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REPORT of Director General of KAMAZ Inc. at Annual Meeting of Shareholders

Esteemed shareholders and participants of the annual meeting of shareholders! May I present to you an Annual Report for the year 2002, with the last year results of KAMAZ Inc. operation, both of the Mother Company and of the Group of KAMAZ Inc. Companies.

Complete information with the fiscal year results will be presented to you later, in the Annual Accounting Report. The current Report is an estimation of major processes and tendencies, which took place within the period under review, and which had their impact on the Company operation results.

Net profit of the Group of KAMAZ Inc Companies within the fiscal year made 78,7 million Rubles. This is by 9% higher than in the year 2001. Net profit of “KAMAZ Inc.” OJSC in 2002 made 1,886,000,000 (one billion eight hundred and eighty-six million) Rubles.

Capitalization of the Mother Company has increased by 23% and now it exceeds USD 290,000,000.

The Group of KAMAZ Inc Companies has delivered goods and rendered services to its customers and end-users to the amount, which exceeds 23 billion Rubles.

In 2002 KAMAZ sold on the markets of Russia, CIS and overseas countries over 20,000 units of trucks and 38,500 cars; nearly 25,000 diesel engines and power units; over 3 billion Rubles’ cost spare parts and major products; 1,5 billion Rubles’ cost of diversification products. Profitability of sales has increased by 26% vs. last year rate and gained 8%.

KAMAZ has successfully stabilized relationships with its suppliers, customers and financial institutions. Within the fiscal year, the Company has met all its obligations without delays. Over 1,2 billion Rubles of accounts payable were restructured, including capitalization of 600 million Rubles.

The year was very difficult for the Company. For the first time, KAMAZ faced tough competition on the domestic market, especially vs. second-hand trucks of western manufacturers.

EU countries are trying hard to overcome lasting recession on the world market of trucks by stimulating truck fleet renovation; approving special taxation and depreciation policies; allocating payments and penalties for environment protection. Very soon, EU is planning to introduce compulsory payment for utilization of old vehicles.

Unprofitable operation of obsolete vehicles on their national markets causes reasonable interest of both Western European vehicle manufacturers and owners in supplying second-hand vehicles to those countries, where vehicle utilization by its manufacture is not stipulated by any agreement.

As the Russian market is functioning under liberal customs policy, and is practically not restricted by neither environmental nor technical regulations, KAMAZ was not ready for such an aggressive expansion of western manufactured vehicles into Russia during the first half of 2002. Sales volumes of second-hand vehicles have increased by 41%. Market position of the Company became even more complicated due to a very sensitive process of transition from barter and set off operations to cash settlements. Certainly, all the above resulted in worsening of the financial status of KAMAZ. Such a situation could be improved only, if a customer was:

• offered a better product with an optimized “price - quality” ratio
• provided with a flexible price settlement system
• offered low operation cost and service cost.

That required availability of certain resources, and they were acquired by focusing together of every opportunity: technological, organizational and financial, which were needed to manufacture heavy-duty trucks and then their export to overseas countries.

The Company has successfully fulfilled its contract obligations on delivery of heavy-duty trucks to Iraq, under the auspice of UN. It was a rather risky operation, if to take into consideration political and economical circumstances in and around Iraq. But KAMAZ took a risk and accomplished the Iraq contract in full, thus earning quite a significant amount in hard currency.

Export volumes in 2002 exceeded 6,000 units. This was twice as much as in 2001.

High profitability of export operations helped to improve financial situation of KAMAZ, thus supporting actions targeted at quality upgrading, renovation of the production range, and gaining back part of its market share. Imported western vehicles’ share was decreased down to 31%, though it the year 2002 it was still too high and made 35,7%.

In accordance with its Quality Policy, from January 2002 KAMAZ stopped powering its vehicles with environmentally non-friendly engines. Instead, engines which meet Euro 1 and Euro 2 came in use. Together with “Aerospace Equipment” International Financial & Industrial Group and in cooperation with “BelRusAuto”, KAMAZ has launched a joint project on development of Euro 3 and Euro 4 diesel engines and other vehicle components, such as: 125 kg/cm torque gear box; hydraulic steering booster; ABS.

Within the year under review the number of claims was reduced by 8%. The number of claims from overseas countries became twice as less. Cost of elimination of defects within a warranty period was reduced by 7%.

Special emphasis in the year under report was made on materialization of the “Main Directions of KAMAZ OJSC Product Policy”, with consideration of experience gained, market survey results, and various initiatives. The main efforts were focused on such items as:

• a family of trucks with 9 ton axial load
• a family of all wheels drive trucks with 6-8 ton axial load
• a family of heavy-duty trucks with 10-13 ton axial load, and
• a family of haulage vehicles of the same 10-13 ton axial load.

Never before in its history KAMAZ Company has had such a dynamic promotion of such a wide range of vehicles.

Quality upgrading and launching of new models became possible due to wide-scale renovation of the basic processes and projects, funded by Russia, Tatarstan, Japanese bank for International Cooperation, “Kanematsu Corporation” company.

Equipping of production lines with USD 200 million worth latest processes and sophisticated machinery has ranked KAMAZ among the most technically advanced machine building companies in CIS.

Within diversification program, there were accomplished several investment projects. One of them was “OKA” small-size passenger car production. The other project was launched at Neftekamsk Dump Truck Assembly Plant, where buses based on “KAMAZ” chassis are currently being assembled.

We can say, that our bus is now the best city bus manufactured in the Countries of Independent States, and “OKA” car is a good quality vehicle, which is very much in demand on the market.

In 2002 there were sold 349 buses. In 2003 the Company plans to double this volume.

Production volumes of a small-size car are limited only by supply of power units (manufactured and supplied by VAZ).

It should be noted, that KAMAZ actions to meet Product Policy and to advance technical level of vehicles, which it promotes to the market, are synchronized both in directions and in time with Avtoprom Development Concept and with Federal Program on “Modernization of Russian Transport System Within a Period up to the year 2010”.

It is important, that though Russia has adopted more strict environment protection standards for vehicles, available scientific and technological potential of KAMAZ still ensures, that its products meet required norms and standards, as well as customers’ needs. In Russia, KAMAZ truck is the most popular and cost effective vehicle for a customer.

To maintain this position it is necessary to implement new trading schemes, profitable for customers, if they choose to buy KAMAZ products.

It’s well known from the world practice, that above 80% of “our” class trucks are distributed through leasing schemes.

The first leasing operations, experienced during the period under report, demonstrated high efficiency and good prospects for that kind of product promotion.

Within 2003 min. 2 000 trucks, buses, and special body vehicles will be leased to fleets.

Esteemed shareholders, we realize, that assets trusted to us, including multiple associated and dependant companies, do not bring subsequent dividends yet. We plan to resume and actively proceed with business structuring, “holding” management improving, to cut off out of profile or excess activities.

Special attention within the period under report was paid to corporate property’s protection and control. There were undertaken certain measures to put an order into rate setting, accounting, punishment of thieves, coordination of activities with law-enforcement bodies. More tight became assets control in the Company’ subsidiaries. The Company has initiated several lawsuits for return of assets, that have been withdrawn though illegal actions of some of subsidiary and dependant companies’ management (including KAMAZPrivatzhilyo, Fedotovo sports complex, etc.).

Esteemed shareholders, KAMAZ operation efficiency much depends on its employees, their qualification, professional skill, experience and knowledge. This is why, personnel, as the most important Company’s potential, is permanently upgrading its knowledge and skills. Within the reviewed period above 40 % of those on the payroll or 22,000 were involved into various training programs.

In accordance with the approved general plan for 2002, average wage of KAMAZ OJSC labor has increased from 4,100 Rubles up to 4,471 Rubles. Wage payment schedules were effected in accordance with terms and conditions of the Bargaining Agreement.

Group of KAMAZ OJSC Companies is fully equipped with labor, which meets both qualitative and quantitative requirements.

Esteemed shareholders!

The main tasks for 2003 are as follows:

• to launch into production heavy-duty range trucks of 13 ton axial load, and also a range of vehicles and buses (including those with larger capacity) to meet Euro 2.
• to increase vs. 2002:
  • KAMAZ share on the Russian market of trucks - up to 39%;
  • warranty period of KAMAZ trucks up to 1,5 years of operation;
• to cut average unit costs per 1 Ruble of commercial output by:
  • 15% on materials
  • 12% on power
  • 12% on labor wages
• to raise profitability from the main operations up to 11.6 %.
• to gain min. 112 million Rubles net profit.

We are sure, that by joint efforts of the Board of Directors, Management Board, and of the staff of Group of Companies, these targets will be met, thus ensuring growth of capitalization of the Company.

Esteemed shareholders! May I ask you to approve the Annual Report of KAMAZ OJSC for 2002 after you listen to the Report of the Chairman of Auditing Committee.