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Friday 31 October, 2003

OMZ(Uralmash-Izhora)

Interim Results

OAO OMZ (Uralmash-Izhora Group)
31 October 2003





                        OAO OMZ (Uralmash-Izhora Group)


                    Interim Consolidated Financial Statements


                       The six months ended June 30, 2003









                                    Contents





Interim Consolidated Financial Statements


Interim Consolidated Balance Sheet                                         2

Interim Consolidated Statement of Income                                   4

Interim Consolidated Statement of Changes in Shareholders' Deficiency      5

Interim Consolidated Statement of Cash Flows                               6

Notes to the Interim Consolidated Financial Statements                     8





                  Interim Consolidated Balance Sheet (unaudited)


                          (In thousands of US dollars)
                                           June 30, 2003    December 31, 2002
                                                 ----------         ------------
Assets
Current assets:
Cash and cash equivalents (Note 5)                 25,758               29,750
Short-term investments (Note 6)                     5,563               11,934
Trade accounts receivable, net (Note 7)            33,957               54,584
Due from related parties (Note 8)                  19,451                2,918
Inventories, net (Note 9)                         201,426              161,736
Costs and recognized income not yet billed         27,372               23,195
(Note 10)
Prepaid expenses and advances to                   79,780               23,610
suppliers
Other current assets (Note 11)                     84,008               38,314
                                                 ----------         ------------
Total current assets                              477,315              346,041

Plant and equipment, net (Note 12)                207,872              201,359
Long-term investments, net (Note 13)               19,271               12,828
Due from related parties, long-term (Note          15,334                2,374
8)
Trade accounts receivable, long-term (Note          3,901               13,508
7)
Other long-term receivables (Note 20)              36,804                    -
Patents and other non-current assets (Note         14,361               13,837
3)
Goodwill (Note 4)                                   9,104                2,585
                                                 ----------         ------------

Total assets                                      783,962              592,532
                                                 ==========         ============

Liabilities and Shareholders' Deficiency
Current liabilities:
Trade accounts payable and accruals                33,436               32,257
Advances received and deferred revenues           105,522               91,139
(Note 14)
Billings in excess of costs and recognized         21,181               23,110
income (Note 10)
Accumulated billings over related cost              1,426                1,509
(Note 10)
Taxes payable (Note 16)                            40,835               35,902
Payroll and related obligations                    12,645               10,206
Due to related parties (Note 8)                    78,469                5,059
Deferred taxes (Note 15)                            7,877                3,514
Short-term borrowings (Note 17)                    54,054               53,329
Current portion of long-term debt (Notes            4,113                3,248
19)
Other payables                                     22,060               24,429
                                                 ----------         ------------
Total current liabilities                         381,618              283,702

Non-convertible bonds (Note 18)                    55,340               28,646
Billings in excess of cost and recognized          16,574               13,508
income, long-term (Note 10)
Long-term debt (Note 19)                           33,042               32,471
Long-term accounts payable                          3,589                1,013
Other long term debt (Note 20)                     36,804                    -
Taxes payable, long-term (Note 16)                 34,587               33,236
Deferred taxes, non-current (Note 15)              11,563                1,471
                                                 ----------         ------------

Total liabilities                                 573,117              394,047

Minority interest (Note 21)                       228,074              229,877




                  Interim Consolidated Balance Sheet (unaudited)


                          (In thousands of US dollars)
                                           June 30, 2003    December 31, 2002
                                                 ----------         ------------
Shareholders' deficiency (Note 22):
Common stock (0.1 ruble par value per                 609                  582
share), 66,250,000 shares authorized and
35,350,000 shares issued as of June 30,
2003 and December 31, 2002; 31,776,282 and
31,375,282 shares outstanding as of June
30, 2003 and December 31, 2002,
respectively
Cumulative preferred stock (0.1 ruble par              50                   48
value and liquidation value per share),
2,750,000 shares authorized, issued and
outstanding
Additional paid-in capital                         81,643               75,644
Treasury stock, 3,573,718 and 3,974,718               (12)                 (13)
shares of common stock as of June 30, 2003
and December 31, 2002, respectively
Accumulated deficit (Note 3)                      (93,633)            (107,653)
Accumulated other comprehensive loss (Note         (5,886)                   -
3)                                               ----------         ------------
Total shareholders' deficiency                    (17,229)             (31,392)
                                                 ----------         ------------

Total liabilities and shareholders'               783,962              592,532
deficiency                                       ==========         ============


The accompanying notes are an integral part of these interim consolidated
financial statements.






_____________________                                  _____________________
                                                                        

Chief Operating Officer                                           Financial
                                                                  Reporting, Tax
                                                                  & Audit
                                                                  Director
Lipsky S. V.                                                  Khaletskaya L.N.
                                                                            









              Interim Consolidated Statement of Income (unaudited)


           (In thousands of US dollars, except for per share amounts)

                       Six months ended June 30,    Six months ended June 30,
                                             2003                         2002
                                         ----------                   ----------

Sales                                     215,702                      202,871

Cost of sales                            (154,480)                    (148,321)
                                         ----------                   ----------

Gross margin                               61,222                       54,550

Selling, general and                      (51,248)                     (37,719)
administrative
expenses
Release from                                 (625)                       2,083
(provision for)
doubtful accounts
receivable
Release from obsolete                       1,003                        6,231
inventory
Impairment of                                   -                         (936)
property, plant and
equipment
Release from obsolete                          97                          594
equipment under                          ----------                   ----------
construction

Income from                                10,449                       24,803
operations

Other income (expense)

Interest income                             1,162                          969
Interest expense                           (8,463)                      (6,023)
Investment income                             417                            -
Investment loss                              (208)                        (845)
Gain on sale of                            12,881                          128
non-core business
units (Note 23)
Gain on release from                          556                            -
tax penalties
Provision for tax                            (645)                      (1,251)
penalties
Foreign exchange gain                       2,815                        2,321
(Note 3)
Other non-operating                        (4,118)                      (4,004)
(losses) gains                           ----------                   ----------

Income before income                       14,846                       16,098
taxes and minority
interest

Income tax expense                         (3,216)                      (8,922)
(Note 15)                                ----------                   ----------

Income before minority                     11,630                        7,176
interest

Minority interest in                        2,518                       (2,586)
net loss (income) of                     ==========                   ==========
subsidiaries
                                           14,148                        4,590
Net income
                                         ==========                   ==========

Other comprehensive
income (loss), net of
income tax
Unrealized holding                              -                          849
income (loss) from
available for sales
securities
Cumulative translation                     (4,648)                           -
adjustment (Note 3)
Deferred tax                               (1,238)                           -
recognized as other                      ==========                   ==========
comprehensive loss
(Note 3)
                                            8,262                        5,439
Comprehensive income
                                         ==========                   ==========

Basic and diluted net                        0.45                         0.15
income per share
Basic and diluted                            0.26                         0.17
comprehensive income
per share
Average shares of                      31,776,282                   31,375,282
common stock
outstanding


The accompanying notes are an integral part of these interim consolidated
financial statements.

     Interim Consolidated Statement of Changes in Shareholders' Deficiency
                                  (unaudited)

             (In thousands of US dollars, except for share amounts)

             Common stock     Cumulative    Additional                   Treasury 
                              preferred     paid-in-capital               common  
                               stock                                       stock

                                                                                                   Accumu-
                                                                                                     lated
                                                                                                     other
                                            Common                                        Accu-    compre-
            Shares      Am-  Shares    Am-     and  Treasury    Total    Shares    Am-    mula-    hensive      Total
                       ount           ount    pre-     Stock                      ount      ted     income
                                            ferred                                       deficit     (loss)
                                             Stock                                                 (Note 3)

Balances    35,350,000  582  2,750,000  48  73,844      1,800    75,644 (3,974,718) (13) (146,609)   (1,213)   (71,561) 
as of 
December              
31, 2001                       

Change in            -    -          -    -      -          -         -          -    -         -       849         849
unrealized
loss on sale
of available
for sale
securities

Net income           -    -          -    -      -          -         -          -    -     4,590          -      4,590

Balances as 35,350,000  582  2,750,000   48  73,844     1,800    75,644 (3,974,718) (13) (142,019)      (364)   (66,122)
as of June           
30, 2002

Balances as 35,350,000  582  2,750,000   48  73,844     1,800    75,644 (3,974,718) (13) (107,653)         -    (31,392)
of December          
31, 2002

Treasury             -    -          -    -       -     2,434     2,434    401,000    2         -          -      2,436
stock issued                                                                    
to
management

Deferred tax         -    -          -    -       -         -         -          -     -        -     (1,238)    (1,238)
recognized as
other
comprehensive
loss (Note 3)

Cumulative           -   27          -    2    3,480       85     3,565          -    (1)       -     (4,648)    (1,055)
translation                                            
adjustment
(Note 3)
                                                                                                                        

Dividends            -    -          -    -        -        -          -         -     -     (128)         -       (128)
accrued

Net income           -    -          -    -        -        -          -         -     -   14,148          -     14,148

Balances as 35,350,000  609  2,750,000   50  77,324     4,319     81,643 (3,573,718) (12) (93,633)    (5,886)   (17,229)
of June 30,       
2003



The accompanying notes are an integral part of these interim consolidated
financial statements.

Interim Consolidated Statement of Cash Flows (unaudited)


                          (In thousands of US dollars)

                                                     Six months ended June 30
                                                            2003          2002
                                                         ---------     ---------
Net income                                                14,148         4,590
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation of plant and equipment                       13,001        10,622
Amortization of patents                                    1,042             -
Foreign exchange gain                                     (3,281)       (2,321)
Deferred tax expense                                       1,559         5,379
Provision (release from) for doubtful accounts               625        (2,083)
receivable
Release from obsolete inventories                         (1,003)       (6,231)
Release from obsolete equipment under construction           (97)         (594)
Impairment loss                                                -           936
Investment income                                           (417)            -
Investment loss                                              208         1,694
Minority interest in net income (loss) of                 (2,518)        2,586
subsidiaries
Gain on sale of non-core business units                  (12,881)         (128)
Gain on release from tax penalties                          (556)            -
Provision for tax penalties                                  180         1,251
Loss on disposal of PP&E                                     229             -
                                                         ---------     ---------
Net change before change in working capital               10,239        15,701
                                                         ---------     ---------

Changes in assets and liabilities, net of effects of
purchase of new subsidiaries:
Trade accounts receivable                                 22,037        16,847
Inventories                                              (29,527)       29,823
Costs and recognized income not yet billed                (2,995)      (13,055)
Taxes receivable                                         (25,251)        3,593
Prepaid expenses and advances to suppliers               (53,000)         (474)
Other current assets                                      (4,101)       (8,657)
Trade accounts receivable long term                       (3,915)      (13,367)
Trade accounts payable and accruals                          988        (9,155)
Advances received                                         52,971       (25,512)
Accumulated billings over related costs                     (150)       (6,496)
Payroll and related obligations                            4,112         4,365
Taxes payable                                              2,542       (15,461)
Amounts due to and from related parties                    8,899        13,365
Billings in excess of costs and recognized income           (571)        2,873
Other payables                                             4,886         3,526
                                                         ---------     ---------
Net cash used in operating activities                    (12,836)       (2,084)


Interim Consolidated Statement of Cash Flow (unaudited)


                          (In thousands of US dollars)

                                                     Six months ended June 30
                                                            2003          2002
                                                         ---------     ---------
Cash Flows from Investing Activities
Net cash paid in acquisition of
Zarubezhenergoproekt (Note 4)                             (1,082)            -
Biolink technologies International inc. (Note 4)          (3,335)            -
SF Almaz                                                  (6,770)       (4,461)
UPET                                                           -          (558)
Friede Goldman                                                 -       (15,140)
Other subsidiaries                                             -        (1,682)
Net proceeds from disposal of short-term                   2,633         4,689
investments
Purchases of plant and equipment                          (8,422)       (7,457)
Proceeds from disposal of plant and equipment                763         3,104
Proceeds from disposals of non-core business units             -           128
Purchase of Atomenergoexport (Note 13)                    (4,940)            -
Purchase of Volgograd Shipbuilding Plant (Note 13)        (2,170)            -
Purchase of other long-term investments                     (339)         (974)
Proceeds from sale of long-term investments                1,712           859
Purchases of other non current assets                        (96)         (287)
                                                         ---------     ---------
Net cash used in investing activities                    (22,046)      (21,779)

Cash Flows from Financing Activities
Net proceeds from short-term loans and borrowings         (2,335)       19,009
Net proceeds from long-term loans and borrowings           1,556           527
Repayment of long term debt                                    -        (1,530)
Proceeds from issuance of non-convertible bonds           28,791         5,850
Redemption of non-convertible bonds                       (4,171)            -
Proceeds from related party loans                          5,805         1,857
                                                         ---------     ---------
Net cash provided by financing activities                 29,646        25,713
                                                               -             -
Effect of exchange rate changes on cash and cash           1,245          (521)
equivalents
Net change in cash and cash equivalents                   (5,237)        1,330
Cash and cash equivalents at beginning of year            29,750        15,267
                                                         ---------     ---------
Cash and cash equivalents at end of year                  25,758        16,596
                                                         =========     =========

Supplementary cash flow information:
Interest paid                                              8,333         6,428
Income taxes paid                                          2,237         1,966

Supplementary disclosure of non-cash activities:
Conversion of Biolink promissory notes into shares         1,382             -


The accompanying notes are an integral part of these consolidated financial
statements.



1.          Description of Business


Open Joint Stock Company ('OAO') Obedinennye Mashinostroitelnye Zavody
(Uralmash-Izhora

Group) (the 'Parent Company' or 'OMZ'), formerly OAO United Heavy Machinery
(Uralmash-IzhoraGroup) and OAO Uralmash-Zavody, is incorporated in Ekaterinburg,
in the Sverdlovsk Region of the Russian Federation, in 1996 and is a holding
company with controlling interests in a number of production, engineering,
trading and investment entities (collectively referred to as the 'Company' or
the 'Group'). The Company organizes its business along six major business lines:
drilling equipment (oil and gas rigs), equipment for nuclear power plants ,
mining equipment, shipbuilding, specialty steels and machinery manufacturing
services. Below is the description of business of the Company's most significant
subsidiaries:


OAO Ural Heavy Machine-Building Plant ('Uralmash'), a manufacturer of heavy
machinery, including, on-shore and off-shore drilling equipment, quarry shovels,
hot and cold rolling equipment, continuous casting units, mills and mill
equipment, was founded in 1933 in Ekaterinburg. Uralmash was instrumental in the
industrialization of the Soviet Union, particularly in the mining and
metallurgical industries. During World War II, Uralmash changed its focus to the
manufacturing of military tanks and fighter planes, converting back to the
production of heavy machinery following the war. In December 1992, Uralmash was
registered as an open joint stock company in accordance with the laws of the
Russian Federation, allowing the public trade of Uralmash shares. In 1997, the
Parent Company acquired a controlling stake in Uralmash through stock swaps with
the previous shareholders.


OAO Izhorskiye Zavody ('Izhorskiye Zavody'), a manufacturer of heavy engineering
machine-building and metallurgical products, equipment for nuclear power plants
and mining equipment, was founded in 1722 in St. Petersburg and is one of the
oldest plants in Russia. Izhorskiye Zavody was formerly a state owned production
association. In 1992, Izhorskiye Zavody was re-organized into an open joint
stock company. In 1998, the Parent Company acquired 46.53% of the Izhorskiye
Zavody shares for cash and issuance of shares. In September 1999, the Parent
Company acquired an additional 20.65% of interest in Izhorskiye Zavody for cash,
and has been consolidating Izhorskiye Zavody since that date.


OAO Welded and Machine-Building Structure Plant ('ZSMK'), a manufacturer of
electrical line pilings, drilling equipment, and custom metal construction, was
founded in 1980 in the Sverdlovsk region and was formerly a state owned
production association. Subsequently ZSMK was re-organized into an open joint
stock company. In 1997, the Parent Company acquired a controlling stake in ZSMK
through stock swaps with the previous shareholders.


OAO Krasnoe Sormovo Plant ('Krasnoe Sormovo'), a manufacturer of sea-river
tankers and dry-cargo vessels for shipping companies and circulation systems for
oilrigs, was founded in 1849 in Nizhniy Novgorod, and was formerly a state owned
production association specializing in the manufacturing of military vessels and
submarines. In 1994, Krasnoe Sormovo was re-organized into an open joint stock
company and switched its facilities to the manufacturing of non-military fleet.
The Parent Company obtained a controlling interest in Krasnoe Sormovo in 2000.


OAO NPO Burovaya Tekhnika ('Burovaya Tekhnika'), a manufacturer of drilling
equipment, Burovaya Tekhnika, was founded in 1953 in Moscow and has subsidiaries
in Volgograd, Lubertsy and Perm. Besides manufacturing drilling equipment,
Burovaya Tekhnika currently carries out research and development for the oil
drilling industry and provides drilling services to oil companies. In the course
of 1997-2001, the Parent Company acquired a controlling interest in Burovaya
Tekhnika.



1.          Description of Business (continued)


During 2001-2002, the Parent Company acquired a controlling interest in S.C.
UPET, S.A. ('UPET'), a Targovisty-based Romanian facility specializing in the
manufacturing of drilling equipment, specifically mobile drilling units, with
plans to use UPET as an expansion platform to strategically important Middle
East and North Africa markets traditionally served by UPET.


In 2002, the Company acquired a 72.77% interest in OAO SF Almaz ('Almaz'), a
shipbuilding facility based in St. Petersburg that develops and manufactures a
wide range of civil, military and special-purpose sea and river vessels,
including air-cushioned landing craft and multi-purpose hovercrafts and patrol
boats.


On 8 January 2003, the Company acquired approximately 20% of the issued shares
in ZAO Atomenergoexport (AEE) for a total consideration of approximately US$4.9
million. As 50% of AEE's shares are held as treasury shares, this effectively
gave the Company a 40% interest. AEE's primary business is the export of nuclear
power plant equipment and services and AEE owns 49% of the issued shares in ZAO
Atomstroyexport (ASE). As approximately 9% of ASE's shares are held as treasury
shares, AEE has an effective 54% interest in ASE (Note 13).


The Company continues to make ongoing efforts to expand its market presence and
modernize its facilities through a series of acquisitions of Russian and foreign
entities in similar industries (Note 4).


The Company is one of the largest manufacturers of heavy engineering products in
Russia. The Company's main customers include certain Russia's largest oil and
gas companies, metallurgical plants, transportation and mining companies, in
addition to the developers of certain nuclear power stations. Approximately 46%
and 34% of its revenues for the six months ended June 30, 2003 and June 30,
2002, respectively, came from sales outside of Russia, mostly sales of nuclear
power plant equipment to Asia-based nuclear power stations and sales of mining
equipment to customers in Asia.


2.       Financial Position


As of June 30, 2003, the Company's interim consolidated balance sheet reflected
an accumulated deficit of US$93,633. Accumulated deficit is the result of net
losses incurred prior to 2000, including substantial impairment charges to
property, plant and equipment in 1999. The nature of the Company's growing
business, combined with the long-term nature of its production cycle, requires
the Company to continue to invest cash in inventory prior to receiving cash from
its customers. In the six months ended June 30, 2003, net investments in working
capital totaled US$23,075, and cash flows from operating activities were
negative US$12,836. In addition, the Company had negative cash flows from
operating activities of US$2,084 including net investments in working capital of
US$17,785, during the six months ended June 30, 2002. Management continues to
implement actions to better manage this cash flow cycle.


These factors could raise doubt as to the Company's ability to continue its
operations as a going concern. The accompanying interim consolidated balance
sheet do not include any adjustments to reflect the possible future effects on
the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.


Management of the Company believes that the Company has sufficient financial
resources to maintain current operations. Management also believes that the
current market situation in Russia and projected future business development of
the Company will allow management to further improve the financial position and
cash flow from operations of the Company. Specifically, the Company's plans and
actions include the following:





2.         Financial Position (continued)


   •As of October 01, 2003, the Company has significant existing long-term
    contracts for the future production of nuclear power station equipment to be
    exported to China and India.
   •As of October 01, 2003, the Company has significant existing contracts
    totaling US$1,142.6 million including contracts for the construction of
    ships and vessels totaling US$619.9 million. Included in this amount is the
    contract for the sale of a submarine to the Chinese Navy executed in 2003
    for which the completion is expected in 2005. Furthermore, the Company has
    continued to experience growth in demand for its products, resulting in a
    significant future production portfolio, many of which extend for several
    years.
   •Over the past six months the Company has successfully worked with banks
    and financing institutions to secure necessary financing for the long-term
    contracts in process and for other investing needs. Based on the terms of
    existing contracts as well as its recent experience, management of the
    Company expects to be able to continue to secure necessary short-term and
    long-term financing for its operational and investing cash flow
    requirements.
   •During 2003, Management has continued to restructure its operations to
    increase its efficiency and reduce costs. Management has also, over the past
    several years, implemented a program to divest of non-core businesses and
    increase its business in core, higher margin business lines. Management
    expects these actions to continue to improve its profitability and results
    of operations.


Management believes that the indicators that could raise doubt about the
Company's ability to continue as a going concern are substantially mitigated by
the above factors, as well as its overall evaluation of its business
environment. As a result, the consolidated financial statements have been
prepared on the basis of accounting principles applicable to a going concern
which assumes that the Company will continue operations in the foreseeable
future and will be able to realize its assets and discharge its liabilities in
the normal course of operations.


3.       Significant Accounting Policies


These unaudited interim consolidated financial statements should be read in
conjunction with the OAO Obedinennye Mashinostroitelnye Zavody'), formerly OAO
United Heavy Machinery (Uralmash-Izhora Group) audited consolidated financial
statements for the year ended December 31, 2002. These consolidated financial
statements, in the opinion of management, include all adjustments necessary for
a fair statement of the consolidated results of operations, financial position,
and cash flows for each period presented. The results for the six months ended
June 30, 2003 are not necessarily indicative of results to be expected for the
full fiscal year 2003 or any other future periods.


The principal accounting policies adopted in the preparation of these
consolidated financial statements are set out below.


Basis of consolidation and presentation


The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America ('US GAAP').


Significant intercompany balances and transactions have been eliminated in the
consolidation. 


For majority-owned subsidiaries that incur losses, it is the Company's policy to
recognize 100% of the losses, after first reducing the related minority
interests' balances to zero. Further, when a majority-owned subsidiary becomes
profitable, the Company will recognize 100% of profits until such time as the
excess losses previously recorded have been recovered. Thereafter, the Company
will recognize profits in accordance with the underlying ownership percentage.


The Parent Company and its subsidiaries maintain their accounting records and
prepare their financial statements in Russian rubles in accordance with the
requirements of Russian accounting and tax legislation. The financial statements
used in preparing the accompanying consolidated financial statements differ from
the financial statements issued for statutory purposes in Russia in that they
reflect certain adjustments, not recorded in the respective accounting books,
which are appropriate to present the financial position, results of operations,
and cash flows in accordance with US GAAP.


The principal adjustments are related to the (1) reserve for doubtful debts and
inventory obsolescence, (2) timing of revenue and expense recognition, (3)
deferred income taxes, (4) foreign currency translation, (5) depreciation and
valuation of plant and equipment, (6) purchase accounting and consolidation, (7)
impairment of assets, and (8) elimination of intercompany balances and
transactions.


Foreign Currency Translation


The Russian Rouble is the Company's functional currency and the US dollar is the
reporting currency, selected by the Company for the purposes of financial
reporting.


The Russian economy was considered hyperinflationary in 1992-2002. Transactions
and balances not already measured in US dollars (primarily Russian Roubles) have
been re-measured into US dollars in accordance with the relevant provisions of
Statement of Financial Accounting Standards ('SFAS') No. 52, 'Foreign Currency
Translation' as applied to entities in highly inflationary economies.


Under SFAS No. 52, revenues, costs, capital, and non-monetary assets and
liabilities are translated at historical exchange rates prevailing on the
transaction dates. Monetary assets and liabilities are translated at exchange
rates prevailing on the balance sheet date. Exchange or translation gains and
losses arising from remeasurement of monetary assets and liabilities that are
not denominated in US dollars are credited or charged to non-operating results.
The foreign exchange gain arising during


3.            Significant Accounting Policies (continued)


Foreign Currency Translation (continued)


the six months of 2002 of US$2,321 resulted from the fact that the Company was
in a net monetary ruble liability position during the course of the year, and
the ruble has been subject to continuous devaluation during the course of six
months ended June 30, 2002.


On January 1, 2003 the Russian economy ceased to be considered
hyperinflationary. The Company's balance sheet at January 1, 2003 was translated
at the current exchange rate of 31.78 Russian Roubles to US$1 prevailing at
January 1, 2003 to establish a new functional currency basis. Starting January
1, 2003 the functional currency financial statements are translated into the
reporting currency utilizing period-end and period average exchange rates for
balance sheet and income statement accounts, respectively, in accordance with
the relevant provisions of SFAS No. 52. As a result of these translation
procedures, a cumulative translation adjustment is recorded directly in
shareholders' equity. No cumulative translation adjustment was made for the
period during which the Russian economy was considered hyperinflationary. The
differences between the new functional currency basis and the tax basis
represent temporary differences, for which deferred taxes are recognized as
other comprehensive loss.


The statement of changes of accumulated other comprehensive income (loss) for
the six months ended June 30, 2003:

              Deferred tax recognized as other comprehensive loss    Cumulative translation adjustment        Total

Accumulated                                                      -                                    -           -
other
comprehensive
loss as at
December 31,
2002

Other                                                       (1,238)                              (4,648)     (5,886)
comprehensive
loss for the
six months
ended June
30, 2003
                                                         -----------                         ------------  ----------
Accumulated                                                 (1,238)                              (4,648)     (5,886)
other                                                    ===========                         ============  ==========
comprehensive
loss as at
June 30,
2003


The official rate of exchange, as determined by the Central Bank of the Russian
Federation for US$1 was 30.35 Russian Roubles at June 30, 2003 (31.78 at
December 31, 2002).


Use of Estimates


The preparation of consolidated financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results may differ from those estimates.


Cash and Cash Equivalents


Cash and cash equivalents include cash on hand and deposits held on call with
domestic banks with maturity of less than three months.







3.            Significant Accounting Policies (continued)


Trade Receivables


Trade receivables are stated net of an allowance for accounts, generally more
than 180 days overdue, which are considered doubtful.


Inventories


Inventories are stated at the lower of cost or net realizable value. Cost is
determined using the first-in first-out (FIFO) method. Costs generally include
raw materials, labor, production overheads and interest for certain long-term
contracts. A reserve for obsolete inventory is created for inventory which
management believes may not be fully recoverable.


Short-Term Investments


The Company accounts for investments in accordance with SFAS No. 115,
'Accounting for Certain Investments in Debt and Equity Securities'. The Company
determines the appropriate classification of investments at the time of purchase
and re-evaluates such designation as of each balance sheet date.


Short-term investments include certain bank promissory notes and deposits,
commercial promissory notes, which were acquired for short-term purposes, and
are stated at fair value. Certain corporate securities that have an established
market are stated at their quoted market value and classified as available for
sale. Accordingly, net realized gains and losses are included in investment
income or loss, while net unrealized gains and losses are included in other
comprehensive income. Changes in the fair value of short-term investments other
than marketable securities are recognized as income or expense.


Long-Term Investments


Long-term investments consist of equity securities, which do not have an
established market, and are carried at cost. The carrying amount of long-term
investments is reduced to recognize a decline other than temporary in the value
of the investments, if necessary.


Taxes Receivables


Taxes receivable are represented predominantly by the input value-added tax
('VAT'), which is offsetable against future VAT charged on the Company's sales.


Property, Plant and Equipment


As of the acquisition date (mid-1997), Uralmash plant and equipment was stated
at its fair value being depreciated replacement cost, which was determined by
independent appraisal as of December 31, 1995 (as adjusted for additions and
disposals through the acquisition date). Subsequent to the initial recognition,
the Company allocated the amounts of negative goodwill of US$395,333 and
US$21,878 resulting from the acquisitions of shares in Uralmash in 1997 and
1998, respectively, against the values of Uralmash plant and equipment acquired.


Since the acquisition date (September 1, 1999), Izhorskiye Zavody plant and
equipment was stated at depreciated replacement cost of US$357,260 determined by
independent appraisal as of December 31, 1999, reduced by the amount of
impairment loss of US$310,355. An additional impairment loss of US$1,015 was
recognized during the year ended December 31, 1999.







3.            Significant Accounting Policies (continued)


Property, Plant and Equipment (continued)


ZSMK plant and equipment is stated at historical cost. Subsequent to the initial
recognition, the Company allocated the negative goodwill of US$45,468 and
US$2,271 resulting from the acquisitions of shares in ZSMK in 1997 and 1998,
respectively, against the values of its plant and equipment.


Krasnoe Sormovo plant and equipment is stated at historical cost. Subsequent to
the initial recognition, the Company allocated the negative goodwill of
US$36,372 and US$6,423 resulting from the acquisitions of Krasnoe Sormovo shares
during 2000 and 2001, respectively, against the values of its plant and
equipment.


Plant and equipment of Burovaya Tekhnika is stated at historical cost.
Subsequent to the initial recognition, the Company allocated the negative
goodwill of US$6,747 resulting from the acquisitions of Burovaya Tekhnika shares
during 2001 against the values of its plant and equipment.


UPET plant and equipment is stated at historical cost reduced by the amount of
the negative goodwill of US$895 resulting from the acquisition of UPET shares
during 2002. As of the date of acquisition of UPET, land was recorded at its
then current market value.


Plant and equipment of other subsidiaries, including other acquisitions made by
the Company in 2002, is stated at historical cost. As of the date of acquisition
of Pavlovsk Machinery, its plant and equipment were recorded net of impairment
loss of US$2,765.


As of June 30, 2002, there was no information available on the market value of
the Company's plant and equipment because of its specialized nature and age, and
because such items are rarely sold.


However, as of June 30, 2003 there was no information available that indicated
that carrying value of the Company's plant and equipment was impaired.


Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, as follows:

Buildings                                                           less than 30
                                                                         years
Machinery and equipment                                             less than 15
                                                                         years
Vehicles                                                             less than 3
                                                                         years
Furniture and fixtures                                               less than 3
                                                                         years


Maintenance costs relating to items of plant and equipment are expensed as
incurred.


The Company capitalized interest of US$850 and US$494 during the six months
ended June 30, 2003 and 2002.


Patents


Patents related to marine engineering that are issued by the US licensing bodies
and acquired in a business purchase, are stated at fair value as of the date of
acquisition. Amortization is computed using the straight-line method over their
remaining estimated useful life of 15 years. As of June 30, 2003, net book value
of such patents was US$12,851.


Business Combinations, Goodwill and Other Intangible Assets


In June 2001, the FASB issued SFAS No. 141, 'Business Combinations', and
SFAS No. 142, 'Goodwill and Other Intangible Assets'. SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. It also includes guidance


3.            Significant Accounting Policies (continued)


Business Combinations, Goodwill and Other Intangible Assets (continued)


on the initial recognition and measurement of goodwill and other intangible
assets arising from business combinations completed after June 30, 2001. SFAS
No. 142 prohibits the amortization of goodwill and intangible assets with
indefinite useful lives. SFAS No. 142 requires that these assets be reviewed for
impairment at least annually. Intangible assets with finite lives will continue
to be amortized over their estimated useful lives. Additionally, SFAS No. 142
requires that goodwill included in the carrying value of equity method
investments no longer be amortized. The Company has adopted SFAS No. 142
effective January 1, 2002. Application of the non-amortization and impairment
provisions of SFAS No. 142 did not have a significant effect on the results of
its operations or financial position.


Goodwill represents the excess of consideration paid over the fair value of net
assets acquired in purchase business combinations. With the adoption of SFAS
No.142, 'Goodwill and Other Intangible Assets', as of January 1, 2002, the
Company discontinued amortization of goodwill. In accordance with SFAS No. 142,
the Company tests goodwill for impairment on an annual basis. Additionally,
goodwill is tested for impairment between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of an
entity below its carrying value. These events or circumstances would include a
significant change in the business climate, legal factors, operating performance
indicators, competition, sale or disposition of a significant portion of the
business or other factors.


Negative Goodwill Arising on Acquisitions


When the cost of acquisition is less than the Company's interest in the fair
values of identifiable assets acquired and liabilities assumed as at the date of
the exchange transaction, the fair values of the non-current assets (generally,
plant and equipment) acquired are reduced proportionally until the excess is
eliminated.


Impairment of Long-Lived Assets


In 2001 and 2000, the Company followed the provisions of SFAS No. 121,
'Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of', which required that long-lived assets and certain intangibles
to be held and used by the Company be reviewed for impairment.


In August 2001, the FASB issued SFAS No. 144, 'Accounting for the Impairment or
Disposal of Long-Lived Assets.' This statement addresses financial accounting
and reporting for the impairment of disposal of long-lived assets, except for
goodwill, and supersedes SFAS No. 121 and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, 'Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,'
for the disposal of a segment of a business (as previously defined in that
opinion). This statement also amends Accounting Research Bulletin No. 41,
'Consolidated Financial Statements', to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The provisions of
the statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company has adopted the new statement
effective January 1, 2002. The adoption of SFAS No. 144 did not have a
significant effect on the result of it operations or financial position.


SFAS No. 144 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount which



3.            Significant Accounting Policies (continued)


Impairment of Long-Lived Assets (continued)


the carrying value of the assets exceeds the fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying value or fair value
less costs to sell.


Social Funds


The Company contributes to the Russian Federation state pension fund, social
insurance, medical insurance fund, and employment fund on behalf of its
employees. The Company's contributions amount to approximately 35.6% and 35.6%
during the six months ended June 30, 2003 and the six months ended June 30, 2002
of the portion of employees' compensation reported for the statutory purposes as
salaries and are expensed as incurred. Total amounts expensed in connection with
contributions to the above funds for the six months ended June 30, 2003 and June
30, 2002 were US$17,946 and US$11,476 respectively.

The Company has no other program or obligation for payment of post-retirement
benefits to its employees.

Minority Interest

Minority interest represents interests of third parties in the net assets of the
Company's subsidiaries.

Treasury Stock

Treasury stock is accounted for under the cost method, whereby a gain or loss is
determined when the treasury stock is reissued or retired.

Revenue Recognition

Sales of Routinely Manufactured Equipment and Standard Services

The Company generates its revenue from the sales of goods to third party
customers and the development of certain engineering documentation. For sales of
goods produced in a standard manufacturing operation, even if produced to
buyers' specification, and standard services, revenue is recognized, net of VAT,
in the period in which the goods are dispatched from the plant or the services
are provided, and invoices are issued. Generally, title passes to the customer
upon shipment. However, there are certain circumstances where the Company is
responsible for delivery and title passes and revenue is recognized at a later
stage. In cases where a contract covers several homogenous or various routinely
manufactured products, sales are recognized under the completed-contract or
unit-of-delivery methods, with a unit of accounting generally being a fully
assembled piece of equipment (e.g. a drilling rig or an excavator) rather than
its individual components. Such sales cover the majority of contracts for the
manufacturing and supply of drilling equipment, metallurgical equipment, mining
equipment, and specialty steels, except for those specifically referred to
below.

Billings made in the exchange for future shipments and costs of supplied
equipment that does not meet the criteria for sales recognition are shown net as
costs of uncompleted contracts in excess of related billings (in current
assets), or billings on uncompleted contracts in excess of related costs (in
current liabilities) separately for each contract.


Multiple-Element Revenue Arrangements


If a contract is segregated in a number of discrete stages and if the title to
equipment or service passes to the customer upon the completion of a certain
stage, revenue is recognized after each stage upon


3.            Significant Accounting Policies (continued)


Revenue Recognition (continued)


dispatch of goods from the plant or provision of a service, and issuance of
invoice. The Company recognizes revenue upon the acceptance of such stages
('elements') following the requirements of the FASB's Emerging Issues Task Force
('EITF') consensus on Issue No. 00-21, 'Accounting for Multiple-Element Revenue
Arrangements' provided that all of the following criteria are met: (a) the
deliverable in the arrangement that has been delivered represents a separate
earnings process; (b) any undelivered item in the arrangement is not essential
to the functionality of the deliverable in the arrangement that has been
delivered; and (c) there is objective and reliable evidence of fair value to
allocate the arrangement consideration to the deliverables. Fair value allocated
to each element of a multiple-element arrangement, which includes various
products and/or services, generally approximates the values stated in the
contracts with buyers. Through June 30, 2003, only a limited number of the
Company's contracts were accounted for as multiple-element revenue arrangements,
specifically contracts to provide equipment and a service (e.g. installation or
engineering) or for the supply of spare parts.


Construction-Type Contracts


Construction-type contracts generally include long-term contracts to manufacture
design-build equipment, including continuous casting machines, nuclear power
plant equipment, ships, and vessels.


A single contract or a group of contracts that otherwise meet the test for
combining under Statement of Position No. 81-1, 'Accounting for Performance of
Construction-Type and Certain Production-Type Contracts' ('SOP No. 81-1'), may
include several elements or phases, each of which the contractor negotiated
separately with the same customer and agreed to perform without regard to the
performance of others. The Company recognizes revenue upon the completion of
each element or phase only if it meets all of the criteria of SOP No. 81-1,
including, but not limited to, the following: (a) the terms and scope of the
contract or project clearly call for separable phases or elements; (b) the
separable phases or elements of the project are often bid or negotiated
separately; (c) the Company has a significant history of providing similar
services to other customers, and the similarity of such services and prices to
other customers are verifiable; (d) the excess of the sum of the prices of the
separate elements over the price of the total project is clearly attributable to
cost savings incident to the combined performance of the contract obligation.


Sales of continuous casting machines and other complex mining and metallurgical
equipment are accounted for under the percentage-of-completion method. The
extent of progress toward completion under such contracts is generally measured
based on the production stage of the various components or units.


Effective January 1, 2002, sales of ships and vessels are accounted for under
the percentage-of-completion method. In the absence of readily determinable
output measures, the extent of progress toward completion under such contracts
is determined based on the ratio of costs incurred to-date to total estimated
costs ('the cost-to-cost method'). The effect of the change from the
completed-contract method applied to the revenue recognition for ships and
vessels prior to 2002 to the percentage-of-completion method was not
significant.


Sales under the long-term contracts for nuclear power plant equipment are
accounted for under the percentage-of-completion method on a pro rata basis of
cost of manufactured equipment (both supplied to customers and in finished
goods) to total estimated contract costs. If the estimates of total contract
costs can be made in ranges most likely to occur, those amounts are used. If the
Company cannot determine 'most likely' amounts, it uses the lowest probable
level of profit in the range until it can





3.            Significant Accounting Policies (continued)


Revenue Recognition (continued)


estimate more precise results. Billings made by the Company and revenues
recognized under the percentage-of-completion method are shown net, either as
costs and recognized income not yet billed (in current assets), or billings in
excess of costs and recognized income (in current liabilities) separately for
each contract.


The majority of the Company's long-term contracts for nuclear power plant
equipment provide for a deferred payment, generally limited to 10% of the total
contract price, that is receivable upon the launch of the respective nuclear
power plants in Iran, China, and India. Since the receipt of such money is
subject to the conditions outside of the direct control of the Company, the
Company treats such deferred payments as contingent consideration and defers
them until the receipts can be assured. Furthermore, such contingent
consideration is not used in the calculation of revenues to be recognized under
the underlying contracts under the percentage-of-completion method.


Expense Recognition


Expenses are recognized in the period in which they are incurred.


Compensated Absences


The liability for employees' compensation for future absences is accrued if all
of the following conditions are met: (a) the Company's obligation relating to
employees' rights to receive compensation for future absences is attributable to
employees' services already rendered; (b) the obligation relates to rights that
vest or accumulate; (c) payment of the compensation is probable; and (d) the
amount can be reasonably estimated.


Research and Development Costs


Research and development costs are expensed as incurred. These costs totaled
US$2,240 and US$424 for the six months ended June 30, 2003 and June 30, 2002,
respectively.


Investment Income


Investment income represents gains realized by the Company on transactions with
government and corporate securities, bank notes, and commercial promissory notes
that are routinely acquired for short or medium-term purposes and generate
income in the form of interest, coupons or excess of sales prices over the
original purchase prices. In addition, included in investment income are net
gains resulting from the repurchase of the Company's own promissory notes at a
discount.


Concentration of Credit Risk


Financial instruments, which potentially expose the Company to concentrations of
credit risk, consist primarily of cash and cash equivalents, short-term and
long-term investments, trade accounts receivable, and other receivables.
Although the Company normally does not require collateral, it usually obtains
advances from customers or customers' promissory notes or bank guarantees before
launching significant or long-term contracts.


The Company primarily deposits available cash with several non-state owned
Russian banks, including Promtorgbank, a related party. The Company also
maintains short-term bank deposits and keeps short-term Russian bank promissory
notes. Management regularly monitors the financial status of the banks where
deposits are maintained.


3.            Significant Accounting Policies (continued)


Concentration of Credit Risk (continued)


The Company also has corporate promissory notes, classified as short-term
investments, issued mostly by regular customers having a good credit history, or
related parties, for which the collectability is reasonably assured.


Fair Value of Financial Instruments


The fair value of financial instruments, consisting of cash, short-term
investments, accounts receivable and payable, non-convertible bonds, and debt
instruments approximates their carrying values.


Related Party Transactions


The Parent Company and its subsidiaries, as part of their normal business,
entered into a number of transactions with related parties, which form part of
the unconsolidated group controlled by the Company's management. The related
party transactions might not have been carried at arm's length, and the
promissory notes issued to or received from other related parties might be
illiquid outside the unconsolidated group of entities under common control, and
are solely used as a settlement instrument within such group. Amounts due to and
from related parties are carried at cost.


Comprehensive Income


The Company applies SFAS No. 130, 'Reporting Comprehensive Income', which
establishes comprehensive standards for the reporting and presentation of income
and its components in a set of general-purpose financial statements.


Segment Information


Effective January 1, 2000, the Company adopted SFAS No. 131, 'Disclosures about
Segments of an Enterprise and Related Information'. Under SFAS No. 131 operating
segments are defined as components of an enterprise about which separate
financial information is available, that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The Company has six reportable operating segments: oil and gas
equipment, mining equipment, specialty steels, equipment for nuclear power
plants, shipbuilding and machinery manufacturing services. Information about
operating segments, including geographic information, is presented in Note 25.


During 2003, in the context of the restructuring program the Company launched
the previous year, the management of the Company segregated its machinery
production operations from its engineering operations. No significant additional
cost was incurred as a result of this restructuring. As a result, a new business
segment, 'Machinery manufacturing services', was formed to account for two main
activities: a) the production of equipment based on OMZ's proprietary
engineering; and b) the production of equipment based on third party
engineering, for various industries, including oil and gas, mining and
metallurgical equipment. The segment encompasses certain production assets of
Uralmash and Izhora plants. Results from manufacturing of equipment for the
Group companies have been eliminated as intra-group transactions in the Group
consolidated financial statements.


Comparative data for the six months ended June 30, 2002 were adjusted for
consistency with the current year presentation.



3.            Significant Accounting Policies (continued)


Current Accounting Pronouncements


Accounting for Asset Retirement Obligations


In August 2001, the FASB issued SFAS No. 143, 'Accounting for Asset Retirement
Obligations.' This statement deals with the costs of closing facilities and
removing assets. SFAS No. 143 requires entities to record the fair value of a
legal liability for an asset retirement obligation in the period it is incurred.
This cost is initially capitalized and amortized over the remaining life of the
asset. Once the obligation is ultimately settled, any difference between the
final cost and the recorded liability is recognized as a gain or loss on
disposition. SFAS No. 143 is effective for years beginning after June 15, 2002.
The adoption of the provisions of SFAS No. 143 is not expected to have a
material impact on the Company's results of operations, financial position, or
cash flows.


Accounting for Costs Associated with Exit or Disposal Activities


In June 2002, the FASB issued SFAS No. 146, 'Accounting for Costs Associated
with Exit or Disposal Activities,' which requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. This statement nullifies Emerging Issues Task Force No. 94-3,
'Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring),'
which required that a liability for an exit cost be recognized upon the entity's
commitment to an exit plan. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of the
provisions of SFAS No. 146 is not expected to have a material impact on the
Company's results of operations, financial position, or cash flows.


Accounting for Stock-Based Compensation


In December 2002, the FASB issued SFAS No. 148, 'Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123'. SFAS No. 148 amends SFAS No. 123, 'Accounting for Stock-Based
Compensation', to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS No. 123
to require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. SFAS No. 148 also amends APB Opinion No. 28, 'Interim Financial
Reporting', to require disclosure about those effects in interim financial
information. The amendments to SFAS No. 123 introduced in SFAS No. 148 effective
for financial statements for fiscal years ending after December 15, 2002. The
adoption of SFAS No. 148 did not have a material impact on the Company's results
of operations, financial position, or cash flows.


Accounting for Guarantees


In November 2002, the FASB issued FASB Interpretation ('FIN') No. 45,
'Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others'. FIN No. 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. The disclosure
provisions of FIN No. 45 are effective for financial statements of annual
periods that end after December 15, 2002. The provisions for initial recognition
and measurement are effective on a prospective basis for guarantees that are
issued or modified after December 31, 2002. The adoption of the provisions of
FIN No. 45 is not expected to have a material impact on the Company's results of
operations, financial position or cash flows.







3.            Significant Accounting Policies (continued)


Current Accounting Pronouncements (continued)


Consolidation of Variable Interest Entities


In January 2003, the FASB issued FIN No. 46, 'Consolidation of Variable Interest
Entities'. FIN No. 46 defines the concept of 'variable interests' and requires
existing unconsolidated variable interest entities to be consolidated into the
financial statements of their primary beneficiaries if the variable interest
entities do not effectively disperse risks among the parties involved.
FIN No. 46 applies immediately to variable interest entities created after
January 31, 2003. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.


If it is reasonably possible that an enterprise will consolidate or disclose
information about a variable interest entity when FIN No. 46 becomes effective,
the enterprise must disclose information about those entities in all financial
statements issued after January 31, 2003. The interpretation may be applied
prospectively with a cumulative-effect adjustment as of the date on which it is
first applied or by restating previously issued financial statements for one or
more years, with a cumulative-effect adjustment as of the beginning of the first
year restated. The Company is currently analyzing whether the adoption of the
provisions of FIN No. 46, and specifically possible consolidation of certain
previously unconsolidated entities, will have a material impact on the Company's
future results of operations, financial position, or cash flows.


At its meeting of October 8, 2003, the Financial Accounting Standards Board
deferred the latest date by which all public entities must apply FIN 46, to the
first reporting period ending after December 15, 2003


Accounting for Revenue Arrangements with Multiple Deliverables


In November 2002, the FASB's EITF issued a revised consensus on Issue No. 00-21,
'Revenue Arrangements with Multiple Deliverables'. In an arrangement with
multiple deliverables, the EITF revised the principles and application guidance
that should be used to determine (a) how the arrangement consideration should be
measured, (b) whether the arrangement should be divided into separate units of
accounting, and (c) how the arrangement consideration should be allocated among
the separate units of accounting. Revised Issue No. 00-21 is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The Company believes that the adoption of the provisions of revised Issue
No. 00-21, and specifically possible recognition of revenues upon the delivery
of components of equipment rather than entire units, could have a material
impact on the Company's future results of operations, financial position, or
cash flows.


Derivative Instruments and Hedging Activities


In April 2003, the Financial Accounting Standards Board issued SFAS No. 149
'Amendment of Statement 133 on Derivative Instruments and Hedging Activities'.
This Statement amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities under FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Company believes that the adoption of this standard
will have no material impact on its consolidated financial statements.


Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity


In May 2003, the Financial Accounting Standards Board issued SFAS No. 150
'Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity'. This Statement establishes


3.            Significant Accounting Policies (continued)


Current Accounting Pronouncements (continued)


Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity (continued)


standards for how classification and measurment certain financial instruments
with characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. The Company believes that the adoption of this standard
will have no material impact on its consolidated financial statements.


Reclassifications


Certain reclassifications have been made to the prior years' consolidated
financial statements to conform with current year presentation. Such
reclassifications had no impact on net income or shareholders' equity.


4.       Business Combinations


Acquisition of Biolink Technologies International Inc.


In 2002, the Company purchased 100,000 of ordinary shares of BioLink, a security
technology provider specializing in the development, manufacturing and marketing
of advanced fingerprint biometric products, based in Florida, USA, representing
an ownership interest of 0.6%, for cash of US$670 from Speed Arrow, a related
party.


In June 2003 the Company increased its ownership in BioLink to 38.6%. By
acquiring the additional stake the Company obtained 51.8% of the voting shares
of Biolink. To determine the results of the acquisition accounted for as a
purchase, net assets of Biolink were recorded at their fair values. The total
value of the acquired share of the net assets of Biolink amounted to US$317.


The fair value of assets acquired and liabilities assumed were as follows as of
the acquisition date:

                                                               June 30, 2003
                                                               --------------
Cash                                                                        82
Trade receivables                                                          143
Inventories                                                                826
Prepaid Expenses                                                            40
Plant and equipment                                                        116
Other assets                                                               405
Trade accounts payable and accruals                                       (531)
Deferred Revenue                                                           (56)
Taxes payable                                                               (6)
Payroll and related liabilities                                           (118)
Long-term debt                                                             (40)
Other payable                                                              (40)
                                                                  --------------
Net assets as of the acquisition date                                      822
Minority interest - 61.4% as of June 30, 2003                             (504)
                                                                  --------------
Net assets acquired                                                        317
Consideration paid by the Company                                        5,569
                                                                  --------------
Goodwill                                                                 5,252
                                                                  ==============


4.       Business Combinations (continued)


Acquisition of Biolink Technologies International Inc. (continued)


Impact of the acquisition on the consolidated statement of cash flows for the
six months ended June 30, 2003:

                                                                      Six months
                                                                  ended June 30,
                                                                          2003
                                                                  --------------

Cash paid by the Company                                                 3,417
Less cash of Biolink                                                       (82)
                                                                  --------------
Cash flows on acquisition, net of cash acquired                          3,335
                                                                  ==============


Acquisition of OAO Zarubezhenergoproekt


In January 2003, the Parent Company acquired a controlling 50.94% interest in
OAO Zarubezhenergoproekt, a research and development institute specializing in
engineering and new technology development for both nuclear and traditional
energy generation plants, for $1,165.


To determine the results of the acquisition accounted for as a purchase, net
assets of Zarubezhenergoproekt were recorded at their fair values. The total
value of the acquired share of the net assets of Zarubezhenergoproekt amounted
to US$654.

                                                              April 01, 2003
Cash                                                                        50
Trade receivables                                                           99
Inventories                                                                268
Taxes receivable                                                            17
Other current assets                                                        29
Plant and equipment                                                      1,219
Other non-current assets                                                    19
Trade accounts payable and accruals                                        (14)
Advances received                                                          (38)
Taxes payable                                                             (266)
Payroll and related liabilities                                            (38)
Other payable                                                              (61)
                                                                   -------------
Net assets as of the acquisition date                                    1,283
Minority interest - 50.94% as of April 01, 2003                           (629)
                                                                   -------------
Net assets acquired                                                        654
Consideration paid by the Company                                        1,165
                                                                   -------------
Goodwill                                                                   511
                                                                   =============


Impact of the acquisition on the consolidated statement of cash flows for the
six months ended June 30, 2003:











4.            Business Combinations (continued)


Acquisition of OAO Zarubezhenergoproekt (continued)

                                                                      Six months
                                                                  ended June 30,
                                                                          2003
                                                                  --------------

Cash paid by the Company                                                 1,132
Less cash of Zarubezhenergoproekt                                          (50)
                                                                  --------------
Cash flows on acquisition, net of cash acquired                          1,082
                                                                  ==============


5.                  Cash and Cash Equivalents


Cash and cash equivalents consisted of the following:

                                                  30 June, 2003     31 December,
                                                   -------------          2002
                                                                   -------------

Cash in USD bank accounts                                 6,069          2,343
Cash in RBS bank accounts                                15,876         25,838
Cash in EUR bank accounts                                   569             18
Cash in other currency                                    1,371              -
Cash equivalents                                          1,181              -
                                                    -------------  -------------

Cash and cash equivalents of the Parent Company          25,066         28,199
and Russian subsidiaries                            =============  =============

Cash in USD bank accounts                                   692          1,203
Cash in EUR bank accounts                                     -            128
Other                                                         -            220
                                                    -------------  -------------
                                                    =============  =============
Cash and cash equivalents of                                692          1,551
foreign subsidiaries
                                                    =============  =============

Total cash and cash equivalents                          25,758         29,750
                                                    =============  =============


Included in cash and cash equivalents as of June 30, 2003 and December 31, 2002
were cash and cash equivalents in several bank accounts with ZAO Promtorgbank
('Promtorgbank'), a related party, in the total amount of US$14,187 and US
$16,799 respectively.


6.       Short-Term Investments


Short-term investments consisted of the following:

                                          30 June, 2003             31 December,
                                           -------------                  2002
                                                                   -------------
Corporate promissory notes                           3,140               8,120
Bank promissory notes                                2,333               3,519
Other                                                   90                 295
                                               -------------       -------------
Total short-term investments                         5,563              11,934
                                               =============       =============







6.       Short-Term Investments (continued)


Corporate Promissory Notes


Corporate promissory notes represent obligations of various Russian and foreign
legal entities, primarily the Company's trade debtors, in the form of promissory
notes that generally do not have an established market. They are reported net of
valuation reserve.


7.       Trade Accounts Receivable


Trade accounts receivable consisted of the following:

                                             30 June, 2003          31 December,
                                              -------------               2002
                                                                   -------------
Trade accounts receivable                             41,336            60,520
Provision for doubtful accounts                       (7,379)           (5,936)
                                                 -------------     -------------
                                                      33,957            54,584
                                                 -------------     -------------
Long-term trade accounts receivable                    3,901            13,508
                                                 =============     =============


Long-term trade accounts receivable are represents deferred payment of US$897
and US$3,005 under long-term construction-type contracts for the supply of
nuclear power plant equipment for Iran and China, respectively, that in
accordance with the contract terms for the manufacturing of nuclear power plant
equipment is receivable when the nuclear power plants in India, China, and Iran
are commissioned and accepted by the customer (Note 10). No interest is charged
on these receivables.


8.       Related Party Transactions


During the six months ended June 30, 2003 and the year ended December 31, 2002,
the Company had transactions or balances with the following of its shareholders
or companies under their control or control of, or influence by, management :


• Promtorgbank, incorporated in Russia

• OAO Industrial Group NIPEK-Bioprocess, incorporated in Russia

• ZAO Neftyanoi Investitsionnyi Dom, incorporated in Russia

• OOO NitsTyazhMash, incorporated in Russia

• OOO Machinery Engineering, incorporated in Russia

• ZAO AtomKomplektPostavka, incorporated in Russia

• OOO Resource, incorporated in Russia

• BioLink Technologies International, Inc. ('BioLink'), incorporated in
the USA (Note 4)

• Lotterby Limited, incorporated in British Virgin Islands

• ZAO Atomstroyexport incorporated in Russia (Notes 1, 13)

• ZAO Atomenergoexport (AEE) incorporated in Russia (Notes 1, 13)





8.         Related Party Transactions (continued)


Amounts due from related parties consisted of the following:

                                          30 June, 2003             31 December,
                                           -------------                  2002
                                                                   -------------

ZAO Atomstroyexport                                 15,470                   -
Promtorgbank                                         1,986                 172
Lotterby Limited                                     1,225               1,174
Speed Arrow Limited                                      -                   -
OOO Resource                                           595                 857
BioLink                                                  -                 347
Management                                               -                  20
Other                                                  175                 348
                                               -------------       -------------

Total due from related parties                      19,451               2,918
                                               =============       =============


As of June 30, 2003, a receivable from Promtorgbank consisted of US$986 of
Promtorgbank promissory notes and US$1,000 in a deposit account.


In 1999, the Company entered into several agreements related to the construction
of Liang Yung Gang nuclear power plant in China for the total amount of
US$134,902. In 2002, the Company entered into a long-term agreement related to
the construction of Kudan-Kulam nuclear power plant in India for the total
amount of US$285,761. Most of such long-term agreements were conducted with
Atomstroyexport ('ASE'), which acts as general contractor for all construction
projects at nuclear power plants conducted by the Russian Federation in foreign
countries. Accordingly, ASE has been providing the Company with significant
advance financing under the above long-term construction-type contracts to
supply equipment for the respective nuclear power plants. Since January 2003 ASE
is considered a related party to the Company.


As at June 30, 2003, the amount due from Atomstroyexport of US$15,470 represents
trade receivable for dispatched nuclear power plant equipment. During the six
months of 2003 sales of nuclear power plant equipment to ASE totalled US$35,023,
which exceeds 10 % of total sales of the Company for the six months ended June
30, 2003.


Amounts due from related parties, long-term, consisted of the following:

                                               30 June, 2003        31 December,
                                                -------------             2002
                                                                   -------------

ZAO Atomstroyexport                                    12,673                -
Promtorgbank - trust fund, principal                      675              619
Promtorgbank - trust fund, interest                     1,618            1,570
Promtorgbank - promissory notes                           220               40
Other                                                     148              145
                                                  -------------    -------------

Total due from related parties - long-term             15,334            2,374
                                                  =============    =============


Trust fund represents cash deposited by the Parent Company in Promtorgbank for a
period of 5 years starting April 5, 2000.


As of June 30, 2003, the amount due to the Company from Atomstroyexport was
represents deferred payment of US$3,741, US$8,177 and US$755 under long-term
construction-type contracts for the supply of nuclear power plant equipment for
Iran, China, and India, respectively, that in accordance with the contract terms
for the manufacturing of nuclear power plant equipment is receivable when the
nuclear power plants in India, China, and Iran are commissioned and accepted by
the customer (Note
10). No interest is charged on these receivables.


8.         Related Party Transactions (continued)


Current liabilities to related parties consisted mainly of advances received
from Atomstroyexport for nuclear power plant production and loans granted to the
Company by Promtorgbank:

                                          30 June, 2003             31 December,
                                           -------------                  2002
                                                                   -------------

ZAO Atomstroyexport                                 69,289                   -
Promtorgbank                                         8,375               3,195
Other                                                  805               1,864
                                               -------------       -------------

Total due to related parties                        78,469               5,059
                                               =============       =============


The amount due to Promtorgbank as of June 30, 2003, included loans of US$7,822
and US$553 of liabilities for bank charges. The loans are denominated in rubles
and bear interest from 12 % to 24%.


Included in the amount due to Promtorgbank as of December 31, 2002, was US$1,353
of short-term borrowings, US$1,153 and US$689 for information and
telecommunication services and liabilities for bank charges, respectively.


The loans are denominated in rubles, bear interest from 12 % to 24%, and mature
in 2003.


During the six months ended June 30,2003 and 30 June 2002, the Company accrued
interest expense of US$288 and US$214 respectively on loans issued by
Promtorgbank.


9.         Inventories


Inventories consisted of the following:

                                             30 June, 2003          31 December,
                                              -------------               2002
                                                                   -------------

Materials and spare parts                             75,179            61,455
Work-in-process                                       99,089            83,633
Finished goods                                        50,670            41,163
                                                 -------------     -------------

Total inventories, at cost                           224,938           186,251

Provision for obsolete inventories                   (23,512)          (24,515)
                                                 -------------     -------------
Total inventories, net                               201,426           161,736
                                                 =============     =============


As of June 30, 2003 and December 31, 2002, US$29,324 and US$39,179 of
inventories were pledged under several loan agreements, respectively (Note 17).





10.          Accumulated Costs and Related Billings


Percentage-of-Completion Method


Balances related to arrangements accounted for under the
percentage-of-completion method consisted of the following:

                                                  30 June, 2003     31 December,
                                                   -------------          2002
                                                                   -------------

Costs and recognized income:
Shipbuilding                                             47,832         46,827
Nuclear power plant equipment                            11,537          4,771
Oil and gas equipment                                     1,007          2,569
                                                    -------------  -------------
Total costs and recognized income                        60,376         54,167

Accumulated billings or deferred revenue:
Shipbuilding                                            (44,837)       (46,340)
Nuclear power plant equipment                           (25,590)       (18,916)
Oil and gas equipment                                      (332)        (2,334)
                                                    -------------  -------------
Total accumulated billings or deferred revenue          (70,759)       (67,590)

Total costs and recognized income not yet                27,372         23,195
billed                                              =============  =============
Total billings in excess of costs and recognized        (21,181)       (23,110)
income, short-term                                  =============  =============
Total billings in excess of costs and recognized        (16,574)       (13,508)
income, long-term                                   =============  =============


As of June 30, 2003, the long-term portion of billings in excess of costs and
recognized income represented deferred payment that is due upon the
commissioning of the respective power plants (Notes 7, 8).


Completed Contract Method


Balances related to arrangements accounted for under the completed-contract
method consisted of the following:

                                                  30 June, 2003     31 December,
                                                   -------------          2002
                                                                   -------------

Accumulated costs:
Metallurgical equipment                                     693          1,712
Mining equipment                                            823            776
Oil and gas equipment                                       963          1,660
                                                    -------------  -------------
Total accumulated costs                                   2,479          4,148

Accumulated billings:
Mining equipment                                         (1,109)          (859)
Metallurgical equipment                                    (911)        (2,156)
Oil and gas equipment                                    (1,885)        (2,642)
                                                    -------------  -------------
Total accumulated billings                               (3,905)        (5,657)

Excess of accumulated billings over related              (1,426)        (1,509)
costs                                               =============  =============





11.       Other current assets


Other current assets consisted of the following:

                                        30 June, 2003               31 December,
                                         -------------                    2002
                                                                   -------------
Taxes receivable                                   54,788               28,233
Other current assets                               29,220               10,081
                                              -------------        -------------
Total other current assets                         84,008               38,314
                                              =============        =============


As of June 30, 2003 other current assets include accounts receivable from
Severstalmash related to disposal of the Metallurgical Equipment (METEQ)
business segment totaling US$14,000 settled in October 2003.


Taxes receivable are represented predominantly by the input value-added tax
('VAT'), which is offsetable against future VAT charged on the Company's sales.


12.     Property, Plant and Equipment


Property, plant and equipment consist of the following:

                -------      ------   -------       -------   -------                -------                -------
                                    Machinery               Furniture    Equipment under Construction
                                       and                     and
                Land    Buildings   Equipment    Vehicles    Fixtures                                       Total
               -------    ------      -------     -------     -------                            -------    -------
Net book value  2,617     114,458       60,502        598        5,226                          17,958    201,359
as of
December 31,
2002
Cumulative        123       5,237        2,677         22          192                             846      9,097
translation
adjustments
(Note 3)
Property,           -         722          112          1           41                             510      1,386
plant and
equipment of
new
subsidiaries
Additions           -       1,562        1,222        265        6,355                           7,355     16,759
Disposals           -        (210)      (4,416)      (114)        (854)                         (2,724)    (8,318)
Depreciation        -      (5,209)      (5,803)      (179)      (1,805)                             (5)   (13,001)
charge for the
year
Release from        -           -            -          -            -                             101        101
reserve for
obsolete
equipment
under
construction
Impairment          -         449           36          1            3                               -        489
loss
Transfer from       -         287        1,398          -          207                          (1,892)         -
Equipment       =======      ======      =======    =======      =======                         =======    =======
under
Construction
to PPE
Net book value  2,740     117,296       55,728        594        9,365                          22,149    207,872
as of
June, 2003
                =======      ======      =======    =======      =======                         =======    =======


The Company's plant and equipment of US$36,904 and US$37,771 was pledged for the
short-term and long-term bank loans as of June 30, 2003 and December 31, 2002,
respectively.


Accumulated depreciation amounted to US$106,500 and US$93,504 as of June 30,
2003 and December 31, 2002, respectively.










13.     Long-Term Investments


Long-term investments consisted of the following:

                               30 June, 2003                        31 December,
                                -------------                             2002
                                                                   -------------
                                                          -------       -------
                         % of ownership    Amount    % of ownership    Amount
                                   -------   -------           -------   -------

Promtorgbank                        14.9%    7,094              14.9%    6,775
ZAO Atomenergoexport                40.0%    5,088                 -         -
OAO Volgograd                       19.0%    2,236                 -         -
Shipbuilding Plant
OAO CKB Korall                      30.4%    1,994              30.4%    1,956
ZAO Transkat                        15.0%      504              15.0%      480
OAO Shipbuilding Plant               6.3%      290               6.3%      277
Lotos
Ural Motorbikes Plant               19.5%      282              19.5%      270
OAO Volgograd Plant of               2.0%      249               2.0%      238
Burovaya Tekhnika
OAO CKB Lazurit                     32.7%      209              32.7%      200
AOZT Russian Company of              0.8%      126               0.8%      121
Shelf Development
ZAO Noviy registrator               20.0%      105                 -         -
OAO IMZ Ural                           -         -              19.0%    1,830
BioLink                                -         -               0.6%      670
Other                                  -     1,094                 -        11
                                   -------   -------           -------   -------

Total long-term                             19,271                      12,828
investments                        =======   =======           =======   =======


As of June 30, 2003 and December 31, 2002, Promtorgbank shares were recorded net
of valuation reserve for other than temporary decline in value of US$3,644 and
US$3,480 respectively. In addition, valuation allowance of US$844 was made in
respect of Promtorgbank shares acquired prior to December 31, 2001, and recorded
as part of investment loss in the year ended December 31, 2002.


On 8 January 2003, the Company acquired approximately 20% of the issued shares
in ZAO Atomenergoexport ('AEE') for a total consideration of approximately
US$4.9 million. As 50% of AEE's shares are held as treasury shares, this
effectively gave the Company a 40% interest. The Russian government holds a
special or 'golden' share in AEE, which, upon its creation in 1994, afforded it
certain special rights for a period of three years. As at the date of these
Financial Statements, the Russian government had not indicated that it wished to
extend the period during which it had the benefit of these rights. AEE's
headquarters are in Moscow and it has representative offices in China, Iran and
India, as well as in both Western and Eastern Europe. The Company is currently
evaluating its investment in AEE and is considering, amongst other things,
whether to increase its stake in AEE to an effective controlling stake by
acquiring further shares in AEE.


AEE's primary business is the export of nuclear power plant equipment and
services and since its foundation in 1973 AEE has focused on the management of
intergovernmental contracts for technical assistance in Eastern Europe and
Finland. AEE owns 49% of the issued shares interest in ASE. The other major
shareholders in ASE are Zarubezhatomenergostroy, which is controlled by the
Ministry of the Russian Federation for Atomic Energy, and TVEL Corporation
(which is also owned by the Russian state). As approximately 9% of ASE's shares
are held as treasury shares, AEE has an effective 54% interest in ASE. ASE is
one of the leading engineering, procurement, installation and commissioning
('EPIC') contractors for the nuclear equipment industry. Since 1973, AEE and ASE
have constructed 29 generation blocks for nuclear power plants


In the 1st half of 2003, the Company purchased an 18.96% stake in Volgograd
Shipbuilding Plant, which specializes in the manufacturing of river-sea vessels
as well as other equipment for the oil and gas industry, for a total cash
consideration of US$2,170.



13.       Long-Term Investments (continued)


In April 2002, the Company acquired 603,169 shares of OAO CKB Korall, a
Ukrainian-based naval engineering and construction bureau specializing in
engineering of complex mobile offshore drilling units for cash of US$1,934 (Note
26).


No information was available on the fair values of the Company's investments in
Promtorgbank, and other entities as of June 30, 2003 and December 31, 2002. The
non-application of equity method for certain minor equity investments included
in the 'Other' line did not have a material impact on the Company's financial
position or results of its operations.


14.            Advances Received and Deferred Revenue


Customer advances and deferred revenues consisted of the following:

                                                 30 June, 2003      31 December,
                                                  -------------           2002
                                                                   -------------
Chinese Ministry of Defense                              39,396              -
Greece Ministry of National Defense                       4,931
OAO Tyumen Oil Company                                    3,652          2,937
Gazflot                                                   3,205              -
ZAO Poseidon                                              3,109              -
OOO Gazresourse                                           3,109          2,421
OAO Magnitogorsk Iron Works                               1,981          2,358
III OMZ MOIT                                              1,348              -
ZAO Uralneftebursnab                                      1,285              -
OAO LMZ                                                   1,237              -
Lenskoe GBU Vodnih putey                                  1,135              -
Pecheraneftegaz                                             923              -
Itochu Corporation (Japan)                                  692          5,902
RN-Leasing                                                  193          9,651
ZAO Atomstroyexport                                           -         40,648
Other                                                    39,326         27,222
                                                    -------------  -------------
Total advances received and deferred revenue            105,522         91,139
                                                    =============  =============


15.       Income Taxes


Effective January 1, 2002, the Russian Federation profit tax rate was reduced to
24%.


The income tax provision consisted of the following for the six months ended:

                                            June 30, 2003       June 30, 2002
                                              -------------       -------------
Current tax expense                                 1,657               3,543
Deferred tax expense (benefit)                      1,559               5,379
                                              -------------       -------------

                                                    3,216               8,922
                                              =============       =============













15.       Income Taxes (continued)


The reconciliation between the income tax expense computed by applying the
Russian enacted statutory tax rate of 24% to the income before income taxes
presented in the accompanying consolidated financial statements to the income
tax expense reported in the consolidated financial statements is as follows for
the six months ended:

                                                 June 30, 2003   June 30, 2002
                                                   -------------   -------------
Income tax expense computed on income before             3,563           3,864
income taxes at statutory tax rates

Tax effect of permanent differences:
Effect of foreign exchange differences                       -            (670)
Non-deductible expenses                                    493             280
Non-taxable gain on sale of non-core business           (3,091)            (31)
units
Non-taxable gain on release from tax penalties            (133)              -
Other permanent differences                              2,384           2,443

Temporary differences not recognized as measured             -           3,036
by the change in the valuation allowance during    -------------   -------------
the year
Income tax expense reported in the accompanying          3,216           8,922
consolidated financial statements                  =============   =============


The deferred tax balances were calculated by applying the statutory tax rate of
24% in effect at the balance sheet dates to the temporary differences between
the tax basis of assets and liabilities. The amounts reported in the
accompanying consolidated financial statements are comprised of the following:

                                           June 30, 2003    December 31, 2002
Deferred tax assets current:
Revenue deferrals under long-term                     313                4,915
contracts
Deductible inventory provisions                     3,538                3,777
Other accruals and provisions                       7,492                7,691
                                              -------------        -------------
Total deferred tax assets - current                11,343               16,383

Deferred tax liabilities - current:
Inventories expensed for tax purposes              (6,423)              (7,281)
Revenue accruals under                             (4,052)              (1,264)
percentage-of-completion method
Other                                              (4,497)                (761)
                                              -------------        -------------
Total deferred tax liabilities - current          (14,972)              (9,306)

Valuation allowance for deferred tax               (4,248)             (10,591)
assets                                        -------------        -------------
Net deferred tax assets - current
                                              =============        =============

Net deferred tax liabilities - current             (7,877)              (3,514)
                                              =============        =============

Deferred tax assets non - current:
Property, plant and equipment                       9,912                1,125
Available loss carry-forwards                       1,304                2,598
Other                                               4,947
                                              -------------        -------------
Total deferred tax assets - non-current            16,163                3,723



15.       Income Taxes (continued)

                                           June 30, 2003    December 31, 2002
Deferred tax liabilities - non-current:
Difference in depreciation                        (11,502)              (1,431)
Interest accruals on trust fund                      (395)                (395)
                                              -------------        -------------
Total deferred tax liabilities -                  (11,897)              (1,826)
non-current

Valuation allowance for deferred tax              (15,829)              (3,368)
assets                                        -------------        -------------
Net deferred tax assets - non-current                   -                    -
                                              =============        =============

Net deferred tax liabilities -                    (11,563)              (1,471)
non-current                                   =============        =============


For financial reporting purposes, a valuation allowance has been recognized to
reflect management's estimate of the deferred tax assets that are not likely to
be realized.


16.     Taxes Payable


Taxes payable consisted of the following:

                                          30 June, 2003             31 December,
                                           -------------                  2002
                                                                   -------------
VAT                                                 30,574              24,120
Tax penalties                                       16,230              14,986
Unified social tax                                   8,713               8,164
Unified social tax penalties                         6,085               5,812
Income tax                                           5,199               6,131
Road-users' tax                                      2,229               4,910
Personal income tax                                  1,626               1,847
Property tax                                         2,685               1,565
Other taxes                                          2,081               1,603
                                               -------------       -------------

Total taxes payable                                 75,422              69,138

Less long-term portion                             (34,587)            (33,236)
                                               -------------       -------------

Taxes payable, current portion                      40,835              35,902
                                               =============       =============


Tax Restructuring


The long term taxes payables as of June 30, 2003 represents restructured taxes
payables in accordance with a restructuring agreement with the state and local
budgets and non-budget funds.


Uralmash


On September 18, 2000, Uralmash signed a restructuring agreement with the state
and local budgets and non-budget funds to repay its overdue taxes of US$14,985
during the period of 2001-2010, and tax penalties of US$9,074 during the period
of 2001-2010. During 2001, Uralmash signed additional restructuring agreements
with the state and local budgets to repay its overdue tax penalties of US$2,216
during the same period. These restructured tax obligations bear interest at one
tenth of the refinancing rate (which was approximately 28% per annum as of the
restructuring date).


During 2002, Uralmash signed two restructuring agreements with non-budget funds
(i) for repayment of its overdue road-users' tax of US$2,993 during the period
of 2002-2006 and related penalties of US$1,670 during the period of 2006-2010,
and (ii) for repayment of 15% (or US$848) of the total


16.       Taxes Payable (continued)


Tax Restructuring (continued)


penalties accrued for social taxes of US$5,655 during the period of 2003-2006.
In accordance with the restructuring agreement the remaining 85% of the social
taxes penalties will be fully forgiven by the government if Uralmash continue to
make its payments under the restructuring agreements on time.


During the six months ended June 30, 2003 and June 30, 2002, Uralmash paid
US$1,444 and US$1,286 of overdue taxes, respectively.


Izhorskiye Zavody


On March 10, 2000, Izhorskiye Zavody signed a restructuring agreement with the
state budget to repay its overdue taxes of US$4,074 during the period of 2000 -
2006, and tax penalties of US$3,515 during the period of 2006 - 2010. These
restructured tax obligations bear interest of one tenth of the CBR refinancing
rate (which was approximately 55% per annum as of the restructuring date).


On December 27, 2001, Izhorskiye Zavody signed another restructuring agreement
with the state social non-budget funds to repay its overdue social taxes and
related penalties of US$30,345 during the period of 2002-2006, net of US$6,718
reversal of pension fund penalties.


During the six months ended June 30, 2003 and June 30, 2002, Izhorskiye Zavody
paid US$1,064 and US$1,432 of overdue taxes, respectively.


UPET


As of June 30, 2003 and of December 31, 2002, UPET had US$1,952 and US$1,883 of
taxes and related tax penalties restructured by the Ministry of Public Finance
of Romania over the period through August 2006. Such restructured tax
obligations bear interest at 0.06% per day. In addition, in case UPET does not
comply with established schedule of payments it will become subject to
additional accruals of US$747 that had previously been forgiven by the Romanian
tax authorities.


Pursuant to the statutory legislation on restructuring, the above tax penalties
might be fully or partially forgiven by the government if the subsidiaries make
their payments under the restructuring agreements ahead of the schedule above,
as follows: 50% of the penalties will be forgiven if the subsidiaries repay 50%
of the principal due within two years; and the entire amount of penalties due
will be forgiven if the subsidiaries repay 100% of the principal due within four
years.


Aggregate maturities of taxes payable as of June 30, 2003, were as follows:

                                       2003                             40,835
                                       2004                              5,764
                                       2005                              5,720
                                       2006                             10,137
                                       2007                              3,784
                                       2008                              3,358
                                       2009                              3,359
Thereafter                                                               2,465
                                                                       ---------
                                                                        75,422
                                                                       =========





17.     Short-Term Borrowings


Short-term borrowings consist of the following:

                                      30 June, 2003                 31 December,
                                     ----------------                     2002
                                                                ----------------
                                                           ---------   ---------
                                 Annual                     Annual

                                    Rate       Amount        Rate      Amount
                                   ---------   --------    ---------  ---------

Alfa-Bank                            11%-14%       5,891     13-14%      8,960
Raiffeisen Bank                            -           -          7%     6,017
Promstroybank                             13%      2,003         13%     4,013
MMB                                        9%      7,000          -          -
Gazprombank                               11%      4,007          -          -
Nizhegorodskiy Promstroybank               -           -         11%       606
                                     ---------    --------  ---------  ---------
Short-term borrowings in USD                      18,901                19,596
                                     =========    ========  =========  =========

Sberbank                            13% -18%      27,700         18%    24,466
Gazprombank                               18%      6,491         18%     3,146
Vneshtorgbank                             18%        329         18%     2,370
Alfa-Bank                                  -           -         21%     1,894
MDM Bank                                  16%        329          -          -
Nizhegorodskiy Promstroybank               -           -       15.5%       852
                                     ---------    --------  ---------  ---------
Short-term borrowings in RBS                      34,849                32,728
                                     =========    ========  =========  =========

BCR (Romania), Romanian lei               23%        304     32-55%        604
Other                                                  -                   401
                                     ---------    --------  ---------  ---------
Total short-term borrowings                       54,054                53,329
                                     =========    ========  =========  =========


As of June 30, 2003 Alfa-Bank loans were secured by plant and equipment with
book amount of US$3,646. As of December 31, 2002, Alfa-Bank loans were secured
by the Company's finished goods with carrying amount of US$9,743.


As of June 30, 2003 and of December 31, 2002, Alfa-Bank loans received by
Izhorskiye Zavody for US$2,448 and US$7,397, respectively, and Alfa-Bank loans
received by ZAO KomplektAtomIzhora for US$3,442 and US$1,563, respectively, were
secured by the guarantee of ASE. As of June 30, 2003 based on the agreement with
ASE, a portion of advances for future deliveries is effected through the
arrangement of loans to the Company, that are guaranteed by ASE. The Company
repays the loan upon the receipt of the payment for delivered equipment.
Interest expense incurred with respect to such transactions was included in the
total contract price with ASE.


As of December 31, 2002, Alfa-Bank loans received by Specstal for US$1,894 were
secured by the guarantees of OAO OMZ and Izhorskiye Zavody.


Loans received from Sberbank as of June 30, 2003 and of December 31, 2002, were
secured by the Company's plant and equipment with net book value of US$25,590
and US$21,498, and finished goods with carrying amount of US$24,905 and
US$13,889, respectively.


As of June 30, 2003 and of December 31, 2002, Gazprombank loans were secured by
the Company's plant and equipment with net book value of US$5,329 and US$7,027of
which US$1,909 and US$3,715 were also pledged under Sberbank loans,
respectively. As of June 30, 2002, Gazprombank loans were pledged both by
finished goods with total carrying amount of US$1,860.


As of June 30, 2003 Vneshtorgbank loans were secured by the guarantee of the
Company. As of December 31, 2002 Vneshtorgbank loans were secured by finished
goods with carrying amount of US$6,055.


17.       Short-Term Borrowings (continued)


As of June 30, 2003 loan received from MMB by SpetsStal was secured by
work-in-progress and finished goods with carrying amount of US$1,776 and
guaranteed by Izhorskiye Zavody.


As of June 30, 2003 loans received from MDM bank were secured by the guarantee
of the Company and secured by finished goods with carrying amount of US$588.


As of December 31, 2002, loans received from Nizhegorodskiy Promstroybank were
secured by plant and equipment and inventory with carrying amount of US$507 and
US$6,416, respectively.


As of December 31, 2002, a loan received from Raiffeisen Bank was secured by the
Company's common stock with carrying value of US$14,140 and guaranteed by OMZAR.


18.     Non-Convertible Bonds


On 6 September 2001, the Parent Company issued the second series of 390,000
bonds with a nominal value of 1,000 roubles per bond due to mature 900 days from
the date of issue. The entire bond issue was sold at auction, for US$13,227, net
of issuance costs of US$16. The bonds bear interest at a variable rate
determined by the board of directors with interest payable twice a year.
Interest on the first, second, third, fourth and fifth coupons accrued at a rate
of 20.85%, 20.50%, 18.10%, 16.50% and 16.50% per annum, respectively.


On 4 October 2001, the Parent Company issued a third series of 390,000 bonds
with a nominal value of 1,000 roubles per bond due to mature 900 days from the
date of issue. The entire bond issue was sold at auction for US$13,213, net of
issuance costs of US$16. The bonds bear interest at a variable rate determined
by the board of directors with interest payable twice a year. Interest on the
first, second, third and fourth coupons accrued at a rate of 20.85%, 20.15%,
18.50% and 14.00% per annum, respectively. On 7 March 2003, the Parent Company
issued an irrevocable offer for early redemption of the bonds that may be
exercised by holders on 25 September 2003 at par plus accrued interest. In 2001
the Company repurchased 161,191 of these bonds and subsequently resold them to
the third parties at market value.


The repayment of principal of the bonds issued on 6 September 2001 and 4 October
2001 is guaranteed for a total amount of US$24,544 by Uralmash.


Also on March 6, 2003 the Parent Company issued a fourth series of 900,000 bonds
with a nominal value of 1,000 roubles per bond. The entire bond issue was sold
at auction for US$28,200, net of issuance costs of  US$290. The repayment of
principal and coupons for a total amount of US$29,654 is guaranteed by Uralmash.
The bonds have a six year maturity, pay semi-annual coupons and feature an
auction rate re-set mechanism. The bonds are redeemable at the option of the
holders in September 2004 and August 2006 at par. Interest on the first three
coupons is accrued at a rate of at 13% per annum.


Bonds of the 2nd, 3rd and the 4th series are listed at MICEX and are traded on
RTS (with the exception of the fourth series). The bonds are not convertible
into the share capital of the Parent Company and holders of the Parent Company's
bonds are not entitled to any additional rights or preferences.


As of June 30, 2003 the aggregate maturities of non-convertible bonds were as
follows: 2004 - US$12,850 and 2009 - US$29,654 (at par).


As of June 30, 2003 and December 31, 2002, US$2,413 and US$1,484 of interest
accrued on bonds held by third parties were included in other accounts payable
and accruals, respectively. During the six months ended June 30, 2003 and 2002,
the total interest expense under four and tree of non-convertible bonds series
held by third parties was US$2,659 and US$1,649 respectively.





19.     Long-Term Debt


Long-term debt consists of the following:

                                          30 June, 2003             31 December,
                                           -------------                  2002
                                                                   -------------
ING-Bank N.V.                                       30,000              30,000
Rurkela (Ministry of Finance)                        2,639               2,639
Bhilai (Ministry of Finance)                         1,312               1,312
Uraltransportbank                                      937                 859
Alfa-Bank                                            2,267                 677
Other                                                    -                 232
                                               -------------       -------------
Total long-term debt                                37,155              35,719

Less current portion                                (4,113)             (3,248)
                                               -------------       -------------
Long-term debt, non-current                         33,042              32,471
                                               =============       =============


In November 2002, the Parent Company obtained an unsecured US$30,000 loan from
the London branch of ING-Bank N.V. The loan bears interest at a rate of 11.25%
per annum, payable semi-annually. The principal of the loan is repayable on
November 15, 2004.


In April 2002, Uralmash obtained a Euro-denominated loan from Uraltransportbank
for the purchase of foreign metallurgical equipment. The loan bears interest at
a rate of 7.25% per annum and is payable on April 1, 2006. The loan is secured
by the underlying foreign equipment.


In May 1993, Uralmash obtained a loan from the Ministry of Finance of the
Russian Federation for delivery of equipment for the plant in Rurkela, India
under an agreement between Uralmash and Steel Authority of India, Ltd. The loan
bears interest at a rate of 10% per annum. The repayment of the loan should be
effected in full by July 2005. The loan is secured by the rights to receive
payments under an agreement between Uralmash and Steel Authority of India, Ltd.
on delivery of equipment to Rurkela Metallurgical Plant in India. The Ministry
of Finance can withhold from the Uralmash bank accounts the amount of
indebtedness, or the Company's assets in the outstanding amount.


In November 1993, Uralmash obtained a loan from the Ministry of Finance of the
Russian Federation for delivery of equipment to Bhilai Metallurgical Plant in
India. The loan bears interest at a rate of 12% per annum. The repayment of the
loan was to be effected in full by April 1995. Due to this fact the outstanding
balance is shown as current portion of long-term debt. The loan is secured by
the rights to receive payments under an agreement between Uralmash and
Tyazhpromexport on delivery of equipment to Bhilai Metallurgical Plant. The
Ministry of Finance of the Russian Federation can withhold from the Uralmash
account the amount of indebtedness, or the Company's assets in the outstanding
amount. No action has been taken by the Ministry of Finance of the Russian
Federation to obtain immediate repayment.


In September 2001, Uralmash obtained a USD-denominated credit line from
Alfa-Bank. The loan bears interest at a rate of 7.70% per annum and is payable
on December 31, 2006.


Aggregate maturities of long-term debt as of June 30, 2003, were as follows:

                    2003                                                 4,113
                    2004                                                31,154
                    2005                                                   353
                    2006                                                 1,535
                                                                   -------------
                                                                        37,155
                                                                   =============



20.     Other Long Term Debt


As at 1 September 2003, the Company owed Vneshtorgbank US$36.8 million in
connection with the Company's order for a diesel submarine for the Chinese Navy
through Rosoboronexport. Pursuant to an arrangement with Vneshtorgbank,
Vneshtorgbank issued a guarantee to the Chinese Ministry of Defence in respect
of Rosoboronexport's performance bond which was issued as a result of advance
payments made to the Company through Rosoboronexport. Due to a statutory
requirement that significant bank guarantees are collateralised, the Company
provided Vneshtorgbank with promissory notes issued by Vneshtorgbank and
purchased by the Company with funds advanced to the Company by Vneshtorgbank by
way of an unsecured loan of US$36.8 million. The promissory notes and the
unsecured notes are of the same maturity and interest accrues at the same rate.
The Parent Company expects that the Company will offset the promissory notes
against the loan on the relevant payment dates.


21.     Minority Interest

As of December 31, 2002                                                229,877
                                                                   -------------
Cumulative translation adjustment (Note 3)                              10,777
Minority interest in deferred tax recognized as other                  (11,195)
comprehensive loss
(Note 3)
Acquisition of subsidiaries during the six months 2003:
Zarubezhenergoproekt                                                       629
Biolink                                                                    504
Minority interest in net income of subsidiaries                         (2,518)
                                                                   -------------
As of June 30, 2003                                                    228,074
                                                                   =============


22.          Shareholders' Deficiency


Common and Cumulative Preferred Stock


The Company's original charter provided for 2,830,000 shares of authorized
100-ruble par value common stock. Subsequently, the Board of Directors has
authorized the issue of additional charter capital of 9,420,000 shares of common
stock in April 1997, 2,750,000 shares of cumulative preferred stock in May 1997,
and 4,500,000 shares of common stock in June 1997. On May 27, 1998, the Company
additionally issued 18,600,000 shares of common stock with par value of 0.1
rubles. All newly issued stock was used by the Company for acquisition of its
subsidiaries or transferred to related parties, ZAO Neftyanoi Investitsionnyi
Dom and OOO Novye Vozmozhnosti, at par value with an option to re-acquire them
at par value in the future.


The shares of cumulative preferred stock do not have a voting right, except for
certain issues pertaining to the liquidation or reorganization of the Company or
changes in the charter documents, earn dividends at 12% per annum, and have a
liquidation value of 0.1 rubles per share.


In August 2000, the Company additionally authorized 30,000,000 shares of common
stock for future issuances. As of December 31, 2000, the Company's authorized
charter capital consisted of 66,250,000 shares of common stock and 2,750,000
shares of cumulative preferred stock with par value of 0.1 rubles per share, of
which 35,350,000 and 2,750,000, respectively, were issued and outstanding at
that date.


In February 1998, the Company's shareholders converted 12.2% of shares of its
common stock to Global Depositary Receipts and American Depositary Receipts for
trading on international stock





22.          Shareholders' Deficiency (continued)


Common and Cumulative Preferred Stock (continued)


markets. As of June 30, 2003 and December 31, 2002, Global and American
Depositary Receipts amounted to 6,874,278 (19.45% of its common stock) and
7,475,251 (21.15% of its common stock), respectively.


Treasury Stock


In December 2001, the Company re-acquired 4,424,718 shares of its common stock
at a price of 0.1 rubles per share from ZAO Neftyanoi Investitsionnyi Dom and
OOO Novye Vozmozhnosti, both related parties. Such repurchase of treasury stock
was made under the stock option agreement that had been concluded by the parties
in 1998, when these related parties acquired the Company's common stock at
similar prices.


In December 2001, 450,000 shares of the treasury stock were sold to the
Company's management at a price of 0.27 rubles per share. As of the dates of
such sale, the Company's common stock was quoted at US$4.00 per share. The
Company recognized management compensation expense of US$1,800 in its
consolidated statement of income being the fair value of the common stock given
with a corresponding increase in additional paid-in capital.


In December 2002, the Company's Board of Directors approved a plan to distribute
442,500 shares of treasury stock to top managerial employees at a price of 10
cents per share as compensation for their services during the period of 2000 -
2002.


As of December 31, 2002, the Company's common stock was quoted at US$5.80 per
share. The Company recognized management compensation expense of US$2,522 in its
2002 consolidated statement of income. No treasury stock was distributed through
December 31, 2002. Throughout the six months ended June 30, 2003, 401,000 of
shares were purchased by the Company's management.


As of June 30, 2003 and December 31, 2002 3,573,718 and 3,974,718 shares of the
Company's common stock remained in treasury stock. The fair value of such
treasury shares as of June 30, 2003 and December 31, 2002, using the RTS stock
quote as of that date, was US$25,266 and US$23,252.


Stock Awards


As permitted by SFAS No. 123, 'Accounting for Stock-Based Compensation,' the
Company measures compensation expense for its stock-based employee compensation
plans using the intrinsic value method prescribed by the Accounting Principles
Board (APB) Opinion No. 25, 'Accounting for Stock Issued to Employees.' No
compensation costs associated with stock-based awards were charged against the
Company's results of operations in the six months ended June 30, 2003 and 2002.


In December 2002, the Company's Board of Directors approved an executive stock
option plan for its top executives for the period of 2003 - 2005, to become
effective on January 1, 2003. The Plan provides for 4,000,000 shares of the
Company's common stock to be vested over the period of three years. Full vesting
is conditional on the Company's share price reaching US$11 over the period of
three years ended December 31, 2005.


Additional Paid-In Capital


Additional paid-in capital was formed mainly in 1997-98 as a result of the
issuance of the Company's common and cumulative preferred stock at prices in
excess of par value or as a consideration for the acquisition of controlling
stakes in Uralmash, ZSMK and Izhorskiye Zavody. As described above, US$1,800 and
US$2,434 of additional paid-in capital originated in 2001 and six months of 2003
from


22.            Shareholders' Deficiency (continued)


Additional Paid-In Capital (continued)


the re-issuance of the Company's common stock to management as the consideration
for past services.


Distribution of Statutory Earnings


In accordance with Russian legislation, the Company can distribute all profits
as dividends or transfer them to reserves. Dividends may only be declared from
accumulated undistributed and unreserved earnings as shown in the Russian
statutory financial statements. Dividends are subject to a 6% withholding tax,
which can be reduced or eliminated if paid to foreign owners under certain
applicable double tax treaties.


23.     Gain on Sale of Non-Core Business Units


During the first quarter of 2003, the management of the Company disposed of its
Metallurgical Equipment (METEQ) business segment to Severstalmash, the machine
building division of Severstal. Under the agreement Severstalmash acquired the
sales and marketing organization and engineering expertise of the METEQ business
segment as well as the right to use the corresponding trademarks for a total
consideration of US$14 million. The sale resulted in the recognition of a gain
of US$13.0 million. The disposal did not result in the transfer any of the
Company's production facilities to Severstalmash.


Gain on sale of non-core business units consisted of the following during the
six months ended:

                                                 30 June, 2003   30 June, 2002
                                                  -------------   -------------
Disposal of (METEQ) business segment                    12,987               -
Other disposals                                           (106)            128
                                                   -------------   -------------
Total gain on sale of non-core business units           12,881             128
                                                   =============   =============


24.         Commitments and Contingencies


Tax Optimization


The Company uses a number of methods to reduce or minimize its tax obligations,
including transfer of its profits offshore or to domestic tax havens. This
resulted in significant tax savings to the Company in 2001 and prior years.
There is a risk that certain tax optimization transactions may be challenged by
authorities and result in significant penalties and other liabilities, or the
opportunities to execute such transactions may cease.


Management believes that the Company will continue to manage and adapt to any
amendments or new regulations, which may impact upon current business practice
and operations to avoid any material adverse effect.


Economic and Political Environment in Russia


The Russian economy while deemed to be of market status beginning in 2002,
continues to display certain traits consistent with that of a market in
transition. These characteristics have in the past included higher than normal
historic inflation, lack of liquidity in the capital markets, and the existence
of currency controls, which cause the national currency to be illiquid outside
of Russia. The continued success and stability of the Russian economy will be
significantly impacted by the government's continued actions with regard to
supervisory, legal, and economic reforms.



24.            Commitments and Contingencies (continued)


Economic and Political Environment in Russia (continued)


As of June 30, 2003, the Company does not believe that any material matters
exist relating to the developing markets and evolving fiscal and regulatory
environment in Russia, including current pending or future governmental claims
and demands, which would require adjustment to the accompanying consolidated
financial statements for those statements not to be misleading.


The Company may be subject to loss contingencies pursuant to Russian national
and regional environmental claims that may arise from past and current
operations. As Russian laws and regulations evolve concerning environmental
assessments and cleanups, the Company may incur future costs, the amount of
which is currently indeterminable due to such factors as the current state of
the Russian regulatory process, the ultimate determination of responsible
parties associated with these costs and the Russian government's assessment of
respective parties' ability to pay for these costs related to environmental
reclamation.


The Company's operations and financial position will continue to be affected by
Russian political developments including the application of existing and future
legislation and tax regulations. The likelihood of such occurrences and their
effect on the Company could have a significant impact on the Company's ability
to continue operations. The Company does not believe that these contingencies as
related to its operations, are any more significant than those of similar
enterprises in Russia.


25.            Segment Information


The Company has six reportable operating segments. These segments are
combinations of business units that have separate management teams and offer
different products and services. A brief description of each segment is as
follows:


Oil and gas equipment segment specializes in engineering, marketing and sales of
three major types of drilling equipment, specifically oil and gas drilling rigs,
drilling rig units and components and drilling rig spare parts and related
services. Drilling equipment is purchased from Machinery manufacturing services
segment and manufactured at  Burovaya Tekhnika, Pavlovsk Machinery and UPET. One
of the Company's subsidiaries, FGL Buyer, specializes in naval architecture and
marine engineering in the offshore drilling industry.


Mining equipment segment specializes in engineering, marketing and sales of
three major types of mining equipment: excavators (electric mining excavators
and walking draglines), crushing equipment, and rock-drilling machines. Mining
equipment is produced by Machinery manufacturing services segment.


Specialty steel segment produces 150 specialty steel grades and a variety of
castings and forgings. The Company produces high-strength structural grades,
corrosion-resistant, radiation-resistant, heat-resistant, cold-resistant,
non-magnetic and high-alloyed grades of steel. Standard types of casting,
forging, and molding production include retaining rings for power generating
equipment, chill mould blanks, bearing ring blanks, column equipment, ship
spindles, mill rolls, tank courses, as well as similar custom-made metal
products. A significant part of the basic metal production is used internally as
an input for machinery equipment segment, equipment for nuclear power plants.
Specialty steels are manufactured primarily at Uralmash and Izhorskiye Zavody.


Equipment for nuclear power plants segment production is based at Izhorskiye
Zavody and produces three major types of equipment for the nuclear power
industry:


   •Primary circuit equipment for nuclear power plants. A standard set of
    primary circuit equipment produced by the Company comprises of a reactor
    vessel, in-vessel components, and a cover with extending pipes.




25.            Segment Information (continued)


   •Spent nuclear fuel containers for nuclear power blocks. The Company
    manufactures containers for storage and transportation of spent nuclear fuel
    from pressurized water reactors and scientific nuclear reactors.
   •A wide range of spare parts.


In addition, the segment provides services for installation of nuclear power
plant equipment and project management of long-term contracts for construction
of nuclear power plants.


Shipbuilding segment designs and manufactures a wide range of civil, military,
and special-purpose vessels and submarines, including air-cushioned landing
craft and multi-purpose hovercrafts and patrol boats, circulation systems for
oilrigs.


The Company's current product range includes dry-cargo carriers with deadweight
of up to 6,000 tons and oil tankers with deadweight of up to 8,000 tons.
Shipbuilding production is located at Krasnoe Sormovo, Nizhegorodskiy Teplokhod,
Third International, and Almaz.


Machinery manufacturing services segment produces machinery equipment based on
OMZ's proprietary engineering and the production of equipment based on third
party engineering, for various industries, including oil and gas, mining and
metallurgical equipment. The production sites for machinery manufacturing
services are mainly Uralmash and Izhorskiye Zavody.


All remaining activities are included in 'Corporate and Other' category for
reporting purposes.


All six segments meet the criteria set for reportable segments. The Company
evaluates performance and allocates resources based on gross margin.
Intersegment turnover is shown at market-based prices. Management believes that
the utilization of profit (loss) from operations has limited usefulness as it
involves significant judgment in allocating overhead costs because of the
Company's complex operating structure. Selling, general, and administrative
expenses and indirect production costs were allocated among business segments in
the same proportion as direct costs.


Segment information for six months ended June 30, 2003:

               Oil and gas Mining     Specialty  Equipment     Ship-    Machinery     Corporate    Total
               equipment   equipment  steels     for nuclear   building manufacturing  and                           
                                                 power plants           services       other

             

Revenues from  37,757       23,884    24,063       36,994     44,731      24,356      23,917       215,702
external
customers
Intersegment    -            -        26,241           -         -        37,702          -         63,943
revenues
Gross margin   11,878       4,934     10,923       12,651      7,207       9,012       4,617        61,222
Gross margin,   31%          21%        22%          34%        16%         15%         19%           28%
%
Depreciation    1,380         5        1,860         346       1,675       7,058        677         13,001
and
amortization
Income (loss)    798        700        7,086        6,746      2,353       (1,909)    (5,325)       10,449
from
operations
Interest         129        808         250          735         940         703       5,593         9,158
expense
Segment       60,996       25,515     59,299      126,258     133,216    176,581     202,097       783,962
assets
Capital        1,211        -           254         459          633      12,482       1,720        16,759
expenditures







25.     Segment Information (continued)


Segment information for six months ended June 30, 2002:

               Oil and gas Mining     Specialty  Equipment     Ship-    Machinery     Corporate    Total
               equipment   equipment  steels     for nuclear   building manufacturing  and                            
                                                 power plants           services       other




Revenues from  39,119      18,128      20,158     37,089       23,960      38,435      25,982       202,871
external
customers
Intersegment     -           -         41,262       -             -        67,161        -          108,423
revenues
Gross margin   9,652       3,382       8,997      14,183        3,025      11,860       3,451        54,550
Gross margin,    25%        19%          15%        38%          13%         11%          13%          27%
%
Depreciation     491         -         1,513        317           418       7,902         664        11,305
and
amortization
Income (loss)  6,587        549       5,930       6,937           732       6,926      (2,858)       24,803
from
operations
Interest         -           -          -           -               7         -            (7)           -
expense
Segment       68,676     15,357      62,938       66,830       88,686      185,422     104,623       592,532
assets
Capital        1,908       -            715          -          1,495       12,103       6,560        22,781
expenditures


The Company sells its products in several markets. External sales by major
geographic regions were as follows for the six months ended:

                                             June 30, 2003      June 30, 2002
                                                 -----------        -----------
                                                   116,821            133,809
Russia
Asia                                                49,240             29,926
Commonwealth of Independent States                  10,598             28,486
Europe                                              37,914              9,783
North America                                          793                867
Other regions                                          336                  -
                                                 -----------        -----------
Total sales                                        215,702            202,871
                                                 ===========        ===========


26.          Subsequent Events


In July and October 2003, the Company acquired additional stakes of 31.05% and
19.22% of the outstanding common stock of Volgograd Shipbuilding Plant, which
specializes in the manufacturing of river-sea vessels as well as other equipment
for the oil and gas industry, for a total cash consideration of US$3,823 and
US$1,091 increasing its ownership interest therein to 69.23%. Subsequent to
October 07, 2003, Volgograd Shipbuilding Plant has been accounted for under the
full-consolidation method.


In October 2003, the Company acquired additional stakes of 62.51% of OAO CKB
Korall, a Ukrainian-based naval engineering and construction bureau specializing
in engineering of complex mobile offshore drilling units for a total cash
consideration of US$2,501 increasing its ownership interest therein to 92.91%.








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