Notes to the Financial Statements

Annual Report & Accounts 2006We’ve only just begun...

ZiRAXSpecialists in production and supply of:• High performance de-icing solutions• Oilfield process chemicalsZirax produces, markets and sells its productsinternationally to a diverse client-base.Contents01 Highlights02 Chairman’s statement04 Operating Review08 Financial Review10 Board of Directors12 Directors’ report16 Independent Auditors’ report18 Consolidated Income Statement19 Balance Sheets20 Cash Flow Statements21 Consolidated statement of Shareholders’Funds and Statement of Changes inShareholders’ Equity22 Notes to the Financial Statements32 Company information48 Directors and AdvisersTurnover in 2006 reached $25 million...04

Market potential in bothde-icing and oil and gas is vastFinancial performance• Total revenues up 21% to $25.0m (2005 $20.6m)• Pre-tax profit up 35% to $3.9m (2005: $2.9mexcluding exceptional listing costs)• Oilfield process chemical operating profit up186% to $1.6m (2005: $0.6m)• De-icing operating profit up 36% to $3.4mon reduced revenue (2005: $2.5m)• $9.4m cash reserves at 31 December 2006Capacity constraints• Demand continues to exceed supply in bothmajor markets• Increasing capacity*» 2005 – 80,000 metric tonnes» 2006 – 100,000 metric tonnes» 2007 – 170,000 metric tonnes (forecast)*Capacity achieved/forecast at the end of each calendar yearRevenues up21%Profit up35%OilfieldProfit up186%De-icingProfit up36%05 06 07Increase incapacityHighlights...and capacity will increase by 70% in 2007.ZiRAX Annual Report & Accounts 200601

…reflecting global aspirations...80,000 MT100,000 MTMI Swaco has been acustomer of Zirax for severalyears using our product indrilling mud formulationsand completion fluids, buthas recently expanded itsuptake of product to meet itsincreasing needs and activityin Kazakhstan. The quality ofproduct and level of customersupport provided, has giventhem the confidence todevelop a closer relationshipwith Zirax170,000 MT2005 2006 2007Increase in capacityPercentage over the period113%Chairman’s Statement continued ZiRAX Annual Report & Accounts 200603

Having achieved our operational goalsin 2006, we are very optimistic aboutprospects of accelerating growthOperating ReviewZirax is primarily focused onmarkets for high performancede-icing solutions and oilfieldprocess chemicals, and agrowing demand from the widerindustrial market. We are inthe fortunate, but sometimesfrustrating, position thatdemand is outstripping oursupply; while we cannot fulfilevery order, we can selectour customers. In 2006 weincreased revenues from theoilfield process sector by 160%which will reduce the seasonalimpact as we go in to 2007.As a direct consequence,de-icing revenues reducedby 16%, however, greateroperational efficiencies led toa 36% increase in operatingprofit from this sector.Clearly, our ability to matchmarket demand will beenhanced with the expectedincreases in capacity from bothour Russian plant in Volgogradand later in 2007 from Italy,under our agreement withSolvay. The challenge remainsto continue growing marketshare and to meet the changingneeds of the end customer.These markets increasinglydemand new, more efficientand environmentally friendlyways of delivering their endrequirements.A key focus through 2006 andin to 2007 has and will be thepreparation for our increasedcapacity through the expansionof our sales and marketingteam and an increasedinternational focus fordistribution of our products.We are also activelyinvestigating, both through ourown research and developmentand through commercialcollaborations, other potentialapplications and revenuestreams, domestic andinternational.Our marketsHigh performance de-icingsolutionsFollowing the decision toallocate a higher level ofproduct to other sectors,revenues from de-icing reduced16% from $16.1m in 2005to $13.6m in 2006, but ouroperating profit increased 36%from $2.5m in 2005 to $3.4min 2006.In this segment, for 2006, weconcentrated our efforts onserving our principal customerthe Moscow City Council wherewe have won the tender for afourth consecutive year. In sodoing, we have been able toincrease cost efficiencies whichhave dropped straight to thebottom line. We still anticipatesignificant growth potential inthis segment and are exploringways to build on our experienceand knowledge....products that are more eco-friendly than traditional materials...ZiRAX Annual Report & Accounts 200604

Whilst salt products are stillwidely used elsewhere, it isacknowledged that prolongeduse of salt is likely to be harmfulto vegetation and corrosive tometal, resulting in increasingenvironmental legislation beingintroduced worldwide to restrictthe use of lower performancede-icing products.The major advantage of ourde-icing products, IceMeltand calcium chloride pellets,is that they give off heat asthey dissolve, melting more icefaster at lower temperatures.Our products penetrate the icequicker than medium strengthflakes or granules due to theirshape and density, and bettermeet environmental concernsbecause significantly smallerquantities are required to achievethe same result. IceMelt is ourspecially designed and patentedhigh performance de-icing agentwhich also contains a corrosioninhibitor, making it particularlyIn 2001 Moscow City Councilabandoned the traditionalsalt / sand solution to theirde-icing needs and investedUS$ 300m in infrastructureto move to high performancede-icing technology. They didthis to improve the overallperformance and economics,increase effectiveness,melting ice down to -30ºCand to meet the increasingenvironmental demands.The previous salt contentOur products give off heat as theydissolve, melting more ice fasterat lower temperatures…and plans to broaden the product range...was hugely corrosive to thefabric of cars, buildings androads alike and harmful to thesurrounding vegetation. Also,a little recognised aspect,at the end of the seasonthere was a vast clean-upoperation as the undissolvedsand had to be cleared fromthe kerbsides and drains.Zirax has very successfullypartnered Moscow in thisground-breaking approach forthe last four years.Operating Review continued ZiRAX Annual Report & Accounts 200605

Strong all round performancefrom a rapidly growing businessFinancial Review ZiRAX Annual Report & Accounts 2006ResultsTotal revenue for 2006increased 21% from theprevious year to $25.0m.Within our segments, salesof oilfield process chemicalshave grown to $9.2m, whichis 160% over 2005, whilstreducing our dependence onhigh performance de-icingproducts to $13.6m from$16.1m in 2005. We havecoupled this with a 138%increase in the industrialsector to $2.2m, furtherspreading our segment rangeand taking advantage of salesopportunities.Cost of sales showed a muchsmaller increase from $10.9min 2005 to $11.8m in 2006,a 9% rise. Distribution, salesand marketing expenses grew9% to $5.5m compared to$5.0m in 2005, whilst Generaland Administrative expenses(excluding exceptional costs)increased 129% to $3.6m in2006 compared to $1.6min 2005.2006 was the first full yearduring which we owned andoperated the majority of ourproduction facilities. As aresult the cost structure ofthe business has changedconsiderably in the periodunder review. The business hasalso significantly expanded itscorporate overheads to meetits requirements as a publiccompany. This has addedan additional $1.4 million ofcosts. Looking at the costs as awhole they have increased from$17.5 m in 2005 to $20.9 min 2006, representing an overall19% increase. The employeenumbers have decreased from225 at the end of 2005 to205 at the close of 2006 asRevenue increased 21%,profit before tax increased 35%…to penetrate markets across the globe…we introduced efficienciesprincipally on the productionside, after we took ownership ofthese facilities.Operating profit beforeexceptional item has grown 32%to $4.0m in 2006 from $3.1min 2005.The previous year’s exceptionalitem of $1.2m representedone off costs of our admissionto AIM.Profit before taxation hasincreased 135% to $3.9m in2006 from $1.7m in 2005.Profit before tax excluding theexceptional item has increased35% from $2.9m in 2005 to$3.9m in 2006.Profit for the year after tax,excluding the exceptional item,was $2.8m compared to $2.1min 2005, a 33% increase.08

Capital expenditureInvestment in fixed assets of$2.0m in 2006, primarilyresults from the expansion of ourVolgograd plant and facility.Cash flowIn 2006 cash from operationsamounted to $2.5m comparedto $1.0m in 2005.Cash capital expenditure was$2.0m as we expand theVolgograd plant capacity. Wealso made an advanced paymentof $2.6m on the signing ofour Supply Agreement withSolvay and repaid borrowings of$2.4m. The remaining $5.3mof funds from the December2005 Admission, shown in tradeand other receivables on thebalance sheet at 31 December2005, were fully received in theearly part of 2006.Cash and cash equivalentsincreased from $6.1m at31 December 2005 to $9.4mat 31 December 2006.Liquidity and financialriskThe Group has sufficient cashfunds to meet its foreseeablebusiness plans. Any surplusfunds are invested, but wedo not undertake speculativetreasury transactions.Basic EPS was 1.63 centsfor 2006 compared to 0.87cents in 2005. In line withthe Boards’ stated strategy nodividend will be payable forthe period.Fenlon DunphyChief Financial OfficerFinancial Review continued…both existing and emerging.ZiRAX Annual Report & Accounts 200609

Board of Directors ZiRAX Annual Report & Accounts 2006Sir Michael OliverNon-executive Chairman,aged 66Michael began his workinglife in South Africa beforereturning to London in 1970and joining stockbrokers Kitcat& Aitken. He subsequentlybecame a partner of the firmand, after its merger withanother company, its managingdirector. City mergers inthe 1990s saw him becomedirector of Lloyds InvestmentManagement and then in 1994director, Investment Funds, atHill Samuel Asset Management(a wholly owned subsidiary ofLloyds TSB Group). Followingthe Scottish Widows’ mergerwith Lloyds TSB in July 2000,Michael was appointed director,Investment Funds, of the newScottish Widows InvestmentPartnership, a position which heheld until 2001 when he retiredfrom the group.Michael is currently chairman ofGoldstone Resources plc, EuropaOil & Gas plc and the Central &Eastern European Fund and is adirector of two other investmentcompanies. He is also aninternational adviser to theBudapest Stock Exchange.Michael was appointed asa director of Zirax plc on1 November 2005.Mr. Valery AndosovExecutive Director,Chief Executive Officer, aged 38Valery graduated from St.Petersburg State Universityin 1998 with a degree inEngineering and has an MBAfrom the Stockholm School ofEconomics.Valery was appointed as thegeneral director of Zirax LLC in2003. He has more than10 years of business experience,including managing a largepetrochemical company andGlobal Specialty ChemicalsLLC, a global multi-million USdollar sales operation. He hasbroad experience in internationalfinance, trade and logistics,particularly in the field ofchemicals and petrochemicals.Valery was appointed as anexecutive director of Zirax plc on11 August 2005.Mr. Mikhail BaranovNon-executive Director,aged 43Mikhail began his career asa theoretical physicist in theMoscow State UniversityNuclear Physics ResearchInstitute in Moscow in 1986,after graduating from MoscowState University with a diplomain physics. Later he worked inthe semi-conductor researchfield and was employed bystate-owned research anddevelopment centres.He started his career in bankingin 1993 when he was appointedas deputy managing director ofone of the commercial banksin Moscow. Having gainedextensive experience in bankingand trade finance, in 1997 hewas appointed as managingdirector of Kapital Moskva Bankand later as managing directorof Inkaro Bank in Moscow.His banking and financeexperience has involved himin a number of merger andacquisition and investment dealswithin the Russian and CISchemical sector.Mikhail was appointed asa director of Zirax plc on11 August 2005.10

Directors’ Report12The directors present their report and the audited financial statements for the year ended31 December 2006.Principal activities and review of businessThe Group’s principal activities are the production, marketing and sale of calcium chloride basedspeciality chemicals in global markets for de-icing products and oilfield process chemicals. The Group’sbusiness review is included in the Operating Review and Financial Review.The Group comprises Zirax plc and its wholly owned subsidiaries, Zirax LLC and Zirax UK Limited. ZiraxUK Limited was incorporated in July 2006. Production is in the City of Volgograd, Russian Federation.Future developmentsAn indication of future developments is contained in the Chairman’s Statement, Operating Review andFinancial Review on pages 2 to 9.Share capitalThe Company’s authorised and issued share capital as at 31 December 2006, together with details ofshares issued during the year, is set out in note 17 to the financial statements.Major shareholdingsAt 13 April 2007 the following interests of 3% or more in the issued share capital of the Companyappeared in the register maintained in accordance with section 211 of the Companies Act 1985:Number ofshares% of sharecapitalErith Group Limited 102,531,250 59.5Valery Andosov 18,093,750 10.5Pennygold Trading Supplies Limited 15,032,266 8.7OOO Yugo-Vostok Promkapital 13,333,333 7.7Metropol (UK) Limited 6,822,734 4.0Robur Fonder AB 5,229,767 3.0Erith Group Limited is 50% beneficially owned by Mr. M. Baranov who is therefore deemed to beinterested in 29.8% of the ordinary shares.Pennygold Trading Supplies Limited (“Pennygold”) is a company incorporated in the Republic of Ireland,the effective control of which is held by the management of IFC Metropol, an affiliate company ofMetropol (UK) Limited (“Metropol”), the Company’s brokers. Pennygold is an independent entity for thepurposes of carrying out investment business and does not have access to market sensitive data throughMetropol. For the purposes of carrying on designated investment business Metropol treat Pennygold asan intermediate customer.ZiRAX Annual Report & Accounts 2006

Directors’ ReportcontinuedOOO Yugo-Vostok Promkapital (“Yugo-Vostok”)holds 13,333,333 ordinary shares. Mr. M. Baranovand Mr. V. Andosov are deemed to be interested inone-third each of these ordinary shares.Results and dividendThe results for the period are set out on page 18.The directors do not recommend the payment of adividend.Directors and their interestsThe current directors of the Company, together withbrief career details, are shown in the Board ofDirectors section on page 10 to 11.The beneficial interests of the directors who heldoffice at the end of the period in the ordinaryshares of the Company and the interests ofdirectors in share options are shown in notes 6and 18 to the financial statements.CurrencyThe Company’s functional currency is British PoundSterling (GBP). The financial statements arepresented in US Dollars (USD), which is theGroup’s presentation currency.Payments to creditorsThe Group’s policy is to settle the terms of paymentwith its suppliers when agreeing the terms of eachtransaction, either by accepting the suppliers’ termsor by making the suppliers aware of alternativeterms and to abide by the agreed terms. It doesnot follow a published code or standard.Trade creditors of the Company at 31 December2006 represented 11 days’ purchases.Related party transactionsDetails of related party transactions are set out innote 22 to the financial statements.EmployeesThe Group had 205 employees at 31 December2006.Post balance sheet eventsDetails of post balance sheet events are disclosedin the Operating Review and in note 27 to thefinancial statements.Auditors and disclosure ofinformation to auditorsPricewaterhouseCoopers LLP have expressed theirwillingness to be reappointed as auditors of theCompany. Upon the recommendation of the auditcommittee, a resolution to reappoint them as theCompany’s auditors and authorise the directors todetermine their remuneration will be proposed atthe AGM.Each of the directors at the time of this report wasapproved, confirm that:• so far as he is aware, there is no relevant auditinformation (that is, information needed by theCompany’s auditors in connection with preparingtheir report) of which the Company’s auditorsare unaware;• he has taken all the steps that he ought to havetaken in his duty as a director in order to makehimself aware of any relevant audit informationand to establish that the Company’s auditors areaware of that information.Corporate governanceThe directors acknowledge the importance of theCombined Code and comply with its principles sofar as is practicable and appropriate given the sizeand constitution of the Board.Board of directorsThe Board comprises three executive directors andthree non-executive directors, including theChairman. The non-executive directors, excludingMr. Baranov, are considered by the Board to beindependent of management and free from anybusiness or other relationship which couldmaterially interfere with the exercise of theirindependent judgement.13ZiRAX Annual Report & Accounts 2006

Directors’ Reportcontinued14The Board ordinarily meets on a bi-monthly basisto determine strategy and to approve budgets andbusiness plans, major capital expenditure,acquisitions and disposals. Additional meetingsare held as appropriate to transact other business.Formal agendas, briefing papers and reports aresent to the Board in advance of its meetings. TheBoard delegates certain responsibilities to twoboard committees, which have clearly definedterms of reference as described below.The directors have access to the advice andservices of the Company Secretary, who is also adirector. Any director may also take independentprofessional advice at the Company’s expense inthe furtherance of his duties.In accordance with the Articles of Association,normally each year one third of the directors(generally those who have held office for thelongest time since their election) will retire fromoffice at the AGM. A retiring director may be reelectedif eligible and a director appointed by theBoard may also be elected, although in the lattercase the director’s period of prior appointment bythe Board will not be taken into account for thepurposes of rotation. In addition, any directorappointed by the board of directors shall holdoffice only until the next annual general meeting(“AGM”). Accordingly, this year, Valery Andosovand Mikhail Baranov will be offering themselves forre-election.Audit committeeThe Audit Committee is chaired by David Woodand its other members are Sir Michael Oliver andMikhail Baranov. The members of the Committeeare re-elected by the directors each year. TheCommittee meets at least twice a year and isresponsible for ensuring that the appropriatefinancial reporting procedures are properlymaintained and reported on and for meeting theauditors and reviewing their reports relating to thefinancial statements and internal control systems.It is also responsible for monitoring theindependence of the auditors. Executive directorsmay attend meetings of the Audit Committee byinvitation, however at least once a year theCommittee meets the auditors without executivedirectors being present.Remuneration committeeThe Remuneration Committee consists of SirMichael Oliver (Chairman), Mikhail Baranov andDavid Wood. The members of the Committee arere-elected by the directors each year. TheCommittee is responsible for determining theCompany’s policy on the remuneration and termsand conditions of service of the executive directorsand employees, reviewing the performance of theexecutive directors and other senior executives andfor determining appropriate levels of remuneration,in consultation with external advisers asappropriate, with due regard to the interests of theshareholders. The Committee meets at least twicea year. The remuneration of the non-executivedirectors will also be set by the RemunerationCommittee. The Committee also makesrecommendations to the Board in respect ofemployee incentives, including the granting ofshare options. No director is permitted toparticipate in discussions or decisions concerninghis own remuneration.Zirax has adopted a Code for dealing in ordinaryshares by directors and employees which isappropriate for an AIM quoted company.Internal controlThe Board is responsible for ensuring that theGroup maintains an adequate system of internalcontrol and risk management. The internalcontrols are designed to safeguard the Group’sassets and to ensure the reliability of financialinformation for both internal use by managementand external reporting.The directors are aware that no system can provideabsolute assurance against material misstatementor loss. They are satisfied that the current controlsand processes to manage significant risks areadequate with regard to the current stage of theGroup’s development.ZiRAX Annual Report & Accounts 2006

Directors’ ReportcontinuedShareholdersThe Board attaches great importance tomaintaining good relationships with all itsshareholders and ensures that all price sensitiveinformation is released to its shareholderssimultaneously in accordance with AIM Rules ofthe London Stock Exchange plc.The Board believes that the AGM provides animportant opportunity for dialogue with privateshareholders. At the AGM the Chief ExecutiveOfficer presents a review of the Group’s activities.The directors and senior management of the Groupare available to answer questions both before andafter the meeting.The Company’s website, www.zirax.com, isregularly updated and contains a wide range ofinformation about the Group.Statement of directors’ responsibilitiesThe directors are responsible for preparing theAnnual Report and the financial statements inaccordance with applicable laws and regulations.Company law requires the directors to preparefinancial statements for each financial year. Underthat law the directors have elected to prepare thefinancial statements in accordance withInternational Financial Reporting Standards (IFRS)as adopted by the European Union. The financialstatements are required by law to give a true andfair view of the state of affairs of the Company andthe Group and of the profit or loss of the Group forthat period.In preparing those financial statements thedirectors are required to:• select suitable accounting policies and thenapply them consistently;• make judgements and estimates that arereasonable and prudent;• state that the financial statements comply withIFRS as adopted by the European Union; and• prepare the financial statements on the goingconcern basis unless it is inappropriate topresume that the Company and Group willcontinue in business;The directors confirm that they have complied withthe above requirements in preparing the financialstatements.The directors are responsible for keeping properaccounting records which disclose with reasonableaccuracy at any time the financial position of theCompany and the Group and to enable them toensure that the financial statements comply withthe Companies Act 1985 [and, as regards theGroup financial statements, Article 4 of the IASRegulation]. They are also responsible forsafeguarding the assets of the Company and theGroup and hence for taking reasonable steps forthe prevention and detection of fraud and otherirregularities.BY ORDER OF THE BOARDFenlon DunphyCompany Secretary13 April 200715ZiRAX Annual Report & Accounts 2006

Independent Auditors’ ReportTo the members of Zirax plc16We have audited the Group and Parent Companyfinancial statements (the ‘‘financial statements’’) ofZirax plc for the year ended 31 December 2006which comprise the Consolidated Income Statement,the Consolidated and Parent Company BalanceSheets, the Consolidated and Parent Company CashFlow Statements, the Consolidated Statement ofShareholders’ Funds and Statement of Changes inShareholders’ Equity and the related notes. Thesefinancial statements have been prepared under theaccounting policies set out therein.Respective responsibilities ofdirectors and auditorsThe directors’ responsibilities for preparing theAnnual Report and the financial statements inaccordance with applicable law and InternationalFinancial Reporting Standards (IFRSs) as adoptedby the European Union are set out in theStatement of Directors’ Responsibilities.Our responsibility is to audit the financialstatements in accordance with relevant legal andregulatory requirements and InternationalStandards on Auditing (UK and Ireland). Thisreport, including the opinion, has been preparedfor and only for the Company’s members as a bodyin accordance with Section 235 of the CompaniesAct 1985 and for no other purpose. We do not, ingiving this opinion, accept or assume responsibilityfor any other purpose or to any other person towhom this report is shown or into whose hands itmay come save where expressly agreed by ourprior consent in writing.We report to you our opinion as to whether thefinancial statements give a true and fair view andhave been properly prepared in accordance withthe Companies Act 1985. We also report to youwhether in our opinion the information given in theDirectors’ Report is consistent with the financialstatements.In addition we report to you if, in our opinion, thecompany has not kept proper accounting records,if we have not received all the information andexplanations we require for our audit, or ifinformation specified by law regarding directors’remuneration and other transactions is notdisclosed.We read other information contained in the AnnualReport and consider whether it is consistent withthe audited financial statements. The otherinformation comprises only the Directors’ Report,the Chairman’s Statement and the OperatingReview and Financial Review. We consider theimplications for our report if we become aware ofany apparent misstatements or materialinconsistencies with the financial statements. Ourresponsibilities do not extend to any otherinformation.Basis of audit opinionWe conducted our audit in accordance withInternational Standards on Auditing (UK andIreland) issued by the Auditing Practices Board.An audit includes examination, on a test basis,of evidence relevant to the amounts anddisclosures in the financial statements. It alsoincludes an assessment of the significantestimates and judgments made by the directorsin the preparation of the financial statements,and of whether the accounting policies areappropriate to the Group’s and Company’scircumstances, consistently applied andadequately disclosed.We planned and performed our audit so as toobtain all the information and explanations whichwe considered necessary in order to provide uswith sufficient evidence to give reasonableassurance that the financial statements are freefrom material misstatement, whether caused byfraud or other irregularity or error. In forming ouropinion we also evaluated the overall adequacy ofthe presentation of information in the financialstatements.ZiRAX Annual Report & Accounts 2006

Independent Auditors’ ReportTo the members of Zirax plcOpinionIn our opinion:• the Group financial statements give a true andfair view, in accordance with IFRSs as adoptedby the European Union, of the state of thegroup’s affairs as at 31 December 2006 and ofits profit and cash flows for the year then ended;• the parent Company financial statements give atrue and fair view, in accordance with IFRSs asadopted by the European Union as applied inaccordance with the provisions of theCompanies Act 1985, of the state of the parentCompany’s affairs as at 31 December 2006 andcash flows for the year then ended;• the financial statements have been properlyprepared in accordance with the Companies Act1985;• the information given in the Directors’ Report isconsistent with the financial statements.17PricewaterhouseCoopers LLPChartered Accountants andRegistered Auditors London13 April 2007ZiRAX Annual Report & Accounts 2006

Consolidated Income StatementFor the Year Ended 31 December 2006182006 2005Notes $’000 $’000Revenue 3 24,958 20,583Cost of sales (11,845) (10,917)Gross profit 13,113 9,666Distribution expenses (5,482) (5,028)General and administrative expenses (3,608) (2,812)Operating profit 4 4,023 1,826Operating profit before exceptional item 4,023 3,060Exceptional listing costs 4 – (1,234)Operating profit 4,023 1,826Interest receivable 87 –Interest payable and similar charges (43) (195)Net foreign exchange (loss)/gain (134) 40Profit before taxation 3,933 1,671Taxation 7 (1,132) (795)Profit for the year 2,801 876Earnings per share expressed in US cents per share:Basic 8 1.63 0.87Diluted 8 1.60 0.87The accompanying notes on pages 22 to 47 are an integral part of these financial statements.ZiRAX Annual Report & Accounts 2006

Balance SheetsAt 31 December 2006Non-current assetsGroupCompany2006 2005 2006 2005Notes $’000 $’000 $’000 $’000Property, plant and equipment 9 8,275 6,267 2 –Investment in subsidiaries 26 – – 7,289 7,289Advance payments 11 2,701 – 2,701 –Deferred income tax assets 7 24 – – –Total non-current assets 11,000 6,267 9,992 7,289Current assetsInventories 10 2,082 830 – –Trade and other receivables 11 3,585 11,310 9,482 8,869Financial assets 12 – – – –Cash and cash equivalents 13 9,448 6,513 242 3,320Total current assets 15,115 18,653 9,724 12,189Current liabilitiesShort-term borrowings 14 – 2,104 – –Trade and other payables 15 1,947 2,506 374 822Current tax liabilities 16 127 399 32 5Total current liabilities 2,074 5,009 406 827Net current assets 13,041 13,644 9,318 11,362Non-current liabilitiesLong-term borrowings 14 – 708 – –Deferred tax liabilities 7 – 28 – –Total non-current liabilities – 736 – –Net assets 24,041 19,175 19,310 18,651Shareholders’ equityShare capital 17 2,965 2,965 2,965 2,965Share premium 19 11,194 11,194 11,194 11,194Other reserves 20 4,357 2,292 7,434 5,871Profit and loss account 21 5,525 2,724 (2,283) (1,379)Total shareholders’ equity 24,041 19,175 19,310 18,65119The financial statements on pages 16 to 47 were approved by the Board of Directors on 13 April 2007and were signed on its behalf by:V. Andosov f. DunphyChief Executive OfficerChief Financial OfficerThe accompanying notes on pages 22 to 47 are an integral part of these financial statements.ZiRAX Annual Report & Accounts 2006

Cash Flow StatementsFor the Year Ended 31 December 200620Cash flows from operating activitiesGroupCompany2006 2005 2006 2005*Notes $’000 $’000 $’000 $’000Profit/(loss) before taxation 3,933 1,671 (904) (1,379)Adjustments for:Depreciation of property, plant and equipment 600 338 1 –Share options expense 45 – 45 –Interest income (87) – (648) –Interest expense 43 195 10 –Profit and loss before working capital changes 4,534 2,204 (1,496) (1,379)Decrease/(increase) in trade and other receivables 2,352 (2,175) (5,777) (3,552)Increase in inventories (1,252) (306) – –(Decrease)/increase in trade and other payables (208) 986 (93) 466(Decrease)/increase in taxes payable (272) 303 26 5Increase in advances to suppliers (2,638) – (2,638) –Cash generated from operations 2,516 1,012 (9,978) (4,460)Taxes paid (1,100) (724) – –Net cash from operating activities 1,416 288 (9,978) (4,460)Cash flows from investing activities:Interest received 23 – 421 –Purchase of property, plant and equipment 9 (2,023) (4,050) (3) –Issue of debt securities 1,103 – – –Repayment of debt securities (1,103) – – –Loans granted – (78) – –Loans repaid – 78 – –Purchase of financial assets 12 – (1,855) – –Sale of financial assets 12 – 1,987 – –Net cash used in investing activities (2,000) (3,918) 418 –Cash flows from financing activities:Cash inflow from issue of ordinary shares 5,317 8,541 5,317 8,541Exceptional share issue costs (356) (797) (356) (797)Proceeds from borrowings – 8,311 – –Repayment of borrowings (2,445) (6,692) – –Interest paid (200) (257) – –Net cash used in financing activities 2,316 9,106 4,961 7,744Effects of exchange rate changes 1,570 (49) 1,521 36Net increase/(decrease) in cashand cash equivalents 3,302 5,425 (3,078) 3,320Cash and cash equivalents atbeginning of the period 6,146 721 3,320 –Cash and cash equivalents at end of the period 13 9,448 6,146 242 3,320* 2005 for the Company represents the period from incorporation to 31 December 2005.The accompanying notes on pages 22 to 47 are an integral part of these financial statements.ZiRAX Annual Report & Accounts 2006

Consolidated Statement of Shareholders’ Funds andStatement of Changes in Shareholders’ EquityFor the Year Ended 31 December 2006ProfitShare Share Other and loss Totalcapital premium reserves account equity$’000 $’000 $’000 $’000 $’000Balance at 1 January 2005 1,559 – 2,392 1,848 5,799Profit for the year – – – 876 876Effect of exchange rates – – (241) – (241)Proceeds from the issue of shares 1,406 11,335 – – 12,741Issue of options – (141) 141 – –Balance at 31 December 2005 2,965 11,194 2,292 2,724 19,175Profit for the year – – – 2,801 2,801Effect of exchange rates – – 2,020 – 2,020Share options credit – – 45 45Balance at 31 December 2006 2,965 11,194 4,357 5,525 24,04121Other reserves comprise the Merger, Translation and Other Reserves – see note 20.The accompanying notes on pages 22 to 47 are an integral part of these financial statements.ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 20061. Basis of presentation of the financial statements(a) General informationZirax plc (the Company) is a public limited company incorporated and domiciled in the UnitedKingdom and listed on the AIM market. The address of its registered office is disclosed on the lastpage of this Annual Report. The consolidated financial statements of the Company for the year ended31 December 2006 comprise the Company and its subsidiaries (together referred to as the Group).(b) Statement of complianceThese financial statements have been prepared in accordance with International Financial ReportingStandards (‘IFRS’) and IFRIC interpretations endorsed by the European Union (‘EU’) and with thoseparts of the Companies Act, 1985 applicable to companies reporting under IFRS.22The Company has adopted IFRS since the date of its registration. These financial statements havebeen prepared under the historical cost convention except as disclosed in the accounting policiesbelow.(c) Adoption of revised standardsIn 2006, the Group has not adopted any new standards.In 2005, the Group adopted the revised IFRS below, which are relevant to its operations.IAS 39 (revised 2004) Financial Instruments: Recognition and MeasurementIAS 32 (revised 2003) Financial Instruments: Disclosure and PresentationIFRIC 2 (issued 2004) Members’ Shares in Co-operative Entities and Similar InstrumentsThe following new standards are in issue, but have not yet been applied by the Group. We do notanticipate that these will have a significant effect on the Group’s financial statements when appliedin future periods.IFRS 7 (issued 2005) Financial Instruments: Disclosures – applicable year ended31 December 2007IAS 1 (amended 2005) Presentation of Financial Statements – applicable year ended31 December 2007IFRS 8 (issued 2006) Operating Segments – applicable year ended 31 December 2009(d) Basis of consolidationThe consolidated financial statements incorporate the financial statements of the Company andentities controlled by the Company (its subsidiaries) up to 31 December each year.All intra-group transactions, balances, income and expenses are eliminated on consolidation.(e) Merger accountingThe Company was incorporated in England on 11 August 2005 and entered into an agreementto acquire the entire share capital of Zirax LLC on 28 October 2005 which was completed on15 November 2005. The acquisition was effected by way of issue of shares. The acquisition hasbeen accounted for using the merger accounting principles under UK standard FRS 6 (Acquisitionsand Mergers) as the directors believe that this is not a business combination in the scope of IFRS 3(Business Combinations) and there is no international standard dealing with business combinationsoutside the scope of IFRS 3. Accordingly, the financial information for the previous year has beenpresented as if Zirax LLC had been owned throughout the comparative accounting periods.ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued1. Basis of presentation of the financial statements continued(e) Merger accounting continuedAs explained above, the Company acquired the entire share capital of Zirax LLC and the Group hasaccounted for the combination using merger accounting. The consideration was satisfied by theissue of 90,625,000 equity shares of $1,559,000. The premium of $3,430,000 on the issue ofthese shares was taken to the merger reserve.The difference of $1,177,000 arising on consolidation between the value of Zirax plc shares issued($4,989,000) and the nominal value of Zirax LLC shares acquired ($3,812,000) has been debitedto other reserves.(f) Management estimatesThe preparation of financial statements requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and the reported amounts of revenues andoperating costs during the reporting period. The most significant estimates relate to realisabilityand depreciable lives of property plant and equipment, allowances for bad and doubtful debts andobsolete inventory, vacation accrual, fair values of financial instruments and share options, anddeferred taxation. Actual results could differ from the estimates.23(g) Segment reportingA business segment is a group of assets and operations engaged in providing products or servicesthat are subject to risks and returns that are different from those of other business segments. Ageographical segment is engaged in providing products or services within a particular economicenvironment that are subject to risks and returns that are different from those of segmentsoperating in other economic environments.Revenue and costs allocation is determined by customer. Assets, liabilities and capital expenditureare allocated by revenue.2. Summary of significant accounting policies(a) Revenue recognitionRevenues are recorded net of VAT and recognised on the date when the risks and rewards ofownership are transferred to the customers. The risks and rewards are deemed to have beentransferred when title has been passed to the customer in accordance with the particular salescontract or invoice. This may be the point when goods are delivered to the customers’ warehouses,are loaded on the trucks from our production site or loaded into the ships for export sales.Revenues are measured at the fair value of the consideration received or receivable. When the fairvalue of consideration received cannot be measured reliably the revenue is recognised at the fairvalue of the goods or services given up.(b) Employee costs(i) Short-term benefitsWages, salaries, social contributions, paid annual leave and sick leave, bonuses, and non-monetary benefitsare accrued in the year in which the associated services are rendered by the employees of the Group.(ii) Pension, medical and social costsThe Group contributes to the Russian Federation state pension, medical and social insurance schemein the normal course of the business. The mandatory contributions are expensed when the associatedservices are rendered by the employees of the Group. There is no Group pension scheme.ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued2. Summary of significant accounting policies continued(c) Foreign currency(i) Functional and presentation currencyThe individual financial statements of each Group company are reported in the currency of theprimary economic environment in which it operates (its functional currency). The functional currencyof the Company and Zirax (UK) Limited is British Pound Sterling (GBP). The functional currency ofZirax LLC is Russian Roubles (RR).The consolidated financial statements are presented in US Dollars (USD), which is the Group’spresentation currency.(ii) Transactions and balances24Monetary assets and liabilities, which are held by the Group and denominated in foreign currenciesat 31 December 2006, are translated into the USD at the exchange rate prevailing at that date.Foreign currency transactions are accounted for at the exchange rate prevailing at the date of thetransaction. Gains and losses resulting from the settlement of such transactions and from thetranslation of monetary assets and liabilities denominated in foreign currency are recognised inthe income statement.At 31 December the official rate of exchange, as determined by the Central Bank of the RussianFederation which has been used in performing translations, was as follows:2006 200531 December RR RR1 USD 26.3311 28.78251 GBP 51.5800 49.7218Exchange restrictions and currency controls exist in relation to the conversion of the RR into othercurrencies. The RR is not freely convertible in most countries outside of the Russian Federation.The exchange rate used in translating the Company’s functional currency of GBP to USD was1.9589 (2005 – 1.7204).(d) Property, plant and equipmentProperty, plant and equipment is recorded at historical cost determined as purchase or constructioncost. At each reporting date management assesses whether there is any indication of impairment ofproperty, plant and equipment. If any such indication exists, management estimates the recoverableamount, which is determined as the higher of an asset’s fair value less costs to sell and its value inuse. For the purposes of assessing impairment, assets are grouped at the lowest levels for whichthere are separately identifiable cash flows (cash-generating units). The carrying amount is reducedto the recoverable amount and the difference is recognised as an expense (impairment loss) in theincome statement. An impairment loss recognised for an asset in prior years is reversed if there hasbeen a change in the estimates used to determine the assets recoverable amount.ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued2. Summary of significant accounting policies continued(d) Property, plant and equipment continuedDepreciation is calculated on the restated amounts of property, plant and equipment on a straightlinebasis. The depreciation periods, which approximate to the estimated useful economic lives ofthe respective assets, are as follows:YearsBuildings 30 to 50Plant and equipment 2 to 20Vehicles 6 to 10The assets’ residual values and useful lives are reviewed, and adjusted, if appropriate, at eachbalance sheet date.Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset,as appropriate, only when it is probable that future economic benefits associated with the item willflow to the Group and the cost of the item can be measured reliably. All other repairs andmaintenance are charged to the income statement during the financial period in which they areincurred.25Gains and losses on disposals are determined by comparing proceeds with the carrying amount.These are included in the income statement.(e) InventoriesInventories are recorded at the lower of cost and net realisable value. The cost of inventory isdetermined using the weighted average cost method. The cost of finished goods and work in progresscomprises raw materials, direct labour, other direct costs and related production overhead (based onnormal operating capacity) but excludes borrowing costs. The net realisable value is the estimatedselling price in the ordinary course of business, less the cost of completion and selling expenses.(f) Trade receivablesTrade receivables are valued initially at fair value and subsequently measured at amortised costusing the effective interest method, less provisions for impairment. A provision for impairment oftrade receivables is established when there is objective evidence that the Group will not be able tocollect all amounts due according to the original terms of the receivables. The amount of theprovision is the difference between the carrying amount and the recoverable amount, being thepresent value of expected cash flows, discounted at the market rate of interest for similar borrowers.The amount of the provision is recognised in the income statement.(g) Value added taxRussian value added taxes (“VAT”) relating to sales by Zirax LLC is payable to the Russian taxauthorities upon collection of receivables from customers. Input VAT is reclaimable against Russiansales VAT upon payment for purchases except for input VAT on the construction of property, plantand equipment, which is reclaimable when the property, plant and equipment is put into operation.Input VAT related to export sales is reclaimable on the date of confirmation of export sales by the taxauthorities. The tax authorities permit the settlement of VAT on a net basis. VAT related to sales andpurchases which have not been settled at the balance sheet date (VAT deferred) is included in thebalance sheet on a gross basis and disclosed separately as a current asset and liability.ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued2. Summary of significant accounting policies continued(g) Value added tax continuedWhere provision has been made for the impairment of receivables, an impairment loss is recordedfor the gross amount of the debtor, including VAT. The related VAT deferred liability is maintaineduntil the debtor is written off for tax purposes.VAT recoverable includes $411,000 (2005: $242,000) in respect of UK VAT.(h) Financial assetsThe Group classifies its financial assets in the following categories: loans and receivables andfinancial assets at fair value through profit or loss. The classification depends on the purposefor which the financial assets were acquired. Management determines the classification of itsinvestments at initial recognition and re-evaluates this designation at every reporting date.(i) Loans and receivables26Loans and receivables are non-derivative financial assets with fixed or determinable payments thatare not quoted in an active market. They arise when the Group provides money, goods or servicesdirectly to a debtor with no intention of trading the receivable. They are included in current assets,except for maturities greater than 12 months after the balance sheet date. These are classified asnon-current assets. Loans and receivables are included in trade and other receivables in thebalance sheet.(ii) Other financial assetsA financial asset is classified in this category if acquired principally for the purpose of selling in theshort term or if so designated by management. Assets in this category are classified as currentassets if they are either held for trading or are expected to be realised within 12 months of thebalance sheet date.All purchases and sales of financial assets are recognised on the trade date – the date on whichthe Group commits to purchase or sell the asset. Financial assets are derecognised when the rightsto receive cash flows from the assets have expired or have been transferred and the Group hastransferred substantially all risks and rewards of ownership. The cost of purchase includestransaction costs. Subsequent to initial recognition financial assets are carried at fair value, whilstloans and receivables are carried at amortised cost using the effective yield method. Realised andunrealised gains and losses arising from changes in the fair value of financial assets are included inthe income statement in the period in which they arise. The Group establishes fair value offinancial assets by using valuation techniques. These include the use of recent arm’s lengthtransactions and reference to other instruments that are similar in nature.(i) Cash and cash equivalentsCash and cash equivalents comprise cash in hand and cash held on demand with banks, and bankoverdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet.ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued2. Summary of significant accounting policies continued(j) Borrowings and borrowing costsBorrowings are valued initially at fair value of the proceeds received (which is determined using theprevailing market rate of interest for a similar instrument, if significantly different from thetransaction price), net of transaction costs incurred. In subsequent periods, borrowings are statedat amortised cost using the effective yield method; any difference between fair value of theproceeds (net of transaction costs) and the redemption amount is recognised as interest expenseover the period of the borrowings. Interest costs on borrowings to finance the construction ofproperty, plant and equipment are capitalised, during the period of time that is required tocomplete and prepare the asset for its intended use. All other borrowing costs are expensed.Borrowings are classified as current liabilities unless the Group has an unconditional right to defersettlement of the liability for at least 12 months after the balance sheet date.(k) ProvisionsProvisions are recognised when the Group has a present legal or constructive obligation as a resultof past events, and it is probable that an outflow of resources will be required to settle theobligation, and a reliable estimate of the amount can be made. Where the Group expects aprovision to be reimbursed, for example under an insurance contract, the reimbursement isrecognised as a separate asset but only when the reimbursement is virtually certain.(l) Taxation27Taxation on profits or losses for the year comprises current and deferred tax. Taxation is recognisedin the income statement except to the extent that it relates to items recognised directly in equity, inwhich case it is recognised in equity.Current tax is the expected tax payable on the taxable income for the year, using rates enacted atthe balance sheet date and any adjustment to tax payable in respect of previous years.Deferred tax assets and liabilities are calculated in respect of temporary differences using thebalance sheet liability method. Deferred income taxes are provided for all temporary differencesarising between the tax basis of assets and liabilities and their carrying values for financialreporting purposes. A deferred tax asset is recorded only to the extent that it is probable thattaxable profit will be available against which the deductible temporary differences can be utilised.Deferred tax assets and liabilities are measured at tax rates that are expected to apply to theperiod when the asset is realised or the liability is settled, based on tax rates that have beenenacted or substantively enacted at the balance sheet date.(m) Non-cash transactionsNon-cash transactions have been excluded from the statement of cash flows. Therefore allinvesting and financing transactions as well as the results of operating activities representtransactions, which are settled in cash.(n) Share capitalThe share capital of the Company consists of registered issued and fully paid ordinary shares. Anyexcess of the fair value of consideration received over the par value is valued as a share premium.ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued2. Summary of significant accounting policies continued(o) Share-based paymentsThe Group issues equity-settled share-based payments to certain employees. Equity-settled sharebasedpayments are measured at fair value (excluding the effect of non market-based vestingconditions) at the date of grant. The fair value determined at the date of grant of the equity-settledshare-based payments is expensed on a straight-line basis over the vesting period, based on theGroup’s estimate of the shares that will eventually vest.Fair value is measured using the Black-Scholes option pricing model. The expected life used in themodel has been adjusted, based on management’s best estimate, for the effects of nontransferability,any exercise restrictions and behavioural considerations.3. Segment informationPrimary reporting format – business segmentsAt 31 December 2006, the Group is organised into two main business segments: (i) manufactureand sale of de-icing products, and (ii) manufacture and sale of oilfield process chemicals.Other Group operations mainly comprise the sale of food additives, sale of semi-finished products,provision of production facilities and corporate activities. These do not constitute separatelyreportable segments.28The segments results for the period ended 31 December 2006 are as follows:OilfieldDe-icing processproducts chemicals Other Total$’000 $’000 $’000 $’000Revenue 13,570 9,170 2,218 24,958Operating profit 3,429 1,573 (979) 4,023Finance costs and netforeign exchange (90)Profit before taxation 3,933Taxation (1,132)Profit for the year 2,801ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued3. Segment information continuedThe segment results for the year ended 31 December 2005 are as follows:OilfieldDe-icing processproducts chemicals Other Total$’000 $’000 $’000 $’000Revenue 16,125 3,525 933 20,583Operating profit 2,514 550 (4) 3,060Exceptional listing cost (1,234) (1,234)Finance costs and netforeign exchange (155)Profit before taxation 1,671Taxation (795)Profit for the year 876The total depreciation cost included in the income statements for the year ended 31 December2006 and the year ended 31 December 2005 is as follows (note 9):OilfieldDe-icing processproducts chemicals Other Total$’000 $’000 $’000 $’000Year ended 31 December 2006 321 216 63 600Year ended 31 December 2005 265 58 15 33829The segment assets and liabilities as at 31 December 2006 and capital expenditure for the periodthen ended are as follows:OilfieldDe-icing processproducts chemicals Other Total$’000 $’000 $’000 $’000Assets 11,710 8,699 5,706 26,115Liabilities 857 601 616 2,074Capital expenditure (note 9) 1,092 728 203 2,023ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued3. Segment information continuedThe segment assets and liabilities as at 31 December 2005 are as follows:OilfieldDe-icing processproducts chemicals Other Total$’000 $’000 $’000 $’000Assets 12,535 2,740 9,645 24,920Liabilities 3,142 1,404 1,199 5,745Capital expenditure 3,173 694 183 4,050Segment assets consist primarily of property, plant and equipment, inventories, receivablesand cash.Segment liabilities comprise operating liabilities.Secondary reporting format – geographical segmentsThe Group sells its products to customers located in two main geographical segments: domesticsales and export sales. They are summarised in the table below. Sales in the domestic market areto customers located in the Russian Federation, where export sales are to the customers locatedmainly in Netherlands, Canada, USA and CIS countries. The risks and rewards of selling to theNetherlands, Canada and the USA are deemed to be similar and so have been included as a singlegeographical segment. Sales to CIS countries are less than 10% and so have been included inthis segment.30Domestic Export Total$’000 $’000 $’000Year ended 31 December 2006 20,343 4,615 24,958Year ended 31 December 2005 15,289 5,294 20,583Revenues are allocated based on the country in which the customer is located. All assets andcapital expenditure are located or incurred in the Russian Federation.CompanyThe Company’s business is to invest in its subsidiaries and, therefore, it operates in asingle segment.ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued4. Operating profit2006 2005$’000 $’000Operating profit is stated after charging:Exceptional listing cost – 1,234Depreciation 600 338In 2005 the costs of listing the company’s shares on AIM havebeen treated as exceptional and expensed in the periodFees payable for the audit of parent companyand consolidated financial statements 233 261Fees payable to the company’s auditors for other servicesOther services pursuant to legislation 101 845Tax services 35 –Other services pursuant to legislation in 2005 relate to charges for the Company’s IPO on AIM inDecember 2005, of which $248,000 have been deducted from the share premium account.5. Staff information (including directors)2006 2005$’000 $’000Employee costs were:Wages and salaries 2,814 977Social security costs 474 157Pension costs 20 –Share option costs 45 –3,353 1,13431At 31 December 2006 the Group employed 205 employees (including directors) (31 December2005: 225 employees).The Group does not operate any pension schemes. Pension costs represent contributions paid todirectors personal pension schemes6. Directors’ remuneration2006 2005$’000 $’000Salaries and benefits 617 164Pension costs 20 –Share option costs 45 –682 164The remuneration of the highest paid director was $201,000 (2005: $149,000).Remuneration paid to key management personnel for their services in full or part time executivemanagement positions is made up of a contractual salary and a performance bonus depending onoperating results. Discretionary bonuses may also be payable to directors, which are approved bythe shareholders’ meeting, provided the Group has statutory profit for the year. There is no longtermcompensation plan.ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued6. Directors’ remuneration continuedThe following tables show the beneficial interests of the directors who held office at the end of theyear in the ordinary shares of the Company and the interests of directors in share options:Directors – shares:Shares heldShares heldatat1 January 31 December2006 (a) Additions 2006Sir Michael Oliver – – –Mr. Valery Andosov 22,538,194 – 22,538,194Mr. Mikhail Baranov (b) 66,979,166 – 66,979,166Mr. Fenlon Dunphy – – –Mr. Mikhail Petrushin – – –Mr. David Wood – – –(a) The amount of shares held at 1 January 2006 have been restated from the amount disclosed inthe Group’s Annual Report & Accounts 2005 to reflect more accurate information now availableto management. The amounts as previously disclosed were: Mr. Valery Andosov, 20,093,750shares; Mr. Mikhail Baranov, 108,197,917 shares.(b) Mr Andosov’s shares are held directly by him and indirectly through 000 Yugo-VostokPromkapital, in which he is a 33.3% shareholder. The number of shares shown in the tableabove represent the deemed interests of Mr Andosov.32(c) Mr. Baranov’s shares are held indirectly through Erith Group Limited, in which he is a 50%shareholder and through 000 Yugo-Vostok Promkapital, in which he is a 33.3% shareholder.The number of shares shown in the table above represent the deemed interests of Mr Baranov.Options OptionsExercise held at granted Options held atDirectors – Price 1 January during 31 December Nominal exerciseoptions (£) 2006 the year 2006 datesMr. Mikhail Petrushin 0.15 861,607 – 861,607 05.06.07 – 12.12.10Sir Michael Oliver 0.15 – 1,723,214 1,723,214 02.04.08 – 02.10.11Mr. David Wood 0.15 – 861,607 861,607 02.04.08 – 02.10.11Mr. Fenlon Dunphy 0.15 – 1,723,214 1,723,214 27.06.08 – 27.12.11Options were issued under an employee share scheme approved by the Board of the Company on12 December 2005 and will not be exercisable until 18 months from the date of grant of the option.Other options were granted to Hanson Westhouse LLP (formerly Westhouse Securities LLP)(note 18).ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued7. TaxationTaxation expense for the year:2006 2005$’000 $’000Current income tax expense (1,184) (786)Deferred tax 52 (9)Taxation (1,132) (795)The taxation for the period is higher (2005: higher) than the standard rate of corporation tax in theUK (30%). The differences are explained below:2006 2005$’000 $’000Profit before taxation 3,933 1,671Profit on ordinary activities multiplied by standardrate of corporation tax of 30% (2005: 30%) (1,181) (501)Effects of:Deferred tax credit recognised on tax losses (17) –Adjustment in respect of foreign taxation rates 273 184Non-deductible expenses and non-taxable income (33) (53)Unrelieved UK taxation losses carried forward (198) (45)Exceptional listing cost – (371)Other (28) –Taxation (1,184) (786)33Deferred taxationIn 2006, the Russian subsidiary’s taxable profit was subject to taxation at 24%. Deferred taxationassets/liabilities of the Russian subsidiary are calculated at 24% as at 31 December 2006 (2005:24%). The net effect of the change in deferred taxation balances at the balance sheet dates isreflected in the income statement for the periods then ended.Deferred taxation assets and liabilities are only offset where there is a legally enforceable right ofoffset and there is an intention to settle the balances net.ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued7. Taxation continuedTaxation effect of deductible and taxable temporary differences:Differences31 December recognition 31 December2005 and reversals 2006Property, plant and equipment (47) 7 (40)Inventory (4) – (4)Accrued expenses 18 13 31Trade and other receivables 5 15 20Losses – 17 17Total net deferred (28) 52 248. Earnings per share (EPS)2006 2005Profit for the year ($’000) 2,801 876Number of shares – weighted averageBasic (‘000) 172,321 100,151Basic earnings per share (cents) 1.63 0.87Number of shares – weighted averageDiluted (‘000) 175,570 100,265Diluted earnings per share (cents) 1.60 0.8734ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued9. Property, plant and equipment – GroupCost:Plant Assetsand under CapitalBuildings Vehicles equipment construction advance Total$’000 $’000 $’000 $’000 $’000 $’000Balance at1 January 2006 3,795 26 3,120 41 – 6,982Additions – 70 75 853 1,025 2,023Translation difference 353 2 290 5 – 650Balance at31 December 2006 4,148 98 3,485 899 1,025 9,655Accumulated depreciation:Balance at1 January 2006 82 6 627 – – 715Depreciation charge 148 9 443 – – 600Translation difference 8 1 56 – – 65Balance at31 December 2006 238 16 1,126 – – 1,380Net book value:Balance at31 December 2006 3,910 82 2,359 899 1,025 8,275Balance at31 December 2005 3,713 20 2,493 41 – 6,267The capital advance relates to sums advanced for producing non-standard production equipmentwhich will be ready in 2007.35ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued9. Property, plant and equipment – Group continuedCost:Plant Assetsand underBuildings Vehicles equipment construction Total$’000 $’000 $’000 $’000 $’000Balance at1 January 2005 1,299 24 1,655 41 3,019Additions 2,542 6 1,499 3 4,050Disposals – (3) – – (3)Translation difference (46) (1) (34) (3) (84)Balance at31 December 2005 3,795 26 3,120 41 6,982Accumulated depreciation:Balance at1 January 2005 26 2 333 – 361Depreciation charge 56 4 278 – 338Translation difference – – 16 – 16Balance at31 December 2005 82 6 627 – 715Net book value:Balance at31 December 2005 3,713 20 2,493 41 6,267Balance at31 December 2004 1,273 22 1,322 41 2,6589. Property, plant and equipment – Company36Plant andequipment Total$’000 $’000Cost:1 January 2006 – –Additions 3 3Balance at 31 December 2006 3 3Accumulated depreciation:1 January 2006 – –Depreciation charge 1 1Balance at 31 December 2006 1 1Net book value:At 31 December 2006 2 2At 31 December 2005 – –ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued10. Inventories2006 2005$’000 $’000Materials and consumables 861 638Work in progress 116 74Finished products 1,105 1182,082 83011. Trade and other receivablesGroupCompany2006 2005 2006 2005$’000 $’000 $’000 $’000Trade receivables 948 2,279 – –Amounts owed by group undertaking – – 9,028 3,269Receivables from related parties (note 22) 137 1,056 – –Less Provision for impairment of advances – (9) – –VAT recoverable 1,531 1,769 410 242Other receivables 969 6,215 44 5,358Advance payments 2,701 – 2,701 –6,286 11,310 12,183 8,869Less Non-current portion: Advancepayments (2,701) – (2,701) –Current portion 3,585 11,310 9,482 8,869Included in other receivables at 31 December 2005 is an amount of £3,078,000 ($5,317,000)relating to outstanding proceeds of placement of shares.Trade receivables are denominated in Russian Roubles, except for $46,000 and $984,000denominated in USD, as at 31 December 2006 and 31 December 2005 respectively.3712. Other financial assets2006 2005$’000 $’0001 January – 132Additions – 1,855Disposals – (1,987)31 December – –Other financial assets consist of interest free related party promissory notes.ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued13. Cash and cash equivalentsGroupCompany2006 2005 2006 2005$’000 $’000 $’000 $’000RR denominated cash and cash equivalents 9,202 3,152 – –Other currency balances with banks 246 3,361 242 3,3209,448 6,513 242 3,320There are no restrictions on the cash balances held.Cash and bank overdrafts include the following for the purposes of the cash flow statement:GroupCompany2006 2005 2006 2005$’000 $’000 $’000 $’000Cash 9,448 6,513 242 3,320Bank overdrafts (note 14) – (367) – –9,448 6,146 242 3,32014. BorrowingsShort-term borrowings:2006 2005$’000 $’000Bank overdrafts (note 13) – 367Bank borrowings – 1,737Long-term borrowings:– 2,104Bank borrowings – 708The interest rates at the balance sheet date were as follows:382006 2005Rate Amount Rate Amount$’000 $’000Bank overdrafts – – 10.5% 367Bank borrowings – – 11.0% 347Bank borrowings – – 15.0% 2,098– 2,812ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued14. Borrowings continuedThe maturity of long-term borrowings is as follows:2006 2005$’000 $’000Between 1 and 2 years – 708All borrowings were in Russian Roubles.15. Trade and other payablesGroupCompany2006 2005 2006 2005$’000 $’000 $’000 $’000Trade payables 640 1,747 49 611Amounts due to related parties (note 22) 105 155 – –Other payables and accruals 1,202 604 325 2111,947 2,506 374 82216. Current tax liabilitiesGroupCompany2006 2005 2006 2005$’000 $’000 $’000 $’000Income tax 3 – – –Value added tax 14 335 – –Property and other taxes 110 64 32 5127 399 32 5Value added tax of $14,000 as at 31 December 2006 (2005: $335,000) is payable to taxauthorities when payments are received from customers or if relevant receivable balances arewritten off.17. Share capitalGroup and Company39Authorised:2006 2005$’000 $’000500,000,000 ordinary shares of 1p each 8,602 8,602Issued and fully paid:172,321,429 ordinary shares of 1p each 2,965 2,965ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continuedPotential issues of ordinary sharesOn 12 December 2005, Zirax plc entered into an option agreement with the directors and HansonWesthouse LLP (formerly Westhouse Securities LLP), the nominated adviser pursuant to whichZirax plc granted options to Hanson Westhouse LLP to subscribe for up to 1,723,214 ordinaryshares at the placing price of 15 pence. The option may be exercised at any time during the periodof 5 years from admission to AIM provided that they may not be exercised in more than 4 tranches.The cost of Hanson Westhouse’s options have been treated as issue costs and deducted from sharepremium, with a corresponding credit to other reserves.Details of options held by directors are disclosed in note 6.18. Share-based paymentsThe Group has granted five tranches of options with a fixed exercise price equal to the placing priceof the shares at the date of admission to AIM. The options were granted to certain directors andHanson Westhouse LLP, as explained in notes 6 and 17. Options were valued using the Black-Scholes option pricing model and the charge for the year was $45,000. No performance conditionswere included in the fair value calculations. The fair value per option granted and the assumptionsused in the calculation are as follows:Share price Fair valueNumber on grant (price) onof shares date grant date FairGrant date granted (pence) (pence) value £12 December 2005 861,607 15p 4.73p 40,75412 December 2005 1,723,214 15p 4.73p 81,5082 October 2006 861,607 14.25p 2.64p 22,7772 October 2006 1,723,214 14.25p 2.64p 45,55427 December 2006 1,723,214 14p 2.48p 42,653402006 2005Range of share price at grant date 14 – 14.25p 15pExercise price 15p 15pExpected volatility 24% 44%Option life (years) 5 5Expected life (years) 2.5 2.5Risk free rate 5.2% 4.8%Dividend yield nil nilZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued18. Share-based payments continuedThe expected volatility is based on management’s best estimate and in 2006 this is represented bythe average volatility of the AIM chemical sector. The expected life is the average expected periodto exercise. The risk free rate of return is the yield on zero-coupon UK government bonds of a termconsistent with the assumed option life. A reconciliation of option movements over the year to 31December 2006 is shown below:weightedaveragenumber exercise(‘000) priceOutstanding at 1 January 2006 2,585 –Granted 4,308 15pExercised – –Outstanding at 31 December 2006 6,893 15pExercisable at 31 December 2006 1,723 15p19. Share premiumGroup Company$’000 $’000At 31 December 2005 and 31 December 2006 11,194 11,19420. Other reservesGroupMerger Translation Otherreserve reserve reserve Total$’000 $’000 $’000 $’000At 1 January 2005 3,430 287 (1,325) 2,392Effect of exchange rates – (241) – (241)Issue of options – – 141 141At 31 December 2005 3,430 46 (1,184) 2,292Effect of exchange rates – 2,020 – 2,020Issue of options – – 45 45At 31 December 2006 3,430 2,066 (1,139) 4,35741Details on merger reserve are provided in note 1(e).The other reserve principally relates to the difference upon consolidation resulting from the mergeraccounting, and the options issued.ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued20. Other reserves continuedCompanyMerger Translation Otherreserve reserve reserve Total$’000 $’000 $’000 $’000At 1 January 2005 – – – –Excess of par value of sharesissued over the book valueof the assets acquired (note 26) 5,730 – – 5,730Issue of options – – 141 141At 31 December 2005 5,730 – 141 5,871Effect of exchange rates – 1,518 – 1,518Share option costs 45 45At 31 December 2006 5,730 1,518 186 7,43421. Profit and loss accountGroup Company$’000 $’000At 1 January 2005 1,848 –Profit/(loss) for the year/period 876 (1,379)At 31 December 2005 2,724 (1,379)Profit/(loss) for the year 2,801 (904)At 31 December 2006 5,525 (2,283)The directors have not presented an individual profit and loss account for the Company, aspermitted by s230 of the Companies Act 1985.22. Balances and transactions with related partiesParties are considered to be related if one party has the ability to control the other party or exercisesignificant influence over the other party in making financial or operational decisions as defined byIAS 24 “Related Party Disclosures”.In considering each possible related party relationship, attention is directed to the substance of therelationship, not merely the legal form.42Related parties may enter into transactions which unrelated parties might not, and transactionsbetween related parties may not be effected on the same terms, conditions and amounts astransactions between unrelated parties.ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued22. Balances and transactions with related parties continuedThe nature of the related party relationships for those related parties with whom the Group enteredinto significant transactions or had significant balances outstanding at 31 December 2006 and31 December 2005 are detailed below. In accordance with IAS 24 disclosure is not required oftransactions and balances between Group companies where such transactions are eliminatedupon consolidation.All sales between the Group and its related parties are based on the market prices current at thetime of sales.All inventory purchases made by the Group from its related parties are based on the market pricescurrent at the time of purchase.In November 2005 the Group sold debt, at face value, due from Benick in the amount of $800,000to the Erith Group Limited. During the year ended 31 December 2006, the Group incurred costs of$97,854 in relation to the collection of this debt, which it bore on behalf of the Erith Group Limited.(i) Balances with related parties:2006 2005Balance sheet caption Relationship $’000 $’000Trade receivable from andprepayments to:OAO Kaustik Under common control 137 217OOO Evroles Under common control – 39Erith Group Limited Shareholder – 800137 1,056Trade payables to:OAO Plastcard Under common control 1 94OAO Kaustik Under common control 73 61OOO European ChemicalCompany Other related party 31 –105 155(ii) Transactions with related parties:2006 2005Income statement caption Relationship $’000 $’000Revenue from transactions with:OAO Kaustik Under common control 448 599OOO Evroles Under common control 7 63OOO European ChemicalCompany Other related party 52 –507 66243ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued22. Balances and transactions with related parties continuedRevenue from transactions with OAO Kaustik is represented mainly by an operating lease ofproduction equipment.2006 2005Income statement caption Relationship $’000 $’000Inventory purchases:OAO Kaustik Under common control 9,513 7,961OOO Evroles Under common control 4 55OAO Plastcard Under common control 26 81OOO European ChemicalCompany Other related party 66 –9,609 8,097Production services purchases:OAO Kaustik Under common control 599 550(iii) Other related party issuesZirax plc agreements described below are related party agreements all of which have been enteredinto on an “arms’ length basis”.(a) On 28 October 2005 Zirax plc entered into a share purchase agreement with Mr. V. Andosovand Erith Group Limited pursuant to which it purchased the entire equity interest in the chartercapital of Zirax LLC for an aggregate consideration of $4,989,000.(b) On 3 November 2005 Zirax plc entered into two set-off agreements with Mr. V. Andosov andErith Group Limited respectively (the “Set-Off Agreements”). Under the Set-Off AgreementsZirax plc agreed to set off the aggregate $4,989,000 purchase price due and payable to Erith GroupLimited and Mr. V. Andosov by Zirax plc against the called-up but unpaid subscription price duefrom them to Zirax plc in respect of the issue of ordinary shares.(c) On 1 September 2005 Zirax LLC entered into a 20 year term framework agreement with OAOKaustik for the supply of raw materials and the provision of utilities and services. The prices for thesupply of goods and services under the framework agreement and any other contract entered intobetween the parties pursuant thereto are determined for the first year of its term and subject toreview thereafter in accordance with the formula set out therein. Pursuant to this frameworkagreement the parties executed several one-year agreements for the supply of hydrochloric acid,liquid calcium chloride, lime-milk, hot water, steam, natural gas, settled water, power, maintenanceand repair, transport and telecommunications, waste purification and disposal services.44ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued23. Significant non-cash transactionsIncluded in sales for the year 2006 are non-cash transactions amounting to $555,000(2005: $732,000). Non-cash transactions represent primarily amounts in relation to theprovision of production facilities to a former related party, JSC Kaustik, and sales ofsemi-finished goods in exchange for production services and utilities.Non-cash transactions have been excluded from the cash flow statement.24. Contingencies, commitments and operating risks(i) InsuranceThe Group holds insurance policies to cover risks related to its export shipments and transportationof goods to customers. Property, plant and equipment are not insured, with the exception of theGroup’s vehicles.(ii) Environmental mattersThe enforcement of environmental regulation in Russian Federation is evolving and the enforcementposture of government authorities is continually being reconsidered. The Group periodically evaluatesits obligations related to environmental pollution. As obligations are determined, they are providedimmediately. Potential liabilities, which might arise as a result of changes in existing regulations, civillitigation or legislation, cannot be estimated but could be material. In the current enforcementclimate, under existing legislation, management believes that there are no significant liabilities forenvironmental damage.(iii) TaxationRussian tax, currency and customs legislation is subject to varying interpretations, and changes,which can occur frequently. Management’s interpretation of such legislation as applied to thetransactions and activity of the Group may be challenged by the relevant regional and federalauthorities. Recent events within the Russian Federation suggest that the tax authorities may betaking a more assertive position in their interpretation of the legislation and assessments, and itis possible that transactions and activities that have not been challenged in the past may bechallenged. As a result, significant additional taxes, penalties and interest may be assessed.Fiscal periods remain open to review by the authorities in respect of taxes for three calendar yearspreceding the year of review. Under certain circumstances reviews may cover longer periods.As at 31 December 2006 management believes that its interpretation of the relevant legislation isappropriate and the Group’s tax, currency and customs positions will be sustained.(iv) Operating environmentWhilst there have been improvements in economic trends in the country, the Russian Federationcontinues to display certain characteristics of an emerging market. These characteristics include, butare not limited to, the existence of a currency that is not freely convertible in most countries outsideof the Russian Federation, restrictive currency controls, and relatively high inflation. The tax,currency and customs legislation within the Russian Federation is subject to varying interpretations,and changes, which can occur frequently.The future economic direction of the Russian Federation is largely dependent upon the effectivenessof economic, financial and monetary measures undertaken by the Government, together with tax,legal, regulatory, and political developments.45ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued24. Contingencies, commitments and operating risks continued(v) Concentration riskThe Group’s business is considerably dependent on the results of annual tenders conducted by theGovernment of Moscow city. The proportion of sales under such tenders for the year 2006 is 52%(2005 – 59%).25. Financial risks(i) Credit riskFinancial assets, which potentially subject the Group to credit risk, consist principally of tradereceivables. The Group has policies in place to ensure that sales of products and services are madeto customers with an appropriate credit history. The carrying amount of accounts receivable, net ofprovision for impairment of receivables, represents the maximum amount exposed to credit risk. TheGroup has no significant concentrations of credit risk, apart from the Government of Moscow city.Although collection of receivables could be influenced by economic factors, management believesthat there is no significant risk of loss to the Group beyond the provision already recorded.Cash is placed in financial institutions, which are considered at time of deposit to have minimal riskof default.(ii) Foreign exchange riskThe Group sells its products in the global market, including products exported to North Americanand European countries and therefore is exposed to foreign exchange risk.Foreign currency denominated assets (accounts receivable) give rise to potential, foreign exchangeexposure. The Group does not have formal arrangements to mitigate foreign exchange risks of theGroup’s operations.(iii) Interest rate riskThe Group’s income and operating cash flows are substantially independent of changes in marketinterest rates. The Group is exposed to interest rate risk through market fluctuations of borrowings.Interest rates on borrowings are fixed.(iv) Liquidity riskTrading activities of the Group are mainly financed with short-term borrowings and trade payables.Significant capital expenditure in 2006 did not result in a net cash outflow from activities for thereporting period.46ZiRAX Annual Report & Accounts 2006

Notes to the Financial Statements31 December 2006 continued26. Investment in subsidiary undertakingCompany2006$’000At 1 January 2006 and 31 December 2006 7,289The investment in the Russian subsidiary undertaking is stated at book value of net assets acquiredin the subsidiary undertaking. The excess of the net assets acquired over the nominal value of theshares issued to acquire the company of $1,559,000 totalled $5,730,000. This balance is includedwithin the merger reserve of the Company.The investment in the UK subsidiary undertaking which was incorporated during the year was anominal amount of $3.Details of the subsidiary undertaking are as follows:Country ofincorporationGroupName and nature of and effectivebusiness registration Type of share shareholdingZirax LLC – producer of chemicals Russia Charter capital 100%Zirax (UK) Limited –distributor of chemicals England Ordinary 100%27. Post balance sheet eventsThere are no events to report after the balance sheet date.47ZiRAX Annual Report & Accounts 2006

Directors and AdvisersDIRECTORSSir James Michael Yorrick Oliver(non-executive chairman)Valery Yurievich Andosov(chief executive officer)Mikhail Vladimirovich Baranov(non-executive director)John Fenlon Dunphy(chief financial officer)Mikhail Leonidovich Petrushin(executive director)David Thomas Wood(non-executive director)SECRETARYJohn Fenlon DunphyAUDIT COMMITTEEDavid Thomas WoodSir James Michael Yorrick OliverMikhail Vladimirovich BaranovREMUNERATION COMMITTEESir James Michael Yorrick OliverMikhail Vladimirovich BaranovDavid Thomas WoodNOMINATED ADVISeRand JOINT BROKERHansonWesthouse Limited12th Floor, One Angel CourtLondon EC2R 7HJTel: +44 (0)207 601 6100Principal BROKERMetropol (UK) LimitedPrinces House, 38 Jermyn StreetLondon SW1Y 6DNTel: +44 (0)207 439 6880SOLICITORSClyde & Co51 EastcheapLondon EC3M 1JPTel: +44 (0)207 623 1244AUDITORSPricewaterhouseCoopers LLP1 Embankment PlaceLondon WC2N 6RHTel: +44 (0)207 583 5000REGISTRARSComputershare Investor Services PlcPO Box 82, The PavilionsBridgwater RoadBristol BS99 7NHREGISTERED OFFICE and HEAD OFFICE68 Lombard StreetLondon EC3V 9LJTel: +44 (0)207 868 1694COMPANY NUMBER05533825WEBSITEwww.zirax.com48ZiRAX Annual Report & Accounts 2006

Zirax plc68 Lombard Street,London EC3V 9LJTel +44 (0)207 868 1694Fax +44 (0)207 868 1800www.zirax.com