does not require, the subsequentmeasurement of servicing assets and servicing liabilities at fair value. Anentity that uses derivative instruments to mitigate the risks inherent inservicing assets and servicing liabilities is required to account for thosederivative instruments at fair value. These provisions of SFAS No. 156 areeffective at the beginning of an entity’s first fiscal year that begins afterSeptember 15, 2006. The adoption of the provisions of SFAS No. 156 is notexpected to have an impact on our results of operations, financial position orcash flows. 

In September 2006, the FASB issued SFAS No. 157, FairValue Measurements.

98

----

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.

This Statement is effective for financial statementsissued for fiscal years beginning after November 15, 2007, and interimperiods within those fiscal years.

In September 2006, the FASB issued SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans, which amends SFASs No. 87, 88, 106 and 132(R). 

This Statement improves financial reporting byrequiring an employer to recognize the overfunded or underfunded status of adefined benefit postretirement plan (other than a multiemployer plan) as anasset or liability in its statement of financial position and to recognizechanges in that funded status in the year in which the changes occur throughcomprehensive income of a business entity or changes in unrestricted net assetsof a not-for-profit organization. An employer with publicly traded equitysecurities is required to initially recognize the funded status of a definedbenefit postretirement plan and to provide the required disclosures as of theend of the fiscal year ending after December 15, 2006.

The adoption of the provisions of SFAS No. 158 is notexpected to have an impact on our results of operations, financial position orcash flows as the we do not have a defined benefit postretirement plan.

In February 2007, the FASB issued SFAS No. 159, TheFair Value Option for Financial Assets and Financial Liabilities—including anamendment of SFAS No. 115. 

This Statement permits entities to choose to measuremany financial instruments and certain other items at fair value. The objectiveis to improve financial reporting by providing entities with the opportunity tomitigate volatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions. This Statement is effective as of the beginning of an entity’sfirst fiscal year that begins after November 15, 2007; however, early adoptionis allowed.

The adoption of theprovisions of SFAS No. 159 is not expected to have an impact on the our resultsof operations, financial position or cash flows. 

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

We invest significant financial and human resources innew product development, focusing on long-term strategic projects aimed atcreating innovative products and technologies. Our research and developmentdepartment focuses on new project development for all three of our businesssegments. It is located at Lianozovsky Dairy Plant and has more than 40employees. 

A new structure uniting all quality controldepartments has also been put in place and is presently located at LianozovskyDairy Plant. These departments often cooperate with third parties such asRussian research institutions, specialized research firms and suppliers. In2006, 2005 and 2004, we spent approximately $1.5 million, $1.3 million and $0.6million on activities associated with new product development. For a moredetailed discussion of new product development see “Item 4. Information on OurCompany—B. Business Overview—New Product Development.”

99

----

**D.**              TrendInformation 

**Markets**

The Russian economy continues to experience growth,with gross domestic product growing at rates of 6.7%, 6.4% and 7.1% in 2006,2005 and 2004, respectively. Disposable income also continues to grow, althoughdisposable income levels in the regions will continue to lag behind Moscowlevels. We believe these macroeconomic improvements in Russia are supportingthe favorable industry trends we have seen. Dairy consumption is shiftingtowards packaged products whereas the share of unpackaged dairy products issteadily decreasing. In addition, consumers in Russia have, in recent years,been demanding more juice-containing, dessert and enriched products. 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.The dairy industry is also seeing the stronger presence of small regionalproducers. 

In 2005 and 2006, demandfor baby food products increased significantly and, as a result, we created aseparate baby food segment. Prior to 2005, baby food was part of our dairysegment. We believe that the baby food market, which increased by 29% in termsof value in 2005 and continued to grow in 2006 driven mainly by stronger salesin the regional markets. However, we also expect that the baby food market willbecome more competitive in the near future, which could negatively impact ourprofit margins.

**Dairy Segment**

In recent years, raw milk volumes decreased in Russia mainlydue to livestock reduction. However, in 2006, the raw milk supply increased by0.6% compared to 2005 due to significant investments into farm development bymajor dairy producers, enhanced effectiveness of cattle-breeding methods, theapplication of modern technologies by Russian farms and the National Program ofAgro-Industrial Development, a government sponsored initiative offeringinterest free loans for the development of agriculture and the creation oflarge farming enterprises and regional milk collection centers.     

Although domestic raw milk production increased onlyby 0.6% in 2006, industry experts estimate that the Russian dairy market grewby 6.8% in 2006. The most significant growth was seen in UHT milk, dairydesserts and cheese..

Our market leadership in the Russian dairy marketdepends on adaptation to a rapidly changing marketplace. The emergence of amiddle class, not only in Moscow and a handful of large cities, but across thecountry is translating into greater health awareness and busier lifestyles.According to Rosstat, by 2010, 54% of the population will be classified asmiddle (monthly incomes of US$500 or higher) or lower middle class (monthlyincomes of US$250 or higher), compared to 41% in 2005. The value growth of thedairy market is expected to rise faster than volume growth, with 12% valuegrowth and 4% volume growth projected for 2007(based on our estimates andmarket data). 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 marketcontinued to shift in 2006, with dairy product sales increasing in regionalmarkets at a more rapid rate than in Moscow and the Central region of Russia.We expect that the growth in regional dairy sales will continue to outpacegrowth in Moscow during 2007.

100

----

A focus on core dairybrands is essential going forward. We were the twelfth largest televisionadvertiser overall in 2006. As advertising rates continue to rise aboveinflation, our marketing efforts will aim to be more effective and targeted,conveying key values of health and wellness.

**Beverages Segment**

At the end of 2006, we witnessed price increases injuice concentrate and other ingredients resulting, in part, from bad harvestsand poor weather conditions in juice-concentrate producing regions. We expectsubstantial price increases for juice concentrate and other materials during2007, which would have a negative impact on our profit margins in the beveragessegment. Also, as the ruble has appreciated against the US dollar in 2006 and asignificant part of our concentrate and packaging materials is denominated inUS dollars, such costs of juice production were lower in 2006 than in 2005.

Average selling prices of our juice products increasedduring 2006. We expect further increases in juice sales prices in ruble termsin 2007. 

In 2005, in order to increase our presence in theregions through engaging lower-middle income consumers, we successfullyre-launched the “Lovely Garden” brand. We sponsored and promoted the brandthrough television commercial and print advertisements in 2005 and 2006, whichresulted in steady sales growth of the “Lovely Garden” juices and nectars.Although we expect further growth of juice sales in the lower-middle segment,we believe that average selling prices in the regions will generally continueto be lower than average selling prices in Moscow and St. Petersburg due to theconsumer preferences in the regions, where household incomes are typicallylower, for lower priced products, which have a negative effect on our grossmargin. For the Central region of Russia where incomes are higher, we arefocusing our efforts on providing beverage products in the upper-middle andpremium segments.

We entered the mineral water market in 2003. Weestimate that the mineral water market in Russia is growing annually atapproximately 10% in volume. Our water offerings include the premium“Essentuki” brand, which is traditionally known to be used for medicalpurposes.

The increase in the costof raw materials and packaging is expected to be substantial in 2007. Theseincreased costs coupled with an increase in transportation and promotional andmarketing expenses could negatively impact our profit margins and operatingincome in the beverages segment.

**Baby Food Segment**

Baby food consumption in Russia is growing due toincreased health awareness and knowledge of the critical importance of propernutrition in the earliest years for later life. Currently, higher and uppermiddle income groups are driving consumption, with income growth expandingdemand for healthy, specialized products for babies across Russia.

With a fast-growing middle class, Russian per capitaconsumption of baby food is expected to rapidly catch up with Central andEastern European levels. In addition, purchases by publicly owned institutionssuch as hospitals and children’s homes, as well as targeted state-run programsaimed at childhood nutrition, continue to play an important role, although theshare of government purchases of the overall market is expected to decline.

The baby food market iscurrently relatively fragmented and new players, foreign and domestic, areentering the market. We expect the market to consolidate, and we believe thatwe are well positioned to benefit from consolidation. Expansion into regionalmarkets will require increased marketing and sales expenditure as well as increasedtransportation costs. We continue to review options for expanding our baby foodproduction capacity in terms of volume and type of production as well asgeographic location. 

101

----

**Selling andDistribution Expenses**

Our selling anddistribution costs increased in 2006 as compared to 2005 in absolute terms andas a percentage of sales. In particular, our transportation, personnel andadvertising costs increased, in large part, as a result of our regionalexpansion program. Advertising costs were also driven upwards by increases inprices charged by the media. Similarly, increased transportation costs weredriven by increased transportation tariffs. We expect these trends to continueand, to the extent that they do, such expenses may outpace our sales growth.

**Exchange Rates andInflation**

A significant part of our costs and expenditures, aswell as liabilities, are either denominated in or tightly linked to the U.S.dollar and the Euro. These include capital expenditures and borrowings, as wellas costs of packaging materials, juice concentrates and certain other rawmaterials. As a result, a decline in the value of the ruble against the U.S.dollar or the Euro can adversely affect us by increasing our costs in rubleterms. If we cannot increase our ruble selling prices in line with the ruble’sdecline in value due to competitive pressures, our margins will suffer.Additionally, if the ruble declines and prices cannot keep pace, we could havedifficulty covering our U.S. dollar-denominated or Euro-denominated costs orrepaying our U.S. dollar-denominated or Euro-denominated indebtedness. Innominal terms, the ruble appreciated against the U.S. dollar in 2006 (4.0%),2005 (1.9%) and 2004 (6.5%), according to the Central Bank of Russia.

Certain of our costs, such as salaries and supplies,are also sensitive to rises in the general price level in Russia. Inflation inRussia for 2006 and 2005 was 9.7% and 10.9%, respectively. In the future, dueto competitive pressures, we may not be able to raise the prices for our productssufficiently to preserve operating margins. Accordingly, high rates ofinflation could increase our costs and decrease our operating margins.

Real appreciation of theruble against the U.S. dollar positively affects our revenues. According to theCentral Bank of Russia, the ruble appreciated in real terms against the U.S.dollar by 10.7%, 10.8% and 15.1% in 2006, 2005 and 2004, respectively.

**E.**               Off-balanceSheet Arrangements

As of December 31,2006, we did not have any off-balance sheet arrangements.

**F.**                ContractualObligations

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

Thefollowing table summarizes our future obligations and commitments under thesecontracts due by the periods indicated as of December 31, 2006:

| ** **                          | ** ** | **Payments due by periods  At December 31, 2006** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **Contractual Obligations**    | ** ** | ** **                                                                      | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After  5 years** | ** ** |
| ** **                          | ** ** | **(in thousands)**                                                         | ** ** |
| Notes payable                       |       | 248,742                                                                         |       |   | — |   |   | 150,000 |   | 98,742 |   |   | — |   |   |
| Vendor financing  obligations       |       | 36,189                                                                          |       |   | 15,284 |   |   | 18,575 |   | 2,330 |   |   | — |   |   |
| Long-term loans                     |       | 34,219                                                                          |       |   | 4,137 |   |   | 13,237 |   | 16,845 |   |   | — |   |   |
| Unconditional  purchase obligations |       | 10,078                                                                          |       |   | 10,078 |   |   | — |   | — |   |   | — |   |   |
| Short-term loans                    |       | 123,849                                                                         |       |   | 123,849 |   |   | — |   | — |   |   | — |   |   |
| Total                               |       | 453,077                                                                         |       |   | 153,348 |   |   | 181,812 |   | 117,917 |   |   | — |   |   |
|                                     |            |                                                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

102

----

Interest payable for thefuture periods is not included. We do not have any contingent commitments as atDecember 31, 2006. For additional information, see “Item 11. Quantitativeand Qualitative Disclosures about Market Risk—Interest Rate Risk.”

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

**A.**                Directorsand Senior Management

Our directors andexecutive officers, and their respective ages and positions as of the date ofthis 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)(3)         |       |       | 1952       |                        |       | Director                                                          |       |
| Mikhail V.  Dubinin(1)        |       |       | 1969       |                        |       | Director                                                          |       |
| Michael A.  O’Neill(3)   |       |       | 1945       |                        |       | Director                                                          |       |
| Alexander S.  Orlov(1)        |       |       | 1948       |                        |       | Director                                                          |       |
| Vladimir N.  Sherbak(2)(3)    |       |       | 1939       |                        |       | Director                                                          |       |
| Earnest Linwood  Tipton(2)(3) |       |       | 1934       |                        |       | Director                                                          |       |
| Victor A.  Tutelyan(3)        |       |       | 1942       |                        |       | Director                                                          |       |
| Evgeny G. Yasin(3)            |       |       | 1934       |                        |       | Director                                                          |       |
| Gavril A.  Yushvaev(1)        |       |       | 1957       |                        |       | Director                                                          |       |
| Tony D. Maher                 |       |       | 1956       |                        |       | Chief  Executive Officer, Chairman of the Management Board        |       |
| Dmitry A.  Anisimov           |       |       | 1971       |                        |       | Chief  Financial Officer, Management Board Member                 |       |
| Vera V. Eliseeva              |       |       | 1958       |                        |       | Head  of Human Resources, Management Board Member                 |       |
| Marina G. Kagan               |       |       | 1968       |                        |       | Head  of Public Affairs, Management Board Member                  |       |
| Gennady K.  Krainov           |       |       | 1951       |                        |       | Head  of Asset Protection Department, Management Board Member     |       |
| Oleg E. Kuzmin                |       |       | 1969       |                        |       | Head  of Dairy Business Unit, Management Board Member             |       |
| Silviu Popovici               |       |       | 1968       |                        |       | Head  of Beverages Business Unit, Management Board Member         |       |
| Grant Winterton               |       |       | 1970       |                        |       | Group  Head of Marketing and Innovations, Management Board Member |       |
| Garry Sobel                   |       |       | 1967       |                        |       | Head of Baby Food  Business Unit                                  |       |

----

(1)          Party to the Amended andRestated Partnership and Cooperation Agreement. See “Item 7. MajorShareholders and Related Party Transactions—B. Related Party Transactions” and“Item 3. 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.”

(2)          Member of the AuditCommittee.

(3)          Independent Director.

103

----

**David Iakobachvili** has served asChairman of Wimm-Bill-Dann’s Board of Directors since May 2001. He alsoserves on the board of directors of a number of businesses that he foundedand developed into large agricultural, real estate and entertainment holdings,namely RusAgroProject CJSC, Agrocomplex Gorki-2 CJSC, Mill Plant #4 OJSC, EiskPort Elevator OJSC and Metelitsa-Club CJSC. He also serves as the directorof Airport Financial Services Limited, a company that provides financialservices. Mr. Iakobachvili also serves on the board of directors of anumber of our subsidiaries: Moscow Baby Food Plant OJSC, Vladivostok DairyPlant OJSC, Wimm-Bill-Dann Ukraine OJSC, Bishkeksut OJSC, Timashevsk DairyPlant OJSC, Wimm-Bill-Dann Beverages OJSC and Gulkevichi Creamery CJSC. Inaddition he serves on the boards of a number of national andinternational organizations, including non-commercial partnershipRusBrand, Russian Union of Industrialists and Entrepreneurs, RussianChamber of Commerce and Industry, National Corporate Governance Council,Russian-American Business Council, Russo-British Chamber of Commerce,Senate of Economic Advisers of the European Democracy Forum, WorldEconomic Forum and Monaco World Summit. 

**Sergei A. Plastinin** has servedas a member of Wimm-Bill-Dann’s Board of Directors since May 2001. Heserved as the Chairman of the Management Board, which is the chiefexecutive officer position, from 2001 to April 2006. Mr. Plastinin is also afounder 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 serves on the boardof directors of a number of our subsidiaries: Wimm-Bill-Dann Beverages OJSC,Timashevsk Dairy Plant OJSC, Vladivostok Dairy Plant OJSC, Wimm-Bill-DannUkraine OJSC, Bishkekesut OJSC, Karasuk CJSC and Gulkevichi Creamery CJSC.

**Guy de Selliers** has served as amember of Wimm-Bill-Dann’s Board of Directors since December 2001.Currently, Mr. de Selliers serves as a member of the board of directorsand a Chairman of the Audit Committee at Norilsk Nickel OJSC and a memberof the board of directors of furniture manufacturer Shatura OJSC andAllied 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, HBAdvisers (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 asa member of Wimm-Bill-Dann’s Board of Directors since May 2001. Currently,Mr. Dubinin serves on the board of directors of several real estatecompanies that he founded or co-founded, namely Istra Springs LLC, NadezhnyFundament LLC, Petri-trade LLC, Cliff-Real Estate LLC, Non-commercial partnershipBenelux Residence, non-commercial organization International community councilon “Golden Falcon” order awarding. 

**MichaelA. O'Neill**has served as a member of Wimm-Bill-Dann’s Board of Directors since December 2001.Currently, Mr. O'Neil serves as chief executive officer of Coca-Cola Icecek in Turkey. He also serveson the board of directors of Efes Breweries International. From 1989 to 2000,Mr. O'Neill held various executive positions within the Coca-Cola Company. Hereceived a degree in Industrial Engineering from the College of CommerceRathmines in 1967.

**Alexander S. Orlov** has served asa member of Wimm-Bill-Dann’s Board of Directors since May 2001. From 1992and 1997, he was director of the dairy department and the general director ofthe Moscow Baby Food Plant. From 1997 to 1998, he was general directorof the Lianozovsky Dairy Plant. Mr. Orlov graduated from the Moscow TechnologyInstitute of Meat and Dairy Industry in 1975.

104

----

**VladimirN. Sherbak**has served as a member of Wimm-Bill-Dann’s Board of Directors since May 2001.From 1996 to 2000, Mr. Sherbak was Deputy Minister of Agriculture of theRussian Federation. He graduated from Krasnodar Polytechnic Institute in1966 and the Academy of Social Science in 1982. 

**Earnest Linwood Tipton**has served as a member of Wimm-Bill-Dann’s Board of Directors since May 2002.He has held various posts at the U.S. International Dairy FoodAssociation (IDFA) and its organizations for over 35 years, culminatingwith his appointment to president and chief executive officer in 1983. Priorto joining IDFA, Mr. Tipton worked as an economist for a milk producers’cooperative and as a dairy economic consultant. He also served as anofficer in the U.S. Army Finance Corp. and holds Bachelor’s and Master’sdegrees from the University of Missouri.

**VictorA. Tutelyan**has served as a member of Wimm-Bill-Dann’s Board of Directors since December 2001.Currently, Mr. Tutelyan is the head of the Institute of Nutrition of theRussian Academy of Medical Science. He is an academician of theRussian Academy of Medical Science and has been the chief secretary of itsPresidium since 2000. From 1980 to 2000, Mr. Tutelyan was the DeputyDirector of the Institute of Nutrition of the Russian Academy of MedicalScience. He graduated from the Moscow Medical Institute in 1965.

**EvgenyG. Yasin** hasserved as a member of Wimm-Bill-Dann’s Board of Directors since December 2001.He has been a professor of the State University—High School of Economics sinceJuly 1998. Mr. Yasin also serves on the board of directors in a number ofbusinesses, namely Seversta’l—Auto, Otkrytie Investitsii OJSC, Echo ofMoscow CJSC and Insurance Group Alfainsurance. He also serves as the presidentof non-governmental fund Expert Institute. From 1994 to 1998, Mr. Yasin was Russia’s Minister of the Economy. Hegraduated from the Hydrotechnical Institute in 1957 with a degree inengineering and in 1963 from Moscow State University with a degree ineconomics.

**Gavril A. Yushvaev**has served asa member of Wimm-Bill-Dann’s Board of Directors since June 2005. He alsoserves as a member of the board of directors of a number of businessesthat he founded and developed into large agricultural and real estate holdings,namely RusAgroProject CJSC, Agrocomplex Gorki-2 CJSC, Mill Plant #4 OJSC, EiskPort Elevator OJSC and Cattle Farm Naroosanovsky OJSC. Mr. Yushvaev alsoserves as the president of RusAgroProject CJSC.

**TonyD. Maher** hasserved as Wimm-Bill-Dann’s Chief Executive Officer and Chairman of theManagement Board since April 2006. Prior to joining Wimm-Bill-Dann, he servedas chairman of the board of directors of Multon, a Russian juice company. Healso held a variety of senior positions in Western, Central and EasternEuropean markets within the Coca-Cola group of companies, including RegionManaging Director for Coca-Cola HBC, one of the largest bottlers ofnon-alcoholic beverages in Europe.

**DmitryA. Anisimov** hasserved as Wimm-Bill-Dann’s Chief Financial Officer and a member of theManagement Board since April 2005. Prior to his appointment, Mr. Anisimovserved as the finance director of the Dairy Business Unit, a position he held sinceMay 2003. He also serves on the board of directors of a number of oursubsidiaries: Tuimazy Dairy Plant OJSC, Wimm-Bill-Dann Ukraine OJSC, BishkeksutOJSC and Karkov Dairy Plant OJSC. Before joining Wimm-Bill-Dann, he served as regional corporate finance managerfor Motorola’s operations in Russia and the CIS from November 1997 to May 2003.Prior to that, he worked for Cadbury Confectionary and British Petroleum PLC.Mr. Anisimov has a degree in economics from the Moscow State Institute ofInternational Relations (MGIMO).

**VeraV. Eliseeva**has served as Wimm-Bill-Dann’s Head of Human Resources and a member of theManagement Board since October 2004. Prior to joining Wimm-Bill-Dann, sheworked for PATHWAYS HR training & consultancy as a senior partner from May2003 to October 2004. She served as the director of human resources for TroikaDialog from November 1999 to April 2003. From September 1997 to November 1999,she worked as a compensation and benefits manager at Nestle Food LLC. Ms.Eliseeva 

105

----

graduated from Moscow State Institute of International Relations (MGIMO)and received a Master’s Degree in business economics from California StateUniversity, Hayward.

**MarinaG. Kagan** hasserved as Wimm-Bill-Dann’s Head of Public Affairs and a member of theManagement Board since May 2004. From 1991 to 1998, Ms. Kagan worked for BBCradio and TV, and served as a Moscow correspondent for the BBC World Service from1995 to 1998. She joined Gavin Anderson & Co, an international investor andpublic relations consultancy in 1998, where she served on the Board ofDirectors until 2001. From 2001 to 2004, Ms. Kagan worked as a partner atShared Value, a London-based international financial public relations andinvestor relations firm. Ms. Kagan graduated from Westminster University inLondon, England.

**GennadyK. Krainov** hasserved as Wimm-Bill-Dann’s Head of Asset Protection Department since December2003 and as a member of the Management Board since June 2005. From 1975 until2003, Mr. Krainov held managerial positions within national securitybodies and at the tax police. He also worked for the Russian External TradeMinistry and Chamber of Commerce and Industry. Mr. Krainov graduated from theMoscow Geology Institute and the Higher School of Committee for State Security,where he received a legal degree.

**OlegE. Kuzmin** hasserved as Wimm-Bill-Dann’s Head of Dairy Business Unit since August 2004 and asa member of the Management Board since 2005. Mr. Kuzmin serves on theboard of directors of a number of our subsidiaries: Kharkov Dairy Plant OJSC,Wimm-Bill-Dann Ukraine OJSC, Tuimazy Dairy Plant OJSC, Bishkeksut OJSC, KarasukCJSC, Buryn Dairy Plant OJSC and Obninsk Dairy Plant OJSC. He also serves as chiefexecutive officer of our subsidiaries Wimm-Bill-Dann OJSC and Moscow Baby FoodPlant OJSC. Mr. Kuzmin hasbeen employed by Wimm-Bill-Dann since 1995. From September 2003 to August 2004,he was head of operations of the dairy business unit. Prior to that, he servedin various managerial positions, including head of the cheese project, directorof the Nizhny Novgorod Dairy Plant, strategy director of the Lianozovsky DairyPlant and marketing director of Wimm-Bill-Dann’s Trading Company. Mr. Kuzmingraduated from Moscow State Bauman Technical University and Moscow StateUniversity. He also received an MBA from the Academy of the National Economy ofthe Government of the Russian Federation.

**Silviu Popovici** hasserved as Wimm-Bill-Dann’s Head of Beverages Business Unit since September 2006and as a member of the Management Board since May 2007. Mr. Popovici hasextensive experience in sales, marketing, operations and general managementwith Bristol-Myers Squibb and Coca-Cola in Romania, Russia and Ukraine. In thetwo and a half years before he joined the company, Mr. Popovici worked ascountry manager for Coca-Cola HBC Ukraine. He has a degree in physics from theUniversity of Bucharest and is currently completing an MBA at the LondonBusiness School in the UK.

**Grant Winterton**hasserved as Wimm-Bill-Dann’s Group Head of Marketing and Innovations sinceNovember 2006 and as a member of the Management Board since May 2007. He hasextensive experience in marketing and sales with multinational companies,including Wella Haircare, Campbell Soup Company (Arnotts Snacking) andCoca-Cola in Australia, Russia, Ukraine, Belarus and China. He also has dairyindustry experience with three years in both the milk and soft dairy divisionsof National Dairies, Australia’s largest dairy producer. Over the course of 14years before joining Wimm-Bill-Dann, Mr. Winterton worked in a variety ofsenior marketing, sales and managerial positions in these fast-moving consumergoods companies. Mr. Winterton holds a Bachelor of Commerce degree from theUniversity of New South Wales, Australia, where he graduated with a doublemajor in marketing and finance.

**Gary Sobel** has served as Head of Baby Food BusinessUnit since March 2007. Mr. Sobel began his career at Procter and Gamble, whereover 13 years he worked in various positions in Canada, the United States,the United Kingdom and Russia. His experience included working in Procter &Gamble’s Wal*Mart Customer Team, as well as heading up In-store Marketing andNew Product Performance for 

106

----

theirBaby Care Division. He headed Dirol Cadbury (a division of Cadbury Schweppes)in Russia. Mr. Sobel graduated from Concordia University (Montreal,Canada) with honors and received a B.A. in Business Administration, as well asan MBA from the University of Western Ontario (Canada).

All of our directors wereelected on June 30, 2006 and, pursuant to Russian law, their terms willexpire on the date of our next annual shareholders’ meeting, which will takeplace on June 27, 2007.

**B.**               Compensationof Directors and Senior Management 

In 2006, the aggregate amount of compensation to thedirectors and Management Board members of Wimm-Bill-Dann Foods OJSC as a groupfor services in all capacities was $6.5 million. In 2006 the Company enteredinto a share-based award agreement with some of its executives. CommencingApril 2007 Stock Appreciation Rights incentive program linked to ADS hasbeen approved for wider senior management. See Note 3 to our ConsolidatedFinancial Statements included under “Item 18. Financial Statements.”

No funds were set aside for pension, retirement andother similar benefits for the same directors and executive officers as ofDecember 31, 2006.

We compensate each boardof directors member $70,000 annually, plus transportation and lodging expensesincurred in connection with board meeting attendance, and up to $2,000 per yearfor other expenses incurred in connection with board-related activities. TheChairman of the Board is compensated $320,000 annually plus transportation andlodging expenses incurred in connection with board meeting attendance, and upto $2,000 per year for other expenses incurred in connection with board-relatedactivities. We also compensate each member of the Personnel and Compensation Committeeand each member of the Investment and Strategic Planning Committee $3,000 andeach member of the Audit Committee $5,000 for participation in each planneddirect Committee meeting.

**C.**               BoardPractices

**Board of Directors**

Members of our Board of Directors are elected by amajority vote of shareholders at our annual general meeting using a cumulativevoting system. Each director is elected for a term that lasts until the nextannual general meeting and may be re-elected an unlimited number of times. Our Boardof Directors currently consists of eleven members, six of whom are independentdirectors. The Board of Directors has the authority to make overall managementdecisions for the Company, except those matters reserved to the shareholders.See “Item 10. Additional Information—B. Charter and Certain Requirements ofRussian Legislation—General Meetings of Shareholders” for more informationregarding the competence of our shareholders’ meetings. The members of ourBoard of Directors serve pursuant to a contract. The contracts do not providefor benefits to the board members upon termination of their employment. Weindemnify each member of our Board of Directors pursuant to agreements, underwhich we indemnify them against, among others, expenses and costs incurred bythem in connection with any claims, suits or proceedings arising out of or as aresult of their service as a director, subject to certain limitations. Theagreements also limit the liability of the directors to compensate us for anylosses caused by them, as well as our ability to take any action against them,subject to certain exclusions.

The business address forall of our officers and directors is 16 Yauzsky Boulevard, Moscow 109028,Russian Federation.

107

----

**Management Board**

The composition of ourManagement Board, which consists of our executive officers, is determined bythe Board of Directors and currently consists of eight members: Tony D. Maher,Dmitry A. Anisimov, Marina G. Kagan, Vera V. Eliseeva, Oleg E. Kuzmin, GrantWinterton, Silviu Popovici and Gennady K. Krainov. Members of the ManagementBoard are nominated by the Chairman of the Management Board and confirmed byour Board of Directors for a term of three years. The Management Board is thecollective executive body of the Company and, under the direction of theChairman of the Management Board, is responsible for our day-to-day management.We indemnify each member of our Management Board pursuant to agreements, underwhich we indemnify them against, among others, expenses and costs incurred bythem in connection with any claims, suits or proceedings arising out of or as aresult of their service as a Management Board member, subject to certainlimitations. The agreements also limit the liability of the Management Boardmembers to compensate us for any losses caused by them, as well as our abilityto take any action against them, subject to certain exclusions.

**Chairman of the Management Board**

In accordance with ourcurrent charter, the Board of Directors appoints the Chairman of our ManagementBoard, our chief executive officer, for a term of three years, which term weintend to extend to five years by amending our charter. We concluded anemployment contract with the current Chairman of our Management Board for aterm of five years. The rights, obligations and the times and amounts ofpayment for the Chairman’s services are determined pursuant to our charter andby contract. The Chairman of the Management Board is responsible for day-to-daymanagement of our activities.

**Board of Directors Committees**

**Audit Committee**

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

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 financial statements and the processes oftheir preparation;

·       our internal accounting and financial controlsystem;

·       work of the internal audit service andindependent auditors;

·       qualifications and independence of theindependent auditors;

·       our compliance with ethical principles; and

·       requirements of legislative and normative acts.

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

**Investment andStrategic Planning Committee**

The Investment and Strategic Planning Committee of ourBoard of Directors was formed on April 24, 2003 by a decision of our Boardof Directors and functions pursuant to bylaws approved by the Board. It is 

108

----

composed of M. O’Neill, anindependent director who serves as the Committee Chairman, S. Plastinin, M. Dubininand V. Tutelyan. 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.

According to the bylaws,the Investment and Strategic Planning Committee shall meet not less than onceduring each fiscal quarter.

**CorporateGovernance Committee**

Our Board ofDirectors made the decision to establish the Board of Directors’ GovernanceCommittee. Although the Committee’s bylaws and its members have not yet beenapproved, the Board of Directors outlined the main goals and objectives of theGovernance Committee as follows:

·       development and observanceof governance principles and corporate rules of conduct, established by theCompany; and

·       appraisal of director’s independence.

**Personnel andCompensation Committee**

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

·       a uniform personnel policyfor all of our subsidiaries;

·       a personnel appraisal,rotation, dismissal, education and training policy and administrativeaccounting standards;

·       a remuneration andcompensation policy, as well as other incentive programs (stock option andpension plans, social programs); and

·       a corporate ethics andcommunications policy.

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

**Company Committees**

**DisclosureCommittee**

Our Disclosure Committee was formed on March 24,2003 by order of the Chairman of our Management Board. It is currently composedof our Chief Financial Officer, Head of Corporate Communications and InvestorRelations, Head of the Legal Department, Head of the Treasury, Head of InternalAudit, Head of the Dairy Unit, Financial Director of the Dairy Unit, Head ofthe Beverages Unit, Financial Director of the Beverages Unit, Head of the BabyFood Unit, Financial Director of the Baby Food Unit and the Head of theReporting, Budgeting and Analysis Department. The Committee’s activities arecoordinated by a senior investor relations manager.

The Disclosure Committee functions pursuant to bylawsand meets as determined by the Committee. It is directly supervised by andreports to the Chairman of the Management Board and Chief Financial Officer.

109

----

According to itsbylaws, the Disclosure Committee is tasked with:

·       overseeing the gathering,evaluating and reporting of information relating to our disclosure obligations;

·       evaluating our system ofdisclosure controls and procedures; and

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

As set forth in thebylaws, the Disclosure Committee is also responsible for all aspects ofinformation disclosure, including ensuring proper documentary execution,transmission, implementation and performance of our rules and principlesof information disclosure, as well as for coordinating the work of our legaldepartment, external and internal auditors and our other departments for thepurpose of preparation of our annual reports and other disclosure documents inaccordance with applicable law. Furthermore, the head and financial director ofeach of our business units have reviewed this annual report on Form 20-Fand to the best of his knowledge believes the disclosure herein is accurate andcomplete.

**Audit Commission(for financial reporting under Russian law)**

The Audit Commissionverifies the accuracy of our financial reporting under Russian law andgenerally 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 six members. Our Audit Commission operatesin accordance with terms set forth in specific guidelines. The terms of all ofour Audit Commission members expire on the date of our next annualshareholders’ meeting, which will take place in June 2007.

**CorporateGovernance**

We are required under theNew York Stock Exchange listing rules to disclose any significantdifferences between the corporate governance practices that we follow underRussian law and applicable listing standards and those followed by U.S.domestic companies under New York Stock Exchange listing standards. Thisdisclosure is posted on our website http:/ /www.wbd.com/f*_*reports/corp*_*govern/.

**D.**              Employees

In2006, we had an average of 19,325 employees within Russia and the othercountries of the CIS, including 10,811 production employees, 5,355 marketing,sales and distribution employees and 3,159 general and administrativeemployees. We do not employ a significant number of part-time employees. In2006, 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 31,** | ** ** | ** ** | ** ** | **Production** | ** ** | **Marketing  Sales  and  Distribution** | ** ** | **General and  Administrative** | ** ** | **Percent  Increase  (Decrease) over  Prior Year** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|----------------|------------|-----------------------------------------|------------|--------------------------------------|------------|--------------------------------------------------------------|------------|
| 2006(1)                                                               |       |       | 10,811     |           |       |                                    | 5,355      |                                 |       |                                                         | 3,159      |   |   |   | 2 | %(2) |   |
| 2005                                                                  |       |       | 9,766      |           |       |                                    | 5,713      |                                 |       |                                                         | 3,478      |   |   |   | 7 | % |   |
| 2004                                                                  |       |       | 8,561      |           |       |                                    | 6,008      |                                 |       |                                                         | 3,140      |   |   |   | (3 | )% |   |

----

(1)          Excluding employees ofbusinesses we acquired in 2006 (Surgut, Ochakovo, Manros and MOLKA).

110

----

(2)          Despite a workforcereduction of over 900 people in the period from June toDecember 2006, we still had a 2% increase in the average number ofpersonnel in 2006 vs. 2005. This growth was due to an increase in productionpersonnel caused by increasing utilization of manufacturingfacilities in 2006, growing Agro business, and relaunching the plantsacquired in 2005 (Obninsk, Pervouralsk and Nazarovo dairy plants).

Our personnel enjoy arelatively high level of social benefits. We provide subsidies for meals, medicalcare and summer vacations for employees and their children. Our employees haveopportunities to upgrade their qualifications by participating in professionaleducation programs. Starting in 1998, leading managers of our subsidiaries havebeen involved in programs to upgrade their professional skills through aprogram of the Russian government. We seek to maintain effective managementteams at our plants by recruiting qualified new employees, as well as throughcustomized retraining programs and on-site training in our leading plants.Programs for training personnel have been developed and implemented at all ourregional plants as well as sales offices and managing company. In addition, in2005, we created a corporate university to educate and train our personnel,create an internal management pool and provide an opportunity for employees toshare their knowledge and experience as well as an opportunity to advance theircareers. In 2006, we also initiated various HR projects in theCompensation & 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.

**E.**               ShareOwnership

Each ADS is the economic equivalent of one share ofour common stock.

Theaggregate beneficial interest of our directors, senior management and employeesas of June 5, 2007 was as follows:

|  | **Number of Shares of Common Stock** | ** ** | **Number of GDSs** | ** ** | **% Capital Stock Outstanding** | ** ** |
|--|---------------------------------------------------------------|------------|------------------------------|------------|------------------------------------------------|------------|
|  |                                                          | 17,297,734 |                         |       |                                           | 3,187,663  |   |   |   | 47.58 |   |   |
|  |                                                               |            |                              |            |                                                |            |  |  |  |  |  |  |

 

For further description ofthe individual interest of our directors and senior management, see “Item 7. MajorShareholders and Related Party Transactions—A. Major Shareholders.”

111

----

***Item 7.****                          MajorShareholders and Related Party Transactions*

**A.**                MajorShareholders

Thefollowing table sets forth information regarding the beneficial ownership ofour common stock as of June 5, 2007:

| **Name of Beneficial Owner** | ** ** | ** ** | ** ** | **Number of  Shares  Owned** | ** ** | **Percentage  of Shares  Outstanding** | ** ** | **Number of  ADSs/GDSs  Owned** | ** ** | **Percentage  of Shares  Outstanding** | ** ** | **Total Number of  Shares Owned  (Shares +  ADSs/GDSs)** | ** ** | **Total Percentage  of Shares  Outstanding  (Shares +  ADSs/GDSs)** | ** ** |
|---------------------------------------------|------------|------------|------------|-----------------------------------|------------|---------------------------------------------|------------|--------------------------------------|------------|---------------------------------------------|------------|------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| Gavril A.  Yushvaev(1)(2)                   |       | 7,538,624  |       |                              | 17.13      | %                                           |       | 1,020,894                            |       |                                        | 2.32       | %                                                                            |       |                                                                               | 8,559,518  |   |   |   | 19.45 | % |   |
| Sergei A.  Plastinin(1)(2)(3)               |       | 3,139,604  |       |                              | 7.14       | %                                           |       | 636,143                              |       |                                        | 1.45       | %                                                                            |       |                                                                               | 3,775,747  |   |   |   | 8.58 | % |   |
| David  Iakobachvili(1)(2)                   |       | 3,673,476  |       |                              | 8.35       | %                                           |       | 786,039                              |       |                                        | 1.79       | %                                                                            |       |                                                                               | 4,459,515  |   |   |   | 10.14 | % |   |
| Mikhail V.  Dubinin(1)(2)                   |       | 1,809,260  |       |                              | 4.11       | %                                           |       | 357,233                              |       |                                        | 0.81       | %                                                                            |       |                                                                               | 2,166,493  |   |   |   | 4.92 | % |   |
| I.M. Arteks  Holdings Limited(4)            |       | 183,639    |       |                              | 0.42       | %                                           |       | —                               |       |                                        | —     |                                                                         |       |                                                                               | 183,639    |   |   |   | 0.42 | % |   |
| Alexander S.  Orlov(1)(2)                   |       | 1,097,064  |       |                              | 2.49       | %                                           |       | 229,688                              |       |                                        | 0.52       | %                                                                            |       |                                                                               | 1,326,752  |   |   |   | 3.02 | % |   |
| Mikhail I.  Vishnyakov(2)                   |       | 304,512    |       |                              | 0.69       | %                                           |       | 135,488                              |       |                                        | 0.31       | %                                                                            |       |                                                                               | 440,000    |   |   |   | 1.00 | % |   |
| Viktor E.  Evdokimov(2)                     |       | 0.00       |       |                              | 0.00       | %                                           |       | 22,178                               |       |                                        | 0.05       | %                                                                            |       |                                                                               | 22,178     |   |   |   | 0.05 | % |   |
| Other holders of  ordinary shares           |       | 8,658,821  |       |                              | 19.68      | %                                           |       | —                               |       |                                        | —     |                                                                         |       |                                                                               | 8,658,821  |   |   |   | 19.68 | % |   |
| Holders of  American Shares(5)              |       | —     |       |                              | —     |                                        |       | 14,407,337                           |       |                                        | 32.7439    | %                                                                            |       |                                                                               | 14,407,337 |   |   |   | 32.7439 | % |   |
| Total                                       |       | 26,405,000 |       |                              | 60.0114    | %                                           |       | 17,595,000                           |       |                                        | 39.9886    | %                                                                            |       |                                                                               | 44,000,000 |   |   |   | 100.00 | % |   |

----

(1)          Member of our Board of Directors.

(2)          Party to the Amended andRestated Partnership and Cooperation Agreement.

(3)          This figure contains 1%of shares owned by Lendero Ltd. controlled by Sergei A. Plastinin.

(4)          According to a pressrelease issued by I.M. Arteks Holdings Limited, or Arteks, dated 7June 2004, Arteks transferred 5.29%. of our shares to Parex Banka JSC assecurity under a credit agreement, which amount was reduced to 4.92%. Arteks isa party to the Amended and Restated Partnership and Cooperation Agreement. Arteksowned 4.81% of our shares which were held by Parex Banka JSC as security undera credit agreement. On 22 March 2005 Arteks disposed of 0.48% of ourshares. In November 2006 Arteks redeemed all its shares from Parex.

(5)          According to its latestpublic statements and 13D filing, Groupe Danone, together with itssubsidiaries, holds a 13.7% stake in Wimm-Bill-Dann Foods OJSC.

As of June 5, 2007, we had 44,000,000 shares ofcommon stock outstanding. The total number of ADSs outstanding was 14,407,337representing underlying ownership of 14,407,337 shares, or 32.7439% of ouroutstanding shares. The total number of GDSs outstanding was 3,187,663representing underlying ownership of 3,187,663 shares, or 7.2447% of ouroutstanding shares. The shares underlying the ADSs and GDSs are deposited withDeutsche Bank Trust Company Americas and the local custodian is 

112

----

OOO Deutsche Bank.All shares of common stock have the same voting rights. According to CapitalBridge Analytics we have 34 record holders in the U.S., holding ADSs and/orshares comprising at least 0.034% of our total outstanding share capital.

Based on our share register, we believe we are notdirectly or indirectly owned or controlled by another corporation orgovernment, and that there are no arrangements the operation of which mayresult in a change of control. During 2004, 2005 and 2006, there have not beenany significant changes in the percentage ownership held by any majorshareholders except as described below.

In March 2005,certain shareholders in our controlling group of shareholders, some of whom aremembers of our Board of Directors, sold shares held by them amounting toapproximately 3.0% of our total outstanding shares. In February 2006,Mr. Iakobachvili and Gavril Yushvaev, members of our Board of Directorsand members of the controlling group of shareholders, purchased all sharesowned by Evgeny Yaroslavsky, thereby increasing their respective ownershipstakes to 10.12% and 19.45%, respectively. Following the disposal of hisownership stake, Mr. Yaroslavsky ceased to be a party to the Amended andRestated Partnership and Cooperation Agreement. In November 2006, certainshareholders in our controlling group of shareholders, some of whom are membersof our Board of Directors, sold 10.00% of shares, thereby decreasing theirownership to 48.38%. In April 2007, our shareholders Mr. Dubinin,Mr. Orlov and Mr. Plastinin sold 0.25%, 0.15% and 0.43%,respectively. In January and April 2007,Mr. Iakobachvili bought shares totaling 0.02%, increasing hisshareholding up to 10.14% See “Item 3. Key Information—D. Risk Factors—We arecontrolled by a group of shareholders whose interests could conflict with thoseof the holders of our securities.”

**B.**               RelatedParty Transactions

See Note 30 (RelatedParties) to the Consolidated Financial Statements included elsewhere in thisdocument.

**C.**               Interestsof Experts and Counsel

Not applicable.

***Item 8.****                          FinancialInformation*

**A.**                ConsolidatedStatements and Other Financial Information

**8.A.1-4   See“Item 18. Financial Statements.”**

**8.A.5-6**   Not applicable.

**8.A.7   Litigation**

Prior to January 1, 2003, we used certain taxoptimization initiatives, which resulted in tax savings of approximately $3.8million. Although we believe these tax optimization initiatives comply withRussian tax law, the tax authorities may nonetheless challenge such initiativesand attempt to recover the full amount of the savings, as well as seekpenalties. Starting January 1, 2003, we discontinued using these taxoptimization initiatives.

From 2002 to March 2005, certain of our juiceproducing subsidiaries benefited from small enterprise tax legislation. If wehad not taken advantage of this benefit, our tax expenses would have increasedby approximately $9.4 million during this period. None of our subsidiariescurrently takes advantage of the small enterprise tax benefits. However, ourprior 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.

113

----

See also “Item 3. KeyInformation—D. Risk Factors—Risks Relating to Our Financial Condition—If thevarious initiatives we have used to reduce our tax burden and/or ourcalculation of our VAT and profit tax liabilities are successfully challengedby the Russian tax authorities, we will face significant losses associated withthe assessed amount of tax and related interest and penalties, which would havea material impact on our financial condition and results of operations,” “—Theelimination of a tax privilege from which we currently benefit and/or asuccessful challenge by the tax authorities of our use of this tax privilegewould materially adversely affect our results of operations” and “—We are onlyable to conduct banking transactions with a limited number of creditworthyRussian banks, as the Russian banking system remains underdeveloped, andanother banking crisis could place severe liquidity constraints on ourbusiness, materially adversely affecting our business, financial position andresults of operations.”

**8.A.8   DividendDistribution Policy**

We do not have aformal dividend policy, and annual dividend payments, if any, must berecommended by our board of directors and approved by our shareholders. Inparticular, dividends may be paid only out of net profits for the current yearcalculated under Russian accounting principles and as long as the followingconditions have been met:

·       ourcharter capital has been paid in full;

·       thevalue of our net assets, minus the proposed dividend payment, is greater thanthe total of our charter capital and our reserve fund;

·       wehave repurchased all shares from shareholders having the right to demandrepurchase; and

·       weare not, and would not become as the result of payment of dividends, insolvent.

In June 2006 the General Meeting of Shareholdersapproved 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 amountof RUR 2.27 (approximately $0.08) per share.

In December 2006, the General Meeting ofShareholders approved payment of dividends, recommended by the board, for the 9months of 2006 in the amount of RUR 7.86 (approximately $0.30) per share.We have paid to the shareholders all the dividends approved by GM.

In May 2007, the Board recommended the AnnualGeneral Meeting of Shareholders, to be held on June 27, 2007, to approvepayment of dividends for the full year 2006 in the amount of 3.18 RUR(approximately $0.12) per share.

We anticipate that anydividends we may pay in the future on the shares represented by the ADSs willbe declared and paid to the depositary in rubles and will be converted intoU.S. dollars by the depositary and distributed to holders of ADSs, net of thedepositary’s fees and expenses. Accordingly, the value of dividends received byholders of ADSs will be subject to fluctuations in the exchange rate betweenthe ruble and the U.S. dollar. For a discussion of our policy on dividenddistributions, see “Item 10. Additional Information—B. Charter and CertainRequirements of Russian Legislation—Dividends.”

**B.**               SignificantChanges

On February 6, 2007, UBS (Luxembourg) S.A. issued7.5% Loan Participation Notes due 2008 for the sole purpose of funding a $150million loan (the “Loan”) to WBD Foods. The Loan will mature on May 14,2008 and bears interest at an annual rate of 7.5%, payable in two installmentson November 14, 2007 and May 14, 2008. The loan agreement contains anumber of covenants including requirements to maintain certain financialratios.

114

----

OnApril 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, NizhnyNovgorod Dairy Plant, Baltic Milk Dairy Plant, Pag Rodnik, Nazarovo Dairy Plantand Pervouralsk Dairy Plant.

OnMay 29, 2007 we acquired an additional 30.12% stake in the foundingcapital of Obninsk Dairy Plant OJSC, increasing our share to 96.45% of itscharter capital.

On May 31, 2007 the following subsidiaries were mergedinto Wimm-Bill-Dann (formerly Lianozovsky Dairy Plant): Kursk Baby Food Plant,Moscow Baby Food Plant, Timashevsk Dairy Plant, Vladivostok Dairy Plant.

***Item 9.****                          Offerand Listing Details*

(Only items 9.A.4 and 9.Care applicable.)

**A.**                MarketPrice 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;the quarterly high and low market closing prices per ADS for each quarter of2005 and 2006 and the first quarter of 2007; and the annual high and low marketclosing prices per ADS during 2002, 2003, 2004, 2005 and 2006. Also set forthare the high and low market closing prices for shares of our common stock onthe RTS.

| ** **           | ** ** | **Shares of  Common Stock  High** | ** ** | **Shares of  Common Stock  Low** | ** ** | **ADS  High** | ** ** | **ADS  Low** | ** ** |
|----------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|---------------|------------|--------------|------------|
| May 2007        |       |                                        | $          | 67.67                                      |       |          |       | $            | 60.08      |   |   | $ | 84.18 |   | $ | 76.70 |   |
| April 2007      |       |                                        | $          | 69.16                                      |       |          |       | $            | 64.41      |   |   | $ | 85.55 |   | $ | 80.10 |   |
| March 2007      |       |                                        | $          | 67.02                                      |       |          |       | $            | 50.34      |   |   | $ | 79.86 |   | $ | 59.00 |   |
| February 2007   |       |                                        | $          | 56.88                                      |       |          |       | $            | 51.78      |   |   | $ | 69.10 |   | $ | 60.90 |   |
| January 2007    |       |                                        | $          | 52.57                                      |       |          |       | $            | 49.13      |   |   | $ | 65.59 |   | $ | 56.49 |   |
| December 2006   |       |                                        | $          | 56.24                                      |       |          |       | $            | 39.84      |   |   | $ | 66.59 |   | $ | 49.75 |   |
| 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 |   |
| Fourth Quarter  2005 |       |                                        | $          | 18.40                                      |       |          |       | $            | 17.00      |   |   | $ | 24.10 |   | $ | 17.84 |   |
| Third Quarter  2005  |       |                                        | $          | 16.90                                      |       |          |       | $            | 16.90      |   |   | $ | 19.20 |   | $ | 16.42 |   |
| Second Quarter  2005 |       |                                        | $          | 17.60                                      |       |          |       | $            | 16.50      |   |   | $ | 19.81 |   | $ | 16.12 |   |
| First Quarter  2005  |       |                                        | $          | 18.00                                      |       |          |       | $            | 15.50      |   |   | $ | 19.38 |   | $ | 14.42 |   |
| 2006                 |       |                                        | $          | 67.02                                      |       |          |       | $            | 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 |   |
| 2002                 |       |                                        | $          | 18.28                                      |       |          |       | $            | 17.00      |   |   | $ | 24.95 |   | $ | 16.35 |   |

 

**C.**               Markets

In Russia, our commonstock is listed on the RTS under the symbol “WBDF,” and is admitted for tradingon the Moscow Interbank Currency Exchange (MICEX). American DepositaryReceipts, each representing one share of our common stock, have been listed onthe New York Stock Exchange under the 

115

----

symbol “WBD”since February 8, 2002. Our American Depositary Receipts are also tradedon the Frankfurt Stock Exchange pursuant to a broker-established unsponsoredfacility.

***Item 10.****                   AdditionalInformation*

**A.**                ShareCapital

Not applicable.

**B.**               Charterand Certain Requirements of Russian Legislation

We describe below materialprovisions of our charter in effect on the date of this document and certainrequirements of Russian legislation. In addition to this description, we urgeyou to review our charter to learn its complete terms.

**Our Purpose**

Article 4.1 of our charter provides that our maingoal is to provide the fullest and highest-quality satisfaction of the needs oflegal entities and individuals for the products and services we offer, as wellas to generate profits.

We are registered with theMoscow Inter-District Inspectorate No. 39 of the Russian Ministry of Taxesand Duties under the state registration number 1037700236738.

**General Matters**

Pursuant to our charter,we have the right to issue registered shares of common stock, shares ofpreferred stock and other securities provided for by legal acts of the RussianFederation with respect to securities. Our capital stock currently consists of44,000,000 common shares, each with a nominal value of 20 rubles, all of whichare fully paid, issued and outstanding. Under Russian legislation, chartercapital refers to the aggregate nominal value of the issued and outstandingshares. We are also authorized to issue 44,000,000 common shares with a nominalvalue of 20 rubles each. No preferred shares are authorized or outstanding.Preferred shares may only be issued if corresponding amendments have been madeto our charter pursuant to a resolution of the general meeting of shareholders.We have issued only shares of common stock. The Federal Law on Joint StockCompanies requires us to dispose of any of our shares that we acquire withinone year of their acquisition or, failing that, reduce our charter capital. Werefer to such shares as treasury shares for the purposes hereof. Russianlegislation does not allow for the voting of such treasury shares.

**Rights Attaching toShares**

Holders of ourcommon stock have the right to vote at all shareholders’ meetings. As requiredby the Federal Law on Joint Stock Companies and our charter, all shares of ourcommon stock have the same nominal value and grant identical rights to theirholders. Each fully paid share of common stock, except for treasury shares,gives its holder the right to:

·       freelytransfer the shares without consent of other shareholders;

·       receive dividends;

·       participate in shareholders’meetings and vote on all matters within shareholders’ competence;

·       transfer voting rights toits representative on the basis of a power of attorney;

·       participate in the electionand dismissal of members for the board of directors and review commission;

116

----

·       if holding, alone or withother holders, 2% or more of the voting stock, within 30 days after theend of our fiscal year, make proposals for the agendas of the annualshareholders’ meeting and nominate candidates to the board of directors,management board, counting commission, review commission and for the generaldirector;

·       if holding, alone or withother holders, 10% or more of the voting stock, demand from the board ofdirectors the calling of an extraordinary shareholders’ meeting or anunscheduled audit by the review commission or an independent auditor;

·       demand, under the followingcircumstances, the repurchase by us of all or some of the shares owned by it,as long as such holder voted against or did not participate in the voting onthe decision approving the following:

·        any reorganization;

·        the conclusion of a majortransaction, as defined under Russian law; and

·        any amendment of ourcharter or approval of a restated version of our charter in a manner thatrestricts the holder’s rights;

·       upon liquidation, receive aproportionate amount of our property after our obligations are fulfilled;

·       have access to certaincompany documents, receive copies for a reasonable fee and, if holding alone orwith other holders, 25% or more of the voting stock, have free access toaccounting documents and minutes of the company’s management board meetings;and

·       exercise other rights of ashareholder provided by our charter, Russian legislation and decisions ofshareholders’ meeting approved in accordance with its competence.

**Preemptive Rights**

The Federal Law on JointStock Companies and our charter provide existing shareholders with a preemptiveright to purchase shares or securities convertible into shares during an opensubscription in the amount proportionate to their existing shareholdings. Inaddition, the Federal Law on Joint Stock Companies provides shareholders with apreemptive right to purchase shares or securities convertible into shares, inan amount proportionate to their existing shareholdings, during a closedsubscription if the shareholders voted against or did not participate in thevoting on the decision approving such subscription. The preemptive right doesnot apply to a closed subscription to existing shareholders provided that suchshareholders may each acquire a whole number of shares or securitiesconvertible into shares being placed in an amount proportionate to theirexisting shareholdings. We must provide shareholders with written notice of theproposed sale of shares at least 45 days prior to the offering, duringwhich time shareholders may exercise their preemptive rights.

**Dividends**

The Federal Law on Joint Stock Companies and ourcharter set forth the procedure for determining the quarterly and annualdividends that we may distribute to our shareholders. We may declare dividendsbased on our first quarter, six month, nine month or annual results. Dividendsare recommended to a shareholders’ meeting by a majority vote of the board ofdirectors, and approved by the shareholders’ meeting by a majority vote. Adecision on quarterly, six month and nine month dividends must be taken withinthree months of the end of the respective quarter at the shareholders’ meeting;and a decision on annual dividends must be taken at the annual generalshareholders’ meeting. The dividend approved at the shareholders’ meeting maynot be more than the amount recommended by the board of directors. Dividendsare distributed to holders of our shares as of the record date for theshareholders’ meeting 

117

----

approving the dividends.See “—General Meetings of Shareholders—Notice and Participation.” Dividends arenot paid on treasury shares.

The Federal Law onJoint Stock Companies allows dividends to be declared only out of net profitscalculated under Russian accounting standards and as long as the followingconditions have been met:

·       the charter capital of thecompany has been paid in full;

·       the value of the company’snet assets on the date of adoption of a decision to pay dividends is not less(and would not become less as a result of the proposed dividend payment) thanthe sum of the company’s charter capital, the company’s reserve fund and thedifference between the liquidation value and the par value of the issued andoutstanding preferred shares of the company;

·       the company has repurchasedall shares from shareholders having the right to demand repurchase; and

·       the company is not, andwould not become, insolvent as the result of the proposed dividend payment.

**Distributions toShareholders on Liquidation**

Under Russianlegislation, liquidation of a company results in its termination without thetransfer of rights and obligations to other persons as legal successors. TheFederal Law on Joint Stock Companies and our charter allow us to be liquidated:

·       by a three-quartersmajority vote of a shareholders’ meeting; or

·       by a court order.

Following a decision to liquidate us, the right tomanage our affairs would pass to a liquidation commission appointed by a shareholders’meeting. In the event of an involuntary liquidation, the court may vest theduty to liquidate the company to its shareholders. Creditors may file claimswithin a period to be determined by the liquidation commission, but such periodmust not be less than two months from the date of publication of notice ofliquidation by the liquidation commission.

The Civil Code ofthe Russian Federation gives creditors the following order of priority duringliquidation:

·       individuals owedcompensation for injuries, deaths or moral damages;

·       employees;

·       federal and localgovernmental entities claiming taxes and similar payments to the federal andlocal budgets and to non-budgetary funds; and

·       other creditors inaccordance with Russian legislation.

Claims of creditors in obligations secured by a pledgeof the company’s property (“secured claims”) are satisfied out of the proceedsof sale of the pledged property prior to claims of any other creditors exceptfor the creditors of the first and second priorities described above, providedthat claims of such creditors arose before the pledge agreements in respect ofthe company’s property were made. To the extent that the proceeds of sale ofthe pledged property are not sufficient to satisfy secured claims, the latterare satisfied simultaneously with claims of the fourth priority creditors asdescribed above.

The Federal Law on Insolvency (Bankruptcy), however,provides for a different order of priority for creditors’ claims in the eventof bankruptcy.

118

----

The remainingassets of a company are distributed among shareholders in the following orderof priority:

·       payments to repurchaseshares from shareholders having the right to demand repurchase;

·       payments of declared butunpaid dividends on preferred shares and the liquidation value of the preferredshares determined by the company’s charter, if any; and

·       payments to holders ofcommon and preferred shares.

**Liability ofShareholders**

The Civil Code ofthe Russian Federation and the Federal Law on Joint Stock Companies generallyprovide that shareholders in a Russian joint stock company are not liable forthe obligations of a joint stock company and bear only the risk of loss oftheir investments. This may not be the case, however, when one person or entityis capable of determining decisions made by another person or entity. Theperson or entity capable of determining such decisions is called an “effectiveparent.” The person or entity whose decisions are capable of being sodetermined 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-makingcapability is provided for in the charter of the effective subsidiary or in acontract between such persons; and

·       the effective parent givesbinding instructions to the effective subsidiary.

Thus, a shareholder of an effective parent is notitself liable for the debts of the effective parent’s effective subsidiary,unless that shareholder is itself an effective parent of the effective parent.Accordingly, a shareholder will not be personally liable for our debts or thoseof our effective subsidiaries unless such shareholder controls our business andthe conditions set forth above are met.

In addition, an effectiveparent is secondarily liable for an effective subsidiary’s debts if aneffective subsidiary becomes insolvent or bankrupt resulting from the action oromission of an effective parent only when the effective parent has used theright to give binding instructions knowing that they would result in insolvencyof the effective subsidiary. This is the case no matter how the effectiveparent’s capability to determine decisions of the effective subsidiary arises,such as through ownership of voting securities or by contract. In theseinstances, other shareholders of the effective subsidiary may claimcompensation for the effective subsidiary’s losses from the effective parentthat caused the effective subsidiary to take any action or fail to take anyaction knowing that such action or failure to take action would result inlosses.

**Alteration ofCapital**

**Charter CapitalIncrease**

We may increase ourcharter capital by:

·       issuing new shares, or

·       increasing the nominalvalue of previously issued shares.

A decision on any issuance of shares or securitiesconvertible into shares by closed subscription, or an issuance by opensubscription of common shares or securities convertible into common sharesconstituting 25% or more of the number of issued common shares, requires athree-quarters majority vote of a shareholders’ meeting. In addition, adecision to increase the charter capital by increasing the nominal value ofissued shares requires a majority vote of a shareholders’ meeting. In addition,the issuance of 

119

----

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.

The Federal Law on Joint Stock Companies requires thatthe value of newly issued shares be determined by the board of directors basedon their market value but not less that their nominal value, except in limitedcircumstances where (i) existing shareholders exercise a preemptive rightto purchase shares at not less than 90% of the price paid by third parties, or (ii) feesof up to 10% are paid to intermediaries, in which case the fees paid may bededucted from the price. The price may not be set at less than the nominalvalue of the shares. The board of directors shall value any in-kindcontributions for new shares based on the appraisal report of an independentappraiser.

Russian securitiesregulations set out detailed procedures for the issuance and registration ofshares of a joint stock company. These procedures require:

·       prior registration of ashare issuance with the FSFM;

·       public disclosure ofinformation relating to the share issuance; and

·       following the placement ofthe shares, registration and public disclosure of the results of the placementof shares.

**Charter CapitalDecrease; Share Buy-Backs**

The Federal Law on Joint Stock Companies does notallow a company to reduce its charter capital below the minimum charter capitalrequired by law, which is 100,000 rubles for an open joint stock company orapproximately $3,500. Our charter requires that any decision to reduce ourcharter capital, whether through the repurchase and cancellation of shares or areduction in the nominal value of the shares, be made by a majority vote of ashareholders’ meeting. Additionally, within 30 days of a decision toreduce our charter capital, we must issue a written notice to our creditors andpublish this decision. Our creditors would then have the right to demand,within 30 days of publication or receipt of our notice, early terminationor discharge of relevant obligations by us, as well as compensation fordamages.

The Federal Law on Joint Stock Companies and ourcharter allow our shareholders or our board of directors to authorize therepurchase of up to 10% of our shares in exchange for cash. The repurchasedshares must be resold at market value within one year of their repurchase or,failing that, the shareholders must decide to cancel such shares and decreasethe charter capital. The shares repurchased pursuant to a decision of ourshareholders’ meeting to decrease the overall number of shares, are canceled attheir redemption. Repurchased shares do not bear voting rights.

The Federal Law onJoint Stock Companies allows us to repurchase our shares only if, at the timeof repurchase:

·       our charter capital is paidin full;

·       we are not and would notbecome, as a result of the repurchase, insolvent;

·       the value of our net assetsat 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 valueof our issued and outstanding preferred shares; and

120

----

·       we have repurchased allshares from shareholders having the right to demand repurchase of their sharesin accordance with Russian law, as described immediately below.

The Federal Law onJoint Stock Companies and our charter provide that our shareholders may demandrepurchase of all or some of their shares so long as the shareholder demandingrepurchase voted against or did not participate in the voting on the decisionapproving any of the following actions:

·       reorganization;

·       conclusion of a majortransaction, as defined under Russian law; or

·       amendment of our charter orapproval of a restated version of our charter in a manner which restrictsshareholders’ rights.

We may spend up to 10% ofour net assets calculated under Russian accounting standards on the date of theadoption of the decision which gives rise to a share redemption demanded by theshareholders. If the value of the shares in respect of which shareholders haveexercised their right to demand repurchase exceeds 10% of our net assets, wewill repurchase shares from each such shareholder on a pro-rata basis.

**Registration andTransfer of Shares**

Russian legislation requires that a joint stockcompany maintain a register of its shareholders. Ownership of our registeredshares is evidenced solely by entries made in such register. Any of ourshareholders may obtain an extract from our register certifying the number ofshares that such shareholders hold. Since July 14, 2001, Central MoscowDepository OJSC has maintained our register of shareholders.

The purchase, sale orother transfer of shares is accomplished through the registration of thetransfer in the shareholder register, or the registration of the transfer witha depositary if shares are held by a depositary. The registrar or depositarymay not require any documents in addition to those required by Russianlegislation in order to transfer shares in the register. Refusal to registerthe shares in the name of the transferee or, upon request of the beneficialholder, in the name of a nominee holder, is not allowed except in certaininstances provided for by Russian legislation, and may be challenged in court.

**Reserve Fund**

Russian legislationrequires that each joint stock company establish a reserve fund to be used onlyto cover the company’s losses, redeem the company’s bonds and repurchase thecompany’s shares in cases when other funds are not available. Our charterprovides for a reserve fund of 5% of our charter capital, funded throughmandatory annual transfers of at least 5% of our net profits until the reservefund has reached the 5% requirement.

**Disclosure ofInformation**

Russian securitiesregulations require us to make the following periodic public disclosures andfilings:

·       filing quarterly reportswith 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 andauditors, important developments during the reporting quarter and otherinformation about our financial and business activity;

·       filing with the FSFM andpublishing in the FSFM’s periodical print publication, as well as in othermedia, any information concerning material facts and changes in our financialand business activity, 

121

----

including ourreorganization, certain changes in the amount of our assets, decisions on shareissuances, certain changes in ownership and shareholding, as well asshareholder resolutions;

·       disclosing information onvarious stages of share placement, issuance and registration throughpublication of certain data as required by the securities regulations;

·       disclosing our annualreport and annual financial statements prepared in accordance with Russianaccounting standards;

·       filing with the FSFM on a quarterlybasis a list of our affiliated persons and disclosing the same on our website,on the same basis; and

·       other information asrequired by applicable Russian securities legislation.

**General Meetings ofShareholders**

***Procedure***

The powers of ashareholders’ meeting are set forth in the Federal Law on Joint Stock Companiesand in our charter. A shareholders’ meeting may not decide on issues that arenot included in the list of its competence by the Federal Law on Joint StockCompanies and our charter. Among the issues which the shareholders have thepower to decide are:

·       charter amendments;

·       reorganization orliquidation;

·       election and removal of themembers of the board of directors;

·       determination of thenumber, nominal value, category/type of authorized shares and rights granted bysuch shares;

·       changes in our chartercapital;

·       appointment and removal ofthe members of our review commission and counting commission;

·       approval of our externalauditor;

·       approval of certaininterested party transactions and major transactions;

·       distribution of profits andlosses, including approval of dividends;

·       redemption by the companyof issued shares in cases provided for by the Federal Law on Joint StockCompanies;

·       decision on ourparticipation in holding companies, commercial or industrial groups or otherassociations of commercial entities;

·       approval of certaininternal documents and corporate records; and

·       other issues, as providedfor by the Federal Law on Joint Stock Companies and our charter.

Voting at ashareholders’ meeting is generally based on the principle of one vote per shareof common stock, with the exception of the election of the board of directors,which is done through cumulative voting. Decisions are generally passed by amajority vote of the voting shares present at a shareholders’ meeting. However,Russian law requires a three-quarters majority vote of the voting sharespresent at a shareholders’ meeting to approve the following:

·       charter amendments;

122

----

·       reorganization orliquidation;

·       major transactionsinvolving assets in excess of 50% of the balance sheet value of the company’sassets;

·       determination of thenumber, nominal value and category (type) of authorized shares and the rightsgranted by such shares;

·       repurchase by the companyof its issued shares;

·       any issuance of shares orsecurities convertible into shares of common stock by closed subscription; or

·       issuance by opensubscription of shares of common stock or securities convertible into commonstock, in each case, constituting 25% or more of the number of issued andoutstanding shares of common stock.

The quorum requirement for our shareholders’ meetingsis met if shareholders (or their representatives) accounting for more than 50%of the issued voting shares are present. If the 50% quorum requirement is notmet, another shareholders’ meeting with the same agenda may (and, in the caseof an annual shareholders’ meeting, must) be scheduled and the quorumrequirement is satisfied if shareholders (or their representatives) accountingfor at least 30% of the issued voting shares are present at that meeting.

The annualshareholders’ meeting must be convened by the board of directors between March 1and June 30 of each year, and the agenda must include the following items:

·       election of members of theboard of directors;

·       approval of the annualreport and the annual financial statements, including the balance sheet andprofit and loss statement;

·       approval of distribution ofprofits, including approval of annual dividends and losses, if any;

·       appointment of anindependent auditor; and

·       appointment of the memberof the review commission.

A shareholder or group ofshareholders owning in the aggregate at least 2% of the issued voting sharesmay introduce proposals for the agenda of the annual shareholders’ meeting andmay nominate candidates to the board of directors, management board, countingcommission, review commission and for the general director. Any agendaproposals or nominations must be provided to the company no later than 30calendar days after the preceding financial year end.

Extraordinary shareholders’meetings may be called by the board of directors on its own initiative, or atthe request of the review commission, independent auditor or a shareholder orgroup of shareholders owning, in the aggregate, at least 10% of the issuedvoting shares as of the date of the request.

A general meeting ofshareholders may be held in the form of a meeting or by absentee ballot. Theform of a meeting contemplates the adoption of resolutions by the generalmeeting of shareholders through the attendance of the shareholders or theirauthorized representatives for the purpose of discussing and voting on issuesof the agenda, provided that if a ballot is mailed to shareholders forparticipation at a meeting convened in such form, the shareholders may completeand mail the ballot back to the company without personally attending themeeting. A general meeting of the shareholders by absentee ballot contemplatesthe determination of shareholders’ opinions on issues on the agenda by means ofa written poll.

123

----

Thefollowing issues cannot be decided by a shareholders’ meeting by absenteeballot:

·       election of the members of the board ofdirectors;

·       election of the review commission;

·       approval of a company’s independent auditor; and

·       approval of the annualreport, the annual financial statements, including balance sheet, profit andloss statement and any distribution of profits and losses, including approvalof annual dividends, if any.

***Notice and Participation***

All shareholders entitledto participate in a general shareholders’ meeting must be notified of themeeting, whether the meeting is to be held in the form of a meeting or byabsentee ballot, no less than 30 days prior to the date of the meeting, andsuch notification shall specify the agenda for the meeting. However, if it isan extraordinary shareholders’ meeting to elect the board of directors,shareholders must be notified at least 50 days prior to the date of themeeting. Only those items that were set out in the agenda to shareholders maybe voted upon at a general shareholders’ meeting.

The list of shareholdersentitled to participate in a general shareholders’ meeting is to be compiled onthe basis of data in our shareholders register on the date established by theboard of directors, which date may neither be earlier than the date of adoptionof the board resolution to hold a general shareholders’ meeting nor more than50 days before the date of the meeting (or, in the case of an extraordinaryshareholders’ meeting to elect the board of directors, not later than65 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 ofagenda items and voting thereon;

·       by sending an authorized representative toparticipate in the discussion of agenda items and to vote thereon;

·       by absentee ballot; or

·       by delegating the right tofill out the absentee ballot to an authorized representative.

**Board of Directors**

The Federal Law on Joint Stock Companies and ourcharter provide that our entire board of directors is up for election at eachannual general shareholders’ meeting and that our board of directors is electedthrough cumulative voting. Under cumulative voting, each shareholder may castan aggregate number of votes equal to the number of voting shares held by suchshareholder multiplied by the number of persons to be elected to our board ofdirectors, and the shareholder may give all such votes to one candidate orspread them between two or more candidates. Before the expiration of theirterm, the directors may be removed as a group at any time without cause by amajority vote of a shareholders’ meeting.

The Federal Law on Joint Stock Companies requires atleast a five-member board of directors for all joint stock companies, at leasta seven-member board of directors for a joint stock company with more than1,000 holders of voting shares, and at least a nine-member board of directorsfor a joint stock company with more than 10,000 holders of voting shares. Onlynatural persons (as opposed to legal entities) are entitled to sit on theboard. Members of the board of directors are not required to be shareholders ofthe company. The actual number of directors is determined by the company’scharter or a 

124

----

decision of theshareholders’ meeting. Our charter provides that our board of directors shallconsist of eleven members.

The Federal Law onJoint Stock Companies generally prohibits a board of directors from acting onissues that fall within the exclusive competence of the general shareholders’meeting. Our board of directors has the power to perform the general managementof the company, and decide, among others, the following issues:

·       determination of ourbusiness priorities;

·       convening annual andextraordinary shareholders’ meetings, except in certain circumstances specifiedin the Federal Law on Joint Stock Companies;

·       approval of the agenda of ashareholders’ meeting and determination of the record date for shareholdersentitled to participate in a shareholders’ meeting;

·       placement of our bonds andother securities in cases specified in the Federal Law on Joint StockCompanies;

·       determination of the priceof our property and of our securities to be placed or repurchased, as providedfor 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 onJoint Stock Companies;

·       formation of our executivebodies and early termination of their powers;

·       election of our managementboard and its chairman and the establishment of their compensation;

·       recommendations on theamount of remuneration and compensation to be paid to the members of our reviewcommission and on the fees payable for the services of an independent auditor;

·       recommendations on theamount of the dividend and the payment procedure thereof;

·       the use of our reserve andother funds;

·       approval of our internaldocuments, except for those documents whose approval falls within thecompetence of our shareholders or executive bodies;

·       the creation of branchesand representative offices;

·       approval of major andinterested party transactions in certain cases as provided for by the FederalLaw on Joint Stock Companies;

·       approval of our shareregistrar;

·       ourparticipation in, or exit from, other companies, unless such matters fall underthe jurisdiction of our shareholders or executive bodies;

·       other issues, as providedfor by the Federal Law on Joint Stock Companies and our charter.

Our charter generallyrequires a majority vote of the directors present for an action to pass, withthe exception of actions for which Russian legislation requires a unanimousvote or a majority vote of the disinterested and independent directors, asdescribed herein. A board meeting is considered duly assembled and legallycompetent to act when at least six directors are present.

125

----

**Interested PartyTransactions**

Under the FederalLaw on Joint Stock Companies, certain transactions defined as “interested partytransactions” require approval by disinterested directors or shareholders ofthe company. “Interested party transactions” include transactions involving amember of the board of directors or a member of any executive body of thecompany (including the company’s chief executive officer and/or the company’smanaging organization), any person that owns, together with any affiliates, atleast 20% of a company’s issued voting shares or any person who is able to directthe actions of the company, if that person and/or that person’s spouse,parents, children, adoptive parents or children, brothers or sisters oraffiliates, is/are:

·       a party to, or beneficiaryof, a transaction with the company, whether directly or as a representative orintermediary;

·       the owner of at least 20%of the issued shares of a legal entity that is a party to, or beneficiary of, atransaction with the company, whether directly or as a representative orintermediary; or

·       a member of the board ofdirectors 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 arepresentative or intermediary, or a member of the board of directors or anymanagement body of a management organization of such a company.

The Federal Law on Joint Stock Companies requires thatan interested party transaction by a company with more than 1,000 shareholdersbe approved by a majority vote of the independent directors of the company whoare not interested in the transaction. For purposes of this rule, “anindependent director” is a person who is not, and within the year preceding thedecision to approve the transaction was not, the general director, a member ofany executive body or an affiliate of the company, or a member of the board ofdirectors or any management body of the company’s management organization.Additionally, such person’s spouse, parents, children, adoptive parents orchildren, brothers or sisters may not, and within the year preceding the dateof the decision to approve the transaction did not, occupy positions in theexecutive bodies of the company or positions on the board of directors or ofany management body of the company’s management organization. For companies with1,000 or fewer shareholders, an interested party transaction must be approvedby a majority vote of the directors who are not interested in the transactionif the number of these directors is sufficient to constitute a quorum.

Approval by amajority of shareholders who are not interested in the transaction is requiredif:

·       the value of suchtransaction or a number of interrelated transactions is 2% or more of thebalance sheet value of the company’s assets determined under Russian accountingstandards;

·       the transaction or a numberof interrelated transactions involves the issuance, by subscription, of votingshares or securities convertible into voting shares, or secondary market saleof such securities, in an amount exceeding 2% of the company’s issued votingstock;

·       the number of directors whoare not interested in the transaction is not sufficient to constitute a quorum;or

·       all the members of theboard of directors of the company are interested parties, or none of them is anindependent director.

Approval by a majority of shareholders who are notinterested in the transaction may not be required, until the next annualshareholders’ meeting, for an interested party transaction if such transactionis substantially similar to transactions concluded by the company and theinterested party in the ordinary course of business before such party became aninterested party with respect to the transaction.

126

----

The approval ofinterested party transactions is not required in the following instances:

·       the company has only oneshareholder that simultaneously performs the functions of the executive body ofthe company;

·       all shareholders of thecompany are deemed interested in such transactions;

·       the transactions arise fromthe shareholders executing their preemptive rights to purchase newly issuedshares of the company;

·       the transactions arise fromthe repurchase, whether mandatory or not, by the company of its issued shares;

·       the company merges withanother company, and the latter owns more than three-fourths of the votingcapital stock of the company; or

·       the transactions that aremandatory a company pursuant to Russian law and must be concluded on the basisof fixed prices and tariffs adopted by a competent state body.

**Major Transactions**

The Federal Law on Joint StockCompanies defines a “major transaction” as a transaction, or a number ofinterrelated transactions, involving the acquisition or disposal, or apossibility of disposal (whether directly or indirectly) of property having avalue of 25% or more of the balance sheet value of the 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.

**Change in Control**

***Anti-takeover Protection***

Russian legislationprovides as follows:

·       A person intending toacquire 30% or more of an open joint stock company’s ordinary shares and votingpreferred shares (including, for such purposes, shares already owned by suchperson and its affiliates), will be entitled to make a public tender offer toother holders of such shares or securities convertible into such shares.

·       A person that has acquired30% or more of the totality of an open joint-stock company’s ordinary sharesand voting preferred shares (including, for such purposes, shares already ownedby such person and its affiliates, but excluding shares that were acquiredpursuant to previous voluntary or mandatory offers) will generally be requiredto make, within 35 days of acquiring such shares, a public tender offer forother shares of the same class and for securities convertible into such shares,at a price which is not less than the price determined based on a weightedmarket price of the shares, or on a price supplied by an independent appraiserif the shares have no or insufficient trading history. From the moment ofacquisition of 30% or more of the shares until the moment of delivery of anoffer to the security holders, the person making an offer and its affiliateswill be able to register for quorum and vote only 30% of the shares of thecompany (regardless of the size of their actual holdings). These rules arealso applied (or reapplied) to acquisitions resulting in a person or a group ofpersons owning more than 50% and 75% of a company’s outstanding shares.

127

----

·       A person that as a resultof such an offer becomes (individually or with its affiliates) the owner ofmore than 95% of the company’s ordinary shares and voting preferred shares,must buy out the remaining shares of the company as well as other securitiesconvertible into such shares upon request of the holders of such shares orother securities, 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 kinddescribed in either of the preceding three paragraphs must be accompanied by abank guarantee of payment. If the company is publicly traded, prior notice ofthe offer must be filed with the FSFM; otherwise, notice must be filed with theFSFM no later than the date of the offer. The FSFM may order amendments to theterms of the offer (including price) in order to bring them into compliancewith the rules.

·       Once such an offer has beenmade, competing offers for the same securities can be made by third partiesand, in certain circumstances, acceptance of the initial offer may be withdrawnby the security holders who choose to accept such competing offer. From themaking of such an offer until 20 days after its expiry (which period may incertain cases exceed 100 days) the company’s shareholders meeting will have thesole power to make decisions on charter capital increase, issuance ofsecurities, approval of certain major transactions, and on certain othersignificant matters.

The above rules maybe supplemented through FSFM rulemaking, which may result in a wider, narroweror more specific interpretation of these rules by the government andjudicial authorities, as well as by market participants.

***Approval of the Federal Antimonopoly Service***

Pursuant to the FederalLaw on Competition, acquisitions of voting stock capital of a joint stockcompany, involving companies with a combined value of assets or annualrevenues, exceeding a certain threshold under Russian Accounting Standards, orcompanies registered as having more than a 35% share of a certain commoditymarket, 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.

**Disclosure ofOwnership**

A holder of ourcommon shares is required to disclose information concerning its holdings inthe following cases:

·       the holder acquires 20% ormore of our common shares;

·       the holder increases itspercentage holding of our common shares to a level in excess of 5% (or anintegral multiple thereof) higher than 20% thereof; and

·       the holder decreases itspercentage holding of our common shares to a level in excess of 5% (or anintegral multiple thereof) higher (but not lower) than 20% thereof.

Effective July 1,2006, a holder of our common shares is required to publicly disclose anacquisition of 5% or more of the outstanding common shares of the company, aswell any change in the amount of common shares held by such holder, if as aresult of such change the percentage of common shares held by the holderbecomes greater or lesser than 5, 10, 15, 20, 25, 30, 50 or 75 percent of theoutstanding common shares of the company.

128

----

**Notification ofForeign Ownership**

Foreign persons registeredas individual entrepreneurs in Russia who acquire shares in a Russian jointstock company and foreign companies that acquire shares in a Russian jointstock company may need to notify the Russian tax authorities within one monthfollowing such acquisition. However, the procedure of notifying the Russian taxauthorities by foreign companies that are not registered with such taxauthorities at the time of their share acquisition remains unclear.

**C.**               MaterialContracts

The following is adescription of contracts that have been entered into by us and/or oursubsidiaries or shareholders that may be material to our business.

**Loan Agreementrelating to the Loan Participation Notes and Guarantee**

On May 14, 2003, we entered into a loan agreementwith UBS (Luxembourg) S.A. as lender, pursuant to which UBS (Luxembourg) S.A.lent to us a principal amount of $150 million on May 21, 2003. The loanmatures on May 21, 2008, and interest is payable by us semi-annually inarrears at an annual rate of 8.5%. For the sole purpose of financing this loanto us, UBS (Luxembourg) S.A. issued $150 million 8.5% Loan Participation Notesdue 2008 on May 21, 2003.

The above-mentioned loan to us is unconditionally,irrevocably, jointly and severally guaranteed by the Lianozovsky Dairy Plant,Tsaritsino Dairy Plant, Timashevsk Dairy Plant, Trade Company Wimm-Bill-Dannand Baltic Milk pursuant to a guarantee dated May 14, 2003 entered intowith UBS (Luxembourg) S.A. On July 10, 2006, WBD Foods with the consent ofUBS Luxembourg terminated the guarantee of Timashevsk Dairy Plant and BalticMilk.

On February 6, 2007, we entered into a loanagreement with UBS (Luxembourg) S.A. as lender, pursuant to which UBS(Luxembourg) S.A. lent to us a principal amount of $150 million on February 8,2007. The loan matures on May 14, 2008, and interest is payable by us semi-annuallyin arrears at an annual rate of 7.5%. For the sole purpose of financing thisloan to us, UBS (Luxembourg) S.A. issued $150 million 7.5% LoanParticipation Notes due 2008 on February 8, 2007.

Both the loan agreementsand the guarantee are governed by English law. In the loan agreements, weagreed to certain covenants in respect of, among other things, liens, assetsales, transactions with affiliates and related persons, change of control,mergers and similar transactions, limitation on dividend or other paymentsaffecting our subsidiaries and maintenance of certain ratios. In the guarantee,the Lianozovsky Dairy Plant, Tsaritsino Dairy Plant, Timashevsk Dairy Plant,Trade Company Wimm-Bill-Dann, Baltic Milk, Lianozovo-Samara LLC and the Ural,Krasnodar, Don and Nevsky Dairy Trade Houses agreed to similar covenants.

**Ruble Bonds**

On April 15, 2003, WBD Foods issued 1.5 millionnon-convertible ruble denominated notes at a face value of 1,000 rubles eachguaranteed by Vitafrukt, one of our juice subsidiaries. The offering raised atotal of 1,500 million rubles ($52.1 million at the exchange rate as of December 31,2005, of which $2.3 million had been repaid as at December 31, 2005).Interest was payable semi-annually in arrears commencing on October 14, 2003,and the interest rate for each coupon period was based on the ConsumerPrice Index, published by Goskomstat of the Russian Federation. The interestrate for the first, second, third, fourth, fifth and sixth coupon periods were12.9%, 11.98%, 9.38%, 8.48%, 10.78% and 11.24%, respectively. The notes wereredeemable by WBDFoods on April 11, 2006 and we redeemed the remainingoutstanding notes on this date.

129

----

On December 21, 2005,we issued five-year, 3.0 million non-convertible ruble denominated notes at aface value of 1,000 rubles each. The offering raised a total of approximately$104.2 million at the exchange rate as of December 31, 2005. The notes areredeemable by us on December 15, 2010. The issue was priced at par with acoupon of 9% payable semi-annually.

**Tetra PakAgreements**

On January 1, 2007,the Wimm-Bill-Dann (formerly Lianozovsky Dairy Plant) entered into a supplyagreement to purchase packages for our milk products from JSC Tetra Pak AO ofMoscow. The contract terminates on December 31, 2007. The total amount ofour purchases is estimated under the contract at approximately €18.0million excluding VAT. On January 1, 2007, Wimm-Bill-Dann Beverages(formerly Ramensky Dairy Plant) entered into a supply agreement to purchasepackages for its products from JSC Tetra Pak AO of Moscow. The contractterminates on December 31, 2007. The total amount of our purchases isestimated under the contract at approximately €18.0 million excludingVAT. We expect that the total expenditures in 2007 by Wimm-Bill-Dann Purchaserpursuant to the current contract will be higher due to increased sales. Wepurchase a vast majority of our packaging materials from Tetra Pak, and in 2006,we purchased approximately 60% of our total packaging materials (includingcarton, plastic, foil and other materials) from Tetra Pak.

**Amended andRestated Partnership and Cooperation Agreement**

Our current shareholders Gavril Yushvaev, MikhailDubinin, Sergei Plastinin, Alexander Orlov, David Iakobachvili, MikhailVishnyakov, Viktor Evdokimov and I.M. Arteks Holdings Limited are parties to anAmended and Restated Partnership and Cooperation Agreement which requires theparties to vote the same way, as well as:

*Independent Directors.**  *The parties to the agreementundertake to use their best efforts to ensure that a majority of our directorsare “independent.” A director is considered “independent” if that person isnot:

·       our employee or an employeeor director of any of our subsidiaries;

·       a party to the agreement

·       an employee or director ofa party to the agreement; a family member of a party to the agreement; a personor entity controlled by a party to the agreement; any other person or entitycontrolled by a family member of a party to the agreement; or a person orentity controlled by any employee or director of any of the parties to theagreement; or

·       a person or entitycontrolled by any family member of a party to the agreement or a person orentity controlled by any employee or director of a party to the agreement.

*Voting.**  *The parties to the agreement arerequired to vote all of our shares that they own in the same way. In order todetermine how the parties will vote, the agreement requires them to attempt toagree unanimously on a single voting position on each item on the agenda for ashareholders’ meeting. If they are unable to do so, then the followingprocedures are followed:

·       The parties will vote theirshares as determined by parties holding a two-thirds majority of the sharesheld by the parties;

·       If there is no two-thirdsmajority among the parties, then the parties will vote their shares consistentwith the recommendation of the majority of individuals who are on our board ofdirectors; and

·       If no voting position canbe determined using the procedures noted above, then the parties will abstainfrom voting on that issue, in which case a quorum will not be present underRussian law and the issue would fail to be adopted.

130

----

*Third-PartyBeneficiaries.**  *Beneficialowners of our ADSs are third-party beneficiaries of the agreement and areentitled to enforce and bring actions in respect of the agreement. An actionmay only be brought, however, if beneficial owners of ADSs constituting morethan 50% of our outstanding ADSs, excluding any ADSs held by the parties to theagreement, are parties to such action.

*DisputeResolution.**  *Thegoverning law of the agreement is the law of the State of New York. Anydispute, controversy or cause of action brought arising under the agreementwill be settled by arbitration under the Commercial Arbitration Rules ofthe American Arbitration Association. Any cause of action brought by beneficialowners of more than 50% of the outstanding ADSs, excluding any ADSs held byparties to the agreement, at the option of these owners, may be brought inarbitration under the Commercial Arbitration Rules of the AmericanArbitration Association or may be litigated in the federal or state courts inthe Borough of 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 be terminateduntil the earlier to occur of:

·       any party to the agreementowning all of our issued and outstanding shares;

·       we are liquidated pursuantto the laws of the Russian Federation; or

·       January 16, 2004(provided that a party / the parties give 30 days’ prior written notice).

Upon the occurrence of thefirst two events described above, the agreement automatically terminates.Otherwise, the agreement continues in full force and effect until terminated byany party to the agreement by giving 30 days’ prior written notice to allother parties to the agreement and to us. See “Item 3. Key Information—D. RiskFactors—Risks Relating to Our Business and Industry—We are controlled by agroup of shareholders whose interests could conflict with those of the holdersof our securities.”

**D.**              ExchangeControls

The Federal Law onCurrency Regulation and Currency Control which came into effect as of June 18,2004, sets forth certain restrictions on settlements between residents ofRussia with respect to transactions involving foreign securities (includingADSs), including requirements for settlement in Russian rubles.

**Repatriation ofExport Proceeds**

Russian companies mustrepatriate 100% of their receivables from the export of goods and services(with a limited number of exceptions concerning, in particular, certain typesof secured financing) within seven days of the date on which they were received(also with a limited number of exceptions).

**Restrictions on theremittance of dividends, interest or other payments to non-residents**

The Federal Law on ForeignInvestments in the Russian Federation of July 9, 1999, specificallyguarantees foreign investors the right to repatriate their earnings fromRussian investments. However, the evolving Russian exchange control regime mayaffect your ability to do so. Ruble dividends on common shares may be paid tothe depositary or its nominee and converted into U.S. dollars by the depositaryfor distribution to owners of ADSs without restriction. Also, ADSs may be soldby non-residents of Russia for U.S. dollars outside Russia without regard toRussian currency control laws as long as the buyer is not a Russian residentfor currency control purposes. However, the ability to convert rubles into U.S.dollars is also subject to the availability of U.S. dollars in Russia’scurrency markets. Although there is an existing market within Russia for theconversion of rubles into U.S. dollars, including the interbank currencyexchange and over-the-counter and currency futures markets, the furtherdevelopment of this market is 

131

----

uncertain.At present, there is no market for the conversion of rubles into foreigncurrencies outside of Russia and a limited emerging market in which to hedgeruble and ruble-denominated investments.

**E.**               Taxation

The followingdiscussion describes the material United States federal and Russian income andwithholding tax consequences to you if you are a U.S. holder (generally, a “UnitedStates person,” as the term is defined in the United States Internal RevenueCode of 1986, as amended (the “Code”)) of common stock or ADSs and a residentof the United States for purposes of the Convention between the United Statesof America and the Russian Federation for the Avoidance of Double Taxation andthe Prevention of Fiscal Evasion with respect to Taxes on Income and Capital(the “United States-Russia income tax treaty”) and are fully eligible forbenefits under the United States-Russia income tax treaty. Subject to certainprovisions of the United States-Russia income tax treaty relating tolimitations on benefits, you generally will be a resident of the United States fortreaty purposes that is entitled to treaty benefits if you are:

·       liable, under the laws ofthe United States, to U.S. tax (other than taxes in respect only of income fromsources in the United States or capital situated therein) by reason of yourdomicile, residence, citizenship, place of incorporation, or any other similarcriterion (and, for income derived by a partnership, trust or estate, residenceis determined in accordance with the residence of the person liable to tax withrespect to such income); and

·       not also a resident of theRussian Federation for purposes of the United States-Russia income tax treaty.

The benefits under the United States-Russia income taxtreaty discussed in this document generally are not available to U.S. personswho hold ADSs or common stock in connection with the conduct of a business inthe Russian Federation through a permanent establishment as defined in theUnited States-Russia income tax treaty. Subject to certain exceptions, a U.S.person’s permanent establishment under the United States-Russia income taxtreaty is a fixed place of business through which such person carries onbusiness activities in the Russian Federation (generally including, but notlimited to, a place of management, a branch, an office, and a factory). Undercertain circumstances, a U.S. person may be deemed to have a permanentestablishment in the Russian Federation as a result of activities carried on inthe Russian Federation through agents of the U.S. person. This summary does notaddress the treatment of holders described in this paragraph.

The followingdiscussion is based on:

·       the Code, the Treasuryregulations promulgated thereunder, and judicial and administrativeinterpretations thereof;

·       Russian legislation; and

·       the United States-Russiaincome tax treaty (and judicial and administrative interpretations thereof);

all as in effect on the date of this document. All ofthe foregoing are subject to change, possibly on a retroactive basis, after thedate of this document. This discussion is also based, in part, onrepresentations of the depositary, and assumes that each obligation in thedeposit agreement and any related agreements will be performed in accordancewith its terms. The discussion with respect to Russian legislation is based onour understanding of current Russian law and Russian tax rules, which aresubject to frequent change and varying interpretations.

We believe, and the following discussion assumes, thatfor United States federal income tax purposes, we were not a passive foreigninvestment company for the taxable year ending in 2006, we will not be a 

132

----

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.

The following discussionis not intended as tax advice to any particular investor. It is also not acomplete analysis or listing of all potential United States federal or Russianincome and withholding tax consequences to you of ownership of common stock orADSs. We urge you to consult your own tax adviser regarding the specific UnitedStates federal, state, and local and Russian tax consequences of the ownershipand disposition of the common stock or ADSs under your own particular factualcircumstances.

**Russian Income andWithholding Tax Considerations**

The Russian tax rules applicable to U.S. holdersare characterized by significant uncertainties and limited interpretiveguidance. Russian tax authorities have provided limited guidance regarding thetreatment of ADS arrangements, and there can be no certainty as to how theRussian tax authorities will ultimately treat those arrangements. In 2005 and2006, the Russian Ministry of Finance stated that ADS holders should be treatedas the beneficial owners of the underlying shares for purposes of the doubletax treaty provisions applicable to taxation of dividend income from theunderlying shares. However, double tax treaty relief is available only if,before the transfer of dividends to the depository, the latter has provided theissuer with a list of ADS holders accompanied by each holder’s tax residencycertificate (confirmation of the country of tax residence). It is currentlyunclear whether depositories will be willing or able to provide residencycertificates for ADS holders or implement procedures for holders to benefitfrom applicable tax treaties. Thus, while a U.S. holder may technically beentitled to benefit from the provisions of the United States-Russia income taxtreaty, in practice such relief may be difficult or impossible to obtain.

Russian tax law and procedures are also not welldeveloped, and local tax inspectors have considerable autonomy and ofteninterpret tax rules without regard to the rule of law. Both thesubstantive provisions of Russian tax law and the interpretation andapplication of those provisions by the Russian tax authorities may be subjectto more rapid and unpredictable change than in jurisdictions with moredeveloped capital markets.

Currently, the Russiangovernment is in the process of replacing the existing tax legislation with acomprehensive Tax Code, but it is unclear when this process will be completedand how U.S. holders would be affected. As of January 1, 1999, Part 1(General) of the Tax Code went into effect. This law defines the generalprinciples of taxation in Russia, defines the legal status of taxpayers and taxagencies and determines general rules of tax filings and tax control, aswell as procedures for challenging tax agencies. Part 1 also specifies allthe taxes that can be imposed by federal and local authorities. Further, on January 1,2001, Part 2 of the Tax Code went into effect, providing a description ofthe most significant taxes, and several additional chapters of the tax code aswell as significant amendments became effective during 2003, 2004, 2005 and2006.

**Taxation ofDividends**

Dividends paid to U.S. holders generally will besubject to Russian withholding tax at a 15% rate for legal entities (includingU.S. corporations, partnerships or other entities) and up to a 30% rate forindividual holders. This tax may be reduced to 5% or 10% under the UnitedStates-Russia income tax treaty for U.S. holders; a 5% rate applies for U.S.holders who are legal entities owning 10% or more of the company’s outstandingshares, and a 10% rate applies to dividends paid to U.S. holders, including 

133

----

individuals and legalentities, owning less than 10% of the company’s outstanding shares. See “—UnitedStates-Russia Income Tax Treaty Procedures.”

If the appropriatedocumentation (*i.e.,* residencycertificate) has not been provided to us before the dividend payment date, weare required to withhold tax at the full rate, and U.S. holders qualifying fora reduced rate under the United States-Russia income tax treaty then would berequired to file claims for refund within three years with the Russian taxauthorities. There is significant uncertainty regarding the availability andtiming of such refunds.

**Taxation of CapitalGains**

U.S. holders generally should not be subject to anyRussian income or withholding taxes in connection with the sale, exchange, orother disposition of ADSs or common stock outside of Russia if the shares orADSs are not sold to a Russian resident or persons other than Russian residentswho conduct business in the Russian Federation through a permanentestablishment or are tax registered in Russia based on other grounds.

However, sales or other dispositions of ADSs or commonstock by a U.S. holder that is a legal entity to Russian residents or personsother than Russian residents who conduct a business in Russia through apermanent establishment or are tax registered in Russia based on other groundsmay be subject to Russian income or withholding taxes. Specifically, thepurchaser may be required to withhold 20% of the purchase price (or 24% of thegain if the seller can confirm the cost basis of the security in accordancewith Russian rules) if more than 50% of our assets consists of immovableproperty located in Russia. Regardless of the residence of the purchaser, aU.S. holder that is a legal entity should not be subject to any Russian incomeor withholding taxes in connection with the sale, exchange, or otherdisposition of ADSs if immovable property constitutes 50% or less of our assetsor if ADSs are sold via foreign exchanges where they are legally circulated.

Sales or other dispositions of ADSs or common stock byU.S. holders who are individuals to Russian residents or persons other thanRussian residents who conduct business in Russia through a permanentestablishment or are tax registered in Russia based on other grounds may besubject to Russian income or withholding taxes, and for such a sale by a U.S.holder, the purchaser may be required to withhold 30% of any gain realized onthe sale.

U.S. holders may be ableto claim the benefits of a reduced rate of withholding under the UnitedStates-Russia income tax treaty on the disposition of common stock or ADSs toRussian residents, or obtain a refund of any withheld amounts at rates differentfrom those provided in the treaty, by relying on the United States-Russiaincome tax treaty and complying with the appropriate procedures describedbelow.

**UnitedStates-Russia Income Tax Treaty Procedures**

Under current rules, to claim the benefit of a reducedrate of withholding under the United States-Russia income tax treaty, anon-resident generally must provide official certification from the U.S. taxauthorities of eligibility for the treaty benefits in the manner required byRussian law.

A U.S. holder may obtain the appropriate certificationby mailing completed forms, together with the holder’s name, taxpayeridentification number, the tax period for which certification is required andother applicable information to the United States Internal Revenue Service. Theprocedures for obtaining certification are described in greater detail inInternal Revenue Service Publication 686 and in the instructions to InternalRevenue Service Form 8802. As obtaining the required certification fromthe Internal Revenue Service may take at least six to eight weeks, U.S. holdersshould apply for such certification as soon as possible.

134

----

If tax is withheld by a Russian resident on dividendsor other amounts at a rate different from that provided in the tax treaty, aU.S. holder may apply for a tax refund by filing a package of documents withthe Russian local tax inspectorate to which the withholding tax was remittedwithin three years from the withholding date for U.S. holders which are legalentities, and within one year from the end of the year in which the withholdingoccurred for individual U.S. holders. The package should include theappropriate form (1011DT (2002) for non-dividend income and 1012DT (2002) fordividend income), confirmations of residence of the foreign holder (IRS Form 6166),a copy of the agreement or other documents substantiating the payment ofincome, documents confirming the beneficial ownership of the dividendsrecipient and the transfer of tax to the budget. Under the provisions of theTax Code, the refund of the tax should be effected within one month after thesubmission of the documents. However, procedures for processing such claimshave not been clearly established, and there is significant uncertaintyregarding the availability and timing of such refunds.

Neither the depositary norus has or will have any obligation to assist an ADS holder with the completionand filing of any tax forms.

**United StatesFederal Income Tax Considerations**

The following is ageneral description of the material United States federal income taxconsequences that apply to you if you are, for United States federal income taxpurposes, 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 continue to betreated as a United States person. If a partnership (including any entitytreated as a partnership for United States federal income tax purposes) is abeneficial owner of ADSs or common stock, the United States federal income taxtreatment of a partner in the partnership will generally depend on the statusof the partner and the activities of the partnership. Since your United Statesfederal income and withholding tax treatment may vary depending upon yourparticular situation, you may be subject to special rules not discussedbelow. Special rules will apply, for example, if you are:

·       an insurance company;

·       a tax-exempt organization;

·       a financial institution;

·       a person subject to thealternative minimum tax;

·       a person who is abroker-dealer in securities;

·       an S corporation;

·       an expatriate subject to Section 877of the Code;

·       an owner of, directly,indirectly or by attribution, 10% or more of the outstanding shares of theCompany’s common stock; or

·       an owner holding ADSs orcommon stock as part of a hedge, straddle, synthetic security or conversiontransaction.

In addition, this summary is generally limited topersons holding common stock or ADSs as “capital assets” within the meaning of Section 1221of the Code and whose functional currency is the U.S. dollar. The 

135

----

discussion below also does not address the effect ofany United States state or local tax law or foreign tax law.

For purposes of applying United States federal incomeand withholding tax law, a holder of an ADS should be treated as the owner ofthe underlying shares of common stock represented by that ADS.

The United States Treasuryhas expressed concerns that parties to whom ADSs are pre-released may be takingactions that are inconsistent with the claiming, by United States personsholding ADSs, of foreign tax credits for United States federal income taxpurposes. Such actions would also be inconsistent with the claiming of thereduced rate of tax applicable to dividends received by certain non-corporateUnited States persons, as described below. Accordingly, the analysis of thecreditability of Russian taxes described below, and the availability of thereduced tax rate for dividends received by certain non-corporate United Statespersons, could be affected by future actions that may be taken by the UnitedStates Treasury.

**Taxation ofDividends on Common Stock or ADSs**

For United States federal income tax purposes, thegross amount of a distribution, including any Russian withholding taxes, withrespect to common stock or ADSs will be treated as a taxable dividend to theextent of our current and accumulated earnings and profits, computed inaccordance with United States federal income tax principles. For taxable yearsbeginning before January 1, 2011, if you are a non-corporate taxpayer,such dividends may be taxed at the lower applicable capital gains rate provided(1) certain holding period requirements are satisfied, (2) either (a) ourADSs continue to be listed on the New York Stock Exchange (or other nationalsecurities exchange that is registered under section 6 of the SecuritiesExchange Act of 1934, as amended, or the Nasdaq Stock Market) or (b) weare eligible for the benefits of the United States-Russia income tax treaty,and (3) we are not, for the taxable year in which the dividend was paid,or in the preceding taxable year, a “passive foreign investment company.”Non-corporate U.S. holders are strongly urged to consult their own tax advisorsas to the applicability of the lower capital gains rate to dividends receivedwith respect to ADSs or shares of common stock. Distributions in excess of ourcurrent and accumulated earnings and profits will be applied against and willreduce your tax basis in common stock or ADSs and, to the extent in excess ofsuch tax basis, will be treated as gain from a sale or exchange of such commonstock or ADSs. You should be aware that we do not intend to calculate ourearnings and profits for United States federal income tax purposes and, unlesswe make such calculations, you should assume that any distributions withrespect to common stock or ADSs generally will be treated as a dividend, evenif that distribution would otherwise be treated as a return of capital or ascapital gain pursuant to the rules described above. If you are acorporation, you will not be allowed a deduction for dividends received inrespect of distributions on common stock or ADSs, which is generally availablefor dividends paid by U.S. corporations.

If a dividend distribution is paid in rubles, theamount includible in income will be the U.S. dollar value of the dividend,calculated using the exchange rate in effect on the date the dividend isincludible in income by you, regardless of whether the payment is actuallyconverted into U.S. dollars. Any gain or loss resulting from currency exchangerate fluctuations during the period from the date the dividend is includible inyour income to the date the rubles are converted into U.S. dollars will betreated as ordinary income or loss. You may be required to recognize foreigncurrency gain or loss on the receipt of a refund of Russian withholding taxpursuant to the United States-Russia income tax treaty to the extent the UnitedStates dollar value of the refund differs from the dollar equivalent of thatamount on the date of receipt of the underlying dividend.

Russian withholding tax at the rate applicable to youunder the United States-Russia income tax treaty should be treated as a foreignincome tax that, subject to generally applicable limitations and conditions, iseligible for credit against your U.S. federal income tax liability or, at yourelection, may be 

136

----

deducted in computingtaxable income. If, however, the holder of an ADS is not treated as the ownerof the underlying common stock represented by the ADS for U.S. federal incometax purposes, then Russian withholding tax would not be treated as a foreignincome tax eligible for credit as described in the preceding sentence. IfRussian tax is withheld at a rate in excess of the rate applicable to you underthe United States-Russia income tax treaty, you may not be entitled to creditsfor the excess amount, even though the procedures for claiming refunds and thepractical likelihood that refunds will be made available in a timely fashionare uncertain.

For United States foreigntax credit purposes, a dividend distribution will be treated as foreign sourceincome and will generally be classified as “passive category income” but could,in the case of certain U.S. holders, constitute “general category income” fortaxable years beginning after December 31, 2006. The rules relatingto the determination of the foreign tax credit, or deduction in lieu of theforeign tax credit, are complex and you should consult your own tax advisorswith respect to those rules.

**Taxation on Sale orExchange of Common Stock or ADSs**

The sale of common stock or ADSs will generally resultin the recognition of gain or loss in an amount equal to the difference betweenthe amount realized on the sale and your adjusted basis in such common stock orADSs. That gain or loss will be capital gain or loss if the common stock orADSs are capital assets in your hands and will be long-term capital gain orloss if the common stock or ADSs have been held for more than one year. If youare an individual, such realized long-term capital gain is generally subject toa reduced rate of United States federal income tax. Limitations may apply toyour ability to offset capital losses against ordinary income.

Deposits and withdrawals of common stock by you in exchangefor ADSs will not result in the realization of gain or loss for U.S. federalincome tax purposes.

Gain realized on the saleof common stock or ADSs will generally be treated as U.S. source income andtherefore the use of foreign tax credits relating to any Russian taxes imposedupon such sale may be limited. You are strongly urged to consult your own taxadvisors as to the availability of tax credits for any Russian taxes withheldon the sale of common stock or ADSs.

**InformationReporting and Backup Withholding**

Dividends and proceedsfrom the sale or other disposition of common stock or ADSs that are paid in theUnited States or by a U.S.-related financial intermediary will be subject toU.S. information reporting rules and U.S. backup withholding tax, unlessyou are a corporation or other exempt recipient. In addition, you will not besubject to backup withholding if you provide your taxpayer identificationnumber and certify that no loss of exemption from backup withholding hasoccurred. Holders that are not U.S. persons generally are not subject toinformation reporting or backup withholding, but such holders may be requiredto provide certification as to their non-U.S. status.

**F.**                Dividendsand Paying Agents

Not applicable.

**G.**              Statementby Experts

Not applicable.

**H.**              Documentson Display

The documents that areexhibits to or incorporated by reference in this document can be read at the U.S.Securities and Exchange Commission’s public reference facilities at Room 1024,

137

----

450 Fifth Street, N.W.,Washington, D.C. 20549. You may obtain information on the operation of thePublic Reference Room by calling the SEC at 1-800-SEC-0330or, from outside the United States, at 1-202-942-8090. Copiesmay also be obtained from the SEC website at www.sec.gov.

**I.**                   SubsidiaryInformation

Not applicable.

***Item 11.****                   Quantitativeand Qualitative Disclosures about Market Risk*

We are exposed to marketrisk from changes in both foreign currency exchange rates and interest rates.Foreign currency exchange risks exist to the extent that our revenues areprimarily denominated in Russian rubles and our costs are denominated in currenciesother than Russian rubles and our foreign currency denominated debt. We aresubject to market risk deriving from changes in interest rates, which mayaffect the cost of our financing. We do not use financial instruments such asforeign exchange forward contracts, foreign currency options, interest rateswaps and forward rate agreements, to manage these market risks, because themarket for these types of financial instruments in Russia is not well developedand the costs of these instruments is relatively high.

**Interest Rate Risk**

Our interest rate exposure results mainly from debtobligations. At December 31, 2006, we had debt amounting to $443.0 million, which comprised variable-rate borrowings of $83.8 million and fixed-rate borrowings of $ 359.2 million. See also “Item5. Operating and Financial Review and Prospects—E. ContractualObligations.”

Thefollowing tables present our variable and fixed-rate debt obligations as ofDecember 31, 2006 by expected maturity dates and related weighted averageinterest rates.

|                              | ** ** | **Expected Maturity Date as of December 31, 2006** | ** ** |
|------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **Currency**                                                                          | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011 and  thereafter** | ** ** | **Total** | ** ** | **Fair  value** | ** ** | **Interest  rates at  December 31,  2006** | ** ** |
| ** **                   | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Variable-rate  loans(1)**  |       | Euro                                                                                  |       | — |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   | — |   |   | — |   |   |
|                              |       | U.S.  dollars                                                                         |       | — |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   | — |   |   | — |   |   |
|                              |       | Rubles                                                                                |       | 83,753 |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 83,753 |   | 83,753 |   |   | 7.83 | % |   |
| **Variable-rate  notes**     |       | Rubles                                                                                |       | — |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   | — |   |   | — |   |   |
| **Total variable rate debt** |       |                                                                                  |       | 83,753 |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 83,753 |   | 83,753 |   |   | 7.83 | % |   |

----

(1)          Ourvariable rate loans are linked to Mosprime rate

138

----

|                                | ** ** | **Expected Maturity Date as of December 31, 2006** | ** ** |
|--------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                     | ** ** | **Currency**                                                                          | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011 and  thereafter** | ** ** | **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 to $359.2 millionand our variable rate debt increased to $83.6 million as a result of our incurrenceof additional short-term and long-term debt. See Notes 15 and 16 to ourConsolidated Financial Statements included under “Item 18. FinancialStatements.” 

Thefollowing tables present our variable and fixed-rate debt obligations as ofDecember 31, 2005 by maturity dates and related weighted average interestrates.

|                                 | ** ** | **Maturity Date as of December 31, 2005** | ** ** |
|---------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **Currency**                                                            | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010 and  thereafter** | ** ** | **Total** | ** ** | **Fair  value** | ** ** | **Interest  rates at  December 31,  2005** | ** ** |
| ** **                      | ** ** | **(in thousands of U.S. dollars)**                  | ** ** |
| **Variable-rate  loans****(1)** |       | Euro                                                                    |       | 2,703 |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 2,703 |   | 2,703 |   |   | 5.69 | % |   |
|                                 |       | U.S. dollars                                                            |       | 1,013 |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 1,013 |   | 1,013 |   |   | 6.06 | % |   |
|                                 |       | Rubles                                                                  |       |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   |   |   |   |   |   |   |   |
| **Variable-rate  notes****(2)** |       | Rubles                                                                  |       | 49,794 |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 49,794 |   | 49,794 |   |   | 11.24 | % |   |
| **Total variable rate debt**    |       |                                                                    |       | 53,510 |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 53,510 |   | 53,510 |   |   | 10.86 | % |   |

----

(1)          Our variable rate loansare linked to LIBOR and EURIBOR.

(2)          Ourruble notes are linked to the inflation index.

|                           | ** ** | **Expected Maturity Date as of December 31, 2005** | ** ** |
|---------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                | ** ** | **Currency**                                                                          | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010 and  thereafter** | ** ** | **Total** | ** ** | **Fair  value** | ** ** | **Interest  rates at  December 31,  2005** | ** ** |
| ** **                | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Fixed-rate loan**       |       | Rubles                                                                                |       | 19,904 |   | 764 |   | 713 |   | 455 |   |   | 16 |   |   | 21,852 |   | 21,852 |   |   | 5.85 | % |   |
|                           |       | U.S.  dollars                                                                         |       | 10,436 |   | 7,731 |   | 6,161 |   | 4,813 |   |   | 535 |   |   | 29,676 |   | 29,676 |   |   | 4.11 | % |   |
|                           |       | Euro                                                                                  |       | 5,090 |   | 5,025 |   | 1,179 |   | 904 |   |   | 180 |   |   | 12,378 |   | 12,378 |   |   | 3.62 | % |   |
| **Fixed-rate  Notes**     |       | U.S.  dollars                                                                         |       | — |   | — |   | 150,000 |   | — |   |   | — |   |   | 150,000 |   | 150,000 |   |   | 8.5 | % |   |
| **Total fixed rate debt** |       |                                                                                  |       | — |   | — |   | — |   | — |   |   | 104,230 |   |   | 104,230 |   | 104,230 |   |   | 9.0 | % |   |
|                           |       |                                                                                  |       | 35,430 |   | 13,520 |   | 158,053 |   | 6,172 |   |   | 104,961 |   |   | 318,136 |   | 318,136 |   |   | 7.89 | % |   |

 

139

----

Our fixed rate debtincreased to $318.1 million as a result of our issuance of rubledenominated notes in 2005 and our variable rate debt decreased to$53.5 million. See Notes 15 and 16 to our Consolidated FinancialStatements included under “Item 18. Financial Statements.”

**Foreign CurrencyRisk**

Our foreign currency exchange risk exposure resultsfrom the fact that our revenues are primarily denominated in Russian rubles anda significant portion of our costs is denominated in currencies other thanRussian rubles and net monetary liability position from our foreign currencydenominated debt. Thus, we incur remeasurement gains as the Russian rubleappreciates against other currencies and losses as the ruble depreciatesagainst other currencies. Management believes that monetary assets andliabilities denominated in foreign currencies, other then foreigncurrency-denominated debt, are not significant from a foreign currency riskperspective.

As of December 31, 2006, our U.S. dollar debtposition amounted to $171.0 million and our euro debt position amounted to$21.7 million, compared to a U.S. dollar debt position of $180.7 million andeuro debt position of $15.1 million as of December 31, 2005.

|                | ** ** | **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 |   |
|                |            |                                                                                       |            |          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

|                | ** ** | **Expected Maturity Date as of December 31, 2005** | ** ** |
|----------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **     | ** ** | **Currency**                                                                          | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010 and  thereafter** | ** ** | **Total** | ** ** | **Fair  value** | ** ** |
| ** **     | ** ** | **(in thousands of U.S. dollars)**                                | ** ** |
| **Debt**       |       | Rubles                                                                                |       | 69,798 |   | 764 |   | 713 |   | 455 |   |   | 104,246 |   |   | 175,876 |   | 175,876 |   |
|                |       | U.S.  dollars                                                                         |       | 11,449 |   | 7,731 |   | 156, 161 |   | 4,813 |   |   | 535 |   |   | 180,689 |   | 180,689 |   |
|                |       | Euro                                                                                  |       | 7,793 |   | 5,025 |   | 1,179 |   | 904 |   |   | 180 |   |   | 15,081 |   | 15,081 |   |
| **Total debt** |       |                                                                                  |       | 88,940 |   | 13,520 |   | 158, 053 |   | 6,172 |   |   | 104,961 |   |   | 371,646 |   | 371,646 |   |

 

During 2006, the Russian ruble appreciated against theU.S. dollar and the euro. We incurred a currency remeasurement gain of $10.3million, which was comprised of gains and losses from euro- and U.S. dollardenominated obligations, respectively, as well as remeasurement gains from ourU.S. dollar-denominated notes. For purposes of accounting for our U.S.dollar-denominated notes, we used the exchange rate as of December 31,2006, which appreciated nominally by 8.5% against the December 31, 2005exchange rate resulting in a currency remeasurement gain.

During 2005, the Russian ruble appreciated against theU.S. dollar and the euro. We incurred a currency remeasurement gain of $1.2million. In 2005, we incurred total currency remeasurement gains of $1.2million, which comprised of gains and losses from euro- and U.S. dollardenominated obligations, respectively, as well as remeasurement gains from ouroperations in Ukraine. For purposes of accounting for our U.S.dollar-denominated notes, we used the exchange rate as of December 31,2005, which depreciated nominally by 3.7% against the December 31, 2004exchange rate resulting in a currency remeasurement loss. On the other hand, asthe value of the ruble increased against the euro, our euro-denominatedobligations resulted in currency remeasurement gains. With respect toruble-denominated liabilities of our Ukrainian subsidiary, we incurred currencyremeasurement gains due to the depreciation of the ruble against the Ukrainianhryvna.

140

----

We believe that the carrying value of our long-termdebt approximates its fair value. The carrying amounts of cash and cashequivalents, accounts receivable, accounts payable and short-term loansreported in the consolidated balance sheet approximate their fair values due tothe short maturity of those instruments.

See also “Item 3. KeyInformation—A. Selected Financial Data—Exchange Rates and Inflation.”

***Item 12.***                   *Description of Securities Other than Equity Securities*

Not applicable.

141

----

**PART II**

***Item 13.****                   Defaults,Dividend Arrearages and Delinquencies*

None.

***Item 14.****                   MaterialModifications to the Rights of Security Holders and Use of Proceeds*

Not applicable.

***Item 15T.****           Controlsand Procedures*

*(a)  *DisclosureControls and Procedures.

As required by Rules 13a-15 and 15d-15under the 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 isrecorded, processed, summarized and reported, within the time periods specifiedin the rules and forms of the Securities and Exchange Commission.Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed by usin our reports that we file or submit under the Exchange Act is accumulated andcommunicated to management, including our chief executive officer and chieffinancial officer, as appropriate to allow timely decisions regarding its requireddisclosure. In designing and evaluating our disclosure controls and procedures,management recognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, and management was required to apply its judgmentin evaluating and implementing possible controls and procedures.

As described below, twomaterial weaknesses were identified in our internal control over financialreporting. The Public Company Accounting Oversight Board’s Auditing StandardNo. 2 defines a material weakness as a significant deficiency, orcombination of significant deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. As a result of the materialweaknesses, our chief executive officer and chief financial officer haveconcluded that, as of December 31, 2006, the end of the period covered bythis report, our disclosure controls and procedures and control over financialreporting were not effective at a reasonable assurance level.

*(b)  *Management’sannual report on internal control over financial reporting.

Management is responsible for establishing andmaintaining adequate internal control over financial reporting.

Internal controlover financial reporting refers to a process designed by, or under thesupervision of, our chief executive officer and chief financial officer andeffected by our board of directors, management and other personnel, to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles and includes those policies andprocedures that:

·       pertainto the maintenance of records that in reasonable detail accurately and fairlyreflect the transactions and dispositions of our assets;

·       providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that our 

142

----

receipts and expendituresare being made only in accordance with authorizations of our management andmembers of our board of directors; and

·       providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of our assets that could have a materialeffect on our financial statements.

Internal control over financial reporting cannotprovide absolute assurance of achieving financial reporting objectives becauseof its inherent limitations. Internal control over financial reporting is aprocess that involves human diligence and compliance and is subject to lapsesin judgment and breakdowns resulting from human failures. Internal control overfinancial reporting also can be circumvented by collusion or improper override.Because of such limitations, there is a risk that material misstatements maynot be prevented or detected on a timely basis by internal control overfinancial reporting. However, these inherent limitations are known features ofthe financial reporting process, and it is possible to design into the processsafeguards to reduce, though not eliminate, this risk.

Management evaluated the effectiveness of our internalcontrol over financial reporting as of December 31, 2006 using theframework set forth in the report of the Treadway Commission’s Committee ofSponsoring Organizations (COSO), “Internal Control—Integrated Framework.” Thescope of management’s evaluation excluded the acquisition of Ochakovo andManros, two companies that we acquired in November/December 2006, asdescribed in Frequently Asked Question No. 3 (Oct. 6, 2004) regardingRelease No. 3447986, “Management’s Report on Internal Control OverFinancial Reporting and Certification of Disclosure in Exchange Act PeriodicReports” (June 5, 2003). Accordingly, management’s assessment of ourinternal control over financial reporting does not include internal controlover financial reporting of Ochakovo and Manros, which together represented8.9% of our total assets and 10.7% of our net assets at December 31, 2006,and generated 1.0% of our total revenue and (0.4)% of our net income during theyear then ended.

As a result ofevaluation of effectiveness of internal control over financial reporting as ofDecember 31, 2006, management concluded that the following two materialweaknesses in our internal control existed:

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

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

As a result of thematerial weaknesses, management has concluded that our internal control overfinancial reporting was ineffective as of December 31, 2006.

*AdditionalInformation Regarding the Material Weaknesses*

*Our financial statement closing process and thetransformation of our statutory financial statements into U.S. GAAPconsolidated financial statements has not reduced to an acceptably low levelthe risk that material errors may occur and may not be detected on a timelybasis by management in the normal course of business.*

The first weakness results from the fact that there is nofully automated process in place to support the transformation of statutoryfinancial statements of our subsidiaries to comply with U.S. GAAP or thepreparation of the consolidated balance sheet, consolidated statements ofincome and cash flows, including the reconciliation and elimination ofintragroup balances and transactions. We also lack a sufficiently detaileddescription of individual procedures, responsible persons and controls for theU.S. GAAP financial statements closing processes and documentation of theircompletion. Also, some of our processes 

143

----

regardingaccumulation and communication of detail information regarding non-routinetransactions, commitments and contingencies did not operated effectively asdesigned.

*Insufficient accounting resources and expertise inrespect of the preparation of consolidated financial statements in accordancewith U.S. GAAP.*

The secondweakness relates to our insufficient U.S. GAAP accounting resources andexpertise. Our business consists of 36 operating subsidiaries, of which the 10major subsidiaries are located across eight time zones in Russia and theCommonwealth of Independent States, each of which prepares stand-alonefinancial statements for statutory purposes under Russian accounting standardsor other local country accounting standards. The preparation of our U.S. GAAPconsolidated financial statements is a partly automated process which involves(1) the transformation of these statutory financial statements into U.S. GAAPconsolidated financial statements through accounting adjustments and (2) aconsolidation of all these stand-alone statutory financial statements. Thisprocess is complicated, time-consuming and requires significant attention andtime from our senior accounting personnel at our subsidiaries and corporateheadquarters. Moreover, U.S. GAAP accounting adjustments tend to result inlarge differences between our statutory and U.S. GAAP financial position andresults of operations.

Thesedifficult tasks require U.S. GAAP-experienced accounting personnel at each ofour 10 major subsidiaries and at our Moscow corporate offices. While we havesenior accounting personnel who are ACCA-qualified, Russia has available only asmall number of accounting personnel with U.S. GAAP expertise. Moreover, thereis an increasing demand for such personnel as more Russian companies arebeginning to prepare financial statements on the basis of U.S. GAAP or otherinternational standards. Such competition, combined with the locations of ourmajor subsidiaries which such personnel may not find suitable in comparison toother opportunities, makes it difficult for us to hire and retain suchpersonnel. Under these circumstances, we have had difficulty in remedying thismaterial weakness.

Notwithstanding the stepswe have taken and continue to take that are designed to remedy each materialweakness identified above, we may not be successful in remediating thesematerial weaknesses in the near or long term and we may not be able to preventother material weaknesses in the future.

*RemediationActivities*

We have taken and continue to take several steps to correctthe material weaknesses.

·       Managementdeveloped a documentation of our statutory and U.S. GAAP financial statementsclosing process. We developed and introduced checklists for accountingpersonnel for documenting actual performance of procedures and controls. Wehave reviewed and communicated to proper personnel our processes onaccumulation and communication regarding non-routine transactions, commitmentsand contingencies. Currently, management is in the process of improvinginternal guidelines of the statutory and U.S. GAAP financial statements closingprocess, including individual procedures and controls. This process is takingplace under close supervision of our department of internal control. We expectthese new procedures will be implemented by the end of September 2007.

·       InDecember 2006, we hired a senior accounting professional with appropriateU.S. GAAP experience responsible for review of U.S. GAAP statements and dealingwith complex issues. An individual professional development plan is currentlybeing implemented for the key accounting specialists involved in the U.S. GAAPconsolidated financial statements preparation process, which will be constantlymonitored by management, to further strengthen our accounting function.Currently, four of our key financial staff are in the process of obtainingtheir ACCA certification, and one is ACCA- qualified. Remaining specialists arein the process of registering or obtaining 

144

----

ACCA or DipIfrcertificates. We also have added two additional accounting specialists to ourU.S. GAAP accounting department.

·       InApril 2007, we arranged a training seminar for our key accounting staffprovided by qualified external trainers on Financial Accounting StandardNo. 109, *Accounting for Income Taxes*whichenhanced the process of accounting for income tax in accordance with FinancialAccounting Standard No. 109,. In 2007, we plan to continue arrangingtraining seminars for our accounting staff. In particular, a U.S. GAAP updatetraining will be held for our key accounting specialists, and a comprehensiveU.S. GAAP training will be held for all U.S. GAAP accounting department duringthe year 2007.

Although wehave undertaken the foregoing initiatives, the existence of a material weaknessis an indication that there is more than a remote likelihood that a materialmisstatement of our financial statements will not be prevented or detected in afuture period. In addition, we cannot assure you that we will not in the futureidentify further material weaknesses or significant deficiencies in ourinternal control over financial reporting that we have not discovered to date.We are taking steps to refine our internal control over financial reportingpursuant to Section 404 of the Sarbanes-Oxley Act, which will take effectbeginning with the year ending December 31, 2006, and the efficacy of thesteps we have taken to date and the steps we are still in the process ofcompleting is subject to continued management review supported by confirmationand testing by management and by our internal auditors, as well as auditcommittee oversight. As a result, additional changes will be made to ourinternal control over financial reporting. See “Item 3. Key Information—D. RiskFactors—There are material weaknesses in our internal control over financialreporting and we may not be able to remedy these material weaknesses or preventfuture material weaknesses. If we fail to do so there is a more than remotelikelihood that a material misstatement of the annual or interim statementswill not be prevented or detected.”

This annual report does not include an attestation reportof our registered public accounting firm regarding internal control overfinancial reporting. Management’s report was not subject to attestation by ourregistered public accounting firm pursuant to temporary rules of the SECthat permit us to provide only management’s report in this annual report.

*(c)  *Changesin internal control over financial reporting.

Management has evaluated,with the participation of our chief executive officer and chief financialofficer, whether any changes in our internal control over financial reportingthat occurred during the period covered by this annual report have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting. Based on the evaluation we conducted, management hasconcluded that no such changes have occurred. However, management believes themeasures that have been implemented to remediate the material weaknesses havehad a material impact on our internal control over financial reporting sinceDecember 31, 2006, and anticipates that these measures and other ongoingenhancements will continue to have a material impact on our internal control overfinancial reporting in future periods.

***Item 16A.****           AuditCommittee Financial Expert*

Our Board of Directors hasdetermined that Guy de Selliers is an “audit committee financial expert” asdefined in Item 16A of Form 20-F. Mr. de Selliers isindependent in accordance with SEC Rule 10A-3.

***Item 16B.****           Codeof Ethics*

In July 2005, ourBoard of Directors approved a Code of Ethics that applies to our employees,including our principal executive officer, principal financial officer andprincipal accounting officer or 

145

----

controller,or persons performing similar functions, which is posted on our website athttp://www.wbd.com/f_reports/corp_govern/. No waivers of the Code of Ethicshave been granted.

***Item 16C.****          PrincipalAccountant Fees and Services*

Ernst &Young LLC has served as our independent public accountants for the fiscal yearsended December 31, 2006 and 2005, 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 2006 and 2005, respectively.

| ** **         | ** ** | **Year ended December 31,** | ** ** |
|--------------------|------------|--------------------------------------------|------------|
| ** **         | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| ** **         | ** ** | **(in U.S. dollars)**            | ** ** |
| Audit Fees         |       | $                                          | 827,096    |   | $ | 929,400 |   |
| Audit-Related Fees |       | —                                     |       | 30,000 |   |
| All Other Fees     |       | 80,423                                     |       | 268,470 |   |
| Total              |       | $                                          | 907,519    |   | $ | 1,227,870 |   |

 

**Audit Fees**

Audit services consistedof the audit of the consolidated financial statements as of and for the yearsended December 31, 2006 and 2005, the Russian statutory audit ofstand-alone financial statements prepared in accordance with Russian accountingprinciples of Wimm-Bill-Dann Foods OJSC as of and for the years endedDecember 31, 2006 and 2005, reviews of the consolidated condensedfinancial statements for the three months ended March 31, 2006 and 2005,the six months ended June 30, 2006 and 2005 and the nine months endedSeptember 30, 2006 and 2005 and services performed by our externalauditors in connection with our Audit Committee meetings and relatedcommunications, as well as with their review of this annual report onForm 20-F.

**Audit-related Fees**

Audit-related services forthe year ended December 31, 2005 consisted of services performed by ourexternal auditors in connection with the issuance of a ruble bond.

**Other Fees**

Other services for theyears ended December 31, 2006 and 2005 mainly consisted of advisoryservices regarding compliance with the Sarbanes-Oxley Act of 2002.

**Audit CommitteePre-Approval Policies and Procedures**

The Sarbanes-Oxley Act of2002 required that we implement a pre-approval process for all engagements withour Independent Registered Public Accounting Firm. In compliance with theserequirements, our Audit Committee pre-approves the engagement terms and fees ofErnst & Young for all audit and non-audit services. The Audit Committeepre-approved the engagement terms and fees of Ernst & Young for allaudit and non-audit services for the fiscal years ended December 31, 2006and 2005.

***Item 16D.****          Exemptionfrom the Listing Standards for Audit Committees*

Not applicable.

***Item 16E.****          Purchasesof Equity Securities by the Issuer and Affiliated Purchasers*

No purchases were made by or on behalf of us or anyaffiliated purchaser of shares or other units of any class of our equitysecurities during the period covered by this annual report.

146

----

**PART III**

***Item 17.****                   FinancialStatements*

**Seeinstead “Item 18. Financial Statements.”**

***Item 18.****                   FinancialStatements*

Thefollowing financial statements, together with the report of Ernst &Young LLC, are filed as part of this annual report on Form 20-F.
|                                                                                                                  | ** ** | ** ** | **Page** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------|----------|------------|------------|
| Index to the Consolidated  Financial Statements                                                                  |       | F-1        |     |
| Report of Independent Registered  Public Accounting Firm                                                         |       | F-2        |     |
| Consolidated Balance Sheets as of  December 31, 2006 and 2005                                               |       | F-3        |     |
| Consolidated Statements  of Operations for the years ended December 31, 2006, 2005 and 2004                 |       | F-5        |     |
| Consolidated Cash Flow  Statements for the years ended December 31, 2006, 2005 and 2004                     |       | F-6        |     |
| Consolidated Statements of  Shareholders’ Equity for the years ended December 31, 2006, 2005 and  2004 |       | F-8        |     |
| Notes  to the Consolidated Financial Statements                                                                  |       | F-9        |     |

 

147

----

***Item 19.****                   Exhibits*

| 1.1   |   | Charter of Wimm-Bill-Dann Foods OJSC (English  Translation) is incorporated by reference to Exhibit 1 to the Annual  Report filed pursuant to Section 13 or 15(d) of the Securities  Exchange Act of 1934 for the fiscal year ended December 31, 2002, on  Form 20-F.                                                                                                                                                           |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.2   |   | Amendments to the  charter of Wimm-Bill-Dann Foods OJSC (English Translation), approved  June 18, 2003 is incorporated herein by reference to Exhibit 1.2 to  the Annual Report filed pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934 for the fiscal year ended December 31,  2003 on Form 20-F.                                                                                                   |
| 1.3   |   | Amendment to the charter  of Wimm-Bill-Dann Foods OJSC (English Translation), approved July 16,  2004 is incorporated herein by reference to Exhibit 1.3 to the Annual  Report filed pursuant to Section 13 or 15(d) of the Securities  Exchange Act of 1934 for the fiscal year ended December 31, 2004 on  Form 20-F.                                                                                                    |
| 1.4   |   | Amendment to the charter  of Wimm-Bill-Dann Foods OJSC (English Translation), approved June 14,  2005 is incorporated herein by reference to Exhibit 1.4 to the Annual  Report filed pursuant to Section 13 or 15(d) of the Securities  Exchange Act of 1934 for the fiscal year ended December 31, 2004 on  Form 20-F.                                                                                                    |
| 1.5   |   | Amendment to the charter  of Wimm-Bill-Dann Foods OJSC (English Translation), approved May 30,  2006                                                                                                                                                                                                                                                                                                                                                |
| 1.6   |   | Amendment to the charter  of Wimm-Bill-Dann Foods OJSC (English Translation), approved July 14,  2006                                                                                                                                                                                                                                                                                                                                               |
| 1.7   |   | Amendment to the charter  of Wimm-Bill-Dann Foods OJSC (English Translation), approved October 23,  2006                                                                                                                                                                                                                                                                                                                                            |
| 1.8   |   | Amendment to the charter  of Wimm-Bill-Dann Foods OJSC (English Translation), approved  December 15, 2006                                                                                                                                                                                                                                                                                                                                           |
| 2.1   |   | Deposit Agreement, dated  January 17, 2002, by and among the Company, the Depositary, and the  holders and beneficial owners from time to time of the ADSs is incorporated  by reference to Exhibit 2.1 to the Annual Report filed pursuant to  Section 13 or 15(d) of The Securities Exchange Act of 1934 for the  fiscal year ended December 31, 2001 on Form 20-F/A.                                                    |
| 4.1   |   | U.S. $150,000,000 Loan  Agreement, dated as of 14 May 2003 between Open Joint Stock Company  Wimm-Bill-Dann Foods as Borrower and UBS (Luxembourg) S.A. as Lender is  incorporated herein by reference to Exhibit 4.1 to the Annual Report  filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934 for the fiscal year ended December 31, 2002 on Form 20-F.                                             |
| 4.2   |   | Deed of Guarantee, dated  as of 14 May 2003 between OAO Lianozovsky Dairy Plant, OAO Tsaritsino  Dairy Plant, ZAO Trade Company Wimm- Bill-Dann as Guarantors and UBS  (Luxembourg) S.A. as Lender is incorporated herein by reference to  Exhibit 4.2 to the Annual Report filed pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 for the fiscal year ended  December 31, 2002, on Form 20-F. |
| 4.2.1 |   | Side Letter and Deed of  Accession dated 23 January 2004 is incorporated herein by reference to  Exhibit 4.2.1 to the Annual Report filed pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31,  2004 on Form 20-F.                                                                                                                                               |
| 4.2.2 |   | Side Letter and Deed of  Accession dated 27 January 2005 is incorporated herein by reference to  Exhibit 4.2.2 to the Annual Report filed pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 for the fiscal year ended  December 31, 2004 on Form 20-F.                                                                                                                                               |

148

----

 

| 4.2.3 |   | Notice on termination of  guarantee provided by OAO Tsaritsino Dairy Plant, OAO Baltic milk Dairy  Plant, OAO Dairy Plant (Timashevsk) dated 10 July 2006                                                                                                                                                                                                                                                                                                                                                                                |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.3   |   | U.S. $150,000,000 Loan  Agreement, dated as of 06 February 2007 between Open Joint Stock Company  Wimm-Bill-Dann Foods as Borrower and UBS (Luxembourg) S.A.                                                                                                                                                                                                                                                                                                                                                                        |
| 4.4   |   | Contract  No. P71028, dated January 1, 2007, by and between CJSC Tetra Pak  and OAO wimm-Bill-Dann.*                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.5   |   | Contract  No. P71039, dated January 1, 2007, by and between CJSC Tetra Pak  and OAO Wimm-Bill-Dann Beverages.*                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.6   |   | Subsoil Use License  No. 01948 issued to Rodniki Valdaya Limited Liability Company; License  Agreement on the terms of subsoil use for the extraction of up to 500 m3/day  of underground drinking water from exploitation wells No. 2537 and  No. 2542 (English Translation) is incorporated herein by reference to  Exhibit 4.5 to the Annual Report filed pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 for the fiscal year ended  December 31, 2002, on Form 20-F. |
| 4.7   |   | 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).                                                                                                                                                                                                                                          |
| 4.8   |   | 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 Registration Statement on  Form F-1 (Registration No. 333-14278).                                                                                                                                                                                                                                         |
| 4.9   |   | 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).                                                                                                                                                                                                                                            |
| 4.10  |   | 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).                                                                                                                                                                                                                                            |
| 4.11  |   | 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).                                                                                                                                                                                                                                           |
| 4.12  |   | 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).                                                                                                                                                                                                                                            |
| 4.13  |   | 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).                                                                                                                                                                                                                                         |
| 4.14  |   | 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).                                                                                                                                                                                                                                       |
| 4.15  |   | 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).                                                                                                                                                                                                                                         |
| 4.16  |   | 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).                                                                                                                                                                                                                                         |

149

----

 

| 4.17 |   | 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).    |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.18 |   | 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). |
| 4.19 |   | 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).     |
| 4.20 |   | 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).  |
| 4.21 |   | 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.                                                                                                                                   |

----

*                    Confidentialtreatment has been requested with respect to certain portions of this exhibit.Omitted portions have been filed separately with the Securities and ExchangeCommission.

150

----

**SIGNATURES**

Theregistrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersigned tosign this annual report on its behalf.

|                     | WIMM-BILL-DANN  FOODS OJSC |
|---------------------|----------------------------|
|                |                       | /s/ TONY D.  MAHER |
|                | By:                        | Tony D. Maher |
|                | Title:                     | *Chief Executive Officer* |
| Date: June 25, 2007 |                       |   |

 

151

----

**Wimm-Bill-Dann FoodsConsolidated Financial StatementsYears ended December 31, 2006 and 2005**

**Contents**

| Report of Independent  Registered Accounting Firm           |   | F-2    |
|-------------------------------------------------------------|--------|--------|
| Consolidated  Financial Statements                          |   |   |
| Consolidated Balance Sheets                                 |   | F-3    |
| Consolidated Statements of  Income and Comprehensive Income |   | F-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 ofIndependent Registered Public Accounting Firm**

The Board of Directors and ShareholdersWimm-Bill-Dann Foods

We have audited the accompanying consolidated balancesheets of Wimm-Bill-Dann Foods, a Russian Open Joint Stock Company (“theCompany”) as of December 31, 2006 and 2005, 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, 2006.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used and significantestimates made by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

In ouropinion, the financial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Wimm-Bill-Dann Foods at December 31,2006 and 2005, and the consolidated results of its operations and its cashflows for each of the three years in the period ended December 31, 2006 inconformity with U.S. generally accepted accounting principles.
| /s/ ERNST &  YOUNG LLC |   |
|---------------------------------|--------|
| April 10, 2007             |
| Moscow, Russia                  |

 

F-2

----

**Wimm-Bill-Dann Foods Consolidated Balance Sheets (Amounts in thousands of U.S. dollars)**

| ** **                                                                   | ** ** | **December 31,** | ** **        |
|------------------------------------------------------------------------------|------------|-----------------------|-------------------|
| ** **                                                                   | ** ** | **2006**              | ** **        | **2005** | ** ** |
| **ASSETS**                                                                   |       |                  |              |   |   |
| **Current assets:**                                                          | ** ** | ** **            | ** **        | ** ** | ** ** |
| Cash  and cash equivalents (Note 5)                                          |       | $                     | 40,310            |   | $ | 93,103 |   |
| Short-term  bank deposits                                                    |       | —                |              | 32,164 |   |
| Trade  receivables, net (Note 6)                                             |       | 89,932                |              | 59,968 |   |
| Inventory  (Note 7)                                                          |       | 174,074               |              | 130,597 |   |
| Taxes  receivable                                                            |       | 51,161                |              | 61,480 |   |
| Advances paid                                                                |       | 30,695                |              | 9,715 |   |
| Net  investment in direct financing leases (Note 8)                          |       | 2,095                 |              | 2,335 |   |
| Deferred  tax asset (Note 18)                                                |       | 12,749                |              | 8,750 |   |
| Other  current assets (Note 9)                                               |       | 19,730                |              | 8,915 |   |
| **Total current assets**                                                     | ** ** | **420,746**           | ** **        | **407,027** | ** ** |
| **Non-current assets:**                                                      | ** ** | ** **            | ** **        | ** ** | ** ** |
| Property,  plant and equipment, net (Note 11)                                |       | 606,728               |              | 459,527 |   |
| Intangible  assets, net (Note 10)                                            |       | 26,844                |              | 7,078 |   |
| Goodwill  (Note 12)                                                          |       | 105,990               |              | 32,008 |   |
| Net  investment in direct financing leases—non-current portion (Note 8) |       | 1,673                 |              | 3,072 |   |
| Long-term  investments                                                       |       | 25                    |              | 138 |   |
| Deferred  tax asset—non-current portion (Note 18)                       |       | 8,737                 |              | 5,554 |   |
| Other  non-current assets (Note 13)                                          |       | 5,193                 |              | 6,153 |   |
| **Total non-current assets**                                                 | ** ** | **7****55,190**       | ** **        | **513,530** | ** ** |
| **Total assets**                                                             | ** ** | **$**                 | **1,175****,936** | ** ** | **$** | **920,557** | ** ** |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-3

----

**Wimm-Bill-Dann Foods Consolidated Balance Sheets (continued) (Amounts in thousands of U.S. dollars, except share data)**

 

| ** **                                                                                        | ** ** | **December 31,** | ** **            |
|---------------------------------------------------------------------------------------------------|------------|-----------------------|-----------------------|
| ** **                                                                                        | ** ** | **2006**              | ** **            | **2005** | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                     | ** ** | ** **            | ** **            | ** ** | ** ** |
| **Current liabilities:**                                                                          | ** ** | ** **            | ** **            | ** ** | ** ** |
| Trade  accounts payable                                                                           |       | $                     | 104,066               |   | $ | 65,780 |   |
| Advances  received                                                                                |       | 13,230                |                  | 5,291 |   |
| Short-term  loans (Note 15)                                                                       |       | 123,849               |                  | 19,554 |   |
| Long-term  loans, current portion (Note 15)                                                       |       | 4,137                 |                  | 3,823 |   |
| Short-term notes payable (Note  16)                                                               |       | —                |                  | 49,794 |   |
| Taxes  payable                                                                                    |       | 9,494                 |                  | 13,406 |   |
| Accrued  liabilities (Note 14)                                                                    |       | 37,103                |                  | 17,071 |   |
| Government  grants—current portion (Note 19)                                                 |       | 1,422                 |                  | 2,174 |   |
| Other  payables (Note 17)                                                                         |       | 37,035                |                  | 30,200 |   |
| **Total current liabilities**                                                                     | ** ** | **330,336**           | ** **            | **207****,0****93** | ** ** |
| **Long-term liabilities:**                                                                        |       |                  |                  |   |   |
| Long-term loans (Note 15)                                                                         |       | 30,082                |                  | 1,824 |   |
| Long-term notes payable (Note  16)                                                                |       | 248,742               |                  | 254,230 |   |
| Other long-term payables (Note  17)                                                               |       | 20,905                |                  | 26,893 |   |
| Government grants—long-term  portion (Note 19)                                               |       | 1,125                 |                  | 3,219 |   |
| Deferred taxes—long-term portion (Note 18)                                                   |       | 28,275                |                  | 15,636 |   |
| **Total  long-term liabilities**                                                                  | ** ** | **329,129**           | ** **            | **301,802** | ** ** |
| **Total  liabilities**                                                                            | ** ** | **659,465**           | ** **            | **508,895** | ** ** |
| **Commitments  and contingencies (Note 30****)**                                                  |       | —                |                  | — |   |
| **Minority  interests (Note 21****)**                                                             | ** ** | **18,977**            | ** **            | **24,619** | ** ** |
| **Shareholders’ equity (Note  20****)****:**                                                 |       |                  |                  |   |   |
| Common stock: 44,000,000  shares authorized, issued and outstanding with a par value of 20 rubles |       | 29,908                |                  | 29,908 |   |
| Share premium account                                                                             |       | 164,132               |                  | 164,132 |   |
| Retained earnings                                                                                 |       | 234,285               |                  | 163,237 |   |
| Accumulated other comprehensive income:                                                           |       |                  |                  |   |   |
| Currency translation  adjustment                                                                  |       | 69,169                |                  | 29,766 |   |
| **Total shareholders’ equity**                                                               | ** ** | **497,494**           | ** **            | **387,043** | ** ** |
| **Total liabilities and  shareholders’ equity**                                              | ** ** | **$**                 | **1,****175****,936** | ** ** | **$** | **920,557** | ** ** |

 

The accompanying notes are an integral part of these consolidated financial statements. 

F-4

----

**Wimm-Bill-Dann FoodsConsolidated Statements of Income and Comprehensive Income(Amounts in thousands of U.S. dollars, except share and per share data)**

| ** **                                                          | ** ** | **Year ended December 31** | ** **    |
|---------------------------------------------------------------------|------------|-------------------------------------------|---------------|
| ** **                                                          | ** ** | **2006**                                  | ** **    | **2005** | ** ** | **2004** | ** ** |
| **Sales  (Note 27)**                                                | ** ** | **$**                                     | **1,762,127** | ** ** | **$** | **1,394,590** | ** ** | **$** | **1,183,986** | ** ** |
| **Cost of sales (Note 22)**                                         | ** ** | **(1,194,159**                            | **)**         | **(999,006** | **)** | **(858,767** | **)** |
| **Gross  profit**                                                   | ** ** | **567,968**                               | ** **    | **395,584** | ** ** | **325,219** | ** ** |
| Selling and distribution  expenses (Note 23)                        |       | (246,054                                  | )             | (191,990 | ) | (173,433 | ) |
| General and administrative expenses (Note 24)                       |       | (134,481                                  | )             | (109,642 | ) | (92,816 | ) |
| Other operating expenses, net                                       |       | (31,812                                   | )             | (6,457 | ) | (6,047 | ) |
| **Operating  income**                                               | ** ** | **155,621**                               | ** **    | **87,495** | ** ** | **52,923** | ** ** |
| Financial  income and expenses, net (Note 25)                       |       | (15,480                                   | )             | (22,868 | ) | (14,618 | ) |
| **Income before provision for  income taxes and minority interest** | ** ** | **140,141**                               | ** **    | **64,627** | ** ** | **38,305** | ** ** |
| Provision for income taxes  (Note 18)                               |       | (41,560                                   | )             | (30,712 | ) | (12,170 | ) |
| Minority interest (Note 21)                                         |       | (3,197                                    | )             | (3,649 | ) | (3,161 | ) |
| **Net Income**                                                      | ** ** | **$**                                     | **95,384**    | ** ** | **$** | **30,266** | ** ** | **$** | **22,974** | ** ** |
| **Other comprehensive income, net of tax**                          | ** ** | ** **                                | ** **    | ** ** | ** ** | ** ** | ** ** |
| Currency translation  adjustment                                    |       | 39,403                                    |          | (14,139 | ) | 23,324 |   |
| **Comprehensive income**                                            | ** ** | **$**                                     | **134,787**   | ** ** | **$** | **16,127** | ** ** | **$** | **46,298** | ** ** |
| **Earnings per share—basic and  diluted**                      | ** ** | **$**                                     | **2.17**      | ** ** | **$** | **0.69** | ** ** | **$** | **0.52** | ** ** |
| Weighted average number of shares outstanding, basic and diluted    |       | $                                         | 44,000,000    |   | $ | 44,000,000 |   | $ | 44,000,000 |   |

 

The accompanying notes are an integral part of these 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** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                          | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash flows from operating  activities:**                                          | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  Income                                                                         |       | $                                         | 95,384     |   | $ | 30,266 |   | $ | 22,974 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:  |       |                                      |       |   |   |   |   |
| Minority interest                                                                   |       | 3,197                                     |       | 3,649 |   | 3,161 |   |
| Depreciation and  amortisation                                                      |       | 62,329                                    |       | 53,435 |   | 44,003 |   |
| Currency  remeasurement loss(gain) relating to bonds payable and long-term payables |       | (13,660                                   | )          | 990 |   | (9,938 | ) |
| Obsolescence and net  realizable value expense                                      |       | 601                                       |       | 1,077 |   | 3,482 |   |
| Provision for doubtful  accounts                                                    |       | 3,130                                     |       | 3,908 |   | 3,722 |   |
| Loss on disposal of  property, plant and equipment                                  |       | 2,340                                     |       | 1,321 |   | 1,013 |   |
| Earned income on net  investment in direct financing leases                         | ** ** | (706                                      | )          | (402 | ) | (639 | ) |
| Deferred tax  expense(benefit)                                                      |       | (6,672                                    | )          | 3,327 |   | (6,019 | ) |
| Non-cash rental received                                                            |       | 2,938                                     |       | 2,496 |   | 1,957 |   |
| Provision (reversal)  of tax contingent liability                                   |       | 1,028                                     |       | (800 | ) | (128 | ) |
| Loss/(gain) from securities  and disposal of long-term investments                  |       | 86                                        |       | 1,786 |   | 190 |   |
| Impairment of tangible assets and intangible assets                                 |       | 15,633                                    |       | — |   | — |   |
| Impairment of goodwill                                                              |       | 2,539                                     |       | — |   | — |   |
| Write-off of unrecoverable investments in direct  finance lease                     |       | 131                                       |       | — |   | — |   |
| Write-off of unrecoverable VAT                                                      |       | 588                                       |       | — |   | — |   |
| Amortisation of bond issue  expenses                                                |       | 1,197                                     |       | 1,046 |   | 1,025 |   |
| Changes in operating assets  and liabilities (net of impact of acquisitions):       | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Inventory                                                                           |       | (18,193                                   | )          | (25,361 | ) | (9,208 | ) |
| Trade accounts receivable                                                           |       | (20,023                                   | )          | (2,636 | ) | (4,883 | ) |
| Advances paid                                                                       |       | (16,224                                   | )          | 9,553 |   | 1,356 |   |
| Taxes receivable                                                                    |       | 8,187                                     |       | 15,082 |   | 13,979 |   |
| Other current assets                                                                |       | (5,549                                    | )          | (1,062 | ) | (3,346 | ) |
| Other long-term assets                                                              |       | 45                                        |       |   |   |   |   |
| Trade accounts payable                                                              |       | 21,713                                    |       | 3,649 |   | 7,000 |   |
| Advances received                                                                   |       | 1,400                                     |       | 1,880 |   | 719 |   |
| Taxes payable                                                                       |       | 906                                       |       | 6,698 |   | 1,526 |   |
| Accrued liabilities                                                                 |       | 14,710                                    |       | 2,816 |   | 2,913 |   |
| Other current  payables                                                             |       | 6,152                                     |       | 678 |   | (3,148 | ) |
| Other long-term payables                                                            |       | 4,045                                     |       | 541 |   | 9 |   |
| **Total cash provided by  operating activities**                                    | ** ** | **167****,252**                           | ** ** | **113****,937** | ** ** | **71,720** | ** ** |
|                                                                                     |            |                                           |            |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-6

----

**Wimm-Bill-Dann Foods** Consolidated Statements of Cash Flows (continued) (Amounts in thousands of U.S. dollars)

 

| ** **                                                         | ** ** | **Year ended December 31** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                         | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash flows from investing  activities:**                         | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash  paid for acquisition of subsidiaries, net of cash acquired   |       | $                                         | (134,367   | ) | $ | (24,964 | ) | $ | (6,697 | ) |
| Cash paid for property,  plant and equipment                       |       | (127,713                                  | )          | (72,805 | ) | (68,103 | ) |
| Cash paid for acquisition of  investments                          |       | —                                    |       | (71 | ) | — |   |
| Proceeds from disposal of  investments                             |       | —                                    |       | 538 |   | 675 |   |
| Proceeds from disposal of  property, plant and equipment           |       | 883                                       |       | 5,944 |   | 2,081 |   |
| Cash paid for net  investments in direct financing leases          |       | (1,496                                    | )          | (1,982 | ) | (1,764 | ) |
| Cash  received from other long-term assets                         |       | 1,429                                     |       | — |   | — |   |
| Cash  invested in short-term bank deposits                         |       | 33,106                                    |       | (31,817 | ) | — | ** ** |
| **Net cash used in investing  activities**                         | ** ** | **(228****,1****58**                      | **)**      | **(125****,157** | **)** | **(73,808** | **)** |
| **Cash  flows from financing activities:**                         | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Short-term loans and notes, net                                    |       | 85,760                                    |       | (3,795 | ) | 7,967 |   |
| Repayment of long-term loans                                       |       | (21,414                                   | )          | (4,099 | ) | (2,481 | ) |
| Proceeds from long-term loans                                      |       | 30,214                                    |       | 1,636 |   | 343 |   |
| Repayment of long-term payables                                    |       | (19,416                                   | )          | (17,123 | ) | (19,727 | ) |
| Repayment of long-term notes payable                               |       | (52,719                                   | )          | — |   | (2,261 | ) |
| Proceeds from long-term notes payable, net of debt  issuance costs |       | —                                    |       | 106,000 |   | — |   |
| Dividends paid                                                     |       | (21,066                                   | )          | — |   | — |   |
| **Total cash provided by  (used in) financing activities**         | ** ** | **1,359**                                 | ** ** | **82****,619** | ** ** | **(16,159** | **)** |
| Impact of exchange rate  differences on cash and cash equivalents  |       | 6,754                                     |       | (2,087 | ) | 1,774 |   |
| **Net increase(decrease) in  cash and cash equivalents**           | ** ** | **(52,793**                               | **)**      | **69,312** | ** ** | **(16,473** | **)** |
| **Cash and cash equivalents, at beginning of the  year**           | ** ** | **93,103**                                | ** ** | **23,791** | ** ** | **40,264** | ** ** |
| **Cash  and cash equivalents, at the end of the year**             | ** ** | **$**                                     | **40,310** | ** ** | **$** | **93,103** | ** ** | **$** | **23,791** | ** ** |

 

| ** **                                                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **SUPPLEMENTAL INFORMATION:**                                   |       |     |       |     |       |     |       |
| Income taxes paid                                               |       | $        | 53,451     |     | $          | 27,123   |       | $ | 20,523 |   |
| Interest paid                                                   |       | 3,238    |       | 22,871   |       | 14,615   |       |
| Income taxes offset with VAT  receivables                       |       | 1,466    |       | 2,715    |       | 1,842    |       |
| Taxes other than income  taxes offset with VAT receivables      |       | 7,929    |       | 3,896    |       | 6,390    |       |
| Vendor financed acquisitions  of property, plant and  equipment |       | 5,561    |       | 5,709    |       | 7,335    |       |
|                                                                 |            |          |            |          |            |          |            |  |  |  |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-7

----

**Wimm-Bill-Dann Foods**Consolidated Statements of Shareholders’ Equity (Amountsin thousands of U.S. dollars, except share amounts)

| ** **                                                  | ** ** | **Common Stock** | ** ** | **Share  premium** | ** ** | **Accumulated  other  comprehensive** | ** ** | **Retained**           | ** **  | ** **   | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|---------------------------------------|------------|------------------------|-------------|--------------|------------|
| ** **                                                  | ** ** | **Shares**            | ** ** | **Amount**         | ** ** | **account**                           | ** ** | **income (loss)** | ** **  | **earnings** | ** ** | **Total** | ** ** |
| Balances at  December 31, 2003                              |       | 44,000,000            |       | $                  | 29,908     |                                  | $          | 164,132                |        |         | $          | 20,581 |   |   | $ | 109,997 |   | $ | 324,618 |   |
| Net income                                                  |       | —                |       | —             |       | —                                |       |                   | —      |         |       | 22,974 |   | 22,974 |   |
| Currency  translation adjustment                            |       | —                |       | —             |       | —                                |       |                   | 23,324      |         |       | — |   | 23,324 |   |
| **Balances at December 31, 2004**                           | ** ** | **44,000,000**        | ** ** | **29,908**         | ** ** | **164,132**                           | ** ** | ** **             | **43,905**  | ** **   | ** ** | **132,971** | ** ** | **370,916** | ** ** |
| Net income                                                  | ** ** | **—**            | ** ** | **—**         | ** ** | **—**                            | ** ** | ** **             | **—**  | ** **   | ** ** | **30,266** | ** ** | **30,266** | ** ** |
| Currency  translation adjustment                            | ** ** | **—**            | ** ** | **—**         | ** ** | **—**                            | ** ** | ** **             | **(14,139** | **)**        | ** ** | **—** | ** ** | **(14,139** | **)** |
| **Balances at December 31, 2005**                           | ** ** | **44,000,000**        | ** ** | **29,908**         | ** ** | **164,132**                           | ** ** | ** **             | **29,766**  | ** **   | ** ** | **163,237** | ** ** | **387,043** | ** ** |
| Net income                                                  | ** ** | **—**            | ** ** | **—**         | ** ** | **—**                            | ** ** | ** **             | **—**  | ** **   | ** ** | **95,384** | ** ** | **95,384** | ** ** |
| Currency  translation adjustment                            | ** ** | **—**            | ** ** | **—**         | ** ** | **—**                            | ** ** | ** **             | **39,403**  | ** **   | ** ** | **—** | ** ** | **39,403** | ** ** |
| 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** | ** ** | ** ** | **$** | **234,285** | ** ** | **$** | **497,494** | ** ** |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-8

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements Years ended December 31, 2006, 2005 and 2004(Amounts in thousands of U.S. dollars, except where otherwise stated)**

**1.   The Company**

Wimm-Bill-Dann Foods (“WBDFoods” or “the Company”) is an open joint stock company registered in Russia.It is a holding company which, as of December 31, 2006, owned controllinginterests in 36 manufacturing facilities in Russia and elsewhere in theCommonwealth of Independent States (“CIS”), as well as distribution branches inmore than 25 cities in Russia and elsewhere in the CIS. WBD Foods has a strongand diversified brand portfolio with over 1,000 types of dairy products, andover 150 types of juice, nectars and still drinks.

**2.   OperatingEnvironment of the Company**

Whilst there have beenimprovements in the Russian economic situation, such as an increase in grossdomestic product and a reduced rate of inflation, Russia continues economicreforms and development of its legal, tax and regulatory frameworks as requiredby a market economy. The future stability of the Russian economy is largelydependent upon these reforms and developments and the effectiveness ofeconomic, financial and monetary measures undertaken by the government.

**3.   Summary ofSignificant Accounting Policies**

*Accounting Principles*

The Company and itssubsidiaries maintain their accounting books and records in domestic currencybased on domestic accounting regulations. The consolidated financial statementshave been prepared in order to present WBD Foods’ consolidated financialposition, results of operations, and cash flows in accordance with accountingprinciples generally accepted in the United States of America (“U.S. GAAP”) andexpressed in terms of U.S. dollars (see paragraph “Translation Methodology” onthe following page).

*Principles ofConsolidation*

The consolidated financialstatements of the Company include the accounts of WBD Foods and itssubsidiaries when the Company has operating and financial control. Results ofsubsidiaries acquired or disposed of during the year and accounted for by thepurchase method have been included in operations from the relevant date ofacquisition to the relevant date of disposal. Pro forma results of operationsreflecting these acquisitions have not been presented because the results ofoperations of the acquired companies, either individually or collectively, arenot material to consolidated results of operations. All inter-company accountsand transactions are eliminated upon consolidation. Minority interests in thenet assets and net results of the Company’s subsidiaries are shown under“Minority interests” in the accompanying consolidated balance sheets andstatements of income.

*Comprehensive Income*

Comprehensiveincome is defined as the change in equity of a company during a period fromnon-owner sources. Comprehensive income of WBD Foods for the years endedDecember 31, 2006, 2005 and 2004 consists of net income and a currencytranslation adjustment in the amount of $39,403, ($14,139) and $23,324,respectively.

F-9

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004(Amounts in thousands of U.S. dollars, except where otherwise stated)**

**3.**   Summary of SignificantAccounting Policies (continued)

*Translation Methodology*

Starting from January 1,2003, Russia is no longer considered a hyperinflationary economy, therefore,the U.S. GAAP financial statements are prepared using the local currency, theRussian ruble, as the functional currency for WBD Foods’ Russian subsidiaries.Subsequent translation to the reporting currency, the U.S. dollar, is made inaccordance with Statement of Financial Accounting Standards (“SFAS”)No. 52. All assets and liabilities of the Company and its subsidiarieswith functional currencies other than the U.S. dollar are translated into U.S.dollar equivalents at exchange rates as follows: (1) asset and liabilityaccounts at the rate of exchange in effect on the balance sheet date,(2) revenues and expenses at the average exchange rates for the year, and(3) shareholders’ equity accounts at historical exchange rates.Translation gains or losses are recorded as a separate component of shareholders’equity, and transaction gains and losses are reflected in net income.

In respect of Wimm-Bill-DannNetherlands B.V., the U.S. dollar has been used to prepare the financialstatements as this is its’ functional currency. The financial statements ofUkrainian, Kyrgyz, Usbekh and Kazakh subsidiaries have been prepared using theUkrainian hryvnia, Kyrgyz som, Uzbek sum and Kazakh tenge, respectively, as thefunctional currency. Translation (remeasurement) of domestic currencydenominated financial statements into U.S. dollars has been performed inaccordance with the provisions of SFAS No. 52.

Theruble is not a fully convertible currency outside the territory of the RussianFederation. Within the Russian Federation, official exchange rates are determineddaily by the Central Bank of Russia (“CBR”). Market rates may differ from theofficial rates but the differences are, generally, within narrow parametersmonitored by the CBR. As of December 31, 2006 and 2005, the official ratesof exchange were 26.33 rubles = 1 U.S. dollar and 28.78 rubles = 1 U.S. dollar,respectively. The translation of local currency denominated assets andliabilities into US dollars for the purposes of these financial statements doesnot indicate that the Company could realize or settle, in U.S. dollars, thereported values of these assets and liabilities. Likewise, it does not indicatethat the Company could return or distribute the reported US dollar value ofcapital to its shareholders.

*Management Estimates*

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 provisions for bad anddoubtful accounts, obsolete inventory, and valuation allowance for deferred taxassets. Actual results could differ from those estimates.

*Cash and Cash Equivalents*

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.

F-10

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004(Amounts in thousands of U.S. dollars, except where otherwise stated)**

**3.**   Summary of SignificantAccounting Policies (continued)

*Short-Term Bank Deposits*

Short-termbank deposits have maturities of more than three months and less than one year.Short-term bank deposits are invested with banks and earn interest at theprevailing short-term deposit rates. Deposits are presented at their cost,including accrued interest. The short-term bank deposits arein rubles and bear an average annual interest of 6 % for 2005and 2006.

*Trade Receivable and Allowance for Doubtful Accounts*

Accounts receivable are statedat their net realizable value which approximates their fair value. The Companyprovides an allowance for doubtful accounts based on management’s periodicreview of accounts, including the delinquency of account balances. Delinquencystatus is based on contractual terms. The Company evaluates the collectibilityof its receivables at least quarterly, based upon various factors, includingthe financial condition and payment history of major customers, an overallreview of collections experience of other accounts and economic factors orevents expected to affect the Company’s future collections.

Tradereceivables are written-off when evidence exists that they will not becollectible. The Company generally does not require collateral from its creditcustomers.

*Inventory*

Inventories, includingwork-in-process, are valued at the lower of cost or market. Cost is the pricepaid or the consideration given to acquire the asset. Cost is determined on thebasis of weighted average cost. For processed inventories, cost is the sum ofthe expenditures and charges, direct and indirect, in bringing goods to theirexisting condition or location. It includes the applicable allocation ofproduction fixed and variable overhead costs. Market is the current replacementcost, whether by purchase or by reproduction, limited to the estimated sellingprice less any costs of completion and disposal (net realizable value) at themaximum level, and net realizable value, less an allowance for normal profit atthe minimum level. Net realizable value is the selling price in the ordinarycourse of business, less the costs of completion, marketing, and distribution.Unrealizable inventory is fully provided for in the accompanying consolidatedfinancial statements.

*Value-Added Taxes*

Value-added taxes (“VAT”) related to sales are payablebased upon invoices issued to the customer or collection of respectivereceivables. VAT incurred for purchases may be reclaimed, subject to certainrestrictions, against VAT related to sales.

VAT related to purchasetransactions that are subject to offset against VAT payable after the balancesheet dates are recognized in the balance sheets on a gross basis.

*Property, Plant and Equipment*

Property, plant and equipment are stated at historic acquisitioncost, less accumulated depreciation.

F-11

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004(Amounts in thousands of U.S. dollars, except where otherwise stated)**

**3.**   Summary of SignificantAccounting Policies (continued)

The acquisition cost of property,plant and equipment comprises its purchaseprice, including import duties and non-refundable purchase taxes and any directlyattributable costs of bringing the asset to its working condition and locationfor its intended use. Expenditures incurred after the assets have been put intooperation, such as repairs and maintenance costs, are normally expensed in theperiod the costs are incurred. In situations where it can be clearlydemonstrated that the expenditures have resulted in an increase in the futureeconomic benefits expected to be obtained from the use of an item of property,plant and equipment beyond its originallyassessed standard of performance, the expenditures are capitalized as anadditional cost of property, plant and equipment. When assets are sold or retired, their cost and accumulateddepreciation are eliminated from the accounts and any gain or loss resultingfrom their disposal is included in other operating expenses of the consolidatedstatement of income.

Thecarrying value of property, plant and equipment, as determined above isdepreciated on a straight-line basis over the estimated useful lives of therelated assets. The following estimated useful lives have been applied:

| Buildings               |   | 10-50 |  years |
|-------------------------|--------|-------|-------------|
| Machinery and equipment |   | 3-25  |  years |
| Computer hardware       |   | 3-12  |  years |
| Other                   |   | 2-15  |  years |

 

Construction in progress comprises costs directlyrelated to construction of property, plant and equipment plus an appropriateallocation of variable and fixed overheads that are incurred in construction.Construction in progress is depreciated once the property, plant and equipmentare put into operation.

The Company capitalizesinterest costs with respect to qualifying construction projects.

*Capital Leases—Lessor Accounting*

The Company presentsassets leased as a receivable equal to the net investment in the lease. Financeincome is based on a pattern reflecting a constant periodic rate of return onthe net investment outstanding and included in other operating expenses.Initial direct costs are deferred and expensed over the period in which therelated revenue is recognized.

***IntangibleAssets***

Intangible assets withdeterminable useful lives are amortized using the straight-line method overtheir estimated period of benefit, ranging from two to ten years.Indefinite-lived intangibles and intangible assets with determinable usefullives are evaluated annually for impairment or when indicators exist indicatingsuch assets may be impaired, such determination of fair value being based on avaluation model that incorporates expected future cash flows and profitabilityprojections.

F-12

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004(Amounts in thousands of U.S. dollars, except where otherwise stated)**

**3.**   Summary of SignificantAccounting Policies (continued)

*Goodwill*

Goodwill represents the purchase price for businessesacquired in excess of the fair value of identifiable net assets acquired. Goodwillis not amortized, but instead tested for impairment at least annually orwhenever indicators of impairment arise.

In cases where the fairvalue of the net assets acquired exceeds the purchase price, that excess (negativegoodwill) is allocated as a pro rata reduction of the amounts that otherwisewould have been assigned to the identifiable assets acquired, excludingfinancial assets other than investments accounted for by the equity method,assets to be disposed of by sale, deferred tax assets and any current assets.If any excess remains after reducing to zero the amounts that otherwise wouldhave been assigned to those assets, that remaining excess is recognized as anextraordinary gain in the period in which the business combination iscompleted.

*Impairment of Long-Lived Assets*

When events andcircumstances occur indicating that the carrying amount of a long-lived asset(group) may not be recoverable, the Company estimates the future undiscountedcash flows expected to derive from the use and eventual disposition of theasset (group). If the sum of the expected future cash flows (undiscounted andwithout interest charges) is less than the carrying amount of the long-livedasset (group), the Company would then calculate the impairment as the excess ofthe carrying value of the asset (group) over the estimate of its fair marketvalue. Impairment loss is included in other operating expenses in theconsolidated statement of income.

*Revenue Recognition*

Sales are recognized, net of VAT and discounts, whengoods are shipped to customers. At the time of shipment, in accordance with theCompany’s standard sales agreements, the title is transferred and the customerassumes the risk and rewards of ownership. This policy is consistent with theRussian Civil Code, which states that legal title transfers when a product is shippedto a customer unless specifically overridden by the sales agreement.

The Company offers salesvolume discounts based on individual customer volumes acquired in a previousmonth. An accrual for such discounts is made at the end of each accounting periodand is recognized as a reduction of revenue in the consolidated statements ofincome.

*Shipping andHandling Expenses*

Shipping and handlingexpenses incurred by the Company are reflected in sales and distributionexpenses in the accompanying consolidated statements of income.

*Government Grants*

Government grants arerecognized when the related cash or assets are received. Government grants aredeferred and amortized over the period necessary to match them with the relatedcosts that they are 

F-13

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004(Amounts in thousands of U.S. dollars, except where otherwise stated)**

**3.**   Summary of Significant Accounting Policies (continued)

intendedto compensate. Grants received are treated as deferred income in theaccompanying consolidated financial statements. The amortization of governmentgrants related to acquisition of property, plant and equipment is recognized asa reduction of cost of sales when depreciation expense of the related long-termassets is recognized. Interest expense incurred in government grant loanprograms is recognized in financial income and expenses, net.

*Debt Issuance Costs*

Debt issuance costs arecapitalized and amortized using the straight line method over the life of therelated debt.

*Taxation*

Deferred tax assets andliabilities are recognized for the expected future tax consequences of existingdifferences between financial reporting and tax reporting bases of assets andliabilities, and loss or tax credit carryforwards using enacted tax rates expectedto be in effect at the time these differences are realized. Valuationallowances are recorded for deferred tax assets where it is more likely thannot that such assets will not be realized. For financial reporting purposes, avaluation allowance has been recognized to reflect management’s estimate of therealization of deferred tax assets. A valuation allowance is provided when itis more likely than not that some or all of the deferred tax assets will not berealized in the future. These evaluations are based on expectations of futuretaxable income and reversals of various taxable temporary differences.

*Advertising and Marketing Costs*

Advertising and marketingcosts are expensed as incurred. Advertising costs for the years endedDecember 31, 2006, 2005 and 2004 were $67,538, $45,336 and $46,106,respectively, and are reflected as a component of selling and distributionexpenses in the accompanying consolidated statements of income (see Note 23).

*Stock Options*

The Company follows the provisions of Statement ofFinancial Accounting Standards No. 123 (revised) “Share-Based Payment”(SFAS No. 123R), which requires all companies to measure compensation costfor all share-based payments (including employee stock options) at fair value.The fair value of share-based payment awards is estimated on the date of grantusing an option-pricing model. The Company has chosen to use the Black-SholesModel as the option-pricing model and the value of the portion of the awardthat is ultimately expected to vest is being recognized as expense on thestraight-line method over the requisite service periods.

F-14

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004(Amounts in thousands of U.S. dollars, except where otherwise stated)**

**3.   Summary ofSignificant Accounting Policies (continued)**

*Earnings per Share*

Earnings per common sharehave been determined based upon the weighted average number of sharesoutstanding during these periods. 

*Concentration ofCredit Risk*

Financial instrumentswhich potentially expose the Company to concentrations of credit risk consistprimarily of cash in banks, short-term bank deposits and trade accountsreceivable. The Company deposits available cash with several financialinstitutions. The credit risk associated with trade accounts receivable islimited due to the Company’s large domestic customer base. At December 31,2006, 2005 and 2004, the Company had no other significant concentrations ofcredit risk. The Company does not usually require collateral from itscustomers.

*Fair Value of Financial Instruments*

The carrying amounts ofcash and cash equivalents, short-term bank deposits, accounts receivable,accounts payable and short-term loans reported in the consolidated balancesheets approximate fair values due to the short maturity of those instruments.Management is of the opinion that the carrying value of the Company’s long-termloans approximates fair value. 

***SegmentReporting***

SFAS No. 131, *Disclosures about Segments of an Enterprise and Related Information*,requires that a business enterprise reports financial and descriptiveinformation about its reportable operating segments. WBD Foods currentlymanages its business as three major operating segments—dairy,****beverages and baby food production anddistribution, and accordingly, reports segment information on this basis.

*Reclassifications*

Where necessary, corresponding figures have beenadjusted to conform with changes in the presentation of the current period. 

Previously, the Companyclassified as sales revenue amounts from sales of non-milk inventory andservices; related expenses were included in the cost of sales. Commencing 2006,the Company began classifying such items in other operating expenses. Prior netsales and cost of sales have been reclassified accordingly for comparativeperiods presented in the accompanying financial statements. This change inclassification has no effect on previously reported net income.

***New Accounting Pronouncements***

*Accounting forUncertainty in Income Taxes*

In July 2006, the FASB issued FASB Interpretation No.48 (“FIN 48”) Accounting for Uncertainty in Income Taxes, an interpretation ofSFAS No. 109, Accounting for Income Taxes. FIN 48 clarifies the accounting forincome taxes by prescribing the minimum recognition threshold a tax position isrequired to 

F-15

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004(Amounts in thousands of U.S. dollars, except where otherwise stated)**

**3.**   Summary of Significant Accounting Policies (continued)

meet before beingrecognized in the financial statements. FIN 48 also provides guidance onderecognition, measurement, classification, interest and penalties, accountingin interim periods, disclosure and transition. In addition, FIN 48 clearlyscopes out income taxes from SFAS No. 5, “Accounting for Contingencies”. 

FIN 48 is effective forfiscal years beginning after December 15, 2006; however, early adoption isallowed. The adoption of the provisions of FIN 48 did not have material impacton the Company’s financial position and results of operations. 

***Accounting for Certain Hybrid Financial Instruments***

In February 2006, the FASB issued SFAS No. 155 *Accounting for Certain Hybrid Financial Instruments,* whichamends SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities,* and No. 140, *Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities*. This Statement resolves issuesaddressed in Statement 133 Implementation Issue No. D1, *Applicationof Statement 133 to Beneficial Interests in Securitized Financial Assets*.

SFAS No. 155 permits fair value remeasurement for anyhybrid financial instrument that contains an embedded derivative that otherwisewould require bifurcation, clarifies which interest-only strips andprincipal-only strips are not subject to the requirements of Statement 133,establishes a requirement to evaluate interests in securitized financial assetsto identify interests that are freestanding derivatives or that are hybridfinancial instruments that contain an embedded derivative requiring bifurcationand clarifies that concentrations of credit risk in the form of subordinationare not embedded derivatives. SFAS No. 155 amends Statement 140 to eliminatethe prohibition on a qualifying special purpose entity from holding aderivative financial instrument that pertains to a beneficial interest otherthan another derivative financial instrument. These provisions of SFAS No. 155are effective for all financial instruments acquired or issued after thebeginning of an entity’s first fiscal year that begins after September 15,2006.

The adoption of theprovisions of SFAS No. 155 is not expected to have an impact on the Company’sresults of operations, financial position or cash flows. 

***Accountingfor Servicing of Financial Assets***

In March 2006, the FASB issued SFAS No. 156, *Accounting for Servicing of Financial Assets,* which amendsFASB Statement No. 140, *Accounting for Transfersand Servicing of Financial Assets and Extinguishments of Liabilities.*

This Statement requires that all separately recognizedservicing assets and servicing liabilities be initially measured at fair value,if practicable. This Statement permits, but does not require, the subsequentmeasurement of servicing assets and servicing liabilities at fair value. Anentity that uses derivative instruments to mitigate the risks inherent inservicing assets and servicing liabilities is required to account for thosederivative instruments at fair value. These provisions of SFAS No. 156 areeffective at the beginning of an entity’s first fiscal year that begins afterSeptember 15, 2006.

F-16

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004(Amounts in thousands of U.S. dollars, except where otherwise stated)**

**3.**   Summary of Significant Accounting Policies (continued)

The adoption of theprovisions of SFAS No. 156 is not expected to have an impact on the Company’sresults of operations, financial position or cash flows.

*Fair ValueMeasurements*

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements.*

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.

This Statement iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years.

*Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans*

In September 2006, the FASB issued SFAS No. 158, *Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans,*which amends FASB Statements No. 87, 88, 106and 132(R)*.*

This Statement improves financial reporting byrequiring an employer to recognize the overfunded or underfunded status of adefined benefit postretirement plan (other than a multiemployer plan) as anasset or liability in its statement of financial position and to recognizechanges in that funded status in the year in which the changes occur throughcomprehensive income of a business entity or changes in unrestricted net assetsof a not-for-profit organization.

An employer with publicly traded equity securities isrequired to initially recognize the funded status of a defined benefitpostretirement plan and to provide the required disclosures as of the end ofthe fiscal year ending after December 15, 2006.

The adoption of theprovisions of SFAS No. 158 did not have an impact on the Company’s results ofoperations, financial position or cash flows as the Company does not have adefined benefit postretirement plan.

*The Fair ValueOption for Financial Assets and Financial Liabilities*

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities*—*Including an amendment of FASB Statement No. 115*. 

This Statement permits entities to choose to measuremany financial instruments and certain other items at fair value. The objectiveis to improve financial reporting by providing entities with the opportunity tomitigate volatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions. 

F-17

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004(Amounts in thousands of U.S. dollars, except where otherwise stated)**

**3.**   Summary of Significant Accounting Policies (continued)

This Statement is effective as of the beginning of anentity’s first fiscal year that begins after November 15, 2007; however, earlyadoption is allowed.

The adoption of theprovisions of SFAS No. 159 is not expected to have an impact on the Company’sresults of operations, financial position or cash flows.

**4.   Businesses Acquired**

*Acquisition ofMinority Interests*

In December 2006, WBD Foods acquired 0.26% of WBD OJSC, a subsidiary, fromshareholders of WBD Foods for cash consideration of $812. The purchaseprice in excess of fair value of net assets acquired of $415 was recorded asgoodwill. 

In October 2006, WBD Foods acquired 30.35% of Nazarovskoe Milk OJSC, a subsidiary, from minority shareholdersfor 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 OJSC, a subsidiary, from minority shareholdersfor cash consideration of $6,955. The fair value of net assets acquired inexcess of purchase price of $4,192 was subsequently recorded as a reduction ofthe value of property, plant and equipment. 

In January 2005, WBD Foods acquired 10% of Sibirskoe Moloko dairy plant OJSC, asubsidiary, from minority shareholders for cash consideration of $1,050. Thepurchase price in excess of fair value of net assets acquired of $355 wasrecorded as goodwill. 

The changes in minorityinterests related to all acquisitions noted above are presented as“Acquisitions by the Company of minority interests in subsidiaries” in Note 21.

*BusinessCombinations*

*2006*

In September 2006, the Company acquired 100% of****SurgutCity Dairy Plant OJSC for cash consideration of $4,536. The acquisitionof Surgut Dairy Plant allows the Company to gain a leading position in apromising region and continue its expansion in the markets of the Urals andSiberia. By having its own enterprise in Surgut, the Company will be able tooptimize its expenditure on logistics by reducing the need to transportproducts between regions.

The fair value of net assets acquired in excess ofpurchase price of $617 was subsequently recorded as a reduction of the value ofproperty, plant and equipment.

In November 2006, theCompany acquired 93.74% of****Ochakovo DairyPlant OJSC for cash consideration of $66,792. Ochakovo Dairy Plant is thefourth largest dairy producer in Russia and one of the largest dairyenterprises in Moscow. The plant produces milk, sour cream, yogurts, cheese curdsand other dairy products under a strong brand portfolio (including brands suchas 33 Cows, Pastushok, Kremlin 

F-18

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004(Amounts in thousands of U.S. dollars, except where otherwise stated)**

**4.**   Businesses Acquired (continued)

Products and Actilife). The acquisition of Ochakovo DairyPlant allows the Company toincrease its share of the Moscow dairy market in volume and in value, to enrichbrand portfolio and obtain a better cooperation with key retailers andsuppliers in Moscow and the Moscow region. The cash consideration paid for thisacquisition was allocated to property, plant and equipment $32,479, intangibleassets $12,562, long-term investments $11, goodwill $30,501, current assets$18,686, less liabilities $27,447.

In December 2006, the Companyacquired 83.36% of Angarsky Milk Plant OJSC (Molka OJSC) for cashconsideration of $4,908. The purchase of Molka OJSC allows the Company tostrengthen its position in a strategically important region and continue itsexpansion in the Siberian market. By having its own enterprise in Irkutskregion, the Company gains the ability to optimize logistical expenditures byeliminating the need for long-distance transport of products between regions.The cash consideration paid for this acquisition was allocated to property,plant and equipment $ 1,923, long-term investments $2, goodwill $3,722, currentassets $1,051, less liabilities $1,790.

In December 2006, theCompany acquired 100% of Manros Group for cash consideration of $51,336.Manros Group comprises six companies of which four are dairy production plants.Manros produces milk, sour cream, yogurts, cottage cheese, kefir and otherdairy products under “Na zdorovie”, “Molochnaya Dolina” and “Vkusnika” brands. The acquisition of Manrosfurther strengthens the Company’s market position in the fast-growing Siberianregion, where continued economic growth is translating into ever growing demandacross our proposition of healthy products aimed at the entire family. The cashconsideration paid for this acquisition was allocated to property, plant andequipment $25,191, intangible assets $5,937, goodwill $37,053, non-currentassets $240, current assets $10,365, less liabilities $27,450. The purchaseprice allocations are preliminary and may change as a result of changes in thefair value of assets and liabilities of acquired entities. Management expectsto finalize purchase price allocations before December 31, 2007.

*2005*

In July 2005, the Company acquired 100% ofExperimental Baby Food Plant LLC for cash consideration of $3,527. ExperimentalBaby Food Plant LLC produces baby food from raw fruits. The acquisition ofExperimental Baby Food Plant LLC allows the Company to increase its productportfolio in the baby food market segment and to keep up with anticipatedgrowth in market demand. The fair value of net assets acquired in excess ofpurchase price of $2,335 was subsequently recorded as a reduction of the valueof property, plant and equipment. 

In July 2005, the Company acquired 66.3% of ObninskDairy Plant OJSC for cash consideration of $6,365. Obninsk Diary Plant ownsseveral milk product brands and a milk product manufacturing facility. Theacquisition of Obninsk Diary Plant allows the Company to increase its existingproduct and brand portfolio and establish its presence in Kaluga region tobetter meet anticipated growth in the local marketplace. The cash considerationpaid for this acquisition was allocated to property, plant and equipment$2,257, intangible assets $903, goodwill $1,091, current assets $2,898, lessliabilities $784.

F-19

----

**Wimm-Bill-Dann Foods** Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)

**4.   Businesses Acquired (continued)**

In October 2005, the Company acquired 100% ofEssentuki mineral water plant CMW (Caucasian Mineral Water) LLC for cashconsideration of $5,505. The acquisition of Essentuki mineral water plant CMW(Caucasian Mineral Water) LLC allows the Company to enhance its existingproduct and brand portfolio by developing mineral water brand“Novoessentukskaya”, expand production of mineral water “Essentuki” in plasticbottles and increase its market share in mineral water segment. Management hasestablished the preliminary purchase price allocation taking into account allrelevant information at the time of preparing these consolidated financialstatements. The purchase price allocation was completed by the Company in 2006.The cash consideration paid for this acquisition was allocated to property,plant and equipment $2,066, intangible assets $358, goodwill $3,171, currentassets $446 less liabilities $536. 

In December 2005, the Company acquired 63.53% ofNazarovskoe Milk OJSC for cash consideration of $5,167. The acquired company isone of the major condensed milk producers in Siberian and Far East regions. Theacquisition of Nazarovskoe Milk OJSC allows the Company to increase itsexisting product and brand portfolio and establish its presence in Krasnoyarskregion that possesses a high growth potential. The cash consideration paidfor this acquisition was allocated to property, plant and equipment $4,482,goodwill $2,007, current assets $1,798 less liabilities $3,120.

In December 2005, the Company acquired 100% ofPervouralsk City Dairy for cash consideration of $119. The purchase priceallocation was completed by the Company in 2006. The purchase price in excessof fair value of net assets acquired was recorded as goodwill in amount of$1,126.

In April, July and September2005, the Company acquired 100%, 99.34% and 63.5% of Plemzavod Za Mir i TrudOJSC , Zaveti Ilicha and Trud farms for cash considerations of $1,689, $344 and$420, respectively. The acquired farms produce raw milk. The acquisitions ofPlemzavod Za Mir I Trud OJSC, Zaveti Ilicha and Trud farms allow the Company toreduce raw material expenses and become less dependable on raw milk suppliers,as well as to ensure a steady supply of raw milk to keep up with anticipated growthin production driven by anticipated increases in market demand. The fair valuesof net assets acquired in excess of purchase prices of $3,894, $2,761 and$1,029 were subsequently recorded as a reduction of the values of property,plant and equipment.

**5.**   Cashand Cash Equivalents

Cashand cash equivalents as of December 31, 2006 and 2005 were comprised asfollows:

| ** **                           | ** ** | **2006** | ** ** | **2005**   | ** ** |
|--------------------------------------|------------|----------|------------|------------|------------|
| Rubles and other  CIS currencies     |       | $        | 39,153     |       | $          | 91,813 |   |
| Hard currencies                      |       | 1,104    |       | 1,235      |       |
| Cash equivalents                     |       | 53       |       | 55         |       |
| **Total  cash and cash equivalents** | ** ** | **$**    | **40,310** | ** ** | **$**      | **93,103** | ** ** |

 

F-20

----

**Wimm-Bill-Dann Foods** Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)

**6.**   TradeReceivables, Net

Tradereceivables as of December 31, 2006 and 2005 were comprised as follows:

| ** **                        | ** ** | **2006** | ** ** | **2005**   | ** ** |
|-----------------------------------|------------|----------|------------|------------|------------|
| Trade receivables                 |       | $        | 97,010     |       | $          | 65,094 |   |
| Allowance for  doubtful accounts  |       | (7,078   | )          | (5,126     | )          |
| **Total  trade receivables, net** | ** ** | **$**    | **89,932** | ** ** | **$**      | **59,968** | ** ** |

 

The movement in the allowance for doubtful accountsfor the years ended December 31, 2006, 2005 and 2004 was as follows:

| ** **                       | ** ** | **2006** | ** ** | **2005**   | ** ** | **2004**  | ** ** |
|----------------------------------|------------|----------|------------|------------|------------|-----------|------------|
| Balance,  beginning of period    |       | $        | 5,126      |       | $          | 13,931    |       | $ | 11,455 |   |
| Provision for  doubtful accounts |       | 3,130    |       | 3,908      |       | 3,722     |       |
| Write off of  trade receivables  |       | (2,027   | )          | (12,358    | )          | (1,938    | )          |
| Currency  translation adjustment |       | 849      |       | (355       | )          | 692       |       |
| **Balance,  end of period**      | ** ** | **$**    | **7,078**  | ** ** | **$**      | **5,126** | ** ** | **$** | **13,931** | ** ** |

 

**7.**   Inventory

Inventoryas of December 31, 2006 and 2005 was comprised as follows:

| ** **           | ** ** | **2006** | ** **  | **2005**   | ** ** |
|----------------------|------------|----------|-------------|------------|------------|
| Raw materials        |       | $        | 101,274     |       | $          | 83,635 |   |
| Work in progress     |       | 16,581   |        | 10,749     |       |
| Finished goods       |       | 56,219   |        | 36,213     |       |
| **Total  inventory** | ** ** | **$**    | **174,074** | ** ** | **$**      | **130,597** | ** ** |

 

Obsolescence and netrealizable value expense during 2006, 2005 and 2004 amounted to $602, $1,077and $3,482, respectively, and was included in cost of sales in the accompanyingconsolidated statements of income.

**8.**   NetInvestment in Direct Financing Leases

Commencing from 1999, the Company announced a programcalled “Dairy Rivers of Russia” with the purpose of ensuring a steady andreliable source of milk. Under this program the Company acquired agriculturalequipment and leased such equipment to several farms. These transactions wereclassified as direct financing leases. The lease agreements vary from one tofive years and provide a free of charge equipment transfer option at the end ofthe lease term. The lease receivables are denominated in EURO, U.S. dollars andRussian rubles. The lessees have the option to settle the receivable throughthe delivery of milk supplies to the Company based on a predetermined schedule.The settlement is based on milk prices which are variable dependent uponprevailing market prices.

F-21

----

**Wimm-Bill-Dann Foods** Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)

**8.**   Net Investment in Direct Financing Leases (continued)

The following lists thecomponents of the net investment in direct financing leases at December 31,2006 and 2005:

| ** **                                   | ** ** | **2006** | ** ** | **2005**   | ** ** |
|----------------------------------------------|------------|----------|------------|------------|------------|
| Total future  minimum lease payments         |       | $        | 4,808      |       | $          | 6,375 |   |
| Less: Unearned  income                       |       | (1,040   | )          | (968       | )          |
| **Net  investment in direct finance leases** | ** ** | **$**    | **3,768**  | ** ** | **$**      | **5,407** | ** ** |
| Current portion                              |       | $        | 2,095      |       | $          | 2,335 |   |
| Long-term portion                            |       | 1,673    |       | 3,072      |       |

 

At December 31,2006, total future minimum lease payments to be received for each of the five succeedingfiscal years are as follows:

| ** ** | ** ** | **Years ended  December 31** | ** ** |
|------------|------------|----------------------------------------|------------|
| 2007       |       |                                   | $          | 2,706 |   |   |
| 2008       |       |                                   | 1,371      |   |   |
| 2009       |       |                                   | 656        |   |   |
| 2010       |       |                                   | 75         |   |   |
| 2011       |       |                                   | —     |   |   |

 

**9.**   OtherCurrent Assets

Othercurrent assets as of December 31, 2006 and 2005 were comprised as follows:

| ** **              | ** ** | **2006** | ** ** | **2005**   | ** ** |
|-------------------------|------------|----------|------------|------------|------------|
| Assets held for  sale   |       | $        | 4,007      |       | $          | 3,324 |   |
| Restricted cash         |       | 9,467    |       | —     |       |
| Other debtors,  net     |       | 3,929    |       | 3,584      |       |
| Deferred expenses       |       | 1,750    |       | 1,649      |       |
| Other                   |       | 577      |       | 358        |       |
| **Total  other assets** | ** ** | **$**    | **19,730** | ** ** | **$**      | **8,915** | ** ** |

 

F-22

----

**Wimm-Bill-Dann Foods** Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)

**10.**   IntangibleAssets, Net

Identifiableintangible assets as of December 31, 2006 and 2005 were comprised asfollows:

| ** **                                 | ** ** | **2006**                        | ** ** | **2005**                      | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **Gross carrying  amount** | ** ** | **Accumulated  amortization** | ** ** | **Gross carrying  amount** | ** ** | **Accumulated  amortization** | ** ** |
| Intangible assets with determinable lives: | ** ** |                            | ** ** | ** **                    |       |   | ** ** |   |   |   |   |   |   |   |   |   |   |
| Financial accounting software              |       |                            | $          | 5,025                         | ** ** |   |   | $ | (1,172 | ) |   |   | $ | 3,302 |   |   |   | $ | (228 | ) |   |
| Trademarks                                 |       |                            | 3,489      | ** **                    |       |   | (1,324 | ) |   |   | 2,369 |   |   |   | (456 | ) |   |
| Supplier contracts                         |       |                            | 907        | ** **                    |       |   | (752 | ) |   |   | 1,602 |   |   |   | (1,079 | ) |   |
| Others                                     |       |                            | 750        | ** **                    |       |   | (65 | ) |   |   | 825 |   |   |   | (21 | ) |   |
| Intangible assets  with indefinite lives:  | ** ** |                            | ** ** | ** **                    |       |   | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Trademarks                                 |       |                            | 19,986     | ** **                    |       |   | — |   |   |   | 764 |   |   |   | — |   |   |
| **Total****intangible assets**             | ** ** |                            | **$**      | **30,157**                    | ** ** |   |   | **$** | **(3,313** | **)** | ** ** | ** ** | **$** | **8,862** |   | ** ** | ** ** | **$** | **(1,784** | **)** | ** ** |

 

Financial accounting software and supplier contractshave a weighted average useful life of five years, and trademarks withdeterminable lives have a useful life of two to ten years.

Amortization expense during the years ended December 31,2006, 2005 and 2004 amounted to $1,564, $752 and $445, respectively.

Amortization expenserelating to the net carrying amount of intangible assets at December 31,2006 is estimated to be $1,412 in 2007, $1,401 in 2008, $1,357 in 2009, $1,275in 2010 and $1,244 in 2011.

**11.**   Property,Plant and Equipment, Net

Thenet book value of property, plant and equipment at December 31, 2006 and2005 was comprised as follows:

| ** **                                               | ** ** | **2006** | ** **  | **2005**   | ** ** |
|----------------------------------------------------------|------------|----------|-------------|------------|------------|
| Buildings                                                |       | $        | 233,166     |       | $          | 157,823 |   |
| Machinery and  equipment                                 |       | 511,905  |        | 446,945    |       |
| Computer hardware                                        |       | 22,973   |        | 15,597     |       |
| Other                                                    |       | 49,636   |        | 36,761     |       |
| Gross book value  of property, plant and equipment       |       | 817,680  |        | 657,126    |       |
| Accumulated  depreciation                                |       | (296,332 | )           | (239,305   | )          |
| Advances paid for  property, plant and equipment         |       | 32,484   |        | 10,898     |       |
| Construction in  progress and equipment for installation |       | 52,896   |        | 30,808     |       |
| **Total  property, plant and equipment, net**            | ** ** | **$**    | **606,728** | ** ** | **$**      | **459,527** | ** ** |

 

The Company capitalized interest costs of $519, $410,and $972 during the years ended December 31, 2006, 2005 and 2004,respectively, with respect to qualified construction projects.

F-23

----

**Wimm-Bill-Dann Foods** Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)

**11.**   Property, Plant and Equipment, Net (continued)

Depreciation expense during the years ended December 31,2006, 2005 and 2004 amounted to $60,765, $52,683, and $43,558, respectively.

The assets transferred tothe Company upon privatisation do not include the land on which the Company’sfactories and buildings, comprising the Company’s principal manufacturingfacilities, are located. The Company has the option to purchase this land uponapplication to the state registrator body or to continue occupying this landunder rental agreements. Russian legislation does not specify an expiry date tothis option. As at December 31, 2006 the Company has not filed anyapplication to exercise the purchase option.

**12.**   Goodwill

Themovement of goodwill for the years ended December 31, 2006 and 2005comprised:

| Balance at  December 31, 2003     |       | $      | 24,695      |       |
|----------------------------------------|------------|--------|-------------|------------|
| Acquisitions                           |       | 78     |        |
| Currency translation adjustment        |       | 1,518  |        |
| Balance at  December 31, 2004     |       | 26,291 |        |
| Acquisitions                           |       | 7,188  |        |
| Currency translation adjustment        |       | (1,471 | )           |
| Balance at  December 31, 2005     |       | 32,008 |        |
| Acquisitions                           |       | 72,462 |        |
| Impairment loss                        |       | (2,539 | )           |
| Currency translation adjustment        |       | 4,059  |        |
| **Balance  at December 31, 2006** | ** ** | **$**  | **105,990** | ** ** |

 

**13.**   OtherNon-Current Assets

Othernon-current assets at December 31, 2006 and 2005 were comprised asfollows:

| ** **                                                               | ** ** | **2006** | ** ** | **2005**   | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|------------|------------|
| Notes issuance  expenses, net of amortisation                            |       | $        | 1,448      |       | $          | 2,456 |   |
| Advances for  further step acquisition of minority interest in: WBD OJSC |       | 2,306    |       | —     |       |
| Moscow Baby Food Plant (“ZDMP”)                                |       | 386      |       | 1,566      |       |
| Tsaritsyno Dairy  Plant (“TsMK”)                               |       | 384      |       |       |       |
| Obninsk Dairy Plant                                                      |       | —   |       | 1,350      |       |
| Sibirskoe Moloko  dairy plant                                            |       | 146      |       | 133        |       |
| Other                                                                    |       | 523      |       | 648        |       |
| **Total  other assets**                                                  | ** ** | **$**    | **5,193**  | ** ** | **$**      | **6,153** | ** ** |

 

F-24

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004**(Amounts in thousands of U.S. dollars, except where otherwise stated)

**14.   AccruedLiabilities**

Accruedliabilities at December 31, 2006 and 2005 were comprised as follows:

| ** **                    | ** ** | **2006** | ** ** | **2005**   | ** ** |
|-------------------------------|------------|----------|------------|------------|------------|
| Payroll related  accruals     |       | $        | 26,243     |       | $          | 11,200 |   |
| Interest accruals             |       | 2,281    |       | 3,154      |       |
| Other accruals                |       | 8,579    |       | 2,717      |       |
| **Total accrued liabilities** | ** ** | **$**    | **37,103** | ** ** | **$**      | **17,071** | ** ** |

 

**15.   Short-Term andLong-Term Loans**

Short-termloans at December 31, 2006 and 2005 comprised the following:

| ** **                 | ** ** | **2006**               | ** ** | **2005**   | ** ** |
|----------------------------|------------|------------------------|------------|------------|------------|
| ** **                 | ** ** | **No. of  loans** | ** ** | **Amount** | ** ** | **Weighted  average  interest rate** | ** ** | **No. of  loans** | ** ** | **Amount** | ** ** | **Weighted  average  interest rate** | ** ** |
| Ruble denominated          |       |                   | 24         |       |       | $ | 123,849 |   |   | 8.09 | % |   |   | 22 |   |   | $ | 19,219 |   |   | 10.29 | % |   |
| U.S. dollar denominated    |       |                   | —     |       |       | — |   |   | — |   |   |   | 3 |   |   | 335 |   |   | 7.92 | % |   |
| **Total short-term loans** | ** ** |                   |       |       | ** ** | **$** | **123,849** | ** ** |   |   |   |   |   |   |   | ** ** | **$** | **19,554** | ** ** |   |   |   |   |

 

Long-termloans at December 31, 2006 and 2005 comprised the following:

| ** **                              | ** ** | **2006**               | ** ** | **2005**   | ** ** |
|-----------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                              | ** ** | **No. of  loans** | ** ** | **Amount** | ** ** | **Weighted  average  interest rate** | ** ** | **No. of  loans** | ** ** | **Amount** | ** ** | **Weighted  average  interest rate** | ** ** |
| U.S. dollar  denominated                |       |                   | —     |       |       | $ | — |   |   | — |   |   |   | 1 |   |   | $ | 677 |   |   | 6.59 | % |   |
| EURO denominated                        |       |                   | 2          |       |       | 7,698 |   |   | 1.89 | % |   |   | 2 |   |   | 3,144 |   |   | 4.86 | % |   |
| Ruble denominated                       |       |                   | 22         |       |       | 26,521 |   |   | 5.41 | % |   |   | 5 |   |   | 1,826 |   |   | 14.50 | % |   |
| Total amount of long-term  borrowings   |       |                   |       |       |       | 34,219 |   |   |   |   |   |   |   |   |   | 5,647 |   |   |   |   |   |
| Less current portion of long-term loans |       |                   | —     |       |       | (4,137 | ) |   | — |   |   |   | — |   |   | (3,823 | ) |   | — |   |   |
| **Total long-term loans**               | ** ** |                   |       |       | ** ** | **$** | **30,082** | ** ** |   |   |   |   |   |   |   | ** ** | **$** | **1,824** | ** ** |   |   |   |   |

 

*Guarantees*

At December 31, 2006and 2005, WBD Foods and certain other major subsidiaries guaranteed certainshort-term and long-term bank loans received by other subsidiaries of WBDFoods. The aggregate amount of such guarantees equaled the carrying amount ofthe respective short-term and long-term loans.

F-25

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004**(Amounts in thousands of U.S. dollars, except where otherwise stated)

**15.**   Short-Term and Long-Term Loans (continued)

*Unused lines ofCredit*

At December 31, 2006****the Company had $6,940 of unusedborrowings under its long-term lines of credit.

*Maturity ofLong-Term Loans*

The maturities of long-term loans outstanding at December 31,2006 was as follows:

| ** **                | ** ** | **Years ended  December 31,** | ** ** |
|---------------------------|------------|-----------------------------------------|------------|
| 2007                      |       |                                    | $          | 4,137 |   |   |
| 2008                      |       |                                    | 6,488      |   |   |
| 2009                      |       |                                    | 6,749      |   |   |
| 2010                      |       |                                    | 9,577      |   |   |
| 2011                      |       |                                    | 7,268      |   |   |
| **Total long-term loans** | ** ** | ** **                              | **$**      | **34,219** |   |   |

 

*Collateral*

Certainof the Company’s inventory, property, plant and equipment served as collateralfor the short-term and long-term loans from International Moscow Bank,Rosselkhozbankbank, Gazprombank, Uralsib Bank Nomos-Bank and Sberbank.

At December 31, 2006 and2005 the assets that served as collateral consisted of the following:

·       Inventory in the amounts of $12,063 and $3,433, respectively;

·       Property,plant and equipment with a net book value of $34,804 and $9,381, respectively.

**16.**   Short-Termand Long-Term Notes Payable

Notespayable issued by WBD Foods at December 31, 2006 and 2005 comprised thefollowing:

| **Maturity**              | ** ** | ** **  | ** ** | **Currency** | ** **  | **2006**   | ** ** | **2005**    | ** ** |
|---------------------------|------------|-------------|------------|--------------|-------------|------------|------------|-------------|------------|
| Short-term notes          |       | Ruble       |       | $            | —      |       | $          | 49,794      |       |
|                      |       |        |       | —       |        | 49,794     |       |
| Long-term notes           |       | U.S. dollar |       | $            | 150,000     |       | $          | 150,000     |       |
|                      |       | Ruble       |       | 98,742       |        | 104,230    |       |
| **Total long-term notes** | ** ** | ** **  | ** ** | **$**        | **248,742** | ** ** | **$**      | **254,230** | ** ** |

 

*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 willmature on May 21, 

F-26

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004**(Amounts in thousands of U.S. dollars, except where otherwise stated)

**16.**   Short-Term and Long-Term Notes Payable (continued)

2008and bears interest at an annual rate of 8.5%, payable semi-annually in arrearson May 21 and November 21 of each year.

Two of WBD Foods’ subsidiariesunconditionally, irrevocably, jointly and severally guarantee its obligationunder the Loan. The loan agreement contains a number of covenants includingrequirements to maintain certain financial ratios.

*WBD Foods RubleNotes*

On April 15, 2003, WBD Foods issued 1,500,000non-convertible ruble denominated notes at a face value of 1,000 rubles each.The offering raised a total of 1,500,000 thousand rubles. The notes wereredeemed by WBD Foods on April 11, 2006. The interest rate for the yearsending December 31, 2006 and December 31, 2005 was 11.24% and 10.78%,respectively.

On December 21, 2005,WBD Foods issued 3,000,000 non-convertible ruble denominated notes at a facevalue of 1,000 rubles each. The offering raised a total of 3,000,000 thousandrubles ($113,934 at the exchange rate as of December 31 2006 of which$15,192 have been repaid as of December 31, 2006). The notes areredeemable by WBD Foods on December 15, 2010. The interest rate of thecoupon is 9%. Interest is payable semi-annually in arrears commencing on June 21,2006.

**17**.   OtherPayables

Other payables primarily represent payables forproperty, plant and equipment and were comprised as follows as ofDecember 31, 2006 and 2005:

| ** **                                         | ** ** | **2006** | ** ** | **2005**   | ** ** |
|----------------------------------------------------|------------|----------|------------|------------|------------|
| Other payables for  property, plant and equipment: |       |     |       |       |       |
| Current payables                                   |       | $        | 9,800      |       | $          | 5,493 |   |
| Vendors financing obligations, including           |       |     |       |       |       |
| —current portion                              |       | 15,284   |       | 15,769     |       |
| —long-term portion                            |       | 20,905   |       | 26,652     |       |
|                                               |       | 45,989   |       | 47,914     |       |
| Other payables:                                    |       |     |       |       |       |
| Current payables                                   |       | 11,951   |       | 8,938      |       |
| Long-term payables, including                      |       |     |       |       |       |
| —current portion                              |       | —   |       | —     |       |
| —long-term portion                            |       | —   |       | 241        |       |
|                                               |       | 11,951   |       | 9,179      |       |
| Total other payables                               |       | 57,940   |       | 57,093     |       |
| Less current  liabilities                          |       | (37,035  | )          | (30,200    | )          |
| **Total other long-term payables**                 | ** ** | **$**    | **20,905** | ** ** | **$**      | **26,893** | ** ** |

 

F-27

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004**(Amounts in thousands of U.S. dollars, except where otherwise stated)

**17.**   Other Payables (continued)

The Company has agreements with suppliers of equipment which providefinancing for the periods ranging from 1 to 9 years. As of December 31, 2006and 2005, vendor financing obligations were $21,013 and $29,677, respectively,EURO 10,628 thousand and EURO 10,050thousand (equivalent to $14,004 and $11,937as of December 31, 2006 and 2005, respectively) 30,858 thousand rubles and23,225 thousand rubles (equivalent to $1,172 and $807 as of December 31, 2006and 2005, respectively). This financing is provided at interest rates of LIBORplus 1.5%, EURIBOR plus 1.5% and 14.0% for U.S. dollar, EURO and rubledenominated contracts, respectively. The majority of equipment financing isprovided by one supplier. At December 31, 2006 and 2005, property, plant andequipment amounting to $33,141 and $47,728, respectively, served as collateralunder these financing agreements.

The maturity of vendors financing obligations and other long-term payables outstanding atDecember 31, 2006 was as follows:

| ** **                                        | ** ** | **Years ended  December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------|------------|
| 2007                                              |       |                                    | $          | 15,284 |   |   |
| 2008                                              |       |                                    | 10,580     |   |   |
| 2009                                              |       |                                    | 7,995      |   |   |
| 2010                                              |       |                                    | 1,937      |   |   |
| 2011                                              |       |                                    | 393        |   |   |
| Total maturity of  other long-term payables       |       |                                    | 36,189     |   |   |
| Less current  portion of other long-term payables |       |                                    | (15,284    | ) |   |
| **Total other long-term payables**                | ** ** | ** **                              | **$**      | **2****0,905** |   |   |

 

**18**.   Income  Tax

WBDFoods’ provision for income taxes for the years ended December 31, 2006, 2005and 2004 was as follows:

| ** **                            | ** ** | **2006** | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|---------------------------------------|------------|----------|------------|------------|------------|------------|------------|
| Current income tax provision          |       | $        | 48,232     |       | $          | 27,385     |       | $ | 18,189 |   |
| Deferred income  tax charge/(benefit) |       | (6,672   | )          | 3,327      |       | (6,019     | )          |
| **Total provision for income  taxes** | ** ** | **$**    | **41,560** | ** ** | **$**      | **30,712** | ** ** | **$** | **12,170** | ** ** |

 

WBD Foods’ statutory income tax rate was 24% for theperiods presented above.

Foreign current income taxprovisions for the years ended December 31, 2006, 2005 and 2004 were $2,372,$700 and $534, respectively.  Foreigndeferred income tax charge/(benefit) for the years ended December 31, 2006,2005 and 2004 were $(258), $637 and ($1,255), respectively.

F-28

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**18**.   Income  Tax(continued)

The actual provision forincome taxes reconciled to WBD Foods’ theoretical tax provision at statutoryrate was as follows for the respective periods ended:

| ** **                                                                               | ** ** | **200**6 | ** ** | **200**5   | ** ** | **200**4   | ** ** |
|------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|------------|------------|
| Income before  provision for income taxes                                                |       | $        | 140,141    |       | $          | 64,627     |       | $ | 38,305 |   |
| Russian statutory  tax rate                                                              |       | 24       | %          | 24         | %          | 24         | %          |
| Theoretical tax  provision at statutory rate                                             |       | 33,634   |       | 15,510     |       | 9,193      |       |
| Tax effect of  expenses not deductible for national statutory taxation purposes          |       | 10,829   |       | 12,341     |       | 6,232      |       |
| Tax effect of  income not taxable for national statutory taxation purposes               |       | (2,172   | )          | (974       | )          | (248       | )          |
| Tax effect of  income tax privileges relating to small business enterprises benefit |       | —   |       | (275       | )          | (1,278     | )          |
| Tax effect of  income tax at different rates                                             |       | (849     | )          | 470        |       | 550        |       |
| Increase  (decrease) in valuation allowance                                              |       | (370     | )          | 2,609      |       | (2,258     | )          |
| Tax effect of  other                                                                     |       | 488      |       | 1,031      |       | (21        | )          |
| **Actual provision for income  taxes**                                                   | ** ** | **$**    | **41,560** | ** ** | **$**      | **30,712** | ** ** | **$** | **12,170** | ** ** |

 

The income tax benefit for smallenterprises was abolished as of January 1, 2002 and continued to be availableto enterprises that were established before July 1, 2001. Such enterprises****wereexempt from income taxes for the first two years of operations and in the thirdand forth years income taxes were levied at a rate of 25% and 50% of the incometax rate, respectively. Starting from****January 1, 2002the Company’s juice production primarily concentrated in two small enterprises,Fruit Rivers and Nectarin, which were registered in March and April 2001,respectively.  These WBD Foods subsidiariesutilized small business enterprises income tax benefits until March 31, 2005.

Unused credits, such as profit tax privileges, may notusually be carried forward under 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-29

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**18.**   Income Tax (continued)

Temporary differencesbetween the tax bases of assets and liabilities and the respective carryingamounts in these consolidated financial statements give rise to the followingdeferred tax assets and liabilities at December 31, 2006 and 2005:

| ** **                                                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets/(liabilities) arising from tax  effect of:                           |       |     |       |     |       |
| Losses carried forward                                                                   |       | $        | 8,541      |     | $          | 10,486 |   |
| Intangible assets                                                                        |       | 867      |       | 1,058    |       |
| Property, plant and  equipment                                                           |       | 8,646    |       | 4,359    |       |
| Net investments in direct financing leases                                               |       | —   |       | 1,297    |       |
| Allowance for doubtful accounts                                                          |       | 4,883    |       | 3,557    |       |
| Obsolescence and net realizable value inventory  write off and other accrued liabilities |       | 2,448    |       | 1,729    |       |
| Payroll related accruals                                                                 |       | 4,265    |       | 907      |       |
| Other                                                                                    |       | 1,188    |       | 896      |       |
| Gross deferred tax asset                                                                 |       | 30,838   |       | 24,289   |       |
| Less valuation allowance for deferred tax asset                                          |       | (7,097   | )          | (7,467   | )          |
| Deferred tax asset net of valuation allowance                                            |       | 23,741   |       | 16,822   |       |
| Intangible assets                                                                        |       | (5,035   | )          | (1,451   | )          |
| Property, plant and equipment                                                            |       | (22,183  | )          | (14,357  | )          |
| Net investments in direct financing leases                                               |       | (2,896   | )          | (1,114   | )          |
| Bonds issuance costs                                                                     |       | (348     | )          | (589     | )          |
| Other                                                                                    |       | (68      | )          | (643     | )          |
| Gross deferred tax liability                                                             |       | (30,530  | )          | (18,154  | )          |
| **Net deferred tax (liability)/asset**                                                   | ** ** | **$**    | **(6,789** | **)**    | **$**      | **(1,332** | **)** |
| Analyzed as to:                                                                          |       |     |       |     |       |
| Current deferred tax asset                                                               |       | 12,749   |       | 8,750    |       |
| Long-term deferred tax asset                                                             |       | 8,737    |       | 5,554    |       |
| Long-term  deferred tax liability                                                        |       | (28,275  | )          | (15,636  | )          |

 

In the context of the Company’s current structure, taxlosses and current tax assets of the different subsidiaries may not be set offagainst current tax liabilities and taxable profits of other subsidiaries and,accordingly, taxes may accrue even where there is a net consolidated tax loss.Therefore, deferred tax assets of one subsidiary of the Company are not offsetagainst deferred tax liabilities of another subsidiary. As at December 31, 2006and 2005, a valuation allowance has been recorded for deferred tax assets inthe amounts of $7,097 and $7,467, respectively, as it is not more likely thannot that sufficient taxable profit will be available to offset the deductibletemporary differences to which these assets relate.

For statutory income tax purposes, WBD Foods and itssubsidiaries had accumulated tax losses of $34,797 which may be carried forwardfor use against future taxable income, of which $4,041, $12,783, 

F-30

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**18.**   Income Tax (continued)

$10,283 and $7,690 expirein the period 2008-2013, 2014, 2015 and 2016 respectively. The use of accumulated tax losses of the Russiansubsidiaries is fully usable starting from the year 2007.

As of December 31, 2006,Fruktopak had deferred tax asset of $1,387 as related to net taxable losscarried forward. Management believes that the loss will be realized in fullagainst the future taxable income of Ramenskiy Plant, to which it merged on May16, 2006, during the year ended December 31, 2007.

**19**.   Government Grants

In 1993-1999 ZDMP received capital grants from theRussian and Moscow Governments.  Thesegrants related to the acquisition of property, plant and equipment for babyfood production and are recognized in the consolidated statements of income inthe period in which the depreciation expense on the related property, plant andequipment is incurred. The conditions of the grants are that ZDMP must continueto use the related property, plant and equipment for baby food production.Management believes that it has complied with this condition and will continueto comply in the future.

The movement in capital government grants during theyears ended December 31, 2006 and 2005 comprised:

| 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 related to minority  interest acquisition |       | (646   | )         |
| Currency translation  adjustment                   |       | 307    |      |
| **Balance at December 31, 2006**                   | ** ** | **$**  | **2,547** | ** ** |

 

Grants are amortized once the related property, plantand equipment are put into operation. Amortization is reported as a reductionin the depreciation expense of the related property, plant and equipment.

During the year endedDecember 31, 2006 and 2005, WBD Foods received operating grants from theRussian Government and Moscow City Government in the amount of $0 and $276,respectively.These grants related to interest rates on loans used foracquisition of milk and other raw materials, and are recognized in the consolidatedstatements of income in the period in which the related interest expense isincurred. The grants were provided at the lower of two-thirds of the CentralBank of Russia interest rate (equating to 11% at December 31, 2006) or actualamount of the interest expense. The conditions of the grants are that WBD Foodsmust use the related loans received from Russian banks for the acquisition ofmilk and other raw materials.

F-31

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**20**.   Shareholders’ Equity

In accordance with Russiancorporate laws, earnings available for dividends are limited to profits,denominated in domestic currency, after certain deductions. At December 31,2006 retained earnings of WBD Foods which are distributable under statutorylegislation totaled 737 million rubles ($28,005 at the exchange rate as ofDecember 31, 2006).

**21**.   MinorityInterest

The movement in minority interest during the yearsended December 31, 2006 and 2005 comprised:

| **Balance at December 31, 2004**                                   | ** ** | **$**   | **17,327** | ** ** |
|--------------------------------------------------------------------|------------|---------|------------|------------|
| Acquisitions by the Company of  minority interests in subsidiaries |       | (1,081  | )          |
| Acquisition of subsidiaries                                        |       | 5,312   |       |
| Minority interest share in net  income                             |       | 3,649   |       |
| Currency translation  adjustment                                   |       | (588    | )          |
| **Balance at December 31, 200****5**                               | ** ** | **$**   | **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** | ** ** |

 

**2**2.   Cost of Sales

Cost of sales for 2006, 2005, and 2004were comprised of the following:

| ** **                     | ** ** | **2006** | ** **    | **2005**   | ** ** | **2004**    | ** ** |
|--------------------------------|------------|----------|---------------|------------|------------|-------------|------------|
| Raw materials                  |       | $        | 986,477       |       | $          | 836,404     |       | $ | 726,934 |   |
| Personnel                      |       | 68,464   |          | 50,030     |       | 44,283      |       |
| Depreciation and  amortization |       | 50,136   |          | 41,921     |       | 34,577      |       |
| Utilities                      |       | 29,240   |          | 21,222     |       | 17,378      |       |
| Goods for resale               |       | 22,556   |          | 16,724     |       | 6,663       |       |
| Other                          |       | 37,286   |          | 32,705     |       | 28,932      |       |
| **Total cost of sales**        | ** ** | **$**    | **1,194,159** | ** ** | **$**      | **999,006** | ** ** | **$** | **858,767** | ** ** |

 

F-32

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004 (Amounts in thousands of U.S. dollars, except where otherwise stated)**

**2**3.   Selling and DistributionExpenses

Sellingand distribution expenses for 2006, 2005, and 2004were comprised of the following:

| ** **                                   | ** ** | **2006** | ** **      | **2005**   | ** ** | **2004**        | ** ** |
|----------------------------------------------|------------|----------|-----------------|------------|------------|-----------------|------------|
| Advertising and  marketing                   |       | $        | 76,194          |       | $          | 57,936          |       | $ | 54,298 |   |
| Personnel                                    |       | 55,955   |            | 47,665     |       | 43,831          |       |
| Shipping and  handling                       |       | 73,565   |            | 52,995     |       | 45,938          |       |
| Bad debt expense                             |       | 3,130    |            | 3,908      |       | 3,722           |       |
| Materials and  supplies                      |       | 9,369    |            | 10,446     |       | 8,447           |       |
| Warehouse                                    |       | 10,986   |            | 9,525      |       | 8,937           |       |
| Other                                        |       | 16,855   |            | 9,515      |       | 8,260           |       |
| **Total selling and distribution  expenses** | ** ** | **$**    | **246****,054** | ** ** | **$**      | **191****,990** | ** ** | **$** | **173****,433** | ** ** |

 

**2**4.   General and AdministrativeExpenses

Generaland administrative expenses for 2006, 2005, and 2004 were comprised of thefollowing:

| ** **                                     | ** ** | **2006** | ** **  | **2005**   | ** ** | **2004**    | ** ** |
|------------------------------------------------|------------|----------|-------------|------------|------------|-------------|------------|
| Personnel                                      |       | $        | 78,227      |       | $          | 61,830      |       | $ | 53,250 |   |
| Taxes other than  income tax                   |       | 12,789   |        | 13,194     |       | 11,782      |       |
| Audit, consulting  and legal fees              |       | 10,506   |        | 5,567      |       | 4,655       |       |
| Depreciation                                   |       | 7,215    |        | 5,711      |       | 4,576       |       |
| Materials and  supplies                        |       | 2,462    |        | 3,268      |       | 3,226       |       |
| Communication  costs                           |       | 2,731    |        | 2,880      |       | 2,331       |       |
| Rent                                           |       | 2,670    |        | 2,177      |       | 2,268       |       |
| Security expenses                              |       | 1,441    |        | 1,638      |       | 469         |       |
| Insurance                                      |       | 2,031    |        | 1,561      |       | 1,367       |       |
| Other                                          |       | 14,409   |        | 11,816     |       | 8,892       |       |
| **Total general and  administrative expenses** | ** ** | **$**    | **134,481** | ** ** | **$**      | **109,642** | ** ** | **$** | **92,816** | ** ** |

 

**25.  **Financial Income and Expenses, Net

Financialincome and expense, net for 2006, 2005, and 2004 were comprised of thefollowing:

| ** **                                   | ** ** | **2006** | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------|------------|----------|------------|------------|------------|------------|------------|
| Interest expense                             |       | $        | 27,898     |       | $          | 23,388     |       | $ | 22,348 |   |
| Interest income                              |       | (4,372   | )          | (1,569     | )          | (1,421     | )          |
| Currency remeasurement  (gains), net         |       | (10,288  | )          | (1,231     | )          | (7,673     | )          |
| Bank charges                                 |       | 2,070    |       | 1,983      |       | 1,857      |       |
| Other financial  expense /(income), net      |       | 172      |       | 297        |       | (493       | )          |
| **Total  financial income and expense, net** | ** ** | **$**    | **15,480** | ** ** | **$**      | **22,868** | ** ** | **$** | **14,618** | ** ** |

 

F-33

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004**(Amounts in thousands of U.S. dollars, except where otherwise stated)

**26.   Pension Costs**

In the normal course ofbusiness, WBD Foods and its subsidiaries contribute to the Russian Federationstate pension scheme on behalf of its employees. Mandatory contributions to thegovernmental pension scheme are expensed when incurred. Governmental pensioncontributions are included in personnel costs in the consolidated statements ofincome. Pension costs amounted to $26,270, $20,282 and $20,557 in 2006, 2005and 2004, respectively. WBD Foods has no other pension obligations.

**27.   SegmentInformation**

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.

WBD Foods’ accountingpolicy for segments is the same as that described in the summary of significantaccounting policies. Management evaluates segment performance based on segmentprofit or loss before minority interests and deferred taxes. Transfers betweensegments are made at values that approximate market values.

F-34

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004**(Amounts in thousands of U.S. dollars, except where otherwise stated)

**27.**   Segment Information (continued)

***Operating Segments—2006***

| ** **                                                                     | ** ** | **Dairy** | ** **  | **Beverages** | ** ** | **Baby  food** | ** ** | **Common and  corporate  assets/expenses** | ** ** | **Intersegment  receivables** | ** ** | **Consolidated** | ** **  |
|--------------------------------------------------------------------------------|------------|-----------|-------------|---------------|------------|----------------|------------|--------------------------------------------|------------|-------------------------------|------------|------------------|-------------|
| Total sales                                                                    |       | $         | 1,339,621   |          | $          | 324,074        |       | $                                          | 117,152    |                          |       | $                | —      |   |   |   | — |   |   | $ | 1,780,847 |   |
| Inter segment sales                                                            |       | (18,720   | )           | —        |       | —         |       |                                       | —     |                          |       |             | —      |   |   | (18,720 | ) |
| Sales to external customers                                                    |       | 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 tax (charge)/benefit                                                  |       |      |        |          |       |           |       |                                       |       |                          |       |             |        |   |   | 6,672 |   |
| Minority interest                                                              |       |      |        |          |       |           |       |                                       |       |                          |       |             |        |   |   | (3,197 | ) |
| Net income (loss)                                                              |       |      |        |          |       |           |       |                                       |       |                          |       |             |        |   |   | $ | 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-35

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004**(Amounts in thousands of U.S. dollars, except where otherwise stated)

**27.**   Segment Information (continued)

***Operating Segments—2005***

| ** **                                                                | ** ** | **Dairy** | ** **  | **Beverages** | ** ** | **Baby   food** | ** ** | **Common and  corporate  assets/expenses** | ** ** | **Intersegment  receivables** | ** ** | **Consolidated** | ** **  |
|---------------------------------------------------------------------------|------------|-----------|-------------|---------------|------------|----------------------|------------|-------------------------------------------------|------------|-------------------------------|------------|------------------|-------------|
| Total sales                                                               |       | $         | 1,005,774   |          | $          | 303,147              |       | $                                               | 87,839     |                          |       | $                | 3           |   |   |   | — |   |   |   | $ | 1,396,763 |   |   |
| Inter segment sales                                                       |       | (2,173    | )           | —        |       | —               |       |                                            | —     |                          |       |             | —      |   |   |   | (2,173 | ) |   |
| Sales to external customers                                               |       | 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** | **)** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **$** | **37,242** |   |   |
| Deferred tax (charge)/benefit                                             |       |      |        |          |       |                 |       |                                            |       |                          |       |             |        |   |   |   | (3,327 | ) |   |
| Minority interest                                                         |       |      |        |          |       |                 |       |                                            |       |                          |       |             |        |   |   |   | (3,649 | ) |   |
| Net income (loss)                                                         |       |      |        |          |       |                 |       |                                            |       |                          |       |             |        | ** ** | ** ** | ** ** | **$** | **30,266** |   |   |
| **Total assets**                                                          | ** ** | **$**     | **572,981** | ** **    | **$**      | **213,009**          | ** ** | **$**                                           | **70,638** | ** **                    | ** ** | **$**            | **131,964** | ** ** | ** ** | ** ** | **$** | **(68,035** | **)** | ** ** | ** ** | **$** | **920,557** |   |   |
| **Expenditure for property, plant  and equipment**                        | ** ** | **$**     | **59,922**  | ** **    | **$**      | **12,962**           | ** ** | **$**                                           | **1,754**  | ** **                    | ** ** | **$**            | **472**     | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **$** | **75,****110** |   |   |
| **Depreciation and amortization**                                         | ** ** | **$**     | **41,209**  | ** **    | **$**      | **8,565**            | ** ** | **$**                                           | **2,993**  | ** **                    | ** ** | **$**            | **668**     | ** ** | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **$** | **53,435** |   |   |
|                                                                           |            |           |             |               |            |                      |            |                                                 |            |                               |            |                  |             |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-36

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued) Years ended December 31, 2006, 2005 and 2004**(Amounts in thousands of U.S. dollars, except where otherwise stated)

**27.**   Segment Information (continued)

***Operating Segments—2004***

| ** **                                                                     | ** ** | **Dairy** | ** **  | **Beverages** | ** ** | **Baby   food** | ** ** | **Common and  corporate  assets/expenses** | ** ** | **Intersegment  receivables** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------|-------------|---------------|------------|----------------------|------------|-------------------------------------------------|------------|-------------------------------|------------|------------------|------------|
| Total sales                                                                    |       | $         | 824,509     |          | $          | 301,050              |       | $                                               | 64,657     |                          |       | $                | —     | ** ** |   |   | — |   |   |   | $ | 1,190,216 |   |   |
| Inter segment sales                                                            |       | (6,230    | )           | —        |       | —               |       |                                            | —     |                          |       |             | —     |   |   |   | (6,230 | ) |   |
| Sales to external customers                                                    |       | 818,279   |        | 301,050       |       | 64,657               |       |                                            | —     |                          |       |             | —     |   |   |   | 1,183,986 |   |   |
| Cost of sales                                                                  |       | (618,918  | )           | (199,232      | )          | (40,611              | )          |                                            | (6         | )                             |       |             | —     |   |   |   | (858,767 | ) |   |
| Gross profit                                                                   |       | 199,361   |        | 101,818       |       | 24,046               |       |                                            | (6         | )                             |       |             | —     |   |   |   | 325,219 |   |   |
| Operating expenses                                                             |       | (151,623  | )           | (86,919       | )          | (7,266               | )          |                                            | (26,488    | )                             |       |             | —     |   |   |   | (272,296 | ) |   |
| Operating income (loss)                                                        |       | 47,738    |        | 14,899        |       | 16,780               |       |                                            | (26,494    | )                             |       |             | —     |   |   |   | 52,923 |   |   |
| Financial income and expense, net and current provision for income  taxes |       | (14,472   | )           | (3,348        | )          | (3,862               | )          |                                            | (11,125    | )                             |       |             | —     |   |   |   | (32,807 | ) |   |
| Net segment profit (loss)                                                      |       | $         | 33,266      |          | $          | 11,551               |       | $                                               | 12,918     |                          |       | $                | (37,619    | ) |   |   | — |   |   |   | $ | 20,116 |   |   |
| Deferred tax (charge)/benefit                                                  |       |      |        |          |       |                 |       |                                            |       |                          |       |             |       |   |   |   | 6,019 |   |   |
| Minority interest                                                              |       |      |        |          |       |                 |       |                                            |       |                          |       |             |       |   |   |   | (3,161 | ) |   |
| Net income (loss)                                                              |       |      |        |          |       |                 |       |                                            |       |                          |       |             |       |   |   |   | $ | 22,974 |   |   |
| **Total assets**                                                               | ** ** | **$**     | **544,592** | ** **    | **$**      | **226,084**          | ** ** | **$**                                           | **56,230** | ** **                    | ** ** | **$**            | **24,671** |   |   |   | **$** | **(55,489** | **)** | ** ** | ** ** | **$** | **796,088** |   |   |
| **Expenditure for property, plant  and equipment**                             | ** ** | **$**     | **57,161**  | ** **    | **$**      | **8,817**            | ** ** | **$**                                           | **5,092**  | ** **                    | ** ** | **$**            | **1,569**  |   |   |   | **—** |   | ** ** | ** ** | **$** | **72,639** |   |   |
| **Depreciation****and amortization**                                           | ** ** | **$**     | **29,856**  | ** **    | **$**      | **11,009**           | ** ** | **$**                                           | **2,234**  | ** **                    | ** ** | **$**            | **904**    |   |   |   | **—** |   | ** ** | ** ** | **$** | **44,003** |   |   |
|                                                                                |            |           |             |               |            |                      |            |                                                 |            |                               |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-37

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued)Years ended December 31, 2006, 2005 and 2004**(Amounts in thousands of U.S. dollars, except where otherwise stated)

**27**.   Segment  Information(continued)

Thechanges in the carrying amount of goodwill for each segment for the years endedDecember 31, 2006, 2005 and 2004 were as follows:

| ** **                        | ** ** | **Dairy** | ** ** | **Beverages** | ** ** | **Baby food** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|-----------|------------|---------------|------------|--------------------|------------|-----------|------------|
| Balance at December 31, 2004      |       | $         | 22,398     |          |       | $                  | 3,893      |      |       |   | $ | — |   |   | $ | 26,291 |   |
| Acquisitions                      |       | 3,765     |       |          | 3,423      |               |       |      | —     |   |   | 7,188 |   |
| Write-off                         |       | —    |       |          | —     |               |       |      | —     |   |   | — |   |
| Currency translation  adjustment  |       | (805      | )          |          | (666       | )                  |       |      | —     |   |   | (1,471 | ) |
| 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** | ** ** |

 

For the years ended December 31, 2006, 2005, and 2004,approximately 93%, 92%, and 94% of sales were generated in and sold tocustomers in Russia. As of December 31, 2006, 2005 and 2004, the long-livedassets of the Company were primarily located in Russia. 

The majority of theCompany’s packaging materials is purchased from one supplier. There can be noassurance that, in the event of a loss of this supplier or unfavourabledevelopments in the business practices of this supplier, substantially all ofthe current levels of packaging materials could be purchased at comparable, ornearly comparable, prices on the international market.

**28.  **Dividends

At the annual shareholders’ meeting on June 30, 2006,dividends per common share were declared in the amount of 6.87 Russian rublesper common share (of which 4.60 Russian rubles are attributable for the periodof 2002-2004 and 2.27 Russian rubles are attributable for the first quarter of2006) which at the date of the meeting was equivalent to $0.25. The dividendswere paid to shareholders in August 2006.

At the shareholders’meeting on December 5, 2006 dividends per common share for nine months endedSeptember 30, 2006 were declared in the amount of 7.86 Russian rubles percommon share which at the date of the meeting was equivalent to $0.30. Thedividends were paid to shareholders in December 2006.

**29.**   Share-based Awards

In 2006 the Company entered into share-based awardagreements with a number of its executives. The arrangements include annualawards of 225,000 share options in each of the three years beginning in 2006and 200,000 share options in both 2009 and 2010. The exercise price of theoptions equals the average sales price of the stock over the 90 days periodpreceding each annual grant. Each tranche vests one-third annually over a threeyear period and can be settled in cash. The contractual terms of options isfrom three to five years from grant date. 

F-38

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued)Years ended December 31, 2006, 2005 and 2004**(Amounts in thousands of U.S. dollars, except where otherwise stated)

**29.**   Share-based Awards (continued)

In accordance with SFAS No. 123R the awards have beenaccounted for as a liability and, as such, the awards’ fair value will beremeasured at each reporting date until the date of settlement. 

Compensation cost for each period until settlement isbased on recording the change, dependant on the percentage of the requisiteservice period that has been rendered at the reporting date, in the fair valueof the award for each reporting period. 

In 2006, 200,000 share options were granted at anexercise price of $25.32 per share, and 25,000 share options were granted at anexercise price of $39.29 per share. As of the grant date, the Company expectedthat all of the shares will vest. The Company expensed $2,136 for allshare-based awards for the period from the respective grant dates to December31, 2006.

During 2006, none of the share options were canceled,forfeited or exercised and, as of December 31, 2006, none of the share optionsoutstanding are vested or exercisable. 

The aggregate intrinsic value of share options thatare currently outstanding as of December 31, 2006 and that are expected to beexercised in the future is $8,927. The estimated weighted average fair value ofthe individual share options as of December 31, 2006 was $41.23. 

The determination of fair value of share-based awardson the date of grant and each subsequent reporting date, using anoption-pricing 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 stock options exercisebehaviors. 

Asummary of the assumptions used in the application of the Black-Sholes optionvaluation model as of the grant dates in 2006 were as follows:

| Volatility(1)               |   | 32.28%-36.55 | %      |
|-----------------------------|--------|--------------|--------|
| Risk-free  interest rate(2) |   | 6.10%-6.18   | %      |
| Dividend yield(3)           |   | 0.77%-1.53   | %      |
| Expected life (years)(4)    |   | 3 years      |   |

----

(1)          The volatility is basedon historical volatility of the Company’s common stock over the same term asthe expected term of the award.

(2)          The risk-free rate isbased on the Russian Federation Government Bond with expected term similar tothe expected term of the award.

(3)          The dividend yield isbased on expected annual dividends per share and the share price as of thegrant date. 

(4)          Theexpected life is based on the contractual term of the share options andassumption that the options will be exercised after the vesting period but beforeend of contractual term. 

F-39

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued)Years ended December 31, 2006, 2005 and 2004**(Amounts in thousands of U.S. dollars, except where otherwise stated)

**30.   Related Parties**

*Wimm-Bill-DannTrans*

During 2006, 2005 and 2004the Company received transportation services from Wimm-Bill-Dann Trans (“WBDTrans”), a closed joint stock company, which is a WBD Foods’ investee,amounting to approximately $11,713, $11,687 and $11,149, respectively. As ofDecember 31, 2006, 2005 and 2004 advances paid to WBD Trans in respect oftransportation services amounted to $233, $176 and $247, respectively. 

*Milk Suppliers*

During 2006, 2005 and 2004the Company purchased milk from certain milk supplying companies, which arecontrolled by****members of the control group ofshareholders, amounting to $12,175, $4,493 and $2,614, respectively. As ofDecember 31, 2006 and 2005 accounts payable to these milk supplying companiesin respect of milk received amounted to $373 and $134, respectively.

*AlfaStrahovanie*

In 2006 one of the membersof WBD Foods’ Board of Directors was also a member of the Board of Directors ininsurance company AlfaStrahovanie. Insurance services received from AlfaStrahovaniein 2006 amounted approximately to $660. As of December 31, 2006 accountspayable to AlfaStrahovanie in respect to these services amounted to $284.

*Echo of Moscow*

Through 2006 one of themembers of WBD Foods’ Board of Directors was also a member of the Board ofDirectors in broadcasting company Echo of Moscow. Advertising services receivedfrom Echo of Moscow in 2006 amounted approximately to $116. As of December 31,2006 advances paid to Echo of Moscow in respect to these services amounted to$1.

*CurrentShareholders*

During 2006, WBD Foods acquired 0.26% interest in WBDOJSC from current shareholders for $812 (see Note 4).

During 2004, WBD Foods acquired 6.2% interest in TsMKfrom current shareholders for $3,406 (see  Note 4).

During 2004 the Company paidfor legal services, in the amount of $507 respectively, on behalf of certainshareholders. As of December 31, 2004 all these amounts were fully repaid bythe shareholders.

**31.**   Commitmentsand Contingencies

*Property, Plant andEquipment Purchase Commitments*

As of December 31, 2006,contracted expenditures for the purchase of property, plant and equipment inthe period subsequent to December 31, 2006 were $10,078, payable in 2007.

F-40

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued)Years ended December 31, 2006, 2005 and 2004**(Amounts in thousands of U.S. dollars, except where otherwise stated)

**31.**   Commitments and Contingencies (continued)

*Insurance*

As of December 31, 2006,the Company had insurance coverage of $485,178 in respect of property, plantand equipment at 20 major legal entities. The Company had insurance forbusiness interruption at 14 major manufacture facilities with totalcoverage of $421,732. At 26 legal entities the Company had product liabilityinsurance with $1,000 liability coverage per insurance case within theterritory of Russia and CIS countries, $2,500 liability coverage per insurancecase worldwide except for territory of Russia and CIS countries with thecumulative coverage of $5,000. Until the Company obtains insurance coverage foran amount exceeding the carrying value of property, plant and equipment, thereis a risk that the loss or destruction of certain assets could have a materialadverse effect on the Company’s operations and financial position.

*Taxation*

Russian tax, currency and customs legislation issubject to varying interpretations, and changes, which can occurfrequently. Management’s interpretation of such legislation as applied tothe transactions and activity of the Group may be challenged by the relevantregional and federal authorities. Recent events within the RussianFederation suggest that the tax authorities are taking a more assertiveposition in its interpretation of the legislation and assessments and as aresult, it is possible that transactions and activities that have not beenchallenged in the past may be challenged. As such, significant additionaltaxes, penalties and interest may be assessed. It is not practical to determinethe amount of unasserted claims that may manifest, if any, or the likelihood ofany unfavorable outcome. Fiscal periods remain open to review by theauthorities in respect of taxes for three calendar years preceding the year ofreview. 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, 2006. 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 which were identified by management at thebalance sheet date as those that can be subject to different interpretations ofthe tax laws and regulations are not accrued in the consolidated financialstatements.

*Taxation*

During the period 2003 toMarch 31, 2005 certain subsidiaries of WBD Foods utilized small businessenterprises income tax benefits which were available under Russian income taxlegislation being in force before January 1, 2002. The Company believes thatthe tax savings to the Company for the period 2003 to March 31, 2005 in respectof these income tax benefits amounted to approximately $5,349. Should theRussian tax authorities question the appropriate use of these benefits by WBDFoods’ subsidiaries for the years 2003, 2004, and January—March 2005, issue aclaim and prove successful in the court, they would be entitled to recover theamount claimed, together with penalties amounting to 20% of such amount andinterest at the rate of 1/300th of the CentralBank of Russia rate, equating to 0.036% as of December 31, 2006, for each dayof delay for late payment of such amounts. In any case, WBD Foods’management 

F-41

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued)Years ended December 31, 2006, 2005 and 2004**(Amounts in thousands of U.S. dollars, except where otherwise stated)

**31.**   Commitments and Contingencies (continued)

believesthat is has strong grounds on which to oppose any such claim and willvigorously defend its position. 

*Transfer Pricing*

Russian transfer pricingrules entered into force in 1999, giving Russian tax authorities the right tocontrol prices for transactions between related entities and certain othertypes of transactions between independent parties, such as foreign tradetransactions or transactions with significant price fluctuations. The Russiantransfer pricing rules are vaguely drafted, leaving wide scope forinterpretation by Russian tax authorities and arbitration courts and their usein politically motivated investigations and prosecutions. We believe that theprices used by our group are market prices and, therefore, comply with therequirements of Russian tax law on transfer pricing. However, due to theuncertainties in interpretation of transfer pricing legislation, the taxauthorities may challenge our prices and propose adjustments. If such price adjustmentsare upheld by the Russian arbitration courts and implemented, our results ofoperations could be materially adversely affected. In addition, we could facesignificant losses associated with the assessed amount of prior tax underpaidand related interest and penalties, which would have a material adverse effecton our financial condition and results of operations.

**32.**   Impairmentof Tangible Assets and Goodwill

The Company performs asset impairment analyses on itsfacilities on an ongoing basis. During 2006 a review of all non-current assetswas performed in relation to a future company strategy which was altered withthe change in top management. The assessment considered the potentialrecoverability of the carrying amounts of fixed assets and positive goodwill. 

As a result of this review the Company has recognizedan impairment loss of $18,172 in the year ended December 31, 2006, including$15,633 related to fixed assets and intangible assets and $2,539 related topositive goodwill (Novokuibyshevsk plant). The related deferred tax benefitamounted to $3,153.

The impairment loss charge was included in “OtherOperating Expenses” line of Income Statement for the year ended December 31,2006. This amount is attributable to operational segments as follows: Dairy—$7,196,Beverages—$10,976.

The impairment wasrecognized based on the standards promulgated by the Financial AccountingStandard Board. Such standards require the recognition of an impairment chargewhen the cash flows resulting from the operation of an asset are expected to beless than its book value.

**33.   RestructuringCosts**

In 2006 the company has undergone certainrestructuring changes targeted at optimization of personnel headcount anddecrease of personnel expenses in Dairy, Beverage and Holding operationalsegments. The optimization was carried out through the liquidation ofduplicated functions and excessive labour force. According to these changes, anumber of employees have been laid-off and compensated for it. 

F-42

----

**Wimm-Bill-Dann Foods Notes to Consolidated Financial Statements (continued)Years ended December 31, 2006, 2005 and 2004**(Amounts in thousands of U.S. dollars, except where otherwise stated)

**33.**   Restructuring Costs (continued)

The restructuring chargesmainly relate to redundancy costs, which for the year ended December 31,2006 totaled $4,605. Thisamount is attributable to operating segments as follows: Dairy—$1,867,Beverages—$2,412, Holding—$326. Therestructuring costs were included in “Other Operating Expenses”line of Income Statement. Of the total, $2,090 is accrued as Accruedliabilities as of December 31, 2006. 

**34.   SubsequentEvents**

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 willmature on May 14, 2008 and bears interest at an annual rate of 7.5%, payable intwo installments on November 14, 2007 and May 14, 2008. The loanagreement contains a number of covenants including requirements to maintaincertain financial ratios.

OnMarch 5, 2007, the Company disposed of its interest in Novokuibyshevskplant. As at December 31, 2006 Novokuibyshevsk plant complied with theprovisions of SFAS 144 “Accounting for the Impairment or Disposal of Long-LivedAssets” to be classified as a “Long-lived asset to be disposed of by sale”. Allof its assets in the amount of $1,574 are included in ”Other current assets ”; all liabilities inthe amount of $414 are included in “Other current liabilities” in balance sheetfor the year ended December 31, 2006. Net income and cash flows ofNovokuibyshevsk plant in years of 2004-2006 were not significant and notdisclosed separately.

F-43

----