all annual 2007 eng - motorsich.com

A N N U A L R E P O R T 2 0 0 7 -1-

ABOUT COMPANY

Date of foundation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Specialization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Organizational structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Membership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Certificates, licenses, patents . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Operators of aircraft powered with engines

manufactured by Motor Sich JSC . . . . . . . . . . . . . . . . . . . . . 8

Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Main achievements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

ACTIVITY SURVEY

Production activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

New technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Prospects of development . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Post-warranty maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Utilization of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Capital investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Labour and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Personnel policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Foreign economic activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Social sector and charity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

FINANCIAL REPORT

Auditor's conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Report on financial results . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Notes on financial report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

C O N T E N T S

Nowadays Motor Sich JSC is the only aircraft engine-buildingcompany in Ukraine in the field of development, production,testing, in-service support and overhaul of up-to-date aero-engines.

The produce of the company is used in the versatile-purpose civiland military planes and helicopters in more than 120 countriesworldwide.

The cutting-edge technologies developed and implemented atMotor Sich JSC, advanced design and engineering solutions, well-developed scientific and technical infrastructure, highly-skilledpersonnel - all these features lay a basis for success and continu-ous development of Motor Sich JSC.

Owing to combination of intellectual potential, high corporateculture, intensive preparation and launching production of anew-generation aircraft engines the company succeeded tostrengthen and expand its positions on the world market and toprovide the factory with firm orders.

We are much obliged to our multiple partners: designers, suppli-ers of component accessories, customers who have stayed withus for all these years, we express our deep gratitude for coopera-tion and look forward to fruitful, successful and mutually benefi-cial collaboration in future.

With best regards,

V. A. Boguslayev

Chairman of the Board of Directors,Motor Sich JSC

M O T O R S I C H J S C-2-

We work is to become the best engine-building company:

■ in meeting the demands of our Customer, to make theCustomer understand that our produce is the best choice;

■ in influencing the society: the Society shall comprehendthat the activity of the Company is useful for it;

■ in business to ensure growth of revenues and profits ofthe shareholders;

■ in meeting the working conditions and standards of livingof personnel: the employees shall realize that they areneeded by the Company; appreciated and cared about.

Active promotion of our products to the CIS and non-CIScountries.

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MISSION

STRATEGY

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A B O U T C O M P A N Y

Date of foundationFactory was founded in 1907.

SpecializationDevelopment and manufactureof gas-turbine military and civilaircraft engines, industrial drives,power generating sets and consumer goods.

Organizational structureJoint Stock Company (since 1995)

Motor Sich Joint Stock Company is a member of the following associ-ation of factories:

■ Association of Ukrainian Aviation Industry Enterprises "Ukraviaprom" (Kiev)

The association has been established to coordinate the efforts of participants regarding produc-tion, business and scientific activity, uniting financial, physical and other resources for the devel-opment of production of aviation materiel. The subject of activity is to render services to the members of association, and to other physicaland legal persons in legal, economical and organizational issues.

■ "Interregional Associacion of Manufacturers of Ukraine" (Zaporozhye)

The association has been established to satisfy and protect the legal, social, economical, scientif-ic, creative and other interests of its members.The subject of activity is rendering of informational assistance to its members, protection ofsocial and economical rights, promotion of scientific and engineering achievments.

■ Association "Union of Aviation Engine-Building" (Moscow)

The association has been established to satisfy the needs of national economy in the products ofaircraft engine-building, accessories for it, equipment for light and food industry, consumergoods and other products.The subject of activity is the development of new types of aircraft engines and other types ofequipment, rendering series production of the aircraft engines.

■ Zaporozhye Regional Union of Manufacturers and Businessmen 'Potentsial' (Zaporozhye)

The association has been established for increasing the efficiency of production, increasing ofoutput of consumer goods, protection of interests of collectives and leaders.The subject of activity is the creation of high social status and prestige of economy leader andbusinessman in the particular region.

■ Non-profit Organization "Union of Oil-and-Gas Equipment Manufacturers "Neftegas"(Moscow)

The organization has been established for coordinating the common activity and protectinggeneral interests of the union members.The subject of activity is the promotion of its members to the Russian and foreign markets, assis-tance in inviting investments for budgeting of promising programs.

■ Non-profit Partnership "International Union of Aircraft Industry (Moscow)

The association has been established for rendering assistance in the development of businessactivity in the field of aviation and aircraft-building industry, social and legal status of the facto-ries in the industry.The subject of activity is to render the informational assistance to the members of partnership,organization and carrying out exhibitions, competitions and festivals for the sake of promotionof aviation science.

Numberof shareholders . . . . . . . . . 10, 471

Numberof employees . . . . . . . . . . . 21, 660

Company assets,million UAH . . . . . . . . . . . 2, 915.4

Company capital,million UAH . . . . . . . . . . . . . 1, 790

Statutory fund,million UAH. . . . . . . . . . . . . . 280.5

Net profit from realizationfor 2007, million UAH . . 1, 749.7

Financial results for 2007,million UAH. . . . . . . . . . . . . . 207.1

In the late 80-ies Motor Sich was the first UkrainianCompany, which began to incorporate the quality assurancesystem meeting the requirements of ISO 9000 standards.

At present the Company has:

■ Quality System certified by transnational companyBUREAU VERITAS CERTIFICATION for compliance withthe requirements of ISO 9001:2000 (No.213545 dtd.07.05.2007) regarding production, overhaul and mainte-nance of aircraft engines, gas-turbine drives and design-ing the gas-turbine power generating sets accredited inthe USA, Great Britain and Germany;

■ Сertificate of Aviation Register of Interstate AviationCommittee No.ОP 01-PD dtd. 23.10.2007 for manufac-turing modern aircraft engines;

■ Сertificate of Aviation Register of Interstate AviationCommittee No.SPR-11 dtd. 14.08.2007 for overhaulingcivil aircraft engines;

■ Сertificate of Aviation Register of Interstate AviationCommittee No.R-56 dtd. 29.07.1998 for development ofaircraft engines for civil vehicles.

In 2007 the factory received Type Certificates of InterstateAviation Committee and State Aviation Administration ofUkraine:

■ Certificate for An-148 airplane;

■ Type Certificate for D-436-148 engine;

■ Type Certificate for AI-450-MS auxiliary gas-turbineengine (AGTE).

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Certificates

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CERTIFICATES, LICENSES, PATENTS

Licenses ■ License of State Authority of Ukraine on Supervision ofAviation Safety Assurance АV No. 041697 dtd.23.08.2007 about rendering services for passenger andcargo transportation by air;

■ Certificate of State Authority of Ukraine on Supervisionof Aviation Safety Assurance VR No. 0022 dtd.01.04.2007 about organization of aviation transportmaintenance;

■ Certificate of Operator of State Authority of Ukraine onSupervision of Aviation Safety Assurance No. 025 since08. 09.2006;

■ License of the Ministry of Transport of Ukraine AB No.323668 dtd. 23.04.2007 for rendering services for inter-national passenger and cargo transportation by road;

■ License of the Ministry of Health of Ukraine AV No.348265 dtd. 25.05.2007 and license AB No. 123126 dtd.20.10.2004 for rendering medical services with expirydate on 16.06.2007;

■ License of the National Regulatory Commission forElectrical Power Industry of Ukraine PS No. 538 dtd.21.07.1998 for the right of rendering business activityfor supplying electric power at unregulated tariffs;

■ License of the National Regulatory Commission forElectrical Power Industry of Ukraine AV No. 078001 dtd.03.03.2006 for supplying gas at unregulated tariffs;


CERTIFICATES, LICENSES, PATENTS

■ License of the State Committee for Communication andInformation of Ukraine RA No. 003815 dtd. 12.12.2003for utilization of radio-frequency resource of Ukraine.

In case of necessity upon expiry of the Certificates andLicenses the period of their validity will be extended.

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Licenses

No. 8363 dated 21.03.1994. Method of removing corrundum ceramic cores from the internal spaces of products;

No. 21943 dated 16.07.1993. Method of manufacturing friction disks;

UA 57674A dated 29.10.2002. Method of checking theangle of turning the movable elements of gas-turbineengines;

UA 60181A dated 26.02.2003. Method of overhaul of gas-turbine engine;

No. 20479 dated 21.08.2006. Condylar prosthesis;

UA 56153 dated 01.07.1998. Joint implant of the surface of femoral-head prosthesis of Rudenko system;

UA 70181A dated 29.12.2003. Retainer for osteosynthesisof broken femoral neck.

Patents of Ukraineissued by the StateEnterprise "UkrainianInstitute of IndustrialOwnership" (UKRPATENT)

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Among the Customers of our produce are the world-known companies such as: Antonov ANTK, Illyusin Aviation ComplexJSC, Beriev TANTK JSC, Tupolev JSC, Yakovlev Design Bureau JSC,Kamov JSC, Mil MVZ JSC, AeroVodochody (Czech Republic),HONGDU AVIATION INDUSTRY (China), etc.


OPERATORS OF AIRCRAFT POWERED BY THE ENGINES OF MOTOR SICH JSC

ÖÇêéèÄAUSTRIAALBANIABELARUSBULGARIABOSNIA AND HERZEHOVINAGREAT BRITAINHUNGARYGERMANYGREECEIRELANDSPAINITALYCYPRUS LATVIALITHUANIA MACEDONIA MOLDOVA POLANDPORTUGALRUSSIAN FEDERARIONRUMANIASLOVAKIASLOVENIAUKRAINEFRANCECROATIAMONTENEGROCZECH REPUBLICSWITZERLANDESTONIA

AMERICAARGENTINEBOLIVIA BRAZIL VENEZUELA CANADA COLOMBIACUBA MEXICONICARAGUAPANAMAPERUUSAECUADOR

ASIAAZERBAIJANARMENIAAFGHANISTANBANGLADESHBAHREINVIETNAMGAITIGEORGIAISRAELINDIAINDONESIAIRAQIRANYEMEN KAZAKHSTANCAMBODIA

A N N U A L R E P O R T 2 0 0 7

ëÚ‡ÚÂ„Ëfl

-9-

DEMOCRATIC PEOPLE'S REPUBLIC OF KOREA

LAOSKYRGYZSTANPEOPLE'S REPUBLIC OF CHINAMALAYSIAMONGOLIAUNION OF MYANMARNEPALUNITED ARAB EMIRATESPAKISTANPALESTINE REPUBLIC OF KOREASINGAPORESYRIATADJIKISTANTHAILANDTURKMENISTANTURKEY UZBEKISTANSRI LANKA

AFRICAANGOLAALGERIABENIN BURKINA FASOBURUNDIGHANA GUINEA DJIBOUTI DEMOCRATIC REPUBLIC OF CONGOEGYPTZAMBIAWESTERN SAHARAZAIRZIMBABWE CAPE VERDEKENYACONGOCOTE D'IVOIRELIBERIALIBYA MAURITANIAMADAGASCARMALI MOZAMBIQUENAMIBIANIGERIANIGER SARRWANDASENEGALSUDANSOMALIASIERRA LEONEUGANDACENTRAL AFRICAN REPUBLIC CHAD EQUATORIAL GUINEAERITREA ETHIOPIA

AUSTRALIA AND OCEANIAAUSTRALIA EASTERN TIMOR NEW ZEALAND PAPUA NEW GUINEA

STRUCTURE The Joint Stock Company incorporates 15 structural units(without the right of legal person) located in various regions of Ukraine, as well as representation offices in Kiev, Moscow and Delhi.


A B O U T C O M P A N Y

Date of foundation — 1988.

Lines of activity:

■ Testing aircraft engines;

■ Assembly and testing of gas-turbine power generatingsets EG-1000 and EG-6000;

■ Testing 6.3, 8, 10 MW D-336, AI-336 gas-turbine drives;

■ Assembly and testing of gas-turbine pumping units GPA-Ts-6,3;

■ Manufacture of blades;

■ Manufacture and assembly of turbocompressors TRK-7TV for supercharging vehicle and tractor engines;

■ Foundry;

■ Manufacture of gas-pumping complex GPA-K/5,5-GTP/6,3SK.

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ZAPOROZHYE OMELCHENKOMACHINE-BUILDING PLANT

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SNEZHNOYEMACHINE-BUILDINGPLANT


Lines of activity:

■ Production of blades for gas-turbine engines;

■ Manufacture of parts and units for mining equipment;

■ Manufacture of consumer goods with special emphasis on agricultural and utility equipment.


STRUCTURE


Lines of activity:

■ Providing aircraft engines with mass-produced parts and metal products;

■ Production of technological tooling;

■ Overhaul of AI-20 engine and its modifications;

■ Manufacture of EG-1000, PAES-2500 power generating sets;

■ Manufacture and assembly of GTE-MS-2,5; AI-2500Mpower drives;

■ Manufacture of consumer goods with special emphasison a wide range of silencers for cars and agriculturalequipment.

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VOLOCHYSKMACHINE-BUILDINGPLANT

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STRUCTURE

HEALTH CENTREPRIBOY

Location: Primorsk, Zaporozhye region (Azov seashore).

Capacity: Seven comfortable buildings for 490 persons.

Number of vacationers p.a.: approximately 3 thou persons.

Line of activity: family recreation.

Main advantages:

■ Comfortable rooms;

■ Caloric food;

■ Equipped beach;

■ Providing various leisure

■ Gymnasium.


STRUCTURE

Location: Primorsk, Zaporozhye region (Azov seashore).

Capacity: 4 comfortable buildings for 500 persons.

Number of vacationers p.a.: more than 3 thou. persons.


Main advantages:

■ Comfort, home-making environment;

■ Perfectly-organized way of life;

■ Best-equipped beach at Azov seashore;

■ Tennis-courts with special covering;

■ Two thousand square meters of sport grounds;

■ Gymnasium;

■ Billiard, cinema and concert halls;

■ Excellent national cuisine.

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HEALTH CENTREMOTOR

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STRUCTURE


STRUCTURE

HEALTHCENTREHORIZONT

Location: south coast of Crimea, Alushta.

Capacity: 3 sleeping buildings for 500 persons.

Number of vacationers p.a.: more than 4 thou persons.

Specialisation: medical treatment of diseases of respiratoryorgans and functional diseases of nervous system, and ear, nose,throat diseases.


Main advantages: comfortable rooms, picturesque scenery,clean air, warm sea, qualified medical service, adequate diet, providing of various leisure, equipped sports and play grounds,line of stores and cafes.

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STRUCTURE

Motor Sich JSC Airline was founded in 1984 and now is astructural subdivision of Motor Sich JSC. At present it operates on the market of cargo and passenger air trans-portation in Ukraine, CIS, non-CIS and overseas countries.

Base airfield is airport in Zaporozhye (OZH/UKDE).Mokraya aerodrome.

Representation offices are available in:

■ Kiev (Ukraine), ■ Moscow (Russia), ■ Istanbul and Ankara (Turkey).

Airline has its international codes:

■ ICAO code — MSI.■ IATA code — M9 and 011.

Airline renders the following services:

■ cargo and passenger air transportation (scheduled andcharter flights, and business flights) to all regions of theworld;

■ air transportation of hazardous cargo and special-purpose cargo;

■ line maintenance and periodic maintenance of airplanesAn-140, An-24, An-12 and Yak-40, line maintenance ofairplane An-74TK-200.

Airline uses complex aviation systems:

■ System of aviation communications AFTH (УКДЕМСИЬ);

■ International commercial aviation system SITA(OZHSMXH);

■ Systems SIRENA, Amadeus, Gabriel, Galileo and othersfor sale and reservation of air tickets.

Since 2004 the Airline is accredited atUN as the official supplier of air trans-portation services for UN and takespart in air transportation according toUN program in Sudan using aircraftAn-74TK-200.

Aircraft fleet of the airline is com-posed of passenger, cargo/passengerand cargo planes, as follows:

■ Yak-42D . . . . . . . . . . . . . . . . . 1 plane

■ Yak-40 . . . . . . . . . . . . . . . . . . . 1 plane

■ Yak-40(business arrangement) . . . . 1 plane

■ An-24 . . . . . . . . . . . . . . . . . . . . 2 plane

■ An-140 . . . . . . . . . . . . . . . . . . 3 plane

■ An-74TK-200 . . . . . . . . . . . . 1 plane

■ An-12 . . . . . . . . . . . . . . . . . . . . 3 plane

MOTOR SICHAIRLINE

Around the worldin 24 hours

Motor Sich JSC Airline flies scheduled passenger flightson routes:

Zaporozhye - Kiev, Zaporozhye - Moscow (Russia)

Zaporozhye - Istanbul (Turkey), Kiev- Ankara (Turkey)


STRUCTURE

Istanbul

Ankara

Aleppo

Antaliya

Zaporozhye

KIEV

Moscow

According to results of year 2007the aircraft of airline:

■ performed 2, 171 flights

■ accumulated 6, 704 flight hours

■ carried 48, 703 passengers

■ carried 1, 371 tons of cargo

Charter flights are performed to Iran, India, Thailand,Bangladesh, Sri Lanka, Algeria, Israel, Armenia, Georgia,Syria, Italy, Spain, Turkey, Egypt, Kyrgyzstan, Kazakhstan,United Arab Emirates, Slovenia, Germany, France, Hungary,Belgium, Canada, USA and other countries.

Achievements of Airline:

■ 2001–2004 participation in transportation of participants of Paris-Dakar rally;

■ 2003 – gold medal of international fund "For high quality in business practice" (Switzerland);

■ 2004 – Certificate of Quality System ISO 9001 is awarded;

■ 2005 – Certificate of Quality System ISO 9001 is confirmed.

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Around the worldin 24 hours

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STRUCTURE

Russia France India

Spain Egypt Turkey


MAIN ACHIEVEMENTS

19161942

19571916

19421957

Ilya MurometsLa-5FN

An-12

Deka M-100ASh-82FN

AI-20

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MAIN ACHIEVEMENTS

1984

20072004

1984

20072004

An-225 Mriya

Mi-28N

An-148

D-18T

TV3-117VMA-SBM1VD-436-148

Milestones of becoming and development

Production activity achievements of Motor Sich JSC inaccounting year 2007:

■ Obtained commodity realization growth rate of 142.7 % as compared to year 2006;

■ Specific portion of aviation equipment in shipped produce is 84.9%, general-purpose equipment — 10.5%, consumergoods — 4.6%;

■ Obtained commodity output for realization of products, worksand services in the amount of UAH 1 billion 749.7 million thatis by UAH 511.6 million more than in 2006;

■ Share of export in commodity output for realization of products made up 87.5 %;

■ Transferred UAH 224.9 million of taxes and charges to the statebudget and off-budget funds;

■ Manufactured series engines of different types and industrialinstallations to the amount of UAH 917.3 mln., shipped to customers to the amount of UAH 942.9 mln. Overhaul of engines: overhauled to the amount of UAH 374.1 mln., sold to the customers to the amount of UAH 364.1 mln.


PRODUCTION ACTIVITY

Manufacture of a number of new aircraft engines and general-purpose products continued:

D-436-148, AI-450-МS, AI-222K-25F, AI-222-25, TV3-117VMA-SBM1V, gas-pumping complex GPA-K/55-GTP/6,3SK and others.

The prototypes of TV3-117VMA-SBM1V engine have beenmanufactured and certificated.

Consumer goods were manufactured to the amount ofUAH 76.4 million (boat engines MS-40, knee-joint implantsEPK-1, wind power-generating station, hip joint implantsETBS-1, engines MS-10, petrol power saws, etc).

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Structure of produce

Structure of Motor Sich JSC Production Output in 2007, %

■ Basic products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84.9

■ General-purpose products . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5

■ Consumer goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6

The dynamics of sales of products by Motor Sich JSC within 2003 to 2007 in current prices (UAH mln):


PRODUCTION ACTIVITY

2003 2004 2005 2006 2007

Sold product,

total (UAH million) 1,155.4 1,083.1 1,090.4 1,238.1 1,749.7

Including aviation

equipment (UAH million) 947.0 829.7 859.1 982.0 1,398.1

0 300 600 900 1200 1500 1800

2003

2004

2005

2006

2007

– total of sold products (UAH million)– including aviation equipment (UAH million)

1, 155.4

1, 083.1

1, 090.4

947.0

1, 238.1982.0

1, 749.71, 398.1

829.7

859.1

84.9

4.610.5

Use of advanced information technologies is one of themain fields of activity of contemporary enterprise thatdetermines its development and competitiveness.

In this direction Motor Sich JSC carries out the followingactivities:

■ Updating of hardware and upgrading of program base of the net data-processing system are provided;

■ Design systems as well as pre-production systems are upgraded and developed;

■ Technology of designing roller sectors has been developed and incorporated on the basis of solid computer models;

■ Repair technology using methods of welding assembliesmade of heat-resistant alloys and high-strength titaniumtwo-phase alloys has been incorporated;

■ Technology of program winding of experimental high-pressure bottles using polymer composite materials hasbeen incorporated;

■ Significant efforts have been exerted to incorporate andfurther develop the systems of computer-aided designing(CAD), and systems of strength-related license SW com-plex ANSYS;

■ 114 science-intensive production processes in ultra-sound, electrical-discharge, electrochemical, electrolite-and-plazma machining have been incorporated intoseries production.

The digital publishing complex provides the Companywith operational shipping documentation, scientific andtechnical publications, forms, and advertising materials, as well as a factory newspaper.

The information technology development strategy remainsto be based on long-term co-operation with leadingdomestic and overseas partners.

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New technologies

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New technologies

High-speed milling of bladed disksfor GTE

Application of erosion-resistant titanium nitride coating

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Welding and local annealing with electronic beam

Plasma gas-spraying of intricate-shapeparts for GTE


New technologies

Ultrasonic hardening of part surfaces

Ionic nitration

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Precision casting of blades made ofheat-resistant alloys by high-speeddirectional crystallization method

Casting ceramic cores

Developmentprospects

It is planned that in 2008 the increase rate of:

■ production volume will make 114.0%;

■ volume of selling the produce to customers will make 125.8%.

The deliveries of D-436-148 and AI-450-MS engines for An-148planes will begin within the framework of long-term contractwith Ilyushin financial company.

Signing of Contracts is expected with the factories of Russia,Ukraine, India for the delivery of aircraft engines, gas-turbinedrives and power-generating sets for the amounts exceeding USD 130 mln.

Regarding re-engining of the aircraft the following engines arethe most feasible:

■ AI-25TLSh for L-39 planes for MoD of Ukraine and Russia as well as K-8J for MoD of China;

■ AI-450 for Mi-2 helicopters;

■ D-18T, Series 4 for An-124-100, An-124-100M-150;

Basic directions of activity in development and mastering production of new equipment in 2008:

■ Invite budgetary funds for R&D activity;

■ Render validation and certification of the propulsion engine D-436-148 and auxiliary power unit AI-450-MS for complianceto European rules EASA

■ Complete state testing of engines AI-222K-25F and continuecollaboration deliveries of the assemblies for manufacturingengines to contracts;

■ Manufacture parts and assembly units of AI-222K-25F enginesand conduct tests of the prototypes;

■ Complete flight tests of AI-25TLSh engine in L-39 plane andlaunch its production;


PRODUCTION ACTIVITY

■ Manufacture and assembly of D-27 engine forconducting combined state bench certificationtest (СSBСT);

■ Develop conceptual design of 12 MW GTD AI-336-12;

■ Perfection of design and incorporation of heatexchangers TMA-36, TTM-25, VMA-27, VMA-218,VMA-309, VMA-002, VMA-317, TMT-222 into produced engines;

■ Development of technical documentation for universal fire test bench for certification testing of components of D-436-148 propulsion engineand AI-450-MS AGTE;

■ Manufacture of non-standard equipment andtooling for assembly and testing of AI-222K-25F,

D-436-148, MS-400, MS-350 and other engines.

The basic promising activities of the factory in the field of development, production and selling consumer goodsare the development and manufacture of:

■ Power generating complex with wind power station

■ Composite bottle for high-pressure compressed gas;

■ Two-cylinder four-stroke engine for utility and forestmini-tractor and four-stroke outboard boat engine;

■ Uility and forest mini-tractor with hydraulic drives;

■ Propulsive arrangement for fishing boats and motorboats with D-250-05 and MS-10 engines;

■ Pilot batch of mini-tractors MGT 0,2U.

A N N U A L R E P O R T 2 0 0 7 -31-

Total number of 77 engines areoperated now at the gas-pumpingstations and 6 engines at powergenerating stations.

Presently, the PSD renders in-servicesupport of new equipment: An-148prototype airplanes with D-436-148and AI-450-MS engines.

In 2008 it is supposed to perform a big amount of works in organiza-tion of in-service support of An-148production airplanes with D-436-148 and AI-450-MS engines.

After-sales service

Motor Sich JSC has an after-sales service division staffed withhighly experienced specialists (Product Support Department -PSD), which is ready to maintain high level of engines' service-ability in the warranty and after-warranty operation periods.

The cooperation of PSD with Customers is determined by theagreements concluded with them: at present more than 600agreements are effective, 350 agreements from this number havebeen concluded with the Operators from CIS and Baltic states.

In 2007 PSD achieved the following:

■ Rendered various services to the amount of UAH 105 mln;

■ Restored 92 engines to the amount of UAH 17.3 mln. by meansof light overhaul in service. The growth of revenues from thistype of activity has made 210% as compared to 2006;

■ Mastered light overhaul of AI-450-MS, VK-2500, D-436 enginesand their modifications;

■ Technical centers have been established and function now inUAE, Germany, Russia, Ukraine;

■ Experimental work has been launched to try the TV3-117VMA-SBM1V engines in helicopters.

Range of services for gas pumping units and consumer goods hasbeen extended:

■ Mechanism of rendering services with regard to the consumergoods not only during repair but directly at the Consumer's hasbeen worked out to widen the scope of services and earn UAH56.6 thousand.

The sphere of PSD activity became wider by putting new stationsBCS Shurtai, BCS Zevardy and BCS Pamuk in Uzbekistan and gas-turbine power generating set EG-6000 in Grodno (Belarus) intooperation in 2007.


PRODUCTION ACTIVITY

The fixed assets make a basis of the long-term assets. Effectiveutilization of the basic production assets directly influencesthe fulfillment of production plan and reduction of cost ofmanufacture of products.

In 2007 the Company has received industrial and productionassets to the amount of UAH 181.6 million and the amount ofUAH 51.9 million has retired. Thus, the cost of fixed assets hasbeen increased by UAH 129.7 mln (7.7%).

The working machines and equipment constitute the mostactive part of fixed production assets, which determine theeffectiveness and engineering level of production. Due toreceiving new equipment the cost of working machines andequipment got increased by UAH 43.3 mln (7.8%) but theirshare in total cost of fixed assets has not changed as com-pared with the beginning of the year and made up 36.0%.

A N N U A L R E P O R T 2 0 0 7

UTILIZATION OF FIXEDASSETS

-33-

39.5

12.8

36

11.7

Structure of Motor Sich JSC fixed assetsas of 01.01.2008 amount (thou UAH), %

Amount Percentage

Buildings, structures and transfer facilities, land 719, 354 39.5

Transport facilities, furniture, devices and tools 233, 412 12.8

Machinery and equipment 656, 792 36.0

Other fixed assets 213, 411 11.7

TOTAL FIXED ASSETS 1, 822, 969 100.0

UTILIZATION OF FIXEDASSETS

Depreciation of fixed and intangible assets makes UAH 95.0 mln,including depreciation of fixed production assets amounting to UAH 80.0 mln and that of intangible assets amounting to UAH 0.3 mln, depreciation of fixed assets of other types of economic activity makes UAH 14.7 mln.

The yield of capital investments is a basic activity of evaluatingeffectivity of utilizing basic assets, it made UAH 0.905 duringaccounting period as compared with UAH 0.87 according to report of 2006.

The increase of yield of capital investments by UAH 0.218 indicates that the increase of produce production volume takesthe lead over the increase of cost of the factory fixed assets. The utilization of the fixed assets over the accounting period is considered effective.


ACTIVITY SURVEY

2002 2003 2004 2005 2006 20070.0

0.2

0.4

0.6

0.8

1.0

0.74

6

0.61

2

0.68

7

0.90

5

0.82

3

0.73

7

Yield of capital investments in 2002 — 2007 (UAH)

2002 2003 2004 2005 2006 2007

Yield of capital investments

with regard to salable produce 0.737 0.823 0.746 0.612 0.687 0.905

UAH 182.1 mln were sent in 2007 for the works on recon-struction, technical renewal, construction of social sphereobjects, major and current repair of buildings and struc-tures, which were spent for the replacement of physicallyand morally obsolete equipment, improvement of workingconditions of factory employees that permitted to raiseconsiderably the culture of production.

A N N U A L R E P O R T 2 0 0 7

CAPITAL INVESTMENTS

-35-

22.8

5.7

7.3

26.22.2

6.7

10.0

12.0

7.1

Structure of capital investments of Motor Sich JSC

% Amount (UAH thou)

Capital construction of industrial objects 22.8 41, 539

Capital construction of health and social objects 5.7 10, 388

Modernisation of equipment 7.3 13, 293

Procurement of machinery and equipment 26.2 47, 708

Procurement of computer facilities 2.2 3, 994

Procurement of measuring instruments 6.7 12, 271

Procurement of tools and appliances 7.1 12, 936

Manufacture of special tooling 12.0 21, 867

Procurement of other intangibles 10.0 18, 125

Total capital investments 100.0 182, 121

LABOURANDWAGES

The arrangement of labor remuneration at the factory is intendedto provide the remuneration of employees for their labour takinginto account the complexity and condition of the work done,professionalism and organizational merits, results of employee'swork and economical activity of the factory and the divisionhe(she) works for.

Average wages of the production and industrial personnel inDecember 2007 of the account year made UAH 1, 639.6, whilethe wages of production workers made UAH 1, 963.5.

The bonus provisions have been developed and are effective at our Company. The Company together with the trade unionscommittee has summed up the results of economical activity inthe shops, departments and divisions every month, every quarter,every six months and every year during 2007. The winners werepaid the sum of UAH 699.3 thou.

The factory has no debts in paying out wages and paying taxes to the budged and off-budget funds.

During the period of account the factory rendered different typesof assistance to the veterans of Great Patriotic war and labour, to the invalids, retired pensioners of the factory, low-lived andlong families.


ACTIVITY SURVEY

0 300 600 900 1200 1500 1800

2003

2004

2005

2006

2007

– average wage for one employee, total (UAH)– average wage for one production and industrial personnel employee (UAH)

587.3

692.4

733.3

599.4

920.6946.8

1, 295.91, 335.3

706.6

2002 468.0476.5

751.0

Course of growth of average annual wages of Motor Sich JSCemployees within a period from 2002 to 2007 (UAH)

Average wage for 2002 2003 2004 2005 2006 2007

- one employee 468.0 587.3 692.4 733.3 920.6 1, 295.9

- one production and industrialpersonnel employee 476.5 599.4 706.6 751.0 946.8 1, 335.3

Purpose:

Keep and attract additionally highly skilled personnel

Tasks:

■ rendering the employees the real opportunities for professional growth;

■ provision of competitive work remuneration;■ creation of conditions for career promotion;■ ensuring the favourable and safe conditions for work;■ ensuring social protection of the employees, including

pensioners.

22 Candidates of Science are employed at the factory.

Staff recruitment system:

■ competitive selection;■ psychological testing aimed at objective estimation

of intellectual and psychological potential of a person;■ interview of candidates with heads of subdivisions;■ probation period for a candidate.

Training and professional development oriented at system-atic and comprehensive work with personnel reserve:

■ production and technical training courses and dedicatedcourses:

■ relations with educational institutions■ training in Training Center

A N N U A L R E P O R T 2 0 0 7

PERSONNELPOLICY

-37-

Educational structure of production and industrialpersonnel for the parent plant, %

high education . . . . . . . . . . . . . . . . . . . . . 25.4

specialized secondary education . . . . . . . . . 23.9

secondary technical education . . . . . . . . . . 15.3

secondary education . . . . . . . . . . . . . . . . . 32.8

incomplete secondary education . . . . . . . . . 2.6

25.4

32.8

23.9

15.3

2.6

Every year from 120 to 150 young specialists with higher educa-tion, 100 to 120 people with secondary technical education and150 to 170 graduates of vocational schools come to work at thefactory.

The major basic educational institutions for the factory are:

The Zaporozhye National Technical University (ZNTU), theKhar'kov National Aerospace Zhukovsky University (KhAI), theZaporozhye Aviation College (ZAC), the ZaporozhyeElectrotechnical College (ZEC), Higher vocational school No.27.Apart from this many young specialists who have graduated fromthe Zaporozhye State Engineering Academy (ZSEA), theZaporozhye National University (ZNU), the TavricheskAgrotechnical Academy and the Dnepropetrovsk NationalUniversity come to work at our factory.

The agreements have been concluded on cooperation and train-ing of specialists with the Slavyansk college of National AviationUniversity, the University of Humanities 'Zaporozhye Institute ofState and Municipal Government', the Tokmak mechanical train-ing school and the Zaporozhye metallurgical training school. The possibility of concluding agreements on cooperation withthe Zaporozhye college of radio-and-electronic equipment,hydro- and power-generation training school and constructiontraining school is under consideration now.

Agreements are concluded with all young specialists working forthe company, in accordance with these agreements the youngspecialists get additional payment within 2 to 3 years to reach the level of average salary paid at the factory.

Much attention has been paid to on-the-job training of the work-ing young people. At present 938 persons are getting educationin different higher educational institutions (HEI) by correspon-dence.

In 2007 alone 45 employees of Motor Sich JSC have been recom-mended to higher educational institutions of different levels ofaccreditation at the expense of state budget. Totally, 192 employ-ees of the factory are getting education at the expense of statebudget.

The cooperation with the base Zaporozhye aviation collegegrants a possibility not only to provide the factory with specialistshaving secondary special education, but to recommend them tocontinue education in HEI being enrolled in the third yearreplenishing the groups established earlier. In 2007 28 graduatesof ZAC were sent to the ZNTU and KhAI for education at theexpense of state budget.


ACTIVITY SURVEY

31.6

20.5

36.0

12.0

23.9

17.7

14.1

12

9.4

22.9

Qualitative standards of staff:

Structure of employees at the head-quarter plant shown in categories, %

■ basic workers . . . . . . . . . . . . . . . 31.5■ auxiliary workers . . . . . . . . . . . . 20.5■ engineers and office workers . . . 36■ other categories . . . . . . . . . . . . . . . 12

From total amount, %

■ disabled persons . . . . . . . . . . . . . . 4.3■ working pensioners . . . . . . . . . . 24.3

Age structurefor the headquarter plant, %

■ up to 30 years . . . . . . . . . . . . . . . 23.9■ 31 to 40 years . . . . . . . . . . . . . . . 17.7■ 41 to 50 years . . . . . . . . . . . . . . 22. 9■ 51 to 55 years . . . . . . . . . . . . . . . 14.1■ 56 to 60 years . . . . . . . . . . . . . . . . 12■ over 60 years . . . . . . . . . . . . . . . . . 9.4

The average age of the Company'semployees is 42.4 years.

According to an agreement with ZNTU 534 childrenof the employees of Motor Sich JSC have been sentwithin the period from 2003 to 2007 to a day-timedepartment of the branch of faculty of pre-HEItraining to get professions, which are the mostdemanded at the factory.

Another form of training specialists, such as theestablishment of affiliations of HEI chairs at the fac-tory, has advanced further. Beginning from 1996 theaffiliation of KhAI chair 'Technology of productionof aviation engines' and from 1992 the chair of theZNTU 'Equipment of casting production' function atthe factory. In 2005 the affiliation of the ZNTU chair'Technology of production of aviation engines' wasestablished and according to recommendations ofMotor Sich JSC the ZNTU has established a new spe-ciality 'Aircraft engines and power units'.

On the basis of agreement with the base ZAC andZEK the factory annually grants referrals to the chil-dren of factory's employees for training in the col-leges, which ensure a guarantee to the students thatthey will have all types of traineeship at the factoryand, what is no less significant, it guarantees thesubsequent job placement upon graduation.

In 2007 the following students had traineeship atthe factory:

■ more than 350 students from 9 training schoolsand colleges in 21 profession;

■ more than 400 students of 6 vocational schoolsand lyceums in 15 professions.

In order to maintain the corporate spirit and labourdynasties, 76 employees of the factory whose chil-dren came to work at the factory after graduationfrom higher educational institutions and vocationalschools in 2007 have been awarded.

89 children of the factory employees have beenenlisted to the faculty of the ZNTU pre-universitytraining with subsequent training in the Universityon the account of state budget.

67 children of the factory employees have success-fully passed the entrance examinations and have

been enlisted to the Zaporozhye National TechnicalUniversity to get education in the prevailing machine-building professions on the account of state budget:

■ 'Technology of production of aircraft engines';

■ 'Technology of machine-building';

■ 'Metal-cutting machines and systems'.

Due to increasing amount of governmental scholarshipsand exhibitions the amount of scholarship named after V.I. Omelchenko (Ph.D., Engineering, professor) has beenincreased up to 400 UAH.

In order to commemorate the centennial of Motor SichJSC and to raise the prestige of aircraft engine building,training of highly skilled specialists for the factory, eleva-tion of their concernment in building of the competitiveworld-level aeroengines, a Motor Sich JSC scholarship hasbeen established since February 1, 2008 to be granted to 5best five-year-students of the Zaporozhye NationalTechnical University and to 3 students of the ZaporozhyeAviation College. The amount of scholarship to ZNTU stu-dents will be 400 UAH and to ZAC students it will be 350UAH.

For more than 70 years the personnel training division isfunctioning at the factory, now its name is a PersonnelTraining Department. The PTD has a license of Ministry ofEducation and Science of Ukraine in 23 machine-buildingprofessions.

Motor Sich JSC carries out a systematic work on profes-sional training, re-training and further training of the fac-tory's personnel, dedicated training of workers, engineersand administrative employees on safety engineering andhazardous professions. This helps improve the awarenessof personnel and the quality of manufactured products inaccordance with the requirements of International stan-dards.

Since 2006 the Personnel Training Department has got aright on a tender basis to conduct training of unemployedpeople registered at Zaporozhye regional and districtemployment centers. It gives a possibility for the factory totrain personnel to demanded professions on the accountof employment centers.

A N N U A L R E P O R T 2 0 0 7 -39-

FOREIGN ECONOMICACTIVITIY

The main source of revenue like in the previous year was theaccomplishment of export contracts for aircraft engines andground equipment (aircraft engines, gas-turbine drives, spares,repair and mounting tools, provided overhaul, after-sales support,in-service maintenance, extension of service life, technical documentation, etc) and consumer goods.

The inpayment of money according to foreign economic con-tracts has increased by more than 40% as compared with 2006.

The inpayment has been received for fulfilling the followingwork, %:

■ Delivery of aircraft engines . . . . . . . . . . . . . . . . . . . . . . . . . 55.57■ Overhaul of aircraft engines . . . . . . . . . . . . . . . . . . . . . . . . 22.24■ Delivery of spare parts for aircraft engines . . . . . . . . . . . . 3.48■ Extension of service life for aircraft engines . . . . . . . . . . . 1.42■ Other services (including delivery of equipment,

tooling, technical documentation) . . . . . . . . . . . . . . . . . . . 1.15■ Delivery of industrial equipment and spare parts

for it, repair and after-sales maintenanceof industrial equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.87

■ Delivery of consumer goods . . . . . . . . . . . . . . . . . . . . . . . . . 2.27

Geography of deliveries

Russia, China, Algeria, India, Israel, Iran, Uzbekistan, Belarus,countries of South-East Asia and Africa.

Import

The technical re-equipment of the Company continued. Theimport contracts concluded for delivery of equipment, its mod-ernization, procurement of spare parts, components and materi-als for production purposes, computers and software amountedto USD 6.3 mln.


ACTIVITY SURVEY

Produce sales in regions (2007), %:

■ to Russia . . . . . . . . . . . . . . . . . 58.9■ to non-CIS countries . . . . . . . . 32■ Ukraine . . . . . . . . . . . . . . . . . . 9.25■ CIS-countries less Russia . . . . 9.1

58.932

9.1

The amount of money paid under the contracts con-cluded earlier made USD 7, 561.2 thou., including:

■ for purchasing equipment . . . . . . . . . . . . . . . 67.89%■ for overhaul and modernization

of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.98% ■ for spare parts to equipment . . . . . . . . . . . . . 13.59%■ for computers and software . . . . . . . . . . . . . . . 8.54%

The major partners of Motor Sich JSC in the field ofimport of equipment, spares, overhaul and moderniza-tion are Switzerland, Germany, Russia, India, Czech Republic, Bulgaria, Great Britain and othercountries.

A N N U A L R E P O R T 2 0 0 7 -41-

Advertisement and widening of contacts

Much attention was still paid to strengthening andwidening contacts as well as to promotion of theproduce manufactured by Motor Sich JSC.

The delegations of our company have participated inthe biggest international exhibitions thematicallyrelated to products manufactured at Motor Sich JSC:

■ with respect to aviation equipment we have takenpart in aerospace shows, as follows: 'Aero INDIA'(India), 'Paris Airshow' (France), 'MAKS-2007'(Russia), 'Aviation Expo China' (China), etc;

■ with respect to industrial equipment we havetaken part in exhibitions-'Oil and Gas' held inRussia, Uzbekistan, Kazakhstan, Ukraine.

■ with respect to consumer goods we have takenpart in exhibitions 'Construction 2007', 'Machine-building. Metallurgy', 'Pokrov fair' held inZaporozhye, in regional and all-Ukraine competi-tions of fellers in Zhytomir and Kiev regions aswell as in the conferences and seminars dedicatedto the problems of traumatology and orthopedics.

As a result of negotiations held during exhibitions we havesigned the contracts:

■ for delivery of D-436-148 aircraft engines for An-148planes with the Ilyushin financial group for the amountexceeding USD 140 mln.;

■ for delivery of 8 AI-336-8-2 gas-turbine drives toUzbekistan.

Due to our regional representation offices the Companyparticipates in all tenders organized by our business partners.

Technical center has been established in the United ArabEmirates for rendering services in conducting approvedrepairs and light overhaul of engines operated in theMiddle East and North Africa.

67.89

9.98

13.598.54

SOCIAL ACTIVITIESAND CHARITY

The factory has spent UAH 43.7 mln. for health-recreation programsand upkeeping the objects of social sphere that is by UAH 1.0 mlnmore than in 2006.

The capital investments into social sphere have amounted to UAH10.5 mln., including UAH 2.0 mln. for procurement of equipment.

Motor Sich JSC itself upkeeps an immense social infrastructure,which envelops practically all existing types of social protection of a person:

■ health-care■ health improvement■ recreation■ system of preschools■ public catering.

Provided for the disposal of engine-builders is the medical centerequipped at the cutting-edge level, pre-school institutions for chil-dren, factory cultural center with multiple coteries and sections forchildren and adult people, camps for improving health of children,preventotium, recreation houses and rest homes at the picturesqueoverflow banks of Dnieper and at the shore of Azov sea, rest hotelin Crimea.

The factory has introduced the system of medical insurance of employees, which effectively functions now.

The medical division of Motor Sich JSC today is a multi-functionalmedical institution furnished with the up-to-date equipment andthe latest technologies. Every year thousands of engine builders and inhabitants of the Zaporozhye region get qualified assistance.The medical complex Motor Sich became a prize-winner of therating 'Best factories of Ukraine' in the nomination 'Medical service

and health-care' with respect to the rating indices of health-improvement institutions.

The medical division incorporates:

■ out-patients' clinic, ■ hospital (departments of therapy, neurology, urology, otolaryngol-

ogy, gynaecology, traumatology and orthopedy); ■ consulting and diagnostic department;■ stomatology department;■ hydropathic establishment;■ department of preventionism of prenosological forms of ailment.■ pediatric treatment and health-improving complex;■ sanatorium-preventorium;■ health and beauty health-improving complex.


ACTIVITY SURVEY

The sanatorium Raduga of urological profile for 100 seats islocated in a small town Volochysk in the western part of Ukriane.The main preventive cure of the sanatorium-preventorium is mineral water Tovtry. Apart from this, the people having rest in sanatorium are prescribed different medical and preventiveprocedures: ozokerite therapy, baths, inhalation, massage, remedial gymnastics, physical and therapeutic procedures.

The health improvement complex Mayak is a fundamentallyunique facility: a family-type rest home, health-improvement and sport camps for children are spread over a territory of 50hectares.

Provided for the disposal of holiday-makers are more than 100small houses, sporting grounds, tennis tables, snooker, rentalboats and fascinating youth leasure programs.

The pre-school institutions for children are provided with allconditions for physical, psychological and social development of the younger generation, there are grounds for personalimprovement, disclosing of creative capabilities and activation of natural potential. The educational process is carried out in thefollowing directions: physical culture and health improvement,ecology, aesthetics and intellect.

The production potential of engine-builders is determined inmany respects by the healthy life, maintaining and developingsport traditions at the factory. The mass movement for physicalculture that has been embodied in the field-and-track contestsand play competitions of the annual factory spartakiad contributes to improvement of health of the employees and further consolidation of the working collective.

A N N U A L R E P O R T 2 0 0 7 -43-


ACTIVITY SURVEY

Given to the disposal of factory's employees are:

■ stadium for 10, 000 seats, two football fields, combined groundsfor mini-football, handball, basketball, two volleyball fields,grounds for table tennis, 4 tennis lawns, 'health strip' of 1,500m with training equipment;

■ track-and-field ring: three 250-meter running tracks, a handballgymnasium with 1, 000 seats, play hall (1 handball and threevolleyball grounds) for 300 seats, boxing halls, halls for callis-thenics, competitive gymnastics and body-building hall;

■ sports hall of secondary youth school of Olympic reserve fortraining of divers;

■ swimming pool 'Slavutich', two saunas, hydro-shower, two hallsfor athletic gymnastics, hall for general physical training andshaping;

■ swimming pool 'OSVOD';■ water sports base with 2 tennis lawns, one basketball and two

volleyball grounds;■ two sporting and health-improving camps for 110 seats.

The Sports Complex of Motor Sich JSC is provided with centralsport sections for boxing, boat-racing, track-and-field athletics,sailing, football and draughts, about 250 people of different ageare engaged here.

The Sports Complex has three professional handball teams suc-cessfully playing in different leagues of the UkrainianChampionship.

The educatees of Motor Sich sporting club have reached highresults in 2007 at the sport arenas of the most prestigious inter-national competitions. The champions and prize-winners of theOlympic games, world and European championships have beentrained at the grounds of sporting club.

The Shevchenko cultural center of Motor Sich JSC established in1949 is by right considered to be a cultural heart of the city.

The center is furnished with two auditoria with total seatingcapacity of 620 seats and three rehearsal halls featuring total areaof 50 m2.

During a year the cultural center gives stage to around 200 eventswith more than 90, 000 spectators present.

At present it houses 21 group of amateur art activities. The basicdirections of activity are: development of artistic amateur creativi-ty, sponsoring purposeful leisure of factory employees and theirfamilies.

SOCIAL ACTIVITIESAND CHARITY

A N N U A L R E P O R T 2 0 0 7 -45-

In 2007 the factory spent 4.7 mln. UAH for charity. Apart fromthis different sorts of help costing 4.1 mln UAH have been rendered to disabled people, veterans of Great Patriotic war andlabour, retired Company pensioners, low-income people andfamilies of dependent children.

The programs and projects aimed at strengthening of the frater-nal ties with other Slavic nations have been implemented on theinitiative of Motor Sich JSC. The most significant among the proj-ects are: construction of Andrey Pervosvanny Cathedral, inaugu-ration of monument to Andrey Pervosvanny, performance ofCouncil of Slavic nations, field meeting of Moscow intellectualbusiness club, inauguration of monument to the last kosh atamanof Zaporozhskaya Sech Petr Kalnyshevsky on Solovki Islands,erection of monument to Svyatoslav the Brave, construction ofchapel of reverend Ilya Muromets, Kiev-Pechersky thaumaturgeand other.

Motor Sich JSC prefers those events, which are socially-orientedand promote humanism.

The basic channels of charity are the revival of Ukrainian cultureand centuries-old traditions of our people, assistance to educa-tional, sporting, medical and religious institutions.

A special attention is paid at the factory to popularization of thehighest achievements of world classical culture and art, supportof mature artists and talented capable youths.

Motor Sich JSC takes an active part in the rebirth of cultural andhistorical nature reserve on Khortitsa island, in reconstruction ofthe regional Ukrainian musical and dramatic theater, stadiumMetallurg, hospital for invalids of Great Patriotic war in Veliky Lugand many other events.

The factory is a co-founder and major financial sponsor ofresearch institute of history of kossacks at National Academy of sciences of Ukraine, it renders moral support to the rebornkossack movement in Zaporozhye.

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AUDIT CONCLUSION

A N N U A L R E P O R T 2 0 0 7 -47-

BALANCE (thou. UAH)

No. of Notes 31.12.2006 31.12.2007

ASSETS

Intangible assets in residual value 1 476 445

Fixed assets in residual value 2 717, 699 786, 242

Incomplete construction 3 133, 892 133, 827

Long-term financial investments 4 187, 979 230, 813

Long-term debt – 6, 595 6, 595

Other non-circulating assets – 642 642

Production stock 5 829, 614 1, 149, 774

Settlements with debtors 6 281, 249 393, 459

Monetary resources and their equivalents 7 55, 711 83, 816

Current financial investments 4 41, 558 103, 266

Other circulating assets – 11, 964 25, 185

Deferred expenses – 1, 656 1, 367

TOTAL for Assets 2, 269, 035 2, 915, 431

LIABILITIES

Provision of deferred expenses and payments – 2, 695 3, 844

Long-term liabilities – 57, 649 102, 912

Short-term liabilities – 321, 982 357, 838

Settlements with creditors 9 491, 254 659, 987

Deferred income – 219 931

TOTAL for liabilities 873, 799 1, 125, 512

OWNERSHIP CAPITAL

Statutory capital 8 280, 529 280, 529

Additional invested capital 8 – 171, 211

Other additional capital 8 641, 251 650, 367

Capital reserves 8 61, 245 63, 145

Retained profit 8 427, 034 629, 545

Withdrawn capital 8 (14, 823) (4, 878)

TOTAL for ownership capital – 1, 395, 236 1, 789, 919

TOTAL FOR LIABILITIES – 2, 269, 035 2, 915, 431

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REPORT ON FINANCIAL RESULTS (THOU. UAH)

No. of Notes 2006 2007

INCOMES

Net income (proceeds) obtained from sale

of products (goods, works, services) – 1, 238 116 1, 749, 747

from a/c engines production and overhaul – 982, 497 1, 398, 126

from production of industrial equipment – 107, 449 192, 114

from production of consumer goods – 75, 621 71, 998

from other goods, works and services – 72, 549 87, 509

Other operational income 10 780, 067 920, 112

Profit of capital share 10 4, 420 20, 972

Financial income 10 488 –

Other income 10 49, 316 72, 851

Total for Income from cost accounting 2, 072, 407 2, 763, 682

Extraordinary income – –

EXPENSES

Cost of products sold

(goods, works, services) – 762, 639 984, 263

Administrative expenses – 177, 733 260, 574

Sales expenses – 122, 621 137, 738

Other operating expenses 10 845, 265 983, 228

Financial expenses 10 35, 196 37, 328

Capital share expenses 10 12, 662 4, 239

Other expenses 10 44, 621 75, 347

Profit tax – 32, 557 73, 839

Total expenses from cost accounting – 2, 033, 294 2, 556, 556

Extraordinary expenses – – –

Net profit – 39, 113 207, 126

Net profit

per one simple share (one share, UAH) – 22.33 110.80

A N N U A L R E P O R T 2 0 0 7 -49-

NOTES ON FINANCIAL REPORT

MAIN ASPECTS OF ACCOUNTINGPOLICY

The principles of accounting policy used as a basis for preparation of consolidated financial report are determined by effective legislation of Ukraine,Regulations (Standards) for Accounting (R(S)A),accounting policy of Motor Sich JSC approved by Chairman of the Board of Directors , and other regulatory documents of the Company.

The accounting and financial reporting at the Companyis based on the principles of continuity, full coverage,discretion and priority of content over form.

Accounting policy is common for the head plant and allits subsidiaries.

Assets and liabilities are reflected in the Balance Sheetat historical (actual) cost, with the account of the factthat the cost of fixed assets, intangible assets and stocksmay be revaluated in compliance with the requirementsof National standards for accounting.

The currency for the Company financial statement is a national monetary unit of Ukraine, a hryvnya, (UAH).

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NOTE 1

INTANGIBLEASSETS

Intangible assets are accounted in compliance with(R(S)A) 8 'Intangible assets' according to the followinggroups: software products for personal computers,rights to products and services trademarks, rights to objects of industrial property, incomplete capitalinvestments in intangible assets, licenses for effectingdefinite types of activity for over one year.

Costs for creating Company's own trademark areincluded in costs of the period under account. Assetsacquired elsewhere are considered as intangible ones.

Intangible assets consist mainly of the computer software and computer networks.

The Company has no intangible assets, which are underlimitation of the right of ownership and which havebeen registered under security conditions.

Intangible assets depreciation is calculated according to the straightforward method. Useful life is determinedfor each intangible asset.

Cost

Balance as of 31.12.2006 13, 681 131 13, 812

Received per year 295 9 304

Retired per year 23 - 23

Balance as of 31.12.2007 13, 953 140 14, 093

Depreciation

Balance as of 31.12.2006 13, 298 38 13, 336

Accrued per year 320 15 335

Retired per year 23 - 23

Balance as of 31.12.2007 13, 595 53 13, 648

Net balance cost as of 31.12.2006 383 93 476

Net balance cost as of 31.12.2007 358 87 445

Structure and flow of intangible assets (thou. UAH)

Item Software

Other

intangible

assets

Total

A N N U A L R E P O R T 2 0 0 7 -51-

NOTE 2

FIXED ASSETS ANDNON-NEGOTIABLETANGIBLE ASSETS

Fixed assets include tangible assets held by the Companyin order to use them during production or delivery of goods and rendering of services as well as to lease to other persons or to realize administrative and social-and-cultural activities; their expected useful life is morethan one year.

Fixed assets and low-value non-negotiable tangibleassets are shown in the balance with respect to theirhistorical and depreciated costs.

Initial evaluation of objects of fixed assets and low-valuenon-negotiable tangible assets is carried out with respectto their first cost. First cost of an object of fixed assetsand low-value non-negotiable tangible assets includesacquisition price, as well as costs that are directly relatedto bringing the asset to conditions at which its operationis possible.

Residual value of fixed assets is not used.

Additional evaluation and reduction of fixed assets wasnot carried out in 2007.

Depreciation of fixed assets is calculated during usefullife of an object using the straightforward method.

N o t e s o n f i n a n c i a l r e p o r t

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In 2007 fixed assets were acquired for monetary fundsas well as they were built-up at the Company. Fixedassets were retired due to liquidation because they no longer met the criteria for acceptance as assets as well as because they were sold or transferred gratis.

Cost of fixed assets received under operational leaseconditions is UAH 12, 173 thousand.

Primary (revaluated) cost of fully depreciated fixed assetsbeing used is UAH 400, 888 thousand.

Structure and flow of fixed assets (thou. UAH)

Buildings,

structures,

transfer

facilities

Item Machines

and equipment

Cost

Balance as of 31.12.2006 700, 507 609, 510 101, 645 112, 655 168, 939 1, 693, 256

Received per year 40, 143 60, 399 6, 952 38, 134 36, 021 181, 649

Retired per year 21, 332 13, 117 1, 522 6, 825 9, 140 51, 936

Balance as of 31.12.2007 719, 318 656, 792 107, 075 143, 964 195, 820 1, 822, 969

Depreciation

Balance as of 31.12.2006 274, 183 437, 947 56, 061 57, 532 149, 834 975, 557

Accrued per year 17, 122 32, 163 6, 012 10, 140 29, 216 94, 653

Retired per year 8, 757 12, 173 1, 395 4, 109 7, 049 33, 483

Balance as of 31.12.2007 282, 548 457, 937 60, 678 63, 563 172, 001 1, 036, 727

Net balance cost

as of 31.12.2006 426, 324 171, 563 45, 584 55, 123 19, 105 717, 699

Net balance cost

on 31.12.2007 436, 770 198, 855 46, 397 80, 401 23, 819 786, 242

Transport

facilities

Other

fixed

assets

Low-value

non-negotiable

tangible

assets

Total

NOTE 2 (continued)

A N N U A L R E P O R T 2 0 0 7 -53-

NOTE 3

CAPITAL INVESTMENTS

Incomplete capital investments (further referred to as ICI)form a separate group; an individual object of ICI is considered as a unit for their accounting.

The ICI in tangible assets are capital investments in construction, manufacture, reconstruction, modernization,acquisition of objects of non-negotiable tangible assetswhich were not put in service as of the date of the BalanceSheet as well as advance payments for financing of construction. The ICI are entered in the Balance Sheetwith their initial cost.

Depreciation regarding construction in progress is notcalculated.

Structure of capital investments (thou. UAH)

Capital construction 104, 225 88, 376 88, 033 104, 568

Acquisition (founding)

of fixed assets 20, 431 53, 753 54, 258 19, 926


of other non-negotiable

tangible assets 8, 888 39, 510 39, 336 9, 062


of intangible assets – 304 304 –

Others 348 178 255 271

Total 133, 892 182, 121 182, 186 133, 827

Item as of 31.12.2006 Received Retired as of 31.12.2007


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NOTE 4

FINANCIALINVESTMENTS

One of the directions of the Company's activity is theinvestment activity. The Company holds 100 % of sharesof 3 subsidiaries and has stakes in statutory capitals of IVECO-MOTOR SICH Private Joint Stock Company,ODO MOTOR GARANT Insurance Company, VLADIMIRKLIMOV - MOTOR SICH ENGINES Private Joint StockCompany, Media Partner Ltd., ALEKS TV-and-RadioCompany Pvt. JSC, travel company 'Travel Sich' Ltd.,Zaporozhye fishery facility Pvt. JSC and a number of other enterprises in Ukraine and Russia.

Additional investments to four enterprises amounted in 2007 to UAH 17,176.1 thousand.

In all Motor Sich JSC has investments into 36 economicalentities.

Structure of share investments

1 up to 5% 3 3

2 from 5 to 10% 4 2

3 from 10 to 20% 3 2

4 over 20% 22 24

5 100% (Ñè) 4 3

Total 36 36

Line Share Number of enterprises Number of enterprisesNo. as of 01.01.2007 as of 01.01.2008

A N N U A L R E P O R T 2 0 0 7 -55-

In order to provide active intervention of products into CIS and foreign countries and its after-warrantymaintenance, Motor Sich Middle East FEZ company has been established in the free economical zone of Sharja airport (United Arab Emirates) that fulfillsfunctions of Motor Sich JSC Representation office in the Middle East and North Africa. The Company is a 100% property of the JSC.

The Energo-Service Pvt. JSC established with the aim of expanding and strengthening the positions on themarkets of Russia and CIS in the field of development,modernization, production, selling and after-sales warranty maintenance of gas-turbine engines, drives and power-generating sets continued its activeactivity in 2007.

Financial investments with Company's share exceeding20 % are accounted according to the shareholdingsmethod and as of date of balance statement are shownaccording to the cost determined with the due accountof change of the total value of the investment objectproperty assets.

Balance sheet value of the investment increases/decreasesby the amount, which is the investor's share in net profit/loss of the investment object, and is included in the composition of capital contribution profit/loss.At the same time the balance sheet value of the investmentis decreased by the amount of declared dividends. All other financial investment, as of the date of balancestatement, is shown at their first cost.

The current financial investments are effected by operations with simple bills and shares.


Flow of financial investment (thou. UAH)

ItemFinancial investment, accordingto the shareholdings method, in

associated enterprises

subsidiaries

Other financial

investmentTotal

Currentfinancial

investment

Revised balance

as of 31.12.2006 183, 739 2, 630 1, 610 187, 979 41, 558

Investments acquired 12, 842 – 4, 907 17, 749 128, 109

Additional capital 8, 874 – – 8, 874 –

Profit from shareholding 20, 902 70 – 20, 972 –

Readjustment of rates 240 – – 240 –

Acquired dividends 190 – – 190 –

Investments retired 1 – 572 573 65, 474

Expenditures due to shareholding 3, 749 489 – 4, 238 –

Losses from selling

current investments – – – – 927

Balance as of 31.12.2007 222, 657 2, 211 5, 945 230, 813 103, 266

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NOTE 5

PROCESS STOCKStock is considered to be the asset, if there exists a possibility that the Company will get in the futureeconomical benefits connected with their utilizationand their cost can be trustworthily determined. Unit of the stock is each item of the nomenclature.

When stock is transferred into production, sold or disposed otherwise, their evaluation is done accordingto the first-in-first-out method. For monitoring consumption of inventory items, accounting of theirquantity is organized in places of their consumptionand stocktaking is performed regularly.

The stock is shown in accounting and balance statementaccording to their basic cost as of balance date. If onthe date of balance statement price of the stores gotdecreased or if inventory items got spoiled, becameobsolete or lost the expected economic benefits, they are reflected according to the net liquidation value.

Raw staff and materials 47, 020 93, 314

Vendor semi-finished items

and component parts 87, 441 99, 192

Fuel 4, 260 5, 609

Construction materials 775 1, 116

Spare parts 31, 042 40, 136

Low value and rapidly

amortizable items 10, 786 13, 661

Work in process 554, 045 792, 347

Finished products 90, 337 97, 325

Commodities 2, 991 3, 369

Other stock 917 3, 705

Total 829, 614 1, 149, 774

Balance sheet value of stock (thou. UAH)

Balance value

as of 31.12.2006

Balance value

as of 31.12.2007Item

A N N U A L R E P O R T 2 0 0 7 -57-

NOTE 6

DEBT RECEIVABLESDebt receivables are considered to be assets if there existsa possibility that the Company will get in the futureeconomical benefits and their cost can be trustworthilydetermined. Current debt receivables for products,goods and services rendered are accepted as the assetsimultaneously with acceptance of the realization profitand is evaluated according to the basic cost.

The current debt receivables for products, goods and services rendered are included in the balance totalaccording to the realization net profit, which is equal to total debt receivables. For determining realization netprofit as of the date of balance statement a reserve of doubtful debts, which is presented in the report on financial results being included in other operationalexpenditures.

The debt receivables for products and goods are presentedin the balance total according to the realization net profit,which is equal to total debt receivables less the reserveof doubtful debts.

The bad debt receivables are written off from the assetssimultaneously with reduction of the reserve of doubtfuldebts. If the amount of the reserve of doubtful debts is not sufficient the doubtful debts are written off from the assets of the Company for other operationalexpenditures. The amount of compensation of earlierwritten off debt receivables is included in other operational profits.

This financial year on account the doubtful debts the baddebt receivables in amount of 237 thousand UAH werewritten off.

The current debt receivables, which are not connectedwith sales of products, goods and services rendered and those accepted as a bad debt, are written off, andthe loss is included into other operational expenditures.


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The other debt receivables in the report are debt receivables in sums given on account, payments underclaims, and debt on non-commercial operations.

The item 'Long-term debt' reflects the due to the jointactivity with 'Consumer goods factory (Zaporozhye)'Ltd. Co.

Composition of Company debt (thou. UAH)

Item as of 31.12.2007as of 31.12.2006

Bills received – –

Debt receivables for products, goods and services rendered

- realization net profit 144, 650 116, 217

Debt receivables in settlement

- with budget 13, 041 29, 842

- in advances granted 87, 194 205, 801

- in internal settlements 2, 012 1, 681

Other current debt receivables 34, 352 39, 918

Total 281, 249 393, 459

NOTE 6 (continued)

A N N U A L R E P O R T 2 0 0 7 -59-

Item Amount (thou. UAH)

Payment office 207

Current accounts in banks 40, 224

Other accounts in banks (letters of credit, cheque-books) 24, 037

Funds in transit 13

Equivalent funds 19, 335

Total 83, 816

NOTE 7

FUNDS AND INFLUENCEOF EXCHANGERATES

The funds of the Company are allocated on the currentaccounts and in the payment office of the Companyand are expressed both in national and foreign currency.Operations with the foreign currency after primaryacknowledgment are reflected by conversion of thesum in the foreign currency into the currency of balanceaccording to the exchange rate of National Bank of Ukraine at the date of realization of operations. The sums of paid and received advance payments in the foreign currency are converted into the currency of account with the use of the currency rate at the dateof payment or receipt of advance payment.

The balance value of the stated balance sheet accountsin future will be determined (evaluated) according tothe corresponding provisions (standards) of the businessaccounting.

The differences in rates by the monetary clauses in theforeign currency are determined at the date of settlementand at the date of balance. The differences in rates asresult of conversion of the balance clauses denominatedin the foreign currency are reflected in other operationaland other profits (expenses).

During the accounting period, as the result of assets and liabilities conversion the Company received 7, 186thousand UAH as incomes while 6, 309 thousand UAHwere attributed to expenses.


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Index

Quantity of

shareholders

Quantity

of securities

Total

nominal

value

of securities

Share in stock

capital (%)

Registered securities – 2, 077, 990 280, 528, 650.00 100.0

1. Owners, including 10, 471 1, 980, 392 267, 352, 920.00 95.3

1.1 Natural persons 10, 272 484, 172 65, 363, 220.00 23.3

1.2 Juridical persons 199 1, 496, 220 201, 989, 700.00 72.0

1.3 State institutions 0 0 0.00 0.0

2. Issuer – 97, 598 13, 175, 730.00 4.7

NOTE 8

OWNERSHIP CAPITAL

The registered Statutory fund of Motor Sich JSCamounted in 2007 to 280, 528, 650 UAH and consistedof 2, 077, 990 ordinary registered shares with nominalvalue of 135 UAH.

Given below is the structure of capital stock of the factorywith respect to types of owners as of 31.12.2007.

At the end of the year the amount of shares in circulationmade 1, 980, 392. All shares give equal rights for takingpart in voting, receiving dividends and returning thecorporate capital part. Average annual common sharesquantity in 2007 amounted to 1, 869, 321, net profitper one share amounted to 110.48 UAH.

On the basis of activity results in 2006 a decision was made at the shareholders meeting to direct 2, 715thousand UAH for payment of dividends and 1, 900thousand UAH to reserve.

A N N U A L R E P O R T 2 0 0 7 -61-

TotalWith-

drawn

capital

Undistri-

buted

profits

Reserve

capital

Other

additional

capital

Statutory

fund

Addi-

tionally

invested

capital

Item

Changes in ownership capital during 2007 (thou. UAH)

The other additional capital includes the cost of indexation of fixed assets and unfinished construction,additional evaluation of stock, property received free of charge as a result of privatisation.

The correction of mistakes made during compiling of report for 2007 has been effected by correcting the balance of undistributed profit with simultaneousacknowledgement of receipts and expenses.


Balance as of the

beginning of year 280, 529 – 641, 036 61, 245 425, 763 (14, 823) 1, 393, 750

Adjustment:

- correction of mistakes 215 1, 271 1, 486

Adjusted balance as of

the beginning of year 280, 529 – 641, 251 61, 245 427, 034 (14, 823) 1, 395, 236

Revaluation of financial

investments 8, 874 8, 874

Net income during

accounting period 207, 126 207, 126

Distribution of profits:

Payments of dividends (2, 715) (2, 715)

Contribution

to reserve capital 1, 900 (1, 900)

Fixed assets received

free of charge 171, 211 9, 945 181, 156

Exchange differences

on financial investments 242 242

Total number

of changes in capital – 171, 211 9, 116 1, 900 202, 511 9, 945 394, 683

Balance as of the

end of year 280, 529 171, 211 650, 367 63, 145 629, 545 (4, 878) 1, 789, 919

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The Company acknowledges liabilities if their value can be truly assessed and if there exists a possibility of economic gains decrease in future due to cancellation.If on the date of balance formerly acknowledged liabilitiesare not subject to cancellation, their amounts are includedinto the incomes of the period under report.

Current liabilities are presented in the balance accordingto cancellation sum.

The items of current liabilities show debts the cancellationdate for which did not come by the date of balance report.The item 'Other current liabilities' shows the amount of liabilities on non-commercial operations and othercreditors.

NOTE 9

CURRENT LIABILITIES FORSETTLEMENTS

Composition of Company's liabilities (thou. UAH)

Item as of 31.12.2007as of 31.12.2006

Bills issued 38, 513 106, 075

Accounts payable for goods, works and services 117, 319 107, 034

Current liabilities in settlements:

- in advances granted 286, 165 371, 415

- with budget 12, 932 21, 655

- in insurance 7, 150 11, 623

- in payment of labour 18, 545 25, 704

- with participants 4, 924 6, 755

- in internal settlements – –

Other current liabilites 5, 706 9, 726

Total 491, 254 659, 987

A N N U A L R E P O R T 2 0 0 7 -63-

NOTE 10

RECEIPTS AND EXPENSES

The items of receipts and expenses are taken intoaccount and evaluated at the moment of assets sale or service provision. All Company's receipts and expensesin the accounting period are reflected within the sameperiod regardless of date of actual acquisition or paymentof monetary funds.

Receipts, which had to be received in future, but werereceived in the accounting period are accounted as receipts of future periods. Incurred expenses andpayments relating to future periods are accounted as expenses of future periods.

Accounting of percentage receipts and expenses is carriedout by accrual method. Cash basis method is used onlyfor accounting of percentage income added to demandbalance on bank accounts.

The profit from selling the produce (products, work,services) amounted in 2007 to UAH 765, 484 thou.


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Receipts and expenses, which are not connected with sales of products (thou. UAH)

Other operating receipts and expenses

Operational lease of assets 2, 352 –

Operational difference in rates 7, 186 6, 309

Sale of other circulating assets 28, 450 21, 022

Penalties, fines and forfeits 52 184

Doubtful and bad debts – 17, 428

Housing and communal services,

social sector 14, 185 53, 870

Foreign currency sale 866, 620 872, 082

Other operating receipts and expenses 1, 267 12, 330

Total 920, 112 983, 228

Receipts and expenses from participation in capital from investments in:

Associated enterprises 20, 902 3, 783

Subsidiary companies 70 456

Total 20, 972 4, 239

Other financial receipts and expenses

Interest on credit – 37, 328

Other financial receipts and expenses – –

Total – 37, 328

Other receipts and expenses

Realization of financial investments 65, 474 66, 402

Realization of non-negotiable assets 5, 973 5, 352

Realization of property complexes _

Non-operational difference in rates 757 2, 244

Non-negotiable assets write-off 47

Other receipts and expenses 600 1, 349

Total 72, 851 75, 347

Items Receipts Expenses

NOTE 10 (continued)

all annual 2007 eng - motorsich.com

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