the annual report was preliminary approved by the board of

The Annual Report was preliminary approved by the Board of Directors of VSMPO – AVISMA Corporation on May 12, 2006

�Annual report 2005

Full Company NamePublic Stock Company VSMPO-AVISMA Corporation

Company’s Site1, Parkovaya Str., Verkhnaya Salda, Sverdlovsk Region, Russia

Company’s Mailing Address1, Parkovaya Str., Verkhnaya Salda, Sverdlovsk Region, Russia, 624760

State Registration Date February 18th, 1993

Registration Number162 II ВИ

State Registration Number1026600784011

Independent AuditorJoint Stock Company Analytic-Express

Company’s PrintNewspaper “Novator”Newspaper “Metallurgist”

Web-server:www.vsmpo.ruwww.avisma.ru

E-mail:[email protected]@[email protected]

COMPANY INFORMATION

� Annual report 2005

CONTENTS

A LETTER TO SHAREHOLDERS ________________________________________________________ 5

BOARD OF DIRECTORS _____________________________________________________________ 6

KEY PERFORMANCE INDICATORS_____________________________________________________ 7

ANTICIPATED 2005 NET PROFIT DISTRIBUTION __________________________________________ 8

PRODCUTION AND MARKETING ACTIVITY ____________________________________________ 9

Titanium Production _____________________________________________________________ 10

Aluminum Production _____________________________________________________________ 12

Steel and Nickel-Base Alloy Products ______________________________________________ 13

Manufacturing Engineering ________________________________________________________ 14

QUALITY AND CERTIFICATION _____________________________________________________ 15

INNOVATIONS ___________________________________________________________________ 17

Capital Construction, Reconstruction and Modernization ______________________________ 17

Melting _________________________________________________________________________ 17

Forging _________________________________________________________________________ 18

Rolling _________________________________________________________________________ 19

Bar Rolling ______________________________________________________________________ 20

Die Forging Machining Shop Construction ___________________________________________ 20

LABOR PROTECTION AND SAFETY ENGINEERING ______________________________________ 22

ENVIRONMENTAL PROTECTION _____________________________________________________ 23

PERSONNEL MANAGEMENT _________________________________________________________ 25

SOCIAL SPHERE __________________________________________________________________ 27

Medicine ________________________________________________________________________ 28

Culture __________________________________________________________________________ 29

Sports __________________________________________________________________________ 30

Health Improvement and Recreation _________________________________________________ 31

Social Project «Cadet School» ____________________________________________________ 32

Social Assistance and Charity _______________________________________________________ 33

AVISMA - AFFILIATE _______________________________________________________________ 34

ACCOUNTING ____________________________________________________________________ 43

Balance Sheet ____________________________________________________________________ 44

Profit-and-Loss Statement _________________________________________________________ 46

Cash Flow Statement _____________________________________________________________ 47

AUDIT REPORT __________________________________________________________________ 49

SHAREHOLDER INFORMATION ______________________________________________________ 51

RISK FACTORS ____________________________________________________________________ 52

OBSERVANCE OF THE CORPORATE GOVERNANCE CODE ______________________________ 53


A LETTER TO SHAREHOLDERS

In 2005 we faced a unique situ-ation: along with the significant gr-owth of the global aircraft build-ra-tes, the airplane structure has been considerably changing. Aluminum is replaced with composites and titanium, and titanium content in the airplane structure is increasing.

The rapidly developing nuclear power industry will also require a lot of titanium.

Thus, the Corporation is seei-ng great prospect and our present task is to be prepared to meet the growing titanium demand from conventional and emerging econ-omic sectors. It would be even be-tter if we could be ahead of such demand. In the past 2005 our joint efforts were aimed at achieving th-ese objectives.

VSMPO and AVISMAJuly 1, 2005 is the date of offi-

cial registration of our Corporation that unites with the single process cycle two companies which have been working together for a long time.

Titanium ProductionSince 2000, titanium products

output in tons has increased 2 ti-mes, in money terms – 3 times. Ex-port volumes have grown 3.5 times and domestic shipments - 2.4 ti-mes. In this way, while Vladimir Pu-tin is planning to double the gross domestic product by 2010, the Co-rporation has achieved it by 2005.

UpgradingDuring 2005 we upgraded die-

forging and sheet-rolling equipm-ent in the main production shops of the Company. State-of-the-art

computer control systems were in-troduced at all the conversion st-ages in accordance with customer requirements and material prope-rties. We extended our capabilities for product quality inspection by purchasing new fluorescent pene-trant and multizone ultrasonic in-spection units. The sixth tube-we-lding line was launched. And fi-nally, our high road into the future – rough machining of large-size co-mplex shape die forgings. New ma-chines were purchased and put into operation in the machining fa-cility.

Customers Whilst we have become the nu-

mber one supplier to Airbus seve-ral years ago, only in 2005 we ma-naged to become the strategic su-pplier to Boeing which introduced into the market its revolutionary project B787 with the increased ti-tanium content. And of course we maintain our cooperation with do-mestic customers as we are practi-cally their only supplier of titanium products and we fully meet their ti-tanium demand.

DevelopmentWe manage to maintain our le-

ading position and credibility in the world market through constant re-construction and upgrading of eq-uipment, process improvement, regular and capital repairs. Investm-ents are made into production de-velopment and conversion. In 2005 we spent USD 54 mln for these pu-rposes (in 2004 – USD 30 mln). Pr-oduct complexity was significantly increased. Currently VSMPO is re-

cognized as a producer of high-qu-ality value-added products.

SalariesThe positive trend is observed

in one of the most important indic-es of the company’s competitiven-ess - output per man in money te-rms. Salary has also grown and am-ounted to RR 11 000 in 2005 (20% increase compared to 2004).

Social Sphere Every year the Company’s soci-

al expenses are increasing. In 2005 they amounted to RR 321.1 mln, which is 17% higher compared to 2004. These means are used to sup-port sports, medicine, culture, and social assistance.

So, the results of the Compan-y’s activities in 2005 are quite im-pressive. There is a lot of difficult, intensive, interesting work to be done, which means the Company will live and develop further.

Vladislav Tetyukhin

Vladislav Tetyukhin: «2005 was a success for us. All the plans are being implemented»


BOARD OF DIRECTORS

Vyacheslav I. BRECHT

Chairman of the Board of Directors

Dennis KELLY

Chief Financial Officer VSMPO-Tirus US, USA

WASIL A. BESEDIN

Director Maintenance, Reconstruction and RepairAVISMA-AffiliateVSMPO-AVISMA Corporation

Vladislav V. TETYUKHIN

Director GeneralVSMPO-AVISMA Corporation

Nikolai K. MELNIKOV

Director Production Planning and ManagementVSMPO-AVISMA Corporation

John MONAHAN

President VSMPO-Tirus US, USA

Pavel A. RIZANENKO

DirectorInvestment Banking ServicesRenaissance Capital


Units 2002 2003 2004 2005

Sales Revenue (net of VAT) in millions rubles 8 769 8 370 10 572 16 800

Costs per Ruble of Product Sold in kopecks 68 76 83 76

Net Profit in millions rubles 1 390 1 279 1 601 3 174

Balance-Sheet Total in millions rubles 8 121 10 063 12 407 20 447

Average Listed Number of Personnel in persons 14 866 15 234 15 280 18 846

Average Monthly Salary in rubles 6 471 7 436 9 000 11 563

KEY PERFORMANCE INDICATORS


Dynamics of Dividend Payments per Share (in rubles)

Dividend per share: 37.88 rubles

ANTICIPATED 2005NET PROFIT DISTRIBUTION

* Growth vs the previous year, %

Net Profit for the Reporting Period RR 3 174 137 K

Undistributed Profit of the Reporting Year shall be allocated as follows:

1.Payment of Dividends for 2005 RR 436 739 K

2. Capital Investments RR 2 255 198 K

3. Remuneration to the Members of the Board of Directors RR 840 K

4. Remuneration to the Members of the Auditing Committee RR 360 K

5. Consumption Fund RR 481 000 K


In 2005, VSMPO product sales in value terms were RR 16 800 mln. Ex-port share was 69% of the sales vo-lume. The general increase of the Co-mpany’s product sales was primarily due to export of titanium mill produ-cts and ferrotitanium.

The Company has consistent gr-owth of its production output and hence, stable profit increase ensur-ing production reconstruction and development.

The major CIS market customers are Ufa Motor Building Production

Association, Irkut Corporation (Ir-kutsk), Salut (Moscow), Saturn (Mo-scow), Kiev Aircraft Plant “Aviant” (Kiev), Gas and Turbine Construction Facility “ZORIA” – “MASHPROJECT”, Motor-Sich (Zaporozhye), Kazakhm-ys Corporation (Zhezkazgan), etc.

PRODCUTION AND MARKETING ACTIVITY

Sales by Product Type in 2005 (in millions rubles)

10 Annual report 2005

Titanium products account for 71% of Company’s sales, the majority of which is exported - 74% of the to-tal titanium products output.

In 2005, titanium mill products export shipments significantly incr-eased. The share of titanium mill pr-oducts in physical terms accounted for 89% in 2005 compared to 81% in 2004. VSMPO-AVISMA Corporation has made a significant breakthrough in terms of export titanium tube pr-oduction. The share of the abovem-entioned products came to 5.5% co-mpared to 1.6% in 2004, with the an-

Titanium Production

nual increase of 247.5%. Export die forging and forging output and ship-ments have grown by 57% and their share increased from 4.2% to 6.3%.

Shipments of titanium products to the domestic market remained at the same level as in 2004. Shipments structure has undergone some ch-anges.

The share of ingot and bar as well as section and power equipme-nt increased.

The share of value-added prod-ucts in the structure of titanium pr-oducts sold in 2005 remained high

and the share of low-value added pr-oducts was reduced.

So, if in 2004 ingot production accounted for 17% of the total ou-tput, then in 2005 the share was red-uced almost by half and equaled 9% and slab output reduced from 11% in 2004 to 9% in 2005.

The significant share – 16% – still falls at die forgings. Last year several dozens of new parts were at the de-velopment stage.

After putting into operation the machining shop for large-size die fo-rgings for aircraft building compani-es, VSMPO has reached a new level, i.e. not just metal but a machined st-ock is shipped to the Customer. Cu-rrently rough machining operations are mastered and in the long term mastering of finishing operations is planned.

All the abovementioned allows VSMPO to turn from a manufacturer of the stock material like ingot and slab into a highly-developed produ-cer of competitive products at final conversion stages

VSMPO Titanium Products Sales in 2005 (in millions rubles)

11Annual report 2005

Titanium Products (in thousands tons)

0


In 2005 aluminum products ac-counted for 4% of the Company’s sa-les.The main aluminum production parts produced by VSMPO are large extruded panels and sections used for manufacture of aircraft body.

The demand for aluminum pro-ducts from the domestic aircraft-bu-ilding companies and CIS countries is low, since for the last several years they produced only several commer-cial aircraft per annum.

In 2005 approximately 11.5% of aluminum production items were

Aluminum Production

exported including 65% of sections and panels and 35% of forgings and bars. Sections and panels were deliv-ered to Chinese aircraft-building co-mpanies for manufacture of aircraft body and to the western countries for aircraft engine casings.

In addition to aircraft-building companies, traditional customers of VSMPO products are as follows: Ga-zprom using aluminum tubes in gas-pumping stations; the Ministry of Nuclear Power Engineering that has been provided with the special al-

uminum articles for many years; Ur-alvagonzavod that places orders for tank wheel forgings.

Significant aluminum plate or-ders are fulfilled in cooperation with Kamensk-Uralsk Metallurgical Plant, using unique VSMPO equipment for heat treatment, stretching and ul-trasonic inspection of plates, since the partner-company does not have such equipment. As for consumer go-ods, sales of structural sections acco-unted for 47.5%, wheel disks – 25.4% and hothouse sections – 22.4%.

1�Annual report 2005

In 2005, steel products account-ed for 1% of the Company’s sales in value terms. Export forging shipme-nts significantly increased.

The share of these products ac-counted for 9.9% (in tons), whereas in 2004 it was 3.3%. The Company delivers steel and nickel alloy prod-ucts in the form of forgings and die forgings.

The main customers of VSMPO steel products are engine-building companies. For Russian customers the Company supplies rolled rings, shafts and discs for aircraft engines and ground gas turbine units. For fo-reign customers the Company is de-veloping and obtaining approvals

Steel and Nickel-Base Alloy Products

for aircraft engine disc forgings in heat-resistant nickel-base alloys. The trial lots of such forgings have been already shipped.

Both domestic and foreign cu-stomers are satisfied with the quality of VSMPO products; however the pr-ice for the steel products is not qu-ite competitive since there is no VS-MPO-owned steel-smelting facility.

The Company has developed pr-oduction of the unique structural forgings in high-strength steels of 4340М and 300М grades destined for Boeing and Airbus aircraft load-bearing elements. The Company has also developed the process for va-cuum arc remelt of ingots of such st-

eels; however the activity was suspe-nded since there are no electrode su-pplies available.

For about 10 years the Company has been continuously producing st-eel blades (from purchased raw ma-terials) for industrial gas and steam turbines made by Uralturbo (Yeka-terinburg).

Several hundreds of industrial turbines are currently in operation in Russia and they are subject to repa-ir every ten years with the entire re-placement of the blades. Due to the intensive repair process of the ex-isting turbines, VSMPO enjoys the in-creased demand for the steel turbine blades

1� Annual report 2005

One of VSMPO activities is prod-uction of power equipment and ve-ssels in titanium alloys and steels.

In 2005 the share of such pr-oducts accounted for 2% of the Co-mpany’s sales. In money terms the output of products intended for ma-chine-building industry in 2005 in-creased 2.4 times compared to the previous year.

Manufacturing Engineering

The Company set up product-ion of titanium heat exchange and column equipment, as well as pipe modular systems that can be insta-lled in the shells of the existing eq-uipment.

Along with titanium, the bi-met-allic material, titanium-steel, is used.

Recently the customers showed the growing interest in such titani-

um products as flanges, fittings, ad-apters that are used for installation and operation of nuclear power pl-ants and oil-producing platforms.

There is no any other company in Russia except VSMPO that could produce such titanium items; there-fore this business appears to be pr-omising for VSMPO.


Competitiveness of any compa-ny, regardless of the form of owner-ship and size, for the most part de-pends on the quality of its products and compatibility of the price for the products with the proposed quality, i.e. on the extent to which the pr-oducts meet the Customer’s requir-ements. Current market established a new tool for quality assurance of products deliveries implemented as a requirement for establishment of the company’s Quality Management System. It ensures that the require-ments stipulated in the contract or agreement will be actually fulfilled. Due to the abovementioned, one of the major areas of the Company’s ac-tivities is improvement of the current Quality Management System (QMS).

Company’s activities aimed at maintaining and further improvem-ent of QMS are based on the Quality Policy objectives and requirements of the key Customers. VSMPO’s Qu-ality Management System efficiency has been repeatedly approved by In-

dependent Certification Authorities and Customers.

From year to year the number of companies cooperating with VSMPO is increasing and more markets are developed; as result not only the nu-mber of Customers’ audits, but also their profoundness is enhanced.

In 2005, 107 external audits were held (that is by 26 audits more co-mpared to 2004), including 66 Cu-stomer’s audits (that is by 33 audits more compared to 2004).

11 audits were held by Certific-ation Authorities (that is by 1 audit more compared to 2004).

Six (6) internal audits of QMS and production processes were held in the shops. For the purpose of me-eting Rolls-Royce requirements four (4) production hazard review au-dits were held. Two (2) contract ex-ecution audits were performed as di-rected by Quality Department Ma-nagement.

The work for assessment of raw material Suppliers in accordance

with the Audit/Survey Plan was co-ntinued. 12 surveillance audits were held and 27 questionnaires were su-bmitted.

In 2005 PRI certification audits were held per Nadcap Program – the Etching Process (Certificate of Co-mpliance to AC 7108), Materials Tes-ting (Certificate of Compliance to AC 7101), NDT of Materials (Certificates of Compliance to AC7114).

In 2005:- Automated Test Report Data Tr-

ansmission System was put into op-eration;

- the decision on development of the electronic system of distribu-tion, recording and retention of do-cumentation was taken;

- the work in regard to electronic on-line access of all Company’s Div-isions to OST Standards, Process Sp-ecifications (TU), Manufacturing Pl-ans was carried out;

- the procedure for review of Cu-stomer documentation was impr-oved, allowing to flow down all the

QUALITY AND CERTIFICATION


requirements to the Company’s Di-visions in full;

- UST unit for titanium products was put into operation in the bar ro-lling shop;

- 9584 employees (in total), incl-uding 6 501 of blue-collar employe-es and 3 083 of managers, specialists and white-collar employees were tr-ained in the Personnel Training De-partment; among them 1800 em-ployees were trained in QMS;

- production and economic se-minar «Foremen School» was held in the course of which the foremen of

major production shops studied st-atistical methods of product and pr-ocess quality analysis and the theory of solving engineering tasks;

- some of the inspection respo-nsibilities of the Technical Control Department were delegated to pr-oduction personnel allowing them to become responsible for the work fulfilled.

In 2005 production volumes were growing and the product mix was expanded, at that the products quality was continuously improving. Production process audits were held

with a more profound check and as-sessment of the process document-ation requirements implementation at work places. QMS certification to AS/EN 9100, ISO 9001, GOST R ISO 9001 was maintained.

In 2005 VSMPO-AVISMA Corpor-ation ensured stable, high level and efficient performance of QMS.

As of December 31, 2005 the Co-mpany holds 240 current certificates, including 17 – for Quality System, 59 – for processes, and 164 – for prod-ucts.


Melting production developm-ent was aimed at increasing produ-ction volumes, mostly by way of re-construction of VAR furnaces to es-tablish conditions for additional in-volvement of recycled charge ma-terials and improve ingot quality as-surance system.

Basic Actions: - Upgrading of 9 VAR furnaces

Melting

Process Support:- Purchase, installation and putti-

ng into operation two ingot abrasive grinding units.

- Reconstruction of Recycled Ch-arge Materials Etching Area.

- Purchase and installation of 250 ton and 400 ton chopping pres-ses and guillotine shears for titanium scrap cutting.

- Purchase and installation of the turning lathe for intermediate melt ingot conditioning.

Quality Control Improvement: - Design, manufacture and in-

stallation of X-ray inspection unit for master alloys.

- Installation and commissioning of 3 units for 100% titanium sponge inspection.

Capital Construction, Reconstruction and Modernization of Production Facilities

INNOVATIONS


Forging

The undertaken actions allowed to improve metal deformation pr-ocesses, optimize production flows, enhance key equipment loading and increase production volumes with the costs reduced on the account of yield growth.

Hydraulic presses: - The overhaul and upgrading

of 6000 ton press control system al-lowed to manufacture billets with re-duced allowances and the extended length.

- Basic construction and instal-lation works were completed at the area of 1500 ton press: the press was installed, basements for heat treatm-ent furnaces were built.

- GLAMA 1 ton loader was purc-hased for 30 000 and 70 000 ton pr-esses.

Heating facilities: - Two (2) heating furnaces instal-

led at 30 000 and 70 000 ton presses allowed to increase the loading and production capacity of the equipm-ent.

- Centralized control and mo-nitoring system of heating furnaces with accurate stock heating allowing to increase rotor-grade billet output was commissioned.

- Putting into operation of the bogie-hearth furnace solved the is-sue of homogenization of the high-alloy ingots (10-2-3 alloy) at the te-mperature of 1230 °C for 3 hours.

Auxiliary equipment: - Milling equipment upgrading

allowed to perform partial machini-ng of die forgings.

- Roller beds manufactured and installed for KASTO band-saw allow-ed to increase its throughput and eli-minate the problem of stock cutting.

- Construction of the grinding area and installation of four grinding units allowed to enhance use of non-machined ingots in the production process and solve the problem of gr-ind-out of defects at intermediate st-ages that resulted in yield increase.

6000 ton Forging Press Area: - Electric heating furnaces and

LOCHER chamber gas furnace were put into operation that ensured the required spare heating capacities to support the planned production vo-lumes.

- Two mechanized grinding units were installed allowing to solve the problem of grind-out of defects of the intermediate stock.

10 ton electric bridge crane was put into operation at the titanium pr-oducts release area.

Due to sharp output increase st-arting from 2003 the number of pi-eces of the key and auxiliary equip-ment had to be increased in order to ensure the throughput and fulfill the required volumes.

In order to ensure the maximum load of 2000 ton press forging co-mplex the following additional units were installed:

- Two grinding machines for re-moval of surface defects on interm-ediate stocks.

- Two heating furnaces for stock heating for forging on radial-forging


Rolling

The basic intention was to in-crease production output. The gr-eat scope of work was fulfilled for re-placement of morally obsolete and worn-out equipment and tools by new, advanced equipment allowing to improve the quality of the proce-ssed metal with general reduction of the labor-output ratio.

Commissioning of the electric heating furnace with the transfer de-vice allowed to increase output by 1280 tpy.

Purchasing and installation of

KASTO band saw allowed to expand mill products machining area and re-duce plate machining labor intensi-ty.

Process modernization: - equipment of 2000 hot rolling

mill with ring load cells; - upgrading of 1200 rolling mill

hydraulic system; - purchasing and installation of

versatile circular grinding machine BUB 40 CNC/2000;

- purchasing of the roller shape inspection instrument;

- construction of a new brush-washing machine;

After putting into operation mi-lling and grinding machines, output of panels of 12.0 and 18.0 mm in th-ickness increased 2.5-3 times.

Vacuum-creep furnace # 1 was reconstructed to reduce plate anne-aling cycle.

Software for OPTEL measurem-ent complex was developed for au-tomation of product thickness and flatness inspection.

machine RKM-800. - Computer-aided control of th-

ree electric furnaces.- Installation of the tools (dies)

heating furnace for 2 000 ton press was started.

- Test template upsetting furna-ce.

- Four die-head forging block for radial forging on 2 000 ton press was designed and tried-out.

In order to increase forged billets output, four KASTO band-saws were installed.

In order to increase machined disc and ring output:

- New FPI area was commission-ed.

- Installation of ScanMaster UST unit for discs is in process.

- 7 worn rotary-table machines are upgraded.

- Diamond-finishing machine was put into operation

- Two rotary-table machines were put into operation.

- GLAMA manipulator with the li-fting capacity of 2.5 ton was purcha-sed for rolling of rings of a larger we-ight and size.


Bar Rolling

In order to eliminate the bottle necks in rolled bar production the following equipment was commi-ssioned: electric bar annealing fu-rnace, additional bar induction he-ating unit for I 5532 straightening machine and abrasive-cutting ma-

Construction of the die forging machining shop was initiated, prim-arily, owing to the desire of our Cu-stomers to get value added products from VSMPO aiming at manufacture of the finished parts in the near fu-ture.

Landing gear components are subject to machining.

The project objective is produ-ction efficiency increase on account of:

- expansion of the service range rendered to the Customers;

chine. Implementation of these ac-tions allowed to increase the shop capacity for the existing product mix up to 4550 tpy.

To ensure product quality and fulfill Customers’ requirements, th-ree furnaces of the radial-shear ro-

lling mill were re-equipped with temperature monitoring and reco-rding controllers; temperature pa-rameters recording unit for all the heating equipment of the shop and the lengthwise identification unit for bars were purchased.

- reduction of the lead times of the finished products due to elimin-ation of subcontracting;

- guaranteed implementation of the Customers’ requirements for pr-oducts quality.

Project benefits: - additional profits on die forgi-

ng machining;- saving in purchasing of charge

materials due to scrap involvement increase.

Die forging machining shop is

constructed in the area of 9.5 thous-and square meters in the existing pr-emises of the house-building facility.

Equipment for the new machi-ning shop was primarily selected so that to perform machining of the die forgings delivered to our Customers like Goodrich, Boeing, and others, as well as to enable machining of any VSMPO die forging.

When selecting machine types VSMPO specialists consulted leading machining specialists of our Custom-

Die Forging Machining Shop

Construction

21Annual report 2005

ers, visited facilities of potential equ-ipment suppliers and got acquainted with their production.

Final decision on signing the su-pply contracts was taken after verifi-cation of machine operation in both Russian facilities and abroad

The project includes: - construction of the die forging

machining shop comprising 12 ma-chines;

- installation and commissioning of CNC turning lathe;

- purchasing of TMM 4200/420 identification system;

- purchasing and installation of 2 portal bed-type CNC milling ma-chines;

- commissioning of BP130CNC machine;

- purchasing and installation of inspection stands;

- arrangement of work places for design and process engineers and CNC machines software programmers;

- construction of coordinate-me-asuring machines area.


LABOR PROTECTION AND SAFETY ENGINEERING

Labor and Environmental Pr-otection and Industrial Safety De-partment deals with labor safety at VSMPO.

As in the previous years, in 2005 engineering tasks under the Agree-ment to the Labor Contract were fu-lfilled. RR 136 491 K was spent on implementation of the actions stipu-lated by the labor safety agreement. Working environment was improved for 1217 employees including 418 women.

Working places in all VSMPO divi-sions are qualified for preparation for certification for the compliance with labor safety requirements. In 2005, based on qualification results the be-low mentioned efficient engineering tasks were fulfilled which allowed to improve working conditions in most of the shops.

Antivibration chairs with damp-ing springs reducing transportation vibration of the crane cabin were pu-rchased for electric bridge crane op-erators of the forging shop.

The pneumocylinder for tools assembly on the feeder was installed

in order to decrease physical loads of the workers in the tube extrusion shop. Air conditioning equipment was purchased for the monitoring and control station of the furnaces in the tube extrusion shop, for the br-idge crane in the forging shop and the industrial air conditioner for the tooling shop.

Amenity rooms were repaired in the sheet rolling shop and in two fo-rging shops.

Methane leak detectors, alarms for detection of combustible gases in the air of the thermopower shop and oil-fuel level control gages for boiler room # 1 were purchased.

For non-conventional equipm-ent production shop hydraulic st-acking trucks with telescopic ma-sts and electric lifting forks were co-mmissioned; exhaust ventilation for thermal cutting machine and dry fl-oor cleaning unit for the machining area were assembled.

The tilting cradle for thick plates was manufactured for the finished products acceptance area of the sh-eet rolling shop.

To improve thermal conditions in the shops the equipment was de-signed and purchased, construction and installation works for low pr-essure gas piping were partially fu-lfilled and 18 sets of radiators were installed. Drinking water distribution station was purchased for the Cater-ing Division.

34 gas water machines were in-stalled in the shops. In addition, in 15 shops in the heat generation areas 1 liter of tea per shift/worker is provid-ed (RR 774 K was spent).

Special glasses were purchased for eyesight protection of the perso-nnel using PC.

RR 12.011 K was spent for impl-ementation of the abovementioned engineering tasks. RR 95 mln. was sp-ent for repair of production premises and constructions in order to ensure safety operation and improve amen-ities of employees.

With the growth of production volumes new work places are intro-duced leading to the increase in the number of actions required to ensu-re labor safety conditions.


Central Testing Laboratory of Ecological and Production Enviro-nment Protection Department (CT-LE&PEP) included into the Health, Environmental and Safety Division is responsible for addressing envir-onmental issues at VSMPO-AVISMA Corporation. This laboratory was am-ong the first in Sverdlovsk Region to be accredited for the technical co-mpetence.

CTLE&PEP Department is engag-ed in control and implementation of Environmental and Production Envi-ronment Protection law and regulat-ions during products manufacture.

The environmental protection system of the Company is based on the following principle: planning-ra-ting-control-recording-registration-reporting-review-planning and ma-naged in the following three basic fi-elds:

- Protection of ambient air;- Protection of water resources;- Handling of industrial and co-

nsumption wastes The Company carries out enviro-

nmental activity in accordance with the approved standards of emissio-

ns, discharge, generation, handing and distribution of wastes. Licenses for wastes handling activities and hy-drometeorology works were granted to the Company.

Ambient Air Protection The Company does not exceed

the limits of pollutants discharged into the air.

VSMPO uses 169 gas-treatment units that allow to reduce pollutant emissions of the Company by 63%. In 2004-2005, 26 new gas-treatment units were put into operation.

Ambient air protection is arran-ged by the Company in such a ma-nner that emissions discharged by all production facilities of the industrial sites are comparable by weight with emissions produced by boiler hous-es engaged in providing heating for both the Company and the city.

In 2005, the following was fu-lfilled in order to ensure safety of the neutralization system and reduce emissions into the air:

- replacement of dust and gas cleaning equipment in the used et-chants neutralizing premises in the

water supply shop and treatment pl-ants;

- equipment of gas-treatment units with flow meters and pressure gages.

Water Resources ProtectionThe Company uses five perma-

nent effluent discharge outlets. Qu-ality control for 24 pollutants of efflu-ent water is carried out every month at the outlets. 99.6 % of effluent wa-ter is subjected to cleaning through treatment plants of the Company. In 2005, only 24% of pollutants by we-ight were discharged with effluent water against the planned discharge rate established by the Company.

In 2005 the following was perfo-rmed for water protection:

- Activities ensuring the effective operation of the sewage disposal pl-ant including local disposal plants;

- The dike dam of the sludge co-llector was repaired;

- Replacement of utility and dr-inking water supply;

- Design works for advanced tr-eatment from fluorides using treat-ment plants of site A.

ENVIRONMENTAL PROTECTION


Development of the project for the maximum permissible emissions of pollutants with effluent water al-lows to reduce the effluent water co-ntamination charge 5 times.

Wastes Handling Wastes of Hazard Classes 1-5

are generated on industrial sites of the Company. In 2005, 60.2% of wa-stes generated in the Company were used in-house, 27.1% - handed over to outside organizations, 12.7% - al-located on site. The whole volume of wastes allocated on site meets the established standards. Most of al-located wastes are non-toxic wastes of Hazard Class 5. More than 80 em-ployees hold wastes handling ce-rtificates.

Ecological Program Safe environment can be en-

sured only owning to continuous at-tention paid by the Company’s ma-nagement and employees. Mid-term ecological program subjected to the state environmental appraisal has been put into effect in the Company.

ility and drinking water supplies, cl-eaning of the sludge reservoir at the drinking water treatment station.

The projects for the sanitary pr-otection area, reconstruction of tr-eatment plants with advanced trea-tment from fluorides and treatment plants of rainwater collectors at site A are developed.

The major actions in 2005 were as follows:

- Reconstruction of the used et-chants neutralization area with the gas-treatment unit replaced;

- Reconstruction of 8 aerotanks with installation of fine-bubble aera-tors for treatment plants of industrial and domestic sewage;

- Repairs and replacement of ut-

Wastes Distribution in 2005

used on sitehanded to outside organizations allocated on site


PERSONNEL MANAGEMENT

In 2005 the number of the Com-pany employees was 15204 persons. And although it is by 76 people less compared to 2004, the number of the personnel in the major produc-tion shops increased due to the ou-tput growth.

In 2005 the average monthly sa-lary equaled 11374 rubles (in 2004 – 9000 rubles). As in 2004, in 2005 the average age of VSMPO employ-ees was 38 years old.

Just as in 2004, the average work experience of blue collar employees equaled 13 years, specialists – 15 ye-ars; white collar employees – 17 yea-rs; managers – 19 years. The average work experience was 14 years.

In 2005 the honorary certificate of the Winner of the First All-Russian

Contest “The Best Russian Personnel Office-2005” was granted to the Pe-rsonnel Department of VSMPO-AV-ISMA Corporation.

Increasingly high requirements are set up for the personnel and its ability to fulfill the established tasks in the conditions of severe competit-ion at product markets.

In 2005, the work of the speciali-sts of the Personnel Department and the managers of the Company’s divi-sions was aimed at enhancing interr-elation between employees’ produc-tion training level and stimulation of their interest in production results.

In 2005, 9584 VSMPO employees were trained in the Personnel Traini-ng Department, including 6501 wo-rkers and 3083 managers, specialists

and white-collar employees. Among them there were young employees (under 30) – 3816 persons (in 2004 – 3540 persons).

958 people acquired a new rela-ted profession. 862 people improved their qualification degree. 3066 peo-ple finished intentional training cou-rses. The same number of people at-tended short-term courses. 575 pe-ople attended permanent seminars. 1245 people attended courses ar-ranged by the Russian Technical Su-rveillance Authority.

Training resulted in more effic-ient personnel management at the work places and re-distribution of employees in case of insufficient pr-oduction load.

In 2005, order and production


volumes growth made the Personnel Department take efficient actions for supporting production facilities with the qualified graduates finishing Ve-rkhnaya Salda Professional Lyceum, Verkhnaya Salda Aero-Metallurgical College, Nizhnaya Salda Vocational School # 131 (NPU-131), high educ-ation institutions.

In 2005 the Company hired 510 graduates (37.7% of the total numb-er of newly employed), 112 persons (8.3%) who returned from the mi-litary service, and 730 persons (54%) under work contracts. For 2004 the figures were as follows:

- upon graduation of education-al institutions – 484 people (38.8%);

- upon completion of the milita-ry service – 142 people (11.4%);

- under work contracts – 606 pe-ople (48.6%).

As of December 31, 2005, 766 VSMPO employees were the studen-ts of the Urals Polytechnic Institute, the affiliate of the Urals State Techn-ical University. In 2005 the students of Verkhnaya Salda Professional Ly-ceum – 689 persons (in 2004 - 676), Verkhnaya Salda Aero-Metallurgical College – 466 persons (in 2004 – 407), high education institutions – 139 pe-

rsons (in 2004 - 149) were trained in practice at VSMPO.

In 2005 the Company’s organiza-tional structure was changed. For the purpose of production optimization, three divisions (Shop 17, 44, 51) were withdrawn from the Company’s st-ructure.

The following self-financing sub-sidiaries were established on the ba-sis of the above-mentioned shops: VSMPO-LESTA LLC, VSMPO-POSUDA LLC, VSMPO-Stroitel LLC. After re-or-ganization the number of personnel neither reduced nor increased.


SOCIAL SPHERE

PSC VSMPO-AVISMA Corporati-on is a city - constituting, socially re-sponsible company actively particip-ating in development of the city in-frastructure and paying considerate attention to the social sphere su-pport and development. The corpo-rate social expenses in 2005 equaled RR 321.1 mln that is by 17% more co-mpared to the last year.

The Company’s social policy is based on holding to the traditions and maintaining of the common in-terests of the Company employees and their families.

One of the fundamentals of the corporate social policy is labor cont-ract. It provides for labor remunerat-ion guarantees and for social and le-gal protection which is not provided

for by the RF legislation. On the basis of 2005 performa-

nce results, V. V. Tetyukhin, Director General of PSC VSMPO-AVISMA Co-rporation, was awarded a Letter of Gratitude from E. E. Rossel, Governor of Sverdlovsk region, for active part-icipation in charitable activities and help to people in-need of social as-sistance.

Social Expenses (in millions rubles)


The established system of the Company’s personnel health protec-tion permits to provide qualified me-dical treatment directly on site, co-nduct diagnostics of diseases, render ambulatory and stationary assistan-ce, rehabilitation and preventive tr-eatment.

The medical-preventive comp-lex of VSMPO-AVISMA Corporation includes: an outpatient department for 600 visits during a shift; a diagno-stic center for 100 visits during a day; two in-patient departments with 122 beds; recovery center; interplant sa-nitary centers; shop health units.

The medical-preventive complex provides services to 15.5 thousand employees and 7 thousand retirees.

With commissioning of the He-alth and Rehabilitation Center in July 2005, new medical technologies were implemented, which would su-bsequently allow to solve the major task - reduction of the Company’s employee sick rate. In the 6 month

Medicine

period, 7 958 people received med-ical treatment in the Health and Re-habilitation Center, including 560 employees of basic occupations who took complex therapy under packa-ge tours.

In 2005, 2 712 employees receiv-ed medical treatment in the Compa-ny’s in-patient departments.

Prevention program for cardiov-ascular and other chronic noninfect-ious diseases is implemented at VS-MPO-AVISMA Corporation.

This work in 2005 included re-duction of the disease development risk and organization of recreation and rehabilitation activities of the Company’s employees.

After 5 years of the program im-plementation the premature mortal-ity rate of working age was reduced by 40%, hypertension occurrences – by 6% and labor losses due to il-lnesses - by 8%.

In 2005, investments in medicine amounted to RR 79.4 mln. The share

of the medicine expenses in the Co-mpany’s consumption fund in 2005 amounted to 24.7%.

The employee voluntary health insurance system is widely used at VSMPO-AVISMA Corporation.

According to the voluntary he-alth insurance contracts, RR 22.6 mln (RR 1 460 per employee) was spent for purchase of medicines and pa-yment for treatment and surgeries in 2005.

Considering the unsatisfactory demographic situation in the city, the Company undertook additional obligations to render assistance to newly married couples.

Gynecology department was es-tablished in the city. 1129 women, 46% of which are employees of mu-nicipal enterprises, received treatm-ent in this department in 2005.

In 2005 repair of the children’s health center was started. The work performed by the Company’s repair division amounted to RR 4335 K


Culture

For development of the childre-n’s and youth’s creative abilities, crea-tion of the culture of communicatio-ns, arrangement of leisure for the Co-mpany’s employees and city citizens VSMPO Cultural Center was created, including:

- Palace of Culture named after G. D. Agarkov;

- teenager club “Druzhba”;- children’s club “Rovesnik”; - membership club “Rodnik”;- cultural and health-improvem-

ent center “Semya”;- entertaining center “Uralsky”.Active concert, entertainment

and educational activities are carried out in all the departments covering musical, choreographic, arts and cr-afts, and other directions.

38 clubs and creative groups are attended by 1308 people. Seven gr-oups were given the rank of “Recog-nized”.

Choreographic group “Rossiyan-ochka”, choreographic studio “Dance Island”, theater and choreographic st-udio “Shalunishki”, dance studio “Ku-razh”, youth theater, academic choir, brass band, art studio “Fantasy”, dan-ce club “Improvizatcia” and other gr-oups successfully function in the Cu-ltural Center.

All divisions of the Cultural Ce-nter organize events for gross audi-ences: traditional shows devoted to calendar holidays – Women’s Day, Vi-ctory Day, Youth Day, New Year and other.

Shop anniversary parties, family vacation days, festivals and exhibi-tions (e.g. “City of Businessmen”, all-Russia exposition “Ural Forgers”) are very popular.

Creative groups from the Cultur-al Center regularly participate in the regional contests and festivals and the soloists of band “Dombra+” were awarded a diploma of the All-Russia Contest of Performing Art.

VSMPO-AVISMA Corporation cu-ltural expenses steadily increase ev-ery year, only in 2005 expenses per person amounted to RR 1500.

Cultural Expenses (in thousands rubles)

�0 Annual report 2005

One of the major objectives of VSMPO-AVISMA Corporation is su-pport and improvement of health of the Company’s employees, children and teenagers – the main source of the Company’s workforce, as well as creation of conditions for regular ex-ercises and sports activities.

The Company has a constantly developing sports base, which in-cludes:

- stadium “Start” with a hockey court and a football ground;

- sports complex “Chaika” with a swimming pool and sports hall;

- sports and health improvem-ent facility “Melnichnaya” (tracks for downhill racing, hoisters, ski and ro-ller tracks, tracks for ski racing with the length of up to 20 km, track for sledging and snow tubing), where military sports camp “Olimp” functio-ns during summer vacations and sp-orts and health improvement camp – during winter, spring and autumn vacations.

400 children and 2160 Compa-ny’s employees and members of th-eir families regularly attend the sw-imming pool in the sports complex “Chaika”.

Sports

The management pays attention to providing facilities for operation of shop health groups (85 groups) attended by 2300 employees. Wi-nter and summer shop competitions have become a tradition. The comm-on sports tournament is held annual-ly among the Company’s employees. In 2005, 44 shops took part in 13 co-mpetitive events with the total nu-mber of participants of 5062.

At any sports facility one can rent the following sports equipment: racing and mountain ski, snow-tubi-ngs, snow bikes, skates, skateboards, balls etc.

The Company actively supports development of physical education and sports in the educational instit-utions.

-8 sports grounds with 43 sports clubs attended by 986 school child-ren are arranged on the basis of sc-hools;

- at the Company’s expense add-itional physical education lessons are given in two schools of the city;

- annually the schools receive pa-tronage assistance in repair of sports halls, hockey courts and purchasing of new sports equipment;

- in winter time the Company runs 2 hockey courts on the basis of schools.

Every year the number of the wi-nners of regional and all-Russia com-petitions and championships foster-ed in Verkhnaya Salda in increasing. Thus, in 2005, 4 young sportsmen ac-hieved the candidate master results in ski racing, 10 sportsmen achieved the results of the first grown-up ca-tegory, 3 sportsmen became the wi-nners of the cross-country champi-onships of Russia in semi-marathon among the youth and in 10000 me-ter race among the juniors.

Physical Education and Sports Expenses (in thousands rubles)

�1Annual report 2005

The Company has two recreation centers: “Tirus” – for 128 reservations and “Sosnovka” - for 66 reservations.

In 2005 the maintenance costs equaled RR 9 419 K.

7122 people recreated at the ce-nters, among which:

- 4943 people in “Tirus” on va-cation package tours and 15 on one-day package tours;

- 2181 people in “Sosnovka” on vacation and one-month package tours.

For the purpose of the Compan-y’s employees’ health improvement, the Company spent RR 3331.1 K on health resort therapy and 418 peop-le received medical treatment.

370 people received medical tr-eatment in the regional hospital of medical rehabilitation “Lipovka”. The-se expenses amounted to RR 1700 K.

Organization of health impro-vement and recreation for children during vacations is one of the social programs implemented by the Co-mpany.

Throughout a year children he-alth improvement and recreation are organized in:

- country camps “Tirus” and the

Health Improvementand Recreation

camp, named after Z. Kosmodemja-nskaya;

- day camps “Start” and “Olimp”;- non-company camps “Zeleny

Mys” (Novouralsk) and “Niva” (Gele-ndzhik);

- sanatoriums “Usk-Kachka” and “Krasny Yar” in Perm region;

- tourist trips to Moscow, St. Pe-tersburg, Yekaterinburg.

The Company’s employees have 3140 children in the age of 7 to 17 years (schoolchildren) what makes up 70% of the total number of the city schoolchildren, 1241 children are from broken and large families or are under guardianship.

Each child has a chance to spe-nd time in one of the camps during a year.

In 2005 the camps were attend-ed by:

924 children from broken famil-ies;

116 children from families, ha-ving many children;

42 children under guardianship27 handicapped children.For 4 years a labor camp has

been organized on the basis of Ve-rkhnaya Salda professional lyceum.

The Company provides three meals daily to the students involved in the lyceum repair.

10 vacancies are available for te-enagers in children camps. During summer of 2005, 32 schoolchildren of the city worked as junior counse-lors.

In 2005 the program of health improvement and recreation cove-red 170 teenagers after sixteen ye-ars old.

In 2005 expenses for organizati-on of health improvement and recre-ation for children amounted to RR 26 K, including RR 14.8 K from the Co-mpany’s assets.

Certificates of Honor from Sver-dlovsk Region Government and the Federation of Trade Unions were aw-arded to the country camp “Tirus” and sports camp “Start”.

The Company’s trade union be-came one of the winners in the com-petition for the best arrangement of summer recreation for children and teenagers held by the Russian Fe-deration of Independent Trade Un-ions and devoted to the 100th an-niversary of the Russian trade union movement.


Social Project «Cadet School»

On VSMPO-AVISMA Corporation initiative the social project on creat-ion of a new kind of educational es-tablishment – naval cadet school for teenagers from problem families re-quiring social assistance – was de-veloped and implemented. The total amount assigned to this project by the Company is RR 21.4 mln.

In 2004-2005 academic year, the school was attended by 180 children including 97 cadets, 50% of children live in the boarding school.

The school is under the patron-age of VSMPO-AVISMA Corporation and the neighboring Army Missile Division which keep working on the military and patriotic upbringing of the pupils. The best cadets were en-

couraged by a trip to the North Navy at the expense of the Company. The cadet upbringing greatly influenced the teenagers’ personal developme-nt and increased their motivation for studies, discipline and self-organiza-tion.

As a result of this project, the nu-mber of school-children registered in the commission on juvenile affairs for various delinquencies was reduc-ed and the quality of education also changed.

The number of pupils with good and excellent marks increased. In 2005, 9 pupils of the 11th grade gr-aduated from the school.

All graduates continued their education in the lyceum named after

Evstigneev, two of them entered Ver-khnaya Salda evening department of the Urals State Technical University.

Concurrently with the basic ed-ucational process, 50 cadets of the 5th -8th grades of the boarding sc-hool «Cape of Good Hope» master the sailing basics and participate in sailing ship construction in the yacht club «Romantica».

In 2005 the representatives of the yacht club took part in 8 regatt-as at the territory of Russia and were awarded diplomas of the 1st and 2nd degrees.

The Company’s expenses for the project «Cadet School» in 2005 eq-ualed RR 2.6 mln, for the yacht club «Romantica» – RR 493 K.

��Annual report 2005

Social security of VSMPO-AV-ISMA Corporation’s employees is the necessary condition of the stable economic development of the Co-mpany. Annually 16 kinds of social payments are made out of the Com-pany’s profit. These include parent’s support for the children under 3 ye-ars old in excess of the rate set by the legislation, assistance to families ha-ving many children, to disabled pe-rsons and single mothers, discharge allowances for the retirees, addition-al payments for kindergartens, social maternity leaves, unemployment re-lieves for unemployed retirees and other. In 2005, social payments am-ounted to RR 109 mln.

More than 7500 persons are ve-terans of VSMPO-AVISMA Corpora-tion. All of them are united into the public organization “Council of Ve-terans”. All the veterans have the be-nefits established by the Company’s administration and enlisted in the la-bor contract. These benefits include services of the Company’s medical unit; medical insurance (payment for medicines and surgeries). Money for purchasing of firewood is appropria-ted to the veterans living in the pr-ivate houses. Veterans are given free package tours to the Company’s re-creation center. In 2005, the Compa-

Social Assistance and Charity

ny lent support to the veterans in the amount of RR 34.2 mln.

VSMPO-AVISMA Corporation is the winner of the anniversary contest show of the International Forum “Gl-obal Experience and Economy of Ru-ssia” in 2005 and a holder of the Ho-norary Diploma “National Star” for rendering efficient assistance to War and Labor veterans and vigorous ac-tivity related to civil, military and pa-triotic education of the youths.

In 2005 charity was rendered: - for repair of the city objects of

social sphere – RR 4.8 mln.;

- to the city educational establis-hments – RR 180 K;

- for free meals for 50 children from disadvantaged families of the city – RR 440 K;

- to orphan children from the or-phanage and boarding school – RR 239 K;

- for construction of Church of St. John of Evangelist in Verkhnaya Sa-lda – RR 501 K;

- to municipal and regional hea-lth authorities, law enforcement bo-dies, social protection agencies – RR 628 K

�� Annual report 2005

AVISMA - AFFILIATE


ProductionAVISMA is considered to be a

multi-branch chemical and metallu-rgical facility. The major lines of AV-ISMA activities are as follows:

- sponge titanium production;- magnesium and magnesium al-

loys production;- production of chemicals such

as:- titanium tetrachloride;- vanadium oxychloride;- vanadium pentoxide;- barium flux and carnallite flux;- cuprichloric modifier;- potassium chloride electrolyte;- antiicing material “Kama-M;- calcium chloride (solution).

Sponge Titanium IndustryAVISMA is considered to be a

monopolist in production of sponge titanium in Russia and one of the la-rgest among the world manufact-urers. Currently the production vo-lume of VSMPO-AVISMA Corporation is estimated as one third of the en-tire global sponge titanium output. It shows a great potential. Russian influence on the world market is si-milar only with regard to nickel and palladium.

Magnesium and Magnesium Alloy Industry

AVISMA is considered to be the largest producer of magnesium and magnesium alloys in Russia.

Magnesium and Magnesium Alloys Market

Chinese supplies fundamentally changed the overall situation in the

world market of primary magnesi-um. Actually, if China stops the expo-rt today, the world market will suffer from the acute shortage of primary magnesium.

Supplies build-up became, prob-ably, one of the Chinese major achi-evements, as in no other market the Western world feels the leading po-sition of this country as distinctly as in the magnesium market. Providing for about 70% of the world magnes-ium supplies without any signs of sl-owdown and having the capabilities to produce this light metal at low co-sts, China is notably ahead of all its competitors.

CIS countries also constitute a very important region of magnesium production. Four main manufacture-rs are located here: Solekamsk Ma-gnesium Plant and VSMPO-AVISMA Corporation in Russia, Ust-Kameno-gorsk Titanium and Magnesium Wo-rks in Kazakhstan and Zaporozhje Ti-tanium and Magnesium Works in Uk-raine.

In the West currently there are only three major magnesium produ-cers: US Magnesium (MagCorp), USA, with the production capacity of 43 000 tpy, Dead Sea Magnesium, Israel, with the production capacity of 33 000 tpy and Hydro Magnesium, Ca-nada, with the production capacity of 48 000 tpy.

The following new magnesium projects are developed:

- Magnesium plant in Kongo us-ing cheap magnesium carbonite and magnesium chloride brines;

- Magnesium plant in Australia using dump slag of thermal stations;

- Magnesium plant in Asbest, Ru-ssia on the basis of serpentine du-mps.

These are production plants or-iented to the almost zero cost of raw materials with the forecasted magn-esium cost at the level of USD 1250-1350.

In practice use of cheap raw ma-terial will require considerable ex-penses for its development, brine re-fining, conversion into carnalite, thus the cost will hardly be lower than USD 1600-1650.

Besides, Rusal studies and carri-es out economical evaluation of the magnesium plant project on the ba-sis of Gorodishchensk bishofite de-posit not far from Volgograd.

The largest end users of magne-sium are producers of aluminum al-loys which account for 40% of the to-tal demand for this metal. In 2005 magnesium supplies to this sector constituted more than 192 thousand tons.

Production of magnesium alloys for die casting of motor car compon-ents has been developing dynamica-lly. Supplies to this sector constituted more than 164 thousand tons. This sector of the metal market in the last decade demonstrated 15% annual growth. According to the forecasts this tendency will remain for the fo-llowing 5 – 10 years. The annual gro-wth of the European automotive ma-rket alone will constitute 12 – 14%. Today the amount of magnesium al-loy parts used in motor cars exceeds 300 designations, and at an average about 2.5 kg of magnesium is used per motor car.


During the next ten years ma-gnesium consumption will increase twofold. Particularly, in Europe the bulk of magnesium alloys – almost 85% - is used for manufacture of st-eering wheels. Magnesium alloys are used in other automobile systems as well, e.g. engines, interior, carbody components and safety systems. The most important sector of increase of magnesium alloy application in mo-tor cars will be engines.

Chemical Industry. Chemical Products

Chemicals produced by AVISMA are the co-products of magnesium and sponge titanium production. Owing to their variability they have multiple applications: metallurgy, paints and lacquers industry, cataly-sis in chemical industry and agro-in-dustrial sector. Today one of priority production lines for AVISMA is pr-eparation of liquid calcium chloride

used for deicing and oil well control. Demand for liquid calcium chloride has been steadily increasing from 2003. However calcium chloride de-mand is of seasonal nature due to its main application as deicer. The most promising product of this se-ctor is solid granulated product. This product is practically not influenced by the seasonal market fluctuations, unlike liquid calcium chloride, and it is of higher quality compared to pr-evailing flaked calcium chloride as it is easier to proportion and more re-adily soluble.

AVISMA is at the final stage of establishing granulated calcium ch-loride manufacture, commissioning is scheduled for spring of 2006. The major consumers of dehydrated ca-rnallyte in the domestic market and CIS market are: JSC Solekamsk Ma-gnesium Plant, Ust-Kamenogorsk Ti-tanium and Magnesium Works in Ka-zakhstan and Zaporozhje Titanium

and Magnesium Works in Ukraine.In 2006 production of marketab-

le titanium tetrachloride, used in ru-bber and plastics industry, was co-ntinued.

Metallurgical fluxes in 2005 were produced mainly for domestic sales to non-ferrous metallurgical and en-gineering companies.

Future ProspectsConsidering the global develop-

ment trends and the situation in the product markets, the following lines of AVISMA development were set as strategic priorities for 2006 and fu-rther:

1. Increase in sponge titanium production capacities up to 44 000 tpy by 2010.

2. Maintaining magnesium and magnesium chloride production at the level necessary to increase the sponge titanium output.

3. Ensuring reliable production


power supply by establishing ex-ternal power supply via power ne-twork of JSC “Federal Unified Energy Systems”.

4. Expansion of raw material base for titanium slag production with im-plementation of titanium slag techn-ology using charge pellets.

5. Organization of production fa-cility for designated sponge titanium to increase rotor grade sponge titan-ium output.

6. Organization of magnesium alloy die-casting.

7. Maintaining production of new alloys for automotive applicati-ons.

8. Continuous reduction of ma-gnesium costs by way of:

- Commissioning of granulated calcium chloride unit;

- Modernization of the existing casting equipment in electrolysis shop;

- Extension of lifetime of major

and ancillary process equipment;- Organization of magnesium

and magnesium alloy semi-continu-ous casting in the form of billets and slabs;

- Reconstruction of treatment pl-ants to restrict pollution of Kama ba-sin and decrease environmental pa-yments;

- Sales of the full volumes of the spent electrolyte.

Environmental ProtectionIn the second half of 2005, the

work on improvement of the Com-pany’s Environmental Management System (EMS) was continued.

The Environmental Policy of AV-ISMA – Affiliate was developed.

Acting in accordance with the Environmental policy, AVISMA staff tends to continuously improve ind-ices of environmental effectiveness, reduce air and water pollution by im-plementation and improvement of

fume and sewage treatment plants, observe the rules of wastes handling to avoid land pollution, reduce wa-stes generation by process improve-ment and introduce wastes recycling processes.

Among the major activities in the second half of 2005 were the fo-llowing:

- training of the Company’s pe-rsonnel in the EMS requirements;

- reduction of negative impacts of air and water pollution by improv-ement of treatment plants, optimiza-tion of processes and implementati-on of more ecofriendly equipment;

- reduction of production wastes volumes stored at AVISMA by increa-sing wastes recycling;

- monitoring of compliance to the target environmental indices set for AVISMA divisions; corrective ac-tion implementation, etc.


AVISMA pays a lot of attention to popularization of the Environmental Management System, status of envi-ronmental protection work and spre-ading of information about ecologic-al aspects of the Company’s activity. In September 2005, the Company’s specialists took part in the workshop “Social and Economic Development of the Region”, where they shared ex-perience in implementation of EMS at the Company.

In December 2005, within the fr-amework of the personnel develop-ment 22 internal Company auditors were trained at the Environmental Consulting Center of the Perm St-ate Technical University in “Environ-mental Audit for Compliance to ISO 14001:2004”.

Environmental information is re-gularly brought to the notice of AV-ISMA personnel via corporate TV, large circulation newspaper “Me-tallurg” and corporate magazine “VS-MPO-AVISMA Bulletin”.

AVISMA actively participates in the annual regional environmental campaign “Clean Air”. It is held annu-ally from May to September with the purpose to restrict air pollution with vehicle exhaust gases.

In the second half of 2005, the

municipal commission comprising environmental engineers and traffic police officers visited AVISMA control and diagnostics center. No findings were detected at the Company in the course of inspection. Exhaust toxicity and smoking of all inspected transp-ort vehicles was within the limits. Th-ere is a very good reason for it, since the Company’s vehicles are subject to such monthly checks according to the schedule. Based on the results of the “Clean Air” campaign, AVISMA was the second in the group of com-panies having more than 50 vehicles on balance.

Air condition is also constantly checked at the industrial site and in the city.

Actual pollutant emission into air in the second half of the year was lo-wer than the established maximum permissible discharge rate by 50.2%, particularly, chlorine emission was lower than the maximum permissib-le discharge by 43% and chlorine hy-drate emission – by 65%. AVISMA co-mplies with the established rates of the maximum permissible discharge in all pollutants. No unauthorized, emergency emissions took place. Ac-cording to the results of air monito-ring performed by the certified la-

boratory under adverse weather co-nditions, 287 samples were taken in Berezniki residential area for chlorine determination, 287 samples – for ch-lorine hydride, 60 samples – for sus-pended substances, 30 samples – for sulfur dioxide. The maximum conc-entration limit was not exceeded in any sample.

Actual pollutant emission into water reduced by 27.3% compared to the first half of 2005.


All the Company’s divisions met the established limits for waste dispo-sal and consumption at AVISMA waste dump. By increasing the volume of sl-udge and electrolyte mix used for ma-rketable products manufacture, waste disposal at the dump was reduced by 960.6 tons compared to the first half of the year.

In the second half of 2005, expen-ses for implementation of environme-ntal actions equaled RR 58.4 mln. The following actions were implemented:

- design of the fourth line of the industrial effluent treatment plants was completed and reviewed, the eq-uipment was purchased and the line is under construction;

- construction of the calcium ch-loride granulation unit is continued;

- development and environment-al review of the project “Dump for Pr-oduction and Consumption Wastes” is continued.

AVISMA jointly with Berezniki De-partment of Environmental Protection and Management developed and im-plemented the system of 24-hour co-ntrol of the maximum permissible di-scharge at AVISMA.

Under adverse weather conditio-ns, the municipal Department of En-vironmental Monitoring visits AVISMA

and checks compliance to the estab-lished rates of chlorine and chlorine hydrate airborne emission. In the se-cond half of the year, the Department of Environmental Monitoring carried out two checks at the Company. Th-ere were no deviations detected.

Sanitary protection area of AV-ISMA and the industrial site area are among the best in the city. Condition of the sanitary protection area is in-spected by the Nature Protection De-partment and Security Service. In the second half of 2005, the sanitary pr-otection area was cleaned from ga-rbage and broken trees and bushes.

Areas of unauthorized roads were restored, new trees were planted and grass cover was recovered, lawns and flower gardens were laid out, fertilizi-ng, weeding and other required land treatment was carried out. The expe-nses for maintaining and improveme-nt of the sanitary protection area am-ounted to more than RR 15 mln.

To eliminate unauthorized debris in the green shelterbelt of the city, cl-aims were raised against two outside companies.

On December 22, 2005, AVISMA became the winner of the all-Russia contest for the title of the “Russian Le-ader in Environmental Activities”. Vi-

gorous activity of the Company rela-ted to environmental protection and management contributing to the st-able development of the Russian ec-onomy, health improvement of po-pulation, and protection of the co-untry environmental security was co-nfirmed by the Honorary Diploma.

Besides, Vladimir Tankeev, Exec-utive Director of AVISMA, was awar-ded a medal “For Advances in Enviro-nmental Protection” for considerable contribution into implementation of the state environmental policy in the Russian Federation.

Stable work on environment-al protection is the result of the En-vironmental Management System operation, regular implementation of environmental actions and pers-onnel awareness of responsibility for compliance to all environmental re-quirements in the course of product manufacture.

The results of environmental act-ivity implemented by the Company’s divisions in the second half of 2005 had positive effect on economic asp-ects of AVISMA activities as well. The amount of the planned environmen-tal charges in the second half of 2005 was set at RR 8007 K, while the actual payments equaled RR 4100 K.


SOCIAL SPHERE

AVISMA is a community centered company, realizing its social respons-ibility.

Work on development and impl-ementation of social programs is ca-rried out regularly and aimed at mu-tual satisfaction of interests of the employer, employees and local co-mmunity.

Conscientious and socially respo-nsible business practice, implementa-tion of internal and external social pr-ograms allows AVISMA to enhance la-bor efficiency, maintain healthy moral and psychological environment and form the understanding of one’s role in the results of team work.

Besides, the Company manag-ement realizes that by assuming re-sponsibility for realization of social programs, they contribute to impro-vement of the life quality of not only the Company employees, but also th-ose, who live in the city.

The developed Program of Social Sphere Development for 2001-2005 combined in the unified system all health, sports and cultural projects. It constituted the basis for the unified

policy of disease prevention and tre-atment, rehabilitation and healthy life style promotion for the Company’s employees and their families.

The major objectives of the pr-ogram are as follows:

- Health care for extension of the Company’s employees working age that will lead to increase of the qualif-ication level and make up for the lack of qualified young workers.

- Increase of the Company appeal to young and qualified workers.

- Improvement of morale and ps-ychological environment at the Co-mpany.

- Improvement of the Company status and image.

The social development program encompasses four main trends.

Physical and mental health ma-intenance is the top priority of the Co-mpany’s social activity.

Health In 2005 the work within the fram-

es of the abovementioned program was continued. Expenses for running medical unit, country and shop hea-

lth improvement centers constituted about one half of all expenses for ru-nning social objects.

Organization of health care at the Company ensures individual appr-oach. Based on the results of annual medical examination and preventive medical examinations for definite ca-tegories of employees, different grou-ps of patients are formed. Those who need more profound treatment are sent to the specialists of the diagno-stics department or specialized mu-nicipal and regional referral centers. Those, who need regular treatment, are sent to the medical rehabilitation department on the basis of the preve-ntorium. Those, who need preventive treatment, visit shop health improv-ement centers. Those, who need no special treatment, attend sports faci-lities, such as skiing lodge, swimming pool, Sports Facility.

The system approach to health improvement and medical treatme-nt of employees allowed to reduce the time of sick leaves by 7%, while the number of consultations increas-ed. This indicates the efficiency of ea-


rly diagnostics and improvement of the medical treatment quality.

Starting from 2003, the Volunta-ry Health Insurance System is functi-oning. In 2005, expenses for the vo-luntary health insurance equaled RR 19.2 mln. This allowed to extend the list of provided medical services.

In 2005, new equipment for the Company’s health improvement fa-cilities was purchased at the amount of RR 3.2 mln.

In 2005, facilities of the country health improvement center were re-newed. A 50-room hotel was com-missioned after the overhaul repair for recreation of the Company’s em-ployees and their families and other visitors.

In 2005, summer health improv-ement campaign was organized for 960 children in camp “Chaika” and 100 children rested in the camps of Anapa and Gelendzhik.

The Company’s health mainten-ance activities in 2005 were awarded - the Company became the winner of the 5th all-Russia contest “Russian Organization of High Social Efficien-

cy” in nomination “Development of Employee Medical Support System”.

Leisure and RecreationThroughout the year the sports

competition in 14 events was held for the Company’s employees. In the course of the competition 2200 co-mpetitors visited the Sports Facility “Titan”, skiing lodge and swimming pool.

Sports events promote healthy life style, involve people in exercises and prevent diseases. With the same purpose Health Days are declared re-gularly at the skiing lodge, when me-tallurgists and their families may rent skis for free. In 2005, 18 Health Days were organized and attended by 1400 persons.

Work of the Metallurgists’ Palace of Culture contributes to family cons-olidation and children upbringing. In 2005, 319 events attended by 79 th-ousand people were held in the Pa-lace. Among them 58 entertaining and educational events attended by 16 thousand people were held for the Company.

The Palace works in close coop-eration with the Council of Veterans and organizes holidays considering the interests of senior citizens. For the Company shops the Palace team holds anniversary parties.

11 children clubs attended by 1100 children function on a perma-nent basis.

CharityCharity becomes an integral part

of relationships with the city comm-unity.

One of the charity priorities is as-sistance to children and teenagers.

The Company sponsors two re-gional children clubs thus helping to solve the problem of leisure time or-ganization for children. These expe-nses amount to about RR 1 mln. per year. In clubs any child may play ho-ckey or board games and participate in competitions held by counselors free of charge. Qualified hockey co-aches work in each club. During su-mmer vacations children day camps were traditionally organized.

In 2005, some schools received


RR 432 K for incentive scholarship payments to pupils.

Organization of several city ev-ents was supported. In particular, co-ntest of social projects, fixing up of a monument to Reshetov, publication of “The Memory Book”, repair of yard playgrounds. The total amount of charity rendered by the Company is about RR 3 mln.

Care of VeteransIn order to reduce social strain

AVISMA makes monthly payments to persons registered in the Council of Veterans. The amount of payment depends on the working lifetime at the Company. The total amount assi-gned to this purpose during the year was about RR 12.4 mln. Besides, the Company renders assistance in or-ganization of various events for gr-oss audience.

For the purpose of health supp-ort veterans are annually given 180

package tours to medical rehabilita-tion department at the total cost of RR 1.9 mln..

For the past 7 years the Compa-ny annually repairs apartments of la-bor veterans appropriating RR 360 K for this purpose. In case of retireme-nt each employee depending of the working lifetime at the Company re-ceives a nonrecurring disbursement of up to 12 salaries that amounted to RR 1.6 mln in 2004.


ACCOUNTING


BALANCE SHEET

Assets As of 1.01. 2005 As of 1.01.2006

I. Fixed assets

Intangible assets 1 087 1 038

Capital assets 2 245 965 4 543 705

Incompleted construction 1 035 802 1 743 163

Long-term investments 1 032 910 620 428

Deferred tax assets 69 3467

Other fixed assets

Section I, Total 4 315 833 6 911 801

II. Current assets

Inventories 5 720 129 8 959 514

Accounts receivable 2 296 611 4 279 421

Short-term financial investments 36 87117

Cash assets 74 787 208 771

Section II, Total 8 091 563 13 534 823

Balance 12 407 396 20 446 624


Liabilities As of 1.01.2005 As of 1.01.2006

III. Capital and reserves

Charter and additional capital 1 370 617 6 384 987

Reserve capital 624 668

Retained earnings 7 007 255 8 223 661

Own shares repurchased from shareholders (2 056) 0

Section III, Total 8 376 440 14 609 316

IV. Long-term liabilities 20 957 78 032

V. Short-term liabilities

Borrowed funds 1 811 324 3 369 438

Accounts payable 2 147 363 2 242 998

Debts to participants (promoters) in terms of income payment 709 2664

Reserves for prepaid expenses 50 000 139 019

Deferred revenue 603 5157

Section V, Total 4 009 999 5 759 276

Balance 12 407 396 20 446 624


PROFIT-AND-LOSS STATEMENT

Indicator 2004 2005

Proceeds (net) from sales of goods, products, works, services (after value added tax, excises and similar payments)

10 571 946 16 800 410

Net cost of sold goods, products, works, services (7 377 393) (10 057 562)

Gross margin 3 194 553 6 742 848

Gross margin (318 040) (524 040)

Management expenses (1 127 988) (1 609 688)

Profit (loss) from sales 1 748 525 4 609 120

Operating revenues (expenses) (305 509) (611 860)

Other revenues (expenses) 755 880 371 906

Profit before tax 2 198 896 4 369 166

Profit tax and other similar compulsory payments (598 129) (1 195 029)

Extraordinary revenues (expenses)

Net profit 1 600 767 3 174 137


CASH FLOW REPORT

2004 2005

mln. rubles mln. rubles

1. Cash balance at the beginning of the year 208 75

2. Cash flow from operating activities

Cash receipts, Total 22 972 28 413

including:

Receipts from Buyers and Customers 11 802 17 445

Receipts from currency transactions 10 507 9 977

Other receipts 663 991

Cash disbursement, Total (21 736) (29445)

including:

Payment for procured goods, works, services (8229) (14 685)

Remuneration of labor (1234) (1995)

Payment of dividends, interest (103) (296)

Payment under taxes and dues (831) (1420)

Payment to the off-budget funds (469) (472)

Purchase of exchange (467) (57)

Sale of exchange (10065) (9 990)

Other payments (338) (530)

Net receipts from operating activities 1 236 (1 032)

3. Cash flow from investment activities

Cash receipts, Total 7 850

including:

Proceeds from sales of capital assets and other fixed assets 6 1


Proceeds from sales of securities and other investment 0 847

Dividends received 1 2

Interest received

Proceeds from repayment of loans granted to other organizations

Cash disbursement, Total 1568 1126

including:

Acquisition of subsidiaries (68) (68)

Acquisition of capital assets, income-bearing investment in tan-gibles and intangible assets (1496) (1007)

Acquisition of securities and other financial investment (50)

Loans granted to other organizations (4) -

Result of investment activities -1561 -276

4. Cash flow from financing activities

Cash receipt, Total 4019 7105

including:

Receipts from issue of shares or other papers

Receipts from loans and credits granted to other organizations 4019 7105

Cash disbursement, Total 3827 5637

including:

Redemption of own shares and stock 2 -

Repayment of loans and credits (at even) 3825 5612

Discharge of finance lease obligations 25

Result of financing activities 192 1468

4. Cash balance at the end of the reporting period 75 235

AUDIT REPORTon VSMPO-AVISMA Corporation Fi-

nancial Statements for 2005

March 27, 2006Ref. No. Л 45-06

Addressee: PSC VSMPO-AVISMA Corporation

Auditor: Name: Closed Joint Stock Company Analytic ExpressLegal address: 3/2, Gazetny Per., Moscow, 103918, RussiaState registration: State Registration Certificate No. 539688, dd. 24.12.1993. Certificate

on introduction of the entry into the Uniform Public Register of Legal Persons: 77 Series, No. 004301111, dd. July 22, 2002, state registration No. 1027700047451.

License No. E 005434, issued by RF Ministry of Finance under Order No. 387, dd. De-cember 9, 2003 (validity period – 5 years). Scope of the license: general audits.

Audited Company:Name: Public Stock Company VSMPO-AVISMA Corporation Legal address: 1, Parkovaya Str., Verkhnaya Salda, Sverdlovsk Region, Russia, 624760State Registration: State Registration Certificate No. 162, dd. 18.02.1993. Certificate on

introduction of the entry into the Uniform Public Register of Legal Persons: 66 Series, No. 002624651, dd. July 11, 2002, state registration No. 1026600784011.

We have conducted the audit of the attached financial (accounting) statements of PSC VSMPO-AVISMA Corporation for the period from January 1 to December 31, 2005 in-clusive. The audited statements included the following:

Balance Sheet Profit and Loss statement Annex to Balance Sheet and Profit and Loss statement Explanatory note

Responsibility for development and submission of the financial statements is placed upon VSMPO-AVISMA Corporation executive board. We are responsible for expressing our opinion on validity of all the material aspects of the submitted accounting information and compliance of the accounting practices with the requirements of RF Legislation ba-sed on the audit results. We conducted the audit according to the Federal Law on Auditing Activity No. 119-FZ, dd. August 7, 2001; Federal Regulations (Standards) for Auditing Ac-tivity, approved by RF Government Resolution No. 696, dd. September 23, 2002 (with su-pplements); internal auditing regulations.

The audit was planned and conducted in such a way as to get reasonable confidence in the fact that the financial statements do not contain any significant misleading inform-ation. The random audit consisted in testing the evidences proving numerical values and degree of disclosure of the information on financial and economic activities as reflected in the accounting records, assessment of compliance to the generally accepted principals and methods of financial accounting, and the rules for financial statements preparation,

review of the main evaluation indices received by the management of the audited co-mpany and assessment of the general concept of financial statements. We believe that the performed audit provides sufficient ground for expressing our opinion on validity of the submitted statements in all material aspects, including compliance of the accounting pr-actices to the requirements of the RF Legislation.

As a result of the audit, we have not revealed any significant violations of the applica-ble accounting practices or financial statements development rules.

In our opinion, VSMPO-AVISMA Corporation financial statements in all material as-pects validly reflect the financial status of the Company as of December 31, 2005 and the results of the Company’s financial and economic activity for the period from January 1 to December 31, 2005 inclusive.

Without prejudice to our opinion on the validity of the financial statements, we would like to draw attention to the information provided in the explanatory note. Specifically, in 2005 there was reorganization of the Company in the form of affiliation of JSC AVISMA to JSC VSMPO and all the rights and liabilities of JSC AVISMA were transferred to JSC VSMPO. Opening balance at the time of affiliation – July 1, 2005 – was confirmed by the auditing company JSC “Baker Tili Rusaudit”.

Director General,Auditing Company JSC Analytic Express U. G. GritsunAuditor Qualification Certificate No. K003059 issued by the RF Ministry of Finance on April 14, 2003, for unlimited period of time.

Chief Auditor,Auditing Company JSC Analytic Express A. A. PostelnikovAuditor Qualification Certificate No. K003226 issued by the RF Ministry of Finance on April 14, 2003, for unlimited period of time.


SHAREHOLDER INFORMATION

The Company’s registered capital totals

11 529 538 rubles, i.e. 11 529 538 shares with the nominal value of 1 ruble.

The number of shareholders listed in the Company’s Register as of 01.01.2006:

5220, including 13 nominal shareholders

The Company’s Register Holder:

Joint Stock Company Central Moscow Depositary (JSC “CMD”)License No. 10-000-1-00255 dd. 13.09.2002 for un-limited period of time.

The contract for keeping and custody of the Regis-tered Securities Holders Register No. CMD/VSMPO – No. 1, dd. 01.07.2004.


The Issuer’s activities are obvi-ously influenced by the reforms cu-rrently implemented in the Russian Federation and covering the curren-cy regulations, banking, judicial, ta-xation systems, legislation on land use, environment conservation, mi-ning, etc.

Risks Associated with the Cu-rrency Regulations Changes

Federal law on Foreign Currency and Currency Control, No. 173-FZ, dd. 10.12.2003 (came into effect on 17.06.2004, except for some provisi-ons with the specific effective dates), stipulates for mandatory reservation by the residents of the cash assets in Russian rubles on separate accounts in the authorized banks prior to ma-king certain currency transactions, as listed in the law. The above me-ntioned limitations don’t interfere with the Issuer’s activities.

Risks Associated with the Tax Law Changes

Value-added tax.Federal laws No. 117-FZ, No. 118-

FZ, and No. 119-FZ, dd. 22.07.2005,

RISK FACTORS

introduced a number of changes to Article 21 of the Russian Federation Tax Code starting with 01.01.2006.

The Issuer forfeits a right to ch-oose the method of taxation base determination, because accounting “based on payment” was cancelled. At present the time for taxation base determination is the date of shipm-ent (Article 167 of the RF Tax Code), which corresponds to the accoun-ting policy of the Issuer. The above mentioned limitations don’t interfe-re with the Issuer’s activities.

Risks Associated with the Lice-nsing Regulations Changes

Federal law No. 80-FZ, dd. 02.07.2005, on introduction of chan-ges to the federal law on licensing of the certain types of activities, to the federal law on protection of legal en-tities and individual entrepreneurs during state control (supervision), and to the Russian Federation Code on Administrative Control, has made some alterations to the licensing re-gulations. The list of types of licens-ed activities is significantly reduced.

These changes will not affect the

Issuer’s activities and will not cause any legal risks. No licenses were re-called from the Issuer during the re-porting period. The risk of revocati-on or non-renewal of licenses is very low.

Risks Associated with the Ju-dicial Practices Changes

During the reporting period no changes that could significantly af-fect the Issuer’s activities were in-troduced to the related judicial pr-actices.

Risks Associated with the Is-suer’s Activities

Recently the Issuer was not in-volved in legal proceedings with the significant amounts of claims (over 5% of the balance sheet value of the Issuer’s assets).

In the reporting period legal ri-sks didn’t significantly affect the Is-suer’s activities and fulfillment of its obligations.

During the reporting period and at present the legal risks of the Issuer are moderate.


OBSERVANCE OF THE CORPORATE GOVERNANCE CODE

Provisions of the Corporate Governance CodeObserved / Not observed

Notes

GENERAL SHAREHOLDERS MEETING

1

Notice of the general shareholders meeting must be given not later than 30 days before the meeting, independent of the agenda items, unless otherwise provided in the law.

ObservedItem 13.4.1 of the Company’s Charter

2

The shareholders should be able to familiarize themselves with the list of persons authorized to participate in a general shareholders meeting from the moment of notice and until a general shareholders meeting held in person is over, or, in the case of a general shareholders meeting held by means of absentee ballots, until the last date for submitting voting ballots.

According to Article 22 of the Provisions for the general shareholders meeting

3

General shareholders meeting-related information should be communicated to the shareholders by electronic telecommunication means, including on the Internet.

Observed

4

The shareholders should be able to call general shareholders meetings and propose agenda items without producing any documents as evidence of their rights to shares, when such rights are recorded in the share register. When the rights to shares are recorded in a deposit account, a current statement of the account should be regarded as ample proof of the shareholder’s right to the shares.

Observed with regard to equirements for calling general shareholders meeting

Article 11 of the Provisions for the general shareholders meeting

5

The company’s charter or internal regulations should contain the requirement for mandatory presence of director general, members of executive bodies, board of directors, audit commission and the company’s auditor at the general shareholders meeting.

Observed

Article 7 of the Provisions for the board of directorsItem 2.2 of the Provisions for audit commission


6

Candidates to the board of directors, director general, executive bodies, audit commission and the company’s auditor should mandatory attend a general shareholders meeting when the agenda includes formation of the above bodies of the company.

Not observed

7The company’s internal regulations should describe the procedure for registering participants of a general shareholders meeting.

Observed

Article 12 of the Provisions for the general shareholders meeting

BOARD OF DIRECTORS OF THE COMPANY

8The company’s charter should grant the board of directors with the authority to approve its annual financial and business plan.

Observed

Article 5 of the Provisions for the board of directors

9 Availability of the internal risk management procedure approved by the board of directors. Not observed

10

The company’s charter should grant the board of directors with the right to suspend the authority of director general appointed by the general shareholders meeting.

Observed

Item 14.1.2, para. 31 of the Company’s Charter

11

The company’s charter should grant the board of directors with the authority to set forth the requirements for qualification and remunerations to director general, members of the managerial board and heads of major divisions of the company.

Not observed

12

The company’s charter should grant the board of directors with the authority to approve the terms and conditions of employment contracts with director general and members of the managerial board.

Observed

Item 14.1.2, para. 30 of the Company’s Charter


13

The company’s charter or internal regulations should contain the requirement that when approving the terms and conditions of employment contracts with the director general and members of the managerial board, the votes of such members of the board of directors occupying the position of the director general and members of the managerial board should not be counted.

Not observed

14

The board of directors should include at least 3 independent directors, meeting the requirements of the Corporate Governance Code.

Not observed

15

The board of directors should not include the persons who committed economic crimes or crimes against the government, public bodies or bodies of local self-government, or the persons who have records of administrative offences, primarily in such areas as entrepreneurial operations, finance, taxes and duties, or stock market operations.

Observed

16

The board of directors should not include the persons who are the members of the board of directors, the director general, a member of a management body or an employee of a competitor of the company.

Observed

17The company’s charter should contain the requirement for election of members of the board of directors by cumulative voting.

Observed

Item 14.2.1 of the Company’s Charter

18

The company’s internal regulations should obligate the members of the board of directors to refrain from actions that may result or may potentially result in a conflict between their own interests and the interests of the company and, if such conflict of interests exists or arises, they must disclose it to the board of directors.

Not observed


19

The company’s internal regulations should obligate the members of the board of directors to notify the board of directors in writing on their intention to enter into transactions, in particular involving securities of the company or its subsidiary (controlled) companies, and disclose information about previous transactions with such securities.

Observed

Item 3.2 of the Provisions on insider information

20

The company’s internal regulations should contain the requirement that meetings of the board of directors should be conducted at least once every six weeks.

Not observed

21

During the reporting year covered in the company’s annual report, meetings of the board of directors should be conducted at least once every six weeks.

Not observed

22The company’s internal regulations should contain procedure for conducting meetings of the board of directors.

ObservedProvisions for the board of directors

23

The company’s internal regulations should contain the requirement that the company’s transactions with a value equal to, or in excess of, 10 percent of the total value of company’s assets (except when the company customarily engages in such transactions in the ordinary course of its business) should be approved by the board of directors of the company.

Not observed

24

The company’s internal regulations should grant the members of the board of directors with the authority to request all information they need to properly discharge their duties from members of executive bodies and officers of the company; and should provide penalties for failure to do so.

Observed



25

Establishment of the strategic planning committee of the board of directors, or imposing such duties to another committee (except for the audit committee or the human resources and remuneration committee).

Not observed

26

Establishment of the audit committee of the board of directors, which is to develop recommendations for the board of directors on selection of an independent audit organization and interact with the audit commission of the company and the independent audit organization of the company.

Observed

27 The audit committee should include only independent and non-executive directors. Not observed

28 The audit committee should be headed by an independent director. Observed

29

The company’s internal regulations should grant the members of the audit committee access to all the documents and information of the company, provided they do not disclose any confidential information.

Observed

Article 14 of the Provisions for the audit committee of the board of directors

30

Establishment of the human resources and remuneration committee of the board of directors, which is to define eligibility criteria applicable to candidates for the position of member of the board of directors and develop the company’s remuneration policy.

Not observed

31 The head of the human resources and remuneration committee should be an independent director.

Not observed

32

The human resources and remuneration committee should consist of those members of the board of directors who do not hold official positions with the company.

Not observed


33

Establishment of the risk management committee of the board of directors, or imposing such duties to another committee (except for the audit committee or the human resources and remuneration committee).

Not observed

34

Establishment of the corporate conflicts resolution committee of the board of directors, or imposing such duties to another committee (except for the audit committee or the human resources and remuneration committee).

Not observed

35

The corporate conflicts resolution committee should consist of those members of the board of directors who do not hold official positions with the company.

Not observed

36 The corporate conflicts resolution committee should be headed by an independent director. Not observed

37

Availability of the company’s internal regulations approved by the board of directors and describing the procedure for establishment and operations of the board of directors’ committees.

Observed


38

The company’s charter should describe the procedure for quorum determination at the meetings of the board of directors and ensure adequate representation of independent directors at the meetings of the board of directors.

Not observed

EXECUTIVE BODIES OF THE COMPANY

39 Establishment of the collegial executive body (managerial board) of the company. Not observed


40

The company’s charter or internal regulations should contain the mandatory requirement that the managerial board should approve any real estate transactions and loans of the company, provided that the company does not customarily engage in such transactions in the ordinary course of its business.

Not observed

41

The company’s internal regulations should describe the procedure for approval of transactions that are beyond the scope of the financial and business plan of the company.

Not observed

42

The executive bodies of the company should not include the individuals who are the members, officers or employees of legal entities competing with the company.

Observed

43

The executive bodies of the company should not include the persons who committed economic crimes or crimes against the government, public bodies or bodies of local self-government, or the persons who have a record of administrative offences, primarily in such areas as entrepreneurial operations, finance, taxes and duties, stock market operation.

If the functions of the sole executive body of the company are delegated to a managing organization (manager), then director general and members of the managerial board of such managing organization (or manager) should meet the eligibility criteria for director general and members of the managerial board of the company.

Observed

44

The company’s charter or internal regulations should restrain the managing organization (manager) from carrying out similar functions at a rival company or having any connection with the company apart from carrying out the functions of the managing organization (manager).

Not observed


45

The company’s internal regulations should oblige the executive bodies to refrain from actions that will result or may potentially result in a conflict between their interests and the interests of the company and, should any such conflict arise, they should immediately notify the board of directors accordingly.

Not observed

46The company’s charter or internal regulations should set forth eligibility criteria for the managing organization (manager).

Not observed

47The executive bodies of the company should report its performance results to the board of directors on a monthly basis.

Not observed

48

The agreements between the company and its director general (managing organization, manager) and members of its managerial board should contain a liability for the breach of their obligation to refrain from disclosure of confidential and insider information.

Not observed

CORPORATE SECRETARY OF THE COMPANY

49

Appointment (election) of a special officer (the secretary of the company) whose sole objective should be to ensure that corporate bodies and officers comply with procedural requirements safeguarding the rights and interests of the company’s shareholders.

Not observed

50

The company’s charter or internal regulations should describe the procedure for appointment (election) of the secretary of the company and his/her responsibilities.

Not observed

51The company’s charter or internal regulations should set forth eligibility criteria for the secretary of the company.

Not observed


MAJOR CORPORATE ACTIONS

52The company’s charter or internal regulations should require that major transactions be approved prior to their consummation.

Not observed

53 Major transactions should be executed with the participation of independent assessors. Not observed

54

The company’s charter should stipulate that at the time of acquisition of significant equity stakes (takeover), the company should refrain from actions that are aimed at protecting the interests of executive bodies (members of such bodies) and members of the board of directors, and which may result in weakening the position of shareholders. In any event, pending the expiration of the acquisition period, the board of directors should refrain from issuing additional shares, convertible shares or securities that otherwise entitle their holders to purchase shares of the company, even if such issuance is authorized by the charter of the company.

Not observed

55

The company’s charter should require that the board of directors invite an independent assessor to determine the current market value of the company’s shares and how it could be affected by the takeover.

Not observed

56

The company’s charter should not relieve the entity taking over the company of the responsibility to offer to buy out shareholders’ common stock (issuer’s shares convertible into common stock).

Observed

57

The company’s charter or internal regulations should require that an independent assessor be used for determination of the conversion value of shares after the reorganization.

Not observed


DISCLOSURE OF INFORMATION

58

Availability of the internal company document approved by the board of directors setting forth rules of and approaches to disclosure of information by the company (Regulation on Information Policy).

Not observed

59

The company’s internal regulations should require disclosure of information about the reasons for issuance of new shares and the persons purchasing new shares, including those who intend to purchase a large percentage of shares, and whether senior executives of the company will purchase such shares offered for sale.

Not observed

60

The company’s internal regulations should contain a list of information, documents and materials to be furnished to the shareholders to enable them to make decisions regarding issues brought up at a general shareholders meeting.

Observed

Para 13.4.2 of the Company’s Charter

61Availability of the company’s website and disclosure of information about the company through the site.

Observed

62

The company’s internal regulations should require to disclose information about the company’s transactions with its officials in accordance with the charter, and about transactions between the company and entities in which the company’s senior executives directly or indirectly own 20 percent or more of the shares or which are otherwise subject to the influence of such executives.

Not observed

63

The company’s internal regulations should require to disclose information on all transactions of the company which may affect the market price of the company’s shares.

The information is disclosed as required


64

Availability of the internal company document approved by the board of directors setting forth rules of handling the significant information about a company’s operations, shares and other securities of the company and transactions therewith, which is not available to the public and disclosure of which may substantially affect the market value of shares and other securities of the company.

Observed

SUPERVISION OF FINANCIAL AND BUSINESS OPERATIONS

65

Availability of the internal company document approved by the board of directors setting forth the procedures for supervision of the financial and business operations of the company.

Observed

66Establishment of a special structural subdivision of the company responsible for ongoing internal supervision (control and audit service).

Observed

67

The company’s internal regulations should require that the structure and composition of the control and audit service of the company are approved by the board of directors.

Not observed

68

The control and audit service of the company should not include the persons who committed economic crimes or crimes against the government, public bodies or bodies of local self-government, or the persons who have a record of administrative offenses, particularly in such areas as entrepreneurial operations, finance, taxes and duties, and stock markets.

Observed

69

The control and audit service of the company should not include the members of the executive bodies of the company or the persons being the participants, director general, members of the governing bodies or employees of a legal entity competing with the company.

Observed


70

The company’s internal regulations should stipulate the period of time for presentation to the control and audit service of the documents and materials for assessment of the financial and economic operations of the company, as well as responsibility of officials and employees of the company for failure to present same within such period.

Observed

71

The company’s internal regulations should oblige the control and audit service to report the information on errors and violations discovered during business operations to the audit committee, or, in case there is no such committee, to the board of directors of the company.

Observed

72

The company’s charter should require preliminary evaluation of non-standard operations falling outside the scope of the financial and business plan by the control and audit service of the company.

Not observed

73

The internal documents of the company should set forth a procedure for approval of non-standard operations by the board of directors of the company.

Not observed

74

Availability of the internal company document approved by the board of directors setting forth the procedure of auditing the financial and business activity of the company by the audit commission.

Observed

Article 3 of the Regulations for the audit commission.

75

The audit committee should evaluate the opinion of the independent audit organization (auditor) before it is presented to the shareholders at a general shareholders meeting.

Observed

Para 3.1.6 of the Provisions for the Audit Committee of the Board of Directors


DIVIDENDS

76

Availability of the internal company document approved by the board of directors so as to govern the latter in deciding dividends (Regulations on Dividend Policy).

Observed

77

The Regulations on Dividend Policy should provide procedures for determining the minimal portion of net profit of the company directed for payment of dividends, and circumstances under which dividends are not paid or paid only partially on preferred stock with respect to which the amount of dividends is provided by the Company’s charter.

Observed

Article 3 of the Regulations on Dividend Policy

78

The company should publish its dividend policy and all amendments to it in a periodic publication authorized by the company’s charter to announce general shareholders meetings, as well as on the company’s Website, provided the latter exists.

Observed

Article 6 of the Regulations on Dividend Policy


CHANGES IN THE MEMBERSHIP OF THE BOARD OF DIRECTORS DURING THE REPORTING PERIOD

1. Members of the Board of Directors Elected at the Regular General Shareholders Meeting in 2004

Vyacheslav I. Brecht, year of birth 1953Nikolai K. Melnikov, year of birth 1955Igor V. Levin, year of birth 1950Igor L. Malygin, year of birth 1961Eugene N. Olkhovik, year of birth 1955Dennis Kelly, year of birth 1946John Monahan, year of birth 1945

2. Members of the Board of Directors Elected at the Regular General Shareholders Meeting on June 10, 2005

Vyacheslav I. Brecht, year of birth 1953Nikolai K. Melnikov, year of birth 1955Wasil A. Besedin, year of birth 1953Oleg I. Tsarkov, year of birth 1966Vladislav V. Tetyukhin, year of birth 1932Dennis Kelly, year of birth 1946John Monahan, year of birth 1945

3. Members of the Board of Directors Elected at the Special General Shareholders Meeting on October 13, 2005

Vyacheslav I. Brecht, year of birth 1953, interest in the registered capital - noneNikolai K. Melnikov, year of birth 1955, interest in the registered capital - noneWasil A. Besedin, year of birth 1953, interest in the registered capital - nonePavel A. Rizanenko, year of birth 1975, interest in the registered capital - noneVladislav V. Tetyukhin, year of birth 1932, interest in the registered capital - noneDennis Kelly, year of birth 1946, interest in the registered capital - noneJohn Monahan, year of birth 1945, interest in the registered capital - none

Director GeneralVSMPO-AVISMA Corporation V. V. Tetyukhin

Chief AccountantVSMPO-AVISMA Corporation T. V. Novosadova

the annual report was preliminary approved by the board of

Documents