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IMPORTANT NOTICE

THIS OFFERING IS AVAILABLE ONLY TO INVESTORS WHO ARE ADDRESSEES OUTSIDE OF THE U.S.

IMPORTANT: You must read the following before continuing. The following disclaimer applies to the Prospectus following this page (the “Prospectus”) and you are therefore advised to read this disclaimer page carefully before reading, accessing or making any other use of the Prospectus. In accessing the Prospectus, you agree to be bound by the following terms and conditions, including any modifications to them from time to time, each time you receive any information from us as a result of such access.

NOTHING IN THIS ELECTRONIC TRANSMISSION CONSTITUTES AN OFFER OF NOTES FOR SALE IN THE UNITED STATES OR ANY JURISDICTION WHERE IT IS UNLAWFUL TO DO SO. THE NOTES HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, SUBJECT TO CERTAIN EXCEPTIONS, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES.

THE PROSPECTUS AND ITS CONTENTS ARE CONFIDENTIAL AND MAY NOT BE FORWARDED OR DISTRIBUTED TO ANY OTHER PERSON AND MAY NOT BE REPRODUCED IN ANY MANNER WHATSOEVER. ANY FORWARDING, DISTRIBUTION OR REPRODUCTION OF THE PROSPECTUS IN WHOLE OR IN PART IS UNAUTHORISED. FAILURE TO COMPLY WITH THIS DIRECTIVE MAY RESULT IN A VIOLATION OF THE SECURITIES ACT OR THE APPLICABLE LAWS OF OTHER JURISDICTIONS. IF YOU HAVE GAINED ACCESS TO THIS TRANSMISSION CONTRARY TO ANY OF THE FOREGOING RESTRICTIONS, YOU ARE NOT AUTHORISED AND WILL NOT BE ABLE TO PURCHASE ANY OF THE NOTES DESCRIBED THEREIN.

Confirmation of Your Representation: You have been sent the Prospectus on the basis that you have confirmed to J.P. Morgan Securities Ltd. and Merrill Lynch International (the “Joint Lead Managers”), being the senders of the attached, (i) that you and any customers that you represent are not resident in the United States, (ii) that the electronic mail (or e-mail) address to which the Prospectus has been delivered is not located in the United States of America, its territories and possessions, any State of the United States or the District of Columbia (where “possessions” include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands) and (iii) that you consent to delivery of the Prospectus and any amendments or supplements thereto by electronic transmission.

The materials relating to the offering do not constitute, and may not be used in connection with, an offer or solicitation in any place where offers or solicitations are not permitted by law. If a jurisdiction requires that the offering be made by a licensed broker or dealer and the underwriter or any affiliate of any of the Joint Lead Managers is a licensed broker or dealer in that jurisdiction, the offering shall be deemed to be made by such Joint Lead Manager or such affiliate on behalf of Georgian Railway LLC in such jurisdiction. You are reminded that the Prospectus has been delivered to you on the basis that you are a person into whose possession the Prospectus may be lawfully delivered in accordance with the laws of the jurisdiction in which you are located and you may not nor are you authorised to deliver the Prospectus to any other person.

The Prospectus has been sent to you in an electronic form. You are reminded that documents transmitted via this medium may be altered or changed during the process of transmission and consequently none of the Joint Lead Managers and any person who controls them or any of their directors, officers, employees or agents, or any affiliate of any such person, accepts any liability or responsibility whatsoever in respect of any difference between the Prospectus distributed to you in electronic format and the hard copy version available to you on request from any Joint Lead Manager.

Georgian Railway LLC (incorporated in Georgia with limited liability)

U.S.$250,000,000 9.875% Notes due 2015 Issue price: 99.517%

The U.S.$250,000,000 9.875% Notes due 2015 (the “Notes”) will be issued by Georgian Railway LLC (the “Company”). The Notes will mature on 22 July 2015 but may be redeemed earlier at the option of the relevant holder following a Change of Control Event (as defined in “Terms and Conditions of the Notes”) at their principal amount, together (if applicable) with accrued and unpaid interest thereon.

Interest will accrue on the outstanding principal amount of the Notes at the rate of 9.875% per annum from and including 22 July 2010 and will be payable semi-annually in arrear on 22 January and 22 July in each year, commencing on 22 January 2011.

SEE “RISK FACTORS” FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES.

The Notes have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”), or with any securities regulatory authority of any State or other jurisdiction of the United States, and may not be offered or sold within the United States, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. The Notes will be offered and sold in registered form in denominations of U.S.$100,000 and integral multiples of U.S.$1,000 in excess thereof. Notes will be represented by beneficial interests in a global note (the “Global Note”) in registered form without interest coupons attached, which shall be deposited on or about 22 July 2010 with, and registered in the name of a nominee of, a common depositary on behalf of Euroclear Bank S.A./N.V. (“Euroclear”) and Clearstream Banking, société anonyme (“Clearstream, Luxembourg”). Beneficial interests in the Global Note will be shown on, and transfers thereof will be effected only through, records maintained by Euroclear and Clearstream, Luxembourg and their participants. Except as described herein, definitive registered certificates evidencing holdings of Notes issued in exchange for beneficial interests in the Global Note will be available only in certain limited circumstances. See “Provisions Relating to the Notes Whilst in Global Form”.

The Notes are expected to be rated B+ (outlook stable) by Fitch Ratings Ltd. (“Fitch”) and B+ (outlook stable) by Standard & Poor’s Rating Services, a division of The McGraw-Hill Companies, Inc. (“Standard & Poor’s”). A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. Any change in the rating of the Notes could adversely affect the price that a purchaser would be willing to pay for the Notes.

Application has been made to the Financial Services Authority in its capacity as competent authority under the Financial Services and Markets Act 2000 (the “UK Listing Authority”) for the Notes to be admitted to the official list of the UK Listing Authority (the “Official List”) and to the London Stock Exchange plc (the “London Stock Exchange”) for the Notes to be admitted to trading on the London Stock Exchange’s Regulated Market (the “Market”). References in this Prospectus to the Notes being “listed” (and all related references) shall mean that the Notes have been admitted to the Official List and have been admitted to trading on the Market. The Market is a regulated market for the purposes of the Markets in Financial Instruments Directive 2004/39/EC.

Joint Lead Managers BofA Merrill Lynch J.P. Morgan Prospectus dated 20 July 2010

This Prospectus comprises a prospectus for the purposes of Directive 2003/71/EC (the “Prospectus Directive”). The Company accepts responsibility for the information contained in this Prospectus. To the best of the knowledge of the Company (having taken all reasonable care to ensure that such is the case), the information contained in this Prospectus is in accordance with the facts and does not omit anything likely to affect the import of such information.

No person has been authorised to give any information or to make any representation other than as contained in this Prospectus in connection with the offering of the Notes and, if given or made, such information or representation must not be relied upon as having been authorised by the Company or the Joint Lead Managers (as defined in “Subscription and Sale”). Neither the delivery of this Prospectus nor any offer or sale of the Notes made hereunder shall, under any circumstances, constitute a representation or create any implication that there has been no change in the affairs of the Company since the date hereof. The Joint Lead Managers expressly do not undertake to review the financial condition or affairs of the Company during the life of the Notes or to advise any investor in Notes of any information coming to their attention. This Prospectus may only be used for the purpose for which it has been published.

This Prospectus does not constitute an offer to sell or an offer to buy in any jurisdiction to any person to whom it is unlawful to make the offer or solicitation in such jurisdiction, nor does this Prospectus constitute an offer of, or an invitation to subscribe for, or purchase, any Notes and it should not be considered as a recommendation by the Company or any Joint Lead Manager that any recipient of this Prospectus should subscribe for or purchase any Notes. The distribution of this Prospectus and the offering, sale and delivery of the Notes in certain jurisdictions may be restricted by law. Persons into whose possession this Prospectus comes are required by the Company and the Joint Lead Managers to inform themselves about and to observe any such restrictions. None of the Company or the Joint Lead Managers makes any representation to any recipient of this Prospectus regarding the legality of an investment in the Notes by such recipient under applicable investment or similar laws. Each investor should consult with its own advisers as to the legal, tax, business, financial and related aspects of its purchase of the Notes. For a description of certain restrictions on offers, sales and deliveries of Notes, see “Subscription and Sale”.

The Notes have not been registered with, recommended by or approved or disapproved by the United States Securities and Exchange Commission (the “SEC”) or any other federal or state securities commission in the United States nor has the SEC or any other federal or state securities commission confirmed the accuracy or determined the adequacy of this Prospectus. Any representation to the contrary is a criminal offence in the United States.

The Joint Lead Managers have not separately verified the information contained in this Prospectus. Accordingly, no representation, warranty or undertaking, express or implied, is made, and no responsibility or liability is accepted, by the Joint Lead Managers as to the accuracy or completeness of the information contained in this Prospectus or any other information provided by the Company in connection with the Notes or their distribution.

Each recipient of this Prospectus shall be taken to have made its own investigation and appraisal of the condition (financial or otherwise) and status of the Company.

IN CONNECTION WITH THE ISSUE OF THE NOTES, MERRILL LYNCH INTERNATIONAL (THE “STABILISING MANAGER”) (OR ANY PERSON ACTING FOR THE STABILISING MANAGER) MAY OVER-ALLOT NOTES OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE NOTES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NO ASSURANCE THAT THE STABILISING MANAGER (OR ANY PERSON ACTING ON BEHALF OF THE STABILISING MANAGER) WILL UNDERTAKE STABILISATION ACTION. ANY STABILISATION ACTION MAY BEGIN ON OR AFTER THE DATE ON WHICH ADEQUATE PUBLIC DISCLOSURE OF THE TERMS OF THE OFFER OF THE NOTES IS MADE AND, IF BEGUN, MAY BE ENDED AT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF 30 DAYS AFTER THE ISSUE DATE OF THE NOTES AND 60 DAYS AFTER THE DATE OF THE INITIAL ALLOTMENT OF THE NOTES. ANY STABILISATION ACTION OR OVER-ALLOTMENT MUST BE CONDUCTED BY THE STABILISING MANAGER (OR ANY PERSON ACTING ON BEHALF OF THE STABILISING MANAGER) IN ACCORDANCE WITH ALL APPLICABLE LAWS AND RULES.

Third-Party Information regarding the Company’s Market and Industry

Statistical data appearing in this Prospectus has, unless otherwise stated, been obtained from the National Bank of Georgia (the “NBG”) and other public sources in Georgia. Statistics are maintained by these sources in Lari (the national currency of Georgia), U.S. Dollars or Swiss Francs, as applicable. Certain statistics recorded in currencies other than Lari have been converted into Lari at the exchange rates indicated in this Prospectus. Similar statistics may be obtained from other sources, although the underlying assumptions and methodology, and consequently the resulting data, may vary from source to source. Although every effort has been made to include in this Prospectus the most reliable and the most consistently presented data, no assurance can be given that such data was compiled or prepared on a basis consistent with international standards.

The information described above has been accurately reproduced and, as far as the Company is aware and is able to ascertain from the information published by such sources, no facts have been omitted which would render the reproduced information inaccurate or misleading. Where third-party information has been used in this Prospectus, the source of such information has been identified.

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TABLE OF CONTENTS

Page

Forward Looking Statements...... v

Presentation of Financial and Other Information...... vi

Exchange Rate History ...... vii

Overview of the Company...... 1

Selected Financial Information...... 4

Overview of the Offering...... 6

Risk Factors...... 8

Description of the Company’s Business...... 20

Management and Employees...... 44

Use of Proceeds ...... 52

Terms and Conditions of the Notes ...... 53

Provisions Relating to the Notes Whilst in Global Form...... 65

Taxation...... 67

Subscription and Sale ...... 69

General Information ...... 70

Index to Financial Statements...... F-1

FORWARD LOOKING STATEMENTS

This Prospectus contains certain forward-looking statements with respect to the financial condition, results of operations and business of the Company and certain of the plans, intentions, expectations, assumptions, goals and beliefs of the Company regarding such items. These statements include all matters that are not historical fact and generally, but not always, may be identified by the use of words such as “believes”, “expects”, “are expected to”, “anticipates”, “intends”, “estimates”, “should”, “will”, “will continue”, “may”, “is likely to”, “plans” or similar expressions, including variations and the negatives thereof or comparable terminology.

Prospective investors should be aware that forward-looking statements are not guarantees of future performance and that the Company’s actual results of operations, financial condition and business and the development of the industry in which it operates may differ significantly from those made in or suggested by the forward-looking statements contained in this Prospectus. In addition, even if the Company’s results of operations, financial condition and business and the development of the industry in which it operates are consistent with the forward- looking statements contained in this Prospectus, those results or developments may not be indicative of results or developments in subsequent periods.

Factors that could cause actual results to differ materially from the Company’s expectations are contained in cautionary statements in this Prospectus and include, among other things, the following:

• operational limitations, including equipment failures, maintenance and rehabilitation issues and labour disputes;

• unplanned events or accidents affecting the Company’s infrastructure;

• overall economic and business conditions in Georgia and the surrounding region and the continuing effects of the global financial crisis, whose duration and magnitude cannot be ascertained;

• changes in laws, regulations, taxation or accounting standards or practices in Georgia, including the Company’s ability to continue setting tariffs without regulation by the Government of Georgia (the “Government”) or otherwise adjust base tariffs established under the Tariff Agreement (as defined in “Risk Factors—Risks Relating to the Company—Tariffs”);

• changes in tax requirements, including tax rate changes, new tax laws and revised tax law interpretations (including by Georgian courts);

• inflation, interest rate and exchange rate fluctuations in Georgia;

• the Company’s ability to implement the Modernisation Project (as defined in “Overview of the Company”) and the Bypass Project (as defined in “Overview of the Company”);

• the Company’s ability to overcome competition from different modes of transport;

• the Company’s ability to turn the Passenger SBU (as defined in “Overview of the Company”) into a profitable operation; and

• the Company’s success at managing the risks associated with the aforementioned factors.

The sections of this Prospectus entitled “Risk Factors” and “Description of the Company’s Business” contain a more complete discussion of the factors that could affect the Company’s future performance and the industry in which it operates. In light of these risks, uncertainties and assumptions, the forward looking events described in this Prospectus may not occur.

The Company does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to the Company or to persons acting on its behalf are expressly qualified in their entirety by the cautionary statements referred to above and contained elsewhere in this Prospectus.

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

The Company’s independent auditors, The Tbilisi branch of KPMG CIS Limited, have issued an unqualified audit report dated 14 May 2010 in respect of the Company’s financial statements as at and for the year ended 31 December 2009, which include comparative data as at and for the year ended 31 December 2008 (the “2009 Consolidated Financial Statements”). The Company’s previous independent auditors, Deloitte & Touche LLC, issued a qualified audit report dated 7 December 2009 in respect of the Company’s financial statements as at and for the year ended 31 December 2008, which include comparative data as at and for the year ended 31 December 2007 (the “2008 Consolidated Financial Statements” and, together with the 2009 Consolidated Financial Statements, the “Consolidated Financial Statements”). The Consolidated Financial Statements appear elsewhere in this Prospectus. See pages F-58 – F-59 for full details of the qualification in the audit report in respect of the 2008 Consolidated Financial Statements.

The Tbilisi branch of KPMG CIS Limited has also issued a review report in respect of the Company’s consolidated condensed financial statements as at and for the three months ended 31 March 2010, which include certain comparative data as at and for the three months ended 31 March 2009; such consolidated condensed financial statements also appear elsewhere in this Prospectus.

The Consolidated Financial Statements, as well as the Company’s consolidated condensed financial statements as at and for the three months ended 31 March 2010, have been prepared and presented in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (the “IASB”), and are presented in Lari.

The comparative data as at and for the year ended 31 December 2008, which is included in the Company’s 2009 Consolidated Financial Statements, has been restated to adjust for a prior period error identified by the Company’s management in 2009 and relating to the calculation of deferred taxes for property, plant and equipment and prepayments given as at 31 December 2007 and 31 December 2008. Accordingly, this data differs in certain respects from the corresponding data set forth in the 2008 Consolidated Financial Statements. Investors should be aware that, unless otherwise stated, financial data for the Company as at and for the year ended 31 December 2008 set forth in this Prospectus is presented on the basis of the restated data included in the 2009 Consolidated Financial Statements.

References in this Prospectus to “GEL” and “Lari” are to the currency of Georgia; references to “U.S. Dollars” and “U.S.$” are to the currency of the United States; references to “CHF” or “Swiss Francs” are to the currency of Switzerland; and references to “Euros” and “EUR” are to the single currency introduced at the start of the third stage of European Economic and Monetary Union pursuant to the Treaty establishing the European Community, as amended by the Treaty on European Union.

Solely for the convenience of the reader, some financial information in this Prospectus is presented in U.S. Dollars. Unless otherwise indicated, this information is based on the Lari amounts contained in the 2009 Consolidated Financial Statements as converted into U.S. Dollars at the official exchange rate as reported by the NBG as at 31 December 2009, in the case of balance sheet data, or as being the average of the daily rates reported by the NBG for the year ended 31 December 2009, in the case of income statement data.

Certain figures included in this Prospectus have been subject to rounding adjustments; accordingly, figures shown for the same category presented in different tables may vary slightly and figures shown as totals in certain tables may not be an arithmetic aggregation of the figures which precede them.

EXCHANGE RATE HISTORY

The following table sets forth the exchange rate history for the periods indicated, expressed in Lari per U.S. Dollar, and not adjusted for inflation, as published by the NBG. The Federal Reserve Bank of New York does not report a noon buying rate for Lari.

U.S. to Lari Dollar Exchange Rate History High Low Average Period End (Lari per U.S.$1.00) 2005...... 1.84 1.78 1.81 1.83 2006...... 1.83 1.71 1.78 1.71 2007...... 1.72 1.59 1.67 1.59 2008...... 1.67 1.40 1.49 1.67 2009...... 1.70 1.64 1.67 1.69 2010 (up to and including 31 May) ...... 1.79 1.69 1.74 1.78 ______Source: NBG

As of 25 June 2010, the exchange rate published by the NBG was GEL 1.84 = U.S.$1.00.

The rates in the above table may differ from the actual rates used in the preparation of the information appearing in this Prospectus. The inclusion of these exchange rates should not be construed as a representation that the Lari amounts have been or could be converted into U.S. Dollars at this rate or any other rate.

vii

OVERVIEW OF THE COMPANY

Overview

The Company is a limited liability company, established in Georgia on 21 December 1998 pursuant to the Law on Entrepreneurs, Georgia’s basic companies’ law. The Company is wholly owned by the state of Georgia (the “State” or “Georgia”). All of the State’s shares in the Company are controlled by the Enterprise Management Agency (the “EMA”), an agency of the Ministry of Economic Development, which represents and acts on behalf of the State in respect of the Company, other than in respect of any decision to sell or otherwise dispose of the shares of the Company, which is reserved to the Ministry of Economic Development itself. See “— Relationship with the Government”.

The Company operates the national railway system through three principal strategic business units (“SBUs”): the Freight SBU, the Passenger SBU and the Infrastructure SBU. For the year ended 31 December 2009, the Freight SBU and the Passenger SBU accounted for 91% and 5%, respectively, of the Company’s total revenue of GEL 318.8 million (U.S.$190.9 million). Although the Infrastructure SBU is responsible for train dispatching, which is one of the key operations in a railway business, it provides services only to the Freight SBU and the Passenger SBU and does not conduct business with third-party customers. See “Description of the Company’s Business”.

The Company owns and operates the tracks, infrastructure and rolling stock comprising the national railway system and the land adjoining the tracks. As at the date of this Prospectus, the rail assets of the Company comprise a railway network of 1,326 kilometres, of which 94% is electrified and comprises a 468 kilometre fully-electrified mainline from the Azerbaijan and Armenian borders to the Black Sea (of which 300 kilometres are double-track line); 114 stations; and 31 serviceable passenger locomotives, 92 serviceable electric freight locomotives, 58 serviceable diesel freight locomotives, 150 serviceable passenger coaches, 105 serviceable Electric Multiple Units (“EMUs”) and 8,311 serviceable freight wagons. In 2009, the Company transported 17.1 million tonnes of freight, of which 11.4 million tonnes or 66.7% was transit freight, and carried 3.12 million passengers. As at 31 December 2009, the Company employed 14,956 people. See “Description of the Company’s Business”.

The Company benefits from its strategic location within the region. Its railway network comprises a key part of the Transport Corridor Europe Caucasus Asia (“TRACECA”) corridor, forming part of the link that is the shortest route from the Caspian Sea and Central Asia to the Black Sea and the Mediterranean basin. Accordingly, the Company believes that it is uniquely positioned to capitalise on the increasing trade links between Europe and Central Asia, in particular, in relation to the carriage of bulk commodities, such as oil, which are transported most cost-efficiently by rail. See “Description of the Company’s Business”.

The Company’s registered office is at 15 Tamar Mephe Avenue, Tbilisi 0112, Georgia.

Relationship with the Government

The Government does not participate, either directly or indirectly through the EMA, in making decisions in respect of the Company’s business on a day-to-day basis.

Recent Performance

For the three months ended 31 March 2010, the Company had consolidated revenue of GEL 87.9 million (U.S.$51.0 million, converted at GEL 1.722 per U.S.$1.00, the average of the daily rates reported by the NBG for the three months ended 31 March 2010) and profit after tax of GEL 14.3 million (U.S.$8.3 million, converted at GEL 1.722 per U.S.$1.00, the average of the daily rates reported by the NBG for the three months ended 31 March 2010), as compared to revenue of GEL 66.5 million and a loss after tax of GEL 1.6 million for the three months ended 31 March 2009. For the year ended 31 December 2009, the Company had consolidated revenue of GEL 318.8 million (U.S.$190.9 million) and profit after tax of GEL 15.8 million (U.S.$9.5 million),

as compared to revenue of GEL 340.8 million and profit after tax of GEL 36.0 million for the year ended 31 December 2008. The Company’s total assets were GEL 1,826 million (U.S.$1,043 million, converted at GEL 1.749 per U.S.$1.00, the official exchange rate reported by the NBG as at 31 March 2010), GEL 1,810 million (U.S.$1,073 million) and GEL 1,748 million as at 31 March 2010, 31 December 2009 and 31 December 2008, respectively.

Key Strengths

The Company believes that its principal competitive strengths are as follows:

• the Company’s railway network enjoys a strategic geographic location;

• the Company is well-positioned to capitalise on the consistently stable trade volumes between Europe, the Caspian Region and Central Asia;

• the Company is the only operator of railways in Georgia;

• the Company benefits from strong support from the Government;

• the Company’s pricing policies are not subject to Government regulation;

• the Company benefits from strong customer relationships;

• the Company’s senior management team has extensive experience and technical expertise in infrastructure businesses;

• the Company is one of the few railway companies in the world, which generates significant cash flow and profit; and

• the Company benefits from the open business climate in Georgia.

See “Description of the Company’s Business—Key Strengths”.

Strategy

The principal elements of the Company’s strategy are as follows:

• making substantial investments to re-engineer, develop and modernise its infrastructure further;

• capitalising on its strategic location and its relatively low-cost and flexible services to reinforce its competitive advantage over other modes of transport;

• strengthening its operational risk management and reporting methods, as well as enhancing its productivity and efficiency; and

• further improving profitability.

See “Description of the Company’s Business—Strategy”.

Strategic Projects

The Company intends to pursue two key strategic projects in the near future, as follows:

• The Modernisation Project: a project intended to upgrade the Company’s engineering technology; optimise its operations; increase freight transit capacity; reduce operating costs; and upgrade infrastructure assets, including through the rehabilitation of tracks and electric cables, the installation and upgrading of signalling equipment, the improvement of safety features and level crossings, the procurement of new rolling stock and the improvement of

tunnels and bridges (the “Modernisation Project”). The Company’s management expects that the Modernisation Project will be completed within three to four years and, upon completion, result in a decrease in the Company’s operating costs by up to 40%. See “Description of the Company’s Business—Strategic Projects—Modernisation Project”.

• The Bypass Project: a project intended to relocate certain railway infrastructure components from the centre of Tbilisi to the northern part of the city (the “Bypass Project”). This development is expected to foster growth and economic improvements within the city of Tbilisi and, in particular, to create local jobs, as well as to reduce the risk of future environmental contamination since trains will no longer transit through the centre of the city. The Bypass Project is expected to be completed by the end of 2013 and has the strong support of the Government. See “Description of the Company’s Business—Strategic Projects—Bypass Project”.

Credit Ratings

The Notes are expected to be rated B+ (outlook stable) by Fitch and B+ (outlook stable) by Standard & Poor’s. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. See “Risk Factors—Risks Relating to an Investment in the Notes—Credit Ratings”. Any change in the rating of the Notes could adversely affect the price that a purchaser would be willing to pay for the Notes.

Risk Factors

For a detailed discussion of the risks and other factors to be considered when making an investment decision with respect to the Notes, see “Risk Factors” and “Forward Looking Statements”.

SELECTED FINANCIAL INFORMATION

The financial information of the Company set forth below as at and for the years ended 31 December 2009, 2008 and 2007 has been derived from, should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements, contained elsewhere in this Prospectus. The financial information of the Company set forth below as at and for the three months ended 31 March 2010 has been derived from, should be read in conjunction with, and is qualified in its entirety by, the condensed consolidated financial statements as at and for the three months ended 31 March 2010, contained elsewhere in this Prospectus.

Prospective investors should read this selected financial information in conjunction with the information contained in the “Risk Factors”, “Description of the Company’s Business”, the Consolidated Financial Statements and other financial data appearing elsewhere in this Prospectus.

Consolidated Statements of Financial Position

As at 31 March As at 31 December 2010 2009 2008 2007

(U.S.$ (GEL (U.S.$ (GEL (GEL (GEL ASSETS thousands)(1) thousands) thousands)(2) thousands) thousands)(3) thousands) Non-current assets Property, plant and equipment ...... 973,201 1,702,518 1,008,388 1,699,940 1,635,482 1,635,190 Investment property ...... 5,674 9,926 5,888 9,926 13,287 13,247 Other non-current assets ...... 7,565 13,234 7,603 12,817 14,454 9,309 Total non-current assets ...... 986,440 1,725,678 1,021,879 1,722,683 1,663,223 1,657,746 Current assets Inventories ...... 12,587 22,020 14,073 23,725 33,734 27,858 Current tax assets ...... 330 577 2,738 4,615 — — Trade and other receivables ...... 13,055 22,838 13,165 22,194 19,220 7,968 Prepayments and other current assets ...... 20,561 35,970 20,798 35,061 28,555 33,178 Restricted cash ...... — — — — — 9,868 Cash and cash equivalents ...... 10,600 18,544 807 1,361 3,196 4,211 Total current assets ...... 57,133 99,949 51,581 86,956 84,705 83,083 Total assets ...... 1,043,573 1,825,627 1,073,460 1,809,639 1,747,928 1,740,829 EQUITY AND LIABILITIES Equity ...... Charter capital ...... 552,710 966,910 573,738 967,207 933,635 935,588 Non-cash owner contribution reserve ...... 14,468 25,311 15,014 25,311 33,752 9,397 Retained earnings ...... 326,099 570,478 329,912 556,165 576,357 484,332 Total equity ...... 893,277 1,562,699 918,664 1,548,683 1,543,744 1,429,317 Non-current liabilities Loans and borrowings ...... 14,233 24,900 14,770 24,900 3,701 7,068 Trade and other payables ...... 21,793 38,125 17,115 28,853 — — Deferred tax liabilities ...... 41,994 73,464 44,381 74,817 81,783 106,526 Total non-current liabilities ...... 78,020 136,489 76,266 128,570 85,484 113,594 Current liabilities Loans and borrowings ...... 1,116 1,953 2,287 3,855 18,379 3,832 Trade and other payables ...... 34,279 59,968 39,171 66,035 41,877 32,711 Liabilities to the owners ...... 15,913 27,839 15,800 26,636 25,881 32,389 Provisions ...... 3,480 6,088 3,611 6,088 7,904 7,414 Other taxes payable ...... 12,907 22,579 12,928 21,794 14,226 13,466 Other current liabilities ...... 4,580 8,012 4,732 7,978 6,492 105,906 Current tax liabilities ...... — — — — 3,941 2,201 Total current liabilities ...... 72,276 126,439 78,530 132,386 118,700 197,918 Total liabilities ...... 150,296 262,928 154,797 260,956 204,184 311,512 Total equity and liabilities...... 1,043,573 1,825,627 1,073,460 1,809,639 1,747,928 1,740,829 ______Notes: (1) For convenience, these figures have been translated into U.S.$ at the GEL/U.S.$ exchange rate published by the NBG as at 31 March 2010, which was GEL 1.749 per U.S.$1.00. Such translation should not be construed as a representation that the Lari amounts have been or could be converted into U.S. Dollars at this rate or any other rate. (2) For convenience, these figures have been translated into U.S.$ at the GEL/U.S.$ exchange rate published by the NBG as at 31 December 2009, which was GEL 1.686 per U.S.$1.00. Such translation should not be construed as a representation that the Lari amounts have been or could be converted into U.S. Dollars at this rate or any other rate. (3) The comparative data as at and for the year ended 31 December 2008, which is included in the Company’s 2009 Consolidated Financial Statements, has been restated to adjust for a prior period error identified by the Company’s management in 2009 and relating to the calculation of deferred taxes for property, plant and equipment and prepayments given as at 31 December 2007 and 31 December 2008.

Consolidated Statements of Comprehensive Income

For the three months ended 31 March For the year ended 31 December 2010 2009 2009 2008 2007 (U.S.$ (GEL (GEL (U.S.$ (GEL (GEL (GEL thousand(1) thousands) thousands) thousands)(2) thousands) thousands)(3) thousands) Revenue ...... 51,031 87,897 66,463 190,872 318,838 340,888 325,486 Other income ...... 1,077 1,855 10,036 6,392 10,678 18,714 1,974 Payroll expenses...... (15,238) (26,246) (27,333) (63,525) (106,113) (108,747) (105,307) Depreciation and amortisation expenses...... (13,541) (23,323) (23,623) (57,537) (96,111) (98,885) (106,658) Raw materials and consumables used ...... (6,249) (10,763) (10,331) (24,135) (40,315) (45,887) (52,384) Other expenses ...... (7,057) (12,155) (15,699) (38,397) (64,139) (52,687) (41,083) Results from operating activities ...... 10,024 17,265 (487) 13,672 22,838 53,396 22,028 Finance income...... 232 399 18 365 610 884 1,877 Finance costs ...... (480) (826) (1,369) (2,856) (4,771) (11,905) (2,427) Net finance costs ...... (247.907) (427) (1,351) (2,491) (4,161) (11,021) (550) Profit/(loss) before income tax ...... 9,776 16,838 (1,838) 11,181 18,677 42,375 21,478 Income tax (expense)/benefit ...... (1,466) (2,525) 276 (1,718) (2,869) (6,312) 17,706 Profit/(loss) and total comprehensive income for the period 8,310 14,313 (1,562) 9,463 15,808 36,063 39,184

______Notes: (1) For convenience, these figures have been translated into U.S.$ at the average GEL/U.S.$ exchange rate, based on rates published by the NGB, for the three months ended 31 March 2010, which was GEL 1.722 per U.S.$1.00. Such translation should not be construed as a representation that the Lari amounts have been or could be converted into U.S. Dollars at this rate or any other rate. (2) For convenience, these figures have been translated into U.S.$ at the average GEL/U.S.$ exchange rate, based on rates published by the NGB, for 2009, which was GEL 1.670 per U.S.$1.00. Such translation should not be construed as a representation that the Lari amounts have been or could be converted into U.S. Dollars at this rate or any other rate. (3) The comparative data as at and for the year ended 31 December 2008, which is included in the Company’s 2009 Consolidated Financial Statements, has been restated to adjust for a prior period error identified by the Company’s management in 2009 and relating to the calculation of deferred taxes for property, plant and equipment and prepayments given as at 31 December 2007 and 31 December 2008.

OVERVIEW OF THE OFFERING

This overview does not purport to be complete and is taken from, and is qualified in its entirety by, the remainder of this Prospectus. It does not contain all the information investors may consider important in making their investment decision. Therefore, investors should read this entire Prospectus carefully, including, in particular, the section entitled “Risk Factors”.

Company: Georgian Railway LLC.

Issue: U.S.$250,000,000 9.875% Notes due 2015 (the “Notes”).

Issue Price: 99.517% of the principal amount of the Notes.

Interest: The Notes will bear interest at the rate of 9.875% per annum from and including 22 July 2010 to but excluding 22 July 2015. Interest on the Notes will be payable semi-annually in arrear on 22 January and 22 July in each year, commencing on 22 January 2011.

Maturity Date: 22 July 2015.

Use of Proceeds: The Company intends to use the net proceeds of the issue of the Notes for general corporate purposes, which may include financing, in whole or in part, the Modernisation Project and the Bypass Project. See “Use of Proceeds”.

Joint Lead Managers: J.P. Morgan Securities Ltd. Merrill Lynch International.

Fiscal Agent and Principal Paying Citibank, N.A. and Transfer Agent:

Registrar and Paying and Transfer Citigroup Global Markets Deutschland AG & Co. KGaA. Agent:

Negative Pledge; Restriction on The Terms and Conditions of the Notes will contain a negative pledge Certain Corporate Reorganisations; provision, a restriction on certain corporate reorganisations and a Financial Covenant: covenant relating to the maintenance of a ratio of Net Financial Indebtedness (as defined in “Terms and Conditions of the Notes— Condition 3. Covenants” below) to not more than four times EBITDA (as defined in “Terms and Conditions of the Notes—Condition 3. Covenants” below). See “Terms and Conditions of the Notes— Condition 3. Covenants”.

Redemption by Noteholder: If at any time, Georgia ceases to own, directly or indirectly, more than 50% of the Company’s issued share capital or otherwise ceases to control, directly or indirectly, the Company, the Company shall, at the option of each Noteholder, upon such Noteholder giving notice at any time during the relevant period, redeem the Notes held by such Noteholder on the relevant date at the principal amount thereof, together (if applicable) with accrued and unpaid interest thereon to but excluding the date fixed for redemption, as further described in ‘‘Terms and Conditions of the Notes – Condition 5. Redemption and Purchase”.

Cross-acceleration: The Terms and Conditions of the Notes will contain a cross acceleration provision. See “Terms and Conditions of the Notes— Condition 8. Events of Default”.

Initial Delivery of Notes: The Global Note shall be deposited on or about 22 July 2010 with, and registered in the name of a nominee of, a common depositary on

behalf of Euroclear and Clearstream, Luxembourg.

Form and Denomination: The Notes will be offered and sold in registered form, in denominations of U.S.$100,000 and integral multiples of U.S.$1,000 in excess thereof. The Notes will be represented by the Global Note without interest coupons attached. The Global Note will be exchangeable for definitive registered certificates only in the limited circumstances specified in the Global Note.

Taxation: All payments of principal and interest by or on behalf of the Company in respect of the Notes shall be made free and clear of, and without withholding or deduction for, any taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or within Georgia or any political subdivision thereof or any authority therein or thereof having power to tax, in accordance with “Terms and Conditions of the Notes – Condition 7. Taxation”, unless such withholding is required by law, in which event, the Company shall, save in certain circumstances provided in “Terms and Conditions of the Notes – Condition 7. Taxation”, pay such additional amounts as will result in receipt by the Noteholders of such amounts as would have been received by them had no such withholding or deduction been required.

Listing: Application has been made to the UK Listing Authority for the Notes to be admitted to the Official List and to the London Stock Exchange for the Notes to be admitted to trading on the Market.

Selling Restrictions: There are restrictions on the offer, sale and transfer of the Notes in the United States, the United Kingdom and Georgia. See “Subscription and Sale”.

Governing Law: The Notes, and any non-contractual obligations arising out of or in connection with the Notes, will be governed by, and shall be construed in accordance with, English law.

Ratings: The Notes are expected to be rated B+ (outlook stable) by Fitch and B+ (outlook stable) by Standard & Poor’s. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. Any change in the rating of the Notes could adversely affect the price that a purchaser would be willing to pay for the Notes.

Security Codes: ISIN: XS0523947751. Common Code: 052394775.

RISK FACTORS

An investment in the Notes involves a high degree of risk. Potential investors should carefully review this entire Prospectus and, in particular, should consider, among other things, all risks inherent in making such an investment, including the risk factors set forth below, before making a decision to invest. These risk factors, individually or together, could have a material adverse effect on the Company’s ability to repay principal of, and make payments of interest and other amounts due on, the Notes. In addition, factors which the Company believes are material for the purpose of assessing the market risks associated with the Notes are also described below. The value of the Notes could decline due to any of these risks, and prospective investors may lose some or all of their investment.

Prospective investors should note that the risks and uncertainties described below are not the only risks and uncertainties that the Company faces, but rather risks and uncertainties that the Company considers to be material as of the date of this Prospectus. There may be additional risks and uncertainties that the Company currently considers immaterial or of which the Company is currently unaware, and any of these risks and uncertainties could have similar effects to those set forth below. The order in which the risk factors are presented below does not necessarily reflect the likelihood of their occurrence or the magnitude of their potential impact on the Company’s business, financial condition or results of operations.

Risk Relating to the Company

The financial condition of the Company and its results of operations are dependent to a significant degree on the overall economic and political conditions prevailing in Georgia and in its neighbouring countries. The Company is also affected by the financial condition and operations of its principal customers, many of which are significantly impacted by developments in both the domestic and export commodity markets. The worldwide economic downturn beginning in mid-2008 and continuing through the date of this Prospectus has negatively impacted the Company’s operations, resulting in (among other things) both decreased freight transportation volumes and passenger numbers and decreased revenue and operating profits. Although the Company’s freight operations have begun to recover in 2010, there can be no assurance that the Company’s revenue will return to pre-downturn levels or continue growing. Adverse economic or political developments in Georgia or elsewhere in the surrounding region could result in a decline in the demand for the services provided by the Company, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

Competition

The Company faces competition, and may face increased competition in the future, in every aspect of its business from alternative transit routes and oil pipelines. The Company’s competitors may have more resources and better access to customers than the Company does. In particular, the Company’s Freight SBU faces increasing competition from oil pipelines in respect of the transportation of crude oil. Pipelines often have lower transport and operational costs and are more efficient than rail transportation in respect of the transportation of crude oil. Although the rail services provided by the Company offer advantages for the transportation of high- sulphur crude oil, pipelines, such as the Caspian Pipeline Consortium pipeline (the “CPC Pipeline”) and the Baku-Tbilisi-Ceyhan pipeline (the “BTC Pipeline”), compete directly with the Company and pose a significant continuing competitive challenge to the Company’s liquid cargo business, exerting a downward pressure on the tariffs the Company is able to charge. In addition, each of the CPC Pipeline and the BTC Pipeline has unused capacity and the respective owners have announced that they are considering expansion plans. The Freight SBU also faces competition in respect of its freight transportation services from other methods of transport, such as transport by ship and truck, and the Passenger SBU faces competition in respect of its passenger transportation services from other forms of domestic transport, such as buses, mini-buses, passenger automobiles and airplanes. See “Description of the Company’s Business—Passenger Competition”. There can be no assurance that intense competition from other modes of transportation and alternative transit routes will not have a material adverse effect on the Company’s business, financial condition and results of operations.

Relationship with the Government

The Company is a limited liability company wholly owned by the State. As the sole shareholder, the State has the right to approve the appointment of, and to remove, the members of the Supervisory Board. See “Management and Employees—Sole Shareholder”. As a result, although the State does not itself participate in the day-to-day decision-making of the Company, the State has the ability to control the operations of the 8

Company. Although the Company is the largest private employer in the country and the largest provider of the transportation services in Georgia, there can be no assurance that the State will not require the Company to engage in business practices that could materially affect the Company’s ability to operate on a commercial basis or in a way that is consistent with the best interests of the holders of the Notes.

Tariffs

Although, pursuant to the Law on Free Trade and Competition, as amended (the “Prices Law”), the State is authorised to establish freight tariffs through the Rail Transport Authority (the “Rail Transport Authority”), the Rail Transport Authority has not yet been established and the Company is not aware of any current plans of the State to create this Authority. Accordingly, as at the date of this Prospectus, the Company is not subject to any mandatory freight tariffs and, instead, has the right, pursuant to the Railway Code of Georgia, No. 1911, 28 December 2002 (as amended) (the “Georgian Railway Code”), to set its own tariff policy for all types of services independently and without Government approval. In addition, whilst the Company is a co-signatory to the Tariff Agreement (the “Tariff Agreement”), pursuant to which the Company agrees to base tariff rates for transit freight transportation on an annual basis, the Company is permitted to apply certain discounts and to make other adjustments to the base tariffs on a customer-by-customer or shipment-by-shipment basis. See “Description of the Company’s Business—Freight SBU—Regulation and Tariffs”.

There can be no assurance that the Government will not, in the future, either directly or through the establishment of the Rail Transport Authority, implement regulations or otherwise limit the Company’s ability to set its own tariffs. In particular, as in cases of other state-run infrastructure assets, the State could use tariff setting as a means of supporting public policy initiatives without regard to the impact on the Company. In particular, although pricing is not legally mandated by the State, passenger transportation tariffs are not determined by market forces due to the significant social importance to the State of providing affordable passenger transportation services. Accordingly, notwithstanding increased operating expenses, passenger tariffs have remained relatively stable over the past five years, with only slight increases for fares along certain routes. See “Description of the Company’s Business—Passenger SBU—Regulation and Tariffs”. Moreover, as a party to the Tariff Agreement, the Company could be required to agree to limitations on its ability to adjust the applicable base tariff rates. Any limitations on the Company’s ability to control its own tariffs, whether as a result of Government regulation or contractual agreements, could reduce the correlation of such tariffs with the Company’s actual costs of operation, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

Interest Rate Risk

As at 31 December 2009, the Company had an unsecured bank facility outstanding in the amount of U.S.$2.2 million (GEL 3.77 million) due in August 2010 and bearing interest at a floating rate. In addition, in 2010, the Company signed a loan facility agreement with the European Bank for Reconstruction and Development (“EBRD”) for an aggregate amount of CHF 146.2 million, which may be drawn down to provide financing for the Bypass Project. Whilst the Company has the option to convert the interest rate applicable to all or any portion of the amounts outstanding under this facility to a fixed rate, amounts drawn thereunder will otherwise bear interest at floating rates. Increases in the floating interest rates applicable to the Company’s borrowings may reduce the overall return on the Company’s investments and may increase cash outflow on the Company’s borrowings. Whilst the Company aims to limit interest rate risk by monitoring changes in interest rates in the currencies in which its cash, investments and borrowings are denominated and by usually borrowing on a fixed rate basis, any failure to manage the Company’s floating-rate borrowings successfully could have a material adverse effect on the Company’s business, financial condition and results of operations.

Foreign Currency Risk

Although collected in Lari at applicable prevailing rates, substantially all of the Company’s revenue is determined in Swiss Francs. In contrast, although the Company is increasingly providing for the payment of its costs in either Swiss Francs or U.S. Dollars, the Company’s salary expenses and certain of its other operating costs, such as for electricity and services provided under contracts with municipalities, are payable in Lari. In addition, as at the date of this Prospectus, the Company’s borrowings are largely denominated in Lari and, to a lesser extent, U.S. Dollars. As at 31 December 2009, the Company’s Lari-denominated loans and borrowings totalled GEL 25 million (U.S.$14.8 million) and its U.S. Dollar-denominated indebtedness totalled U.S.$2.2 million (GEL 3.77 million) under an unsecured bank facility; the Notes will be denominated in U.S. Dollars.

Although the Company currently intends to enter into certain currency swap transactions to hedge its obligations in respect of the Notes, historically the Company has not utilised forward exchange contracts, currency swaps or other hedging arrangements in respect of its foreign currency risk and there can be no assurance that the Company will be successful in managing any exchange rate risk relating to its operations or the Notes. Thus, the mismatch between the Company’s Swiss Franc-denominated revenue and its GEL and U.S. Dollar-denominated expenses and borrowings, and fluctuations of these currencies against each other, could limit the Company’s ability to meet its day-to-day obligations and service its outstanding short-term and long-term borrowings, including the Notes, and could otherwise have a material adverse effect on the Company’s business, financial condition and results of operations.

Age and Condition of Railway Assets

A substantial portion of the infrastructure and other assets owned and operated by the Company, including its track network and rolling stock, and the respective engineering technology date back to the post-World War II Soviet era. Although the Company has spent GEL 263 million on purchases of property, plant and equipment to upgrade and modernise its infrastructure during the three years ended 31 December 2009 and, as result, the majority of the Company’s operating assets are in good operating condition, much of the Company’s railway network and rolling stock remains old and in need of continual maintenance. There can be no assurance that portions of the Company’s network and other infrastructure assets are not now or will not become outdated or require significant further improvements. Any failure of the Company’s assets to operate properly could lead to material disruptions in the Company’s business, increase the Company’s operating expenses or require significant capital expenditures. Any requirement to replace or repair a significant portion of the Company’s railway assets could have a material adverse effect on the Company’s business, financial condition and results of operations.

Tbilisi Bypass Project

The Bypass Project is in the early planning stages. There can be no assurance that the Company has properly assessed the anticipated costs and benefits of the Bypass Project or the timing to completion once initiated. The Company has made certain assumptions relating to the sale of land in developing the model for the viability of the Bypass Project. The Company has received a favourable valuation of the land from an independent professional appraiser and has entered into a contract with the Municipality of Tbilisi and the EBRD, pursuant to which the Municipality has agreed to invest in the development of the land in order to create infrastructure components like roads, electricity and water supply, sewerage systems, which is expected to increase the value of the land and the probability of a successful sale. In addition, due to the strategic significance of the Bypass Project, the Company understands that the Government is willing to purchase the relevant land at a price sufficient to permit the Company to fund the capital expenditure required for completion of the Bypass Project, in the event the Company is unable to find a buyer at a suitable price. Nevertheless, the Company’s assumptions regarding the value of the land and its ability to sell the land, as well as other assumptions forming the basis for the modelling of the Bypass Project, could prove to be incorrect. Any material deviations from the Company’s expectations, including (but not limited to) the Company’s inability to sell the land made available by the Bypass Project at the anticipated price and timing, whether due to environmental, regulatory or other reasons, higher-than-anticipated costs or delays in completion of the Bypass Project could have a material adverse effect on the Company’s business, financial condition and results of operations.

Modernisation Project

The Company plans to undertake the Modernisation Project, which is intended to upgrade the Company’s engineering technology, optimise its operations, increase freight transit capacity, reduce operating costs and upgrade infrastructure assets, including through the rehabilitation of tracks and electric cables, the installation and upgrading of signalling equipment, the improvement of safety features and level crossings, the procurement of new rolling stock and the improvement of tunnels and bridges. The Modernisation Project is, however, in the early planning stages. The Company has engaged professional technical advisers to conduct a full-scale feasibility study, a recently completed preliminary report of which supports the Company’s management’s expectations of the positive impact of the Modernisation Project on the Company. There can be no assurance, however, that the Company has properly assessed the anticipated costs and benefits of the Modernisation Project or the timing to completion once initiated. Any material deviations from the Company’s expectations, including (but not limited to) higher-than-anticipated costs or delays in completion of the Modernisation Project, could have a material adverse effect on the Company’s business, financial condition and results of operations.

Further Capital Investments

The capital expenditures in respect of the Bypass Project and the Modernisation Project are expected to be funded from external financings, as well as internally-generated cash flows. The Company may, in the future, from time to time, seek financing from the capital markets (in addition to the Notes) and through bilateral or syndicated loans, and the Company may also seek financing from the State, as its sole shareholder, through further capital contributions or otherwise. No assurance can be made, however, that external financing can be arranged on terms acceptable to the Company in an amount sufficient to finance any balance of capital expenditures not otherwise provided for. If the Company is unable to raise necessary financing, it may have to reduce planned capital expenditures and downsize, curtail or slowdown its current plans for these projects, which could adversely affect its business, financial condition and results of operations. Any such reduction in capital expenditure could adversely affect the Company’s ability to expand its business and, if severe enough, its ability to maintain its operations at current levels.

Declining Volumes

In recent years, total freight volumes transported by the Freight SBU and the number of passengers transported by the Passenger SBU have generally decreased. Although the Company expects growth in both freight and passenger volumes in Georgia over the short- to medium-term, there can be no assurance that increased volumes will be achieved by either the Freight SBU or the Passenger SBU. Continued decreases in volumes could have a material adverse effect on the Company’s business, financial condition and results of operations, particularly if the Company is not able to implement offsetting increases in its tariffs.

Passenger Services

Although one of the Company’s strategic objectives is to transform the Passenger SBU into a profitable operation, historically and as at the date of this Prospectus, the passenger transportation services provided by the Company generate a net loss. Whilst the Company plans to invest in new coaches and EMUs in order to increase speed, decrease maintenance expenses and improve travel comfort, and thereby support an increase in passenger transportation prices, there can be no assurance that the Company will attain its objective of generating profit from its passenger rail operations. Historically, passenger tariffs have remained relatively low due to the social importance to the State of the Company’s provision of affordable passenger transportation services. If the Passenger SBU continues to incur losses, this could have a material adverse effect on the Company’s business, financial condition and results of operations.

Audit Committee

The Company’s Audit Committee was established only recently in February 2010. This Committee reviews the Company’s internal audit control procedures and makes recommendations to the Supervisory Board on the appointment of external auditors. Not all the members of the Audit Committee have been appointed yet. See “Management and Employees—Supervisory Board—Audit Committee”. When they are appointed, the members of the Audit Committee may not possess the same auditing and financial reporting qualifications as audit committee members of companies in western jurisdictions. There can be no assurance that future Audit Committee members will acquire or possess such qualifications, which could limit the effectiveness of the Audit Committee.

Interruptions

Rail operators are subject to accidents and derailments. Although there have been no major incidents on the Company’s railway network in recent years, a major rail accident or derailment could also result in damage or loss of the Company’s rolling stock and may also disrupt the Company’s services. In addition, a major rail accident or derailment involving oil or oil products cargo could result in substantial environmental remediation costs. In such circumstances, the Company may not be able to rebuild or repair its rolling stock or restore operations in a timely fashion. As set out below under “Insurance”, the Company does not carry liability insurance or business interruption insurance in relation to these matters. Any negative publicity concerning any accident or derailment could also have a material adverse effect on the Company’s reputation and the attractiveness of its services in the future. Accordingly, a major accident or derailment could have a material adverse effect on the Company’s business, financial condition and results of operations.

Key Personnel

Each of the Bypass Project and the Modernisation Project may put a strain on the Company’s management resources, distracting the Company’s managers from their current tasks or requiring additional management resources to be deployed by the Company. In addition, the Company’s success generally depends, in part, on its ability to continue to attract, retain and motivate qualified personnel. There can be no assurance that the Company will be able to attract and retain the key personnel that it will need to achieve its business objectives, and its ability to retain its workforce may depend on its ability to meet demands for higher wages. Should some of the Company’s management personnel decide to leave the Company, the Company may find it difficult to replace them promptly with other managers of sufficient expertise and experience or at all. In addition, the Company does not have key-man insurance in place in respect of its senior managers. Should the Company lose members of its management without prompt and equivalent replacement, this could have a material adverse effect on the Company’s business, financial condition and results of operations. If the Company is unable to retain key personnel without prompt and equivalent replacement, or attract new qualified personnel to support the growth of its business, the Company could experience a material adverse effect on the Company’s business, financial condition and results of operations.

Environmental Risks

The cost of environmental compliance in the future and potential liability due to any environmental damage that may be caused by the Company or that may already exist on land owned by the Company could be material. Moreover, the Company could be adversely affected by future actions and fines imposed on the Company by environmental authorities. To the extent that any provision in the Company’s accounts relating to remediation costs for environmental liabilities proves to be insufficient, this could have a material adverse effect on the Company’s business, financial condition and results of operations.

Although the Company is obliged to comply with all applicable environmental laws and regulations, it cannot, given the changing nature of environmental regulations, guarantee that it will be in compliance at all times. Any failure to comply with these environmental requirements could subject the Company to, among other things, civil liabilities and penalty fees and possibly temporary or permanent shutdown of the Company’s operations. Any imposition of environmental fines or increases in the costs associated with compliance could have a material adverse effect on the Company’s business, financial condition and results of operations.

Insurance

The insurance industry in Georgia is in a developing state and many forms of insurance protection common in other parts of the world are not yet generally available. Moreover, to the extent insurance may be available to the Company outside Georgia (if at all), based on statistics relating to past failures on the railway, the Company does not believe it would be cost effective to purchase insurance services for its infrastructure assets and, accordingly, in common with other state-owned enterprises, the Company does not have any insurance coverage for its plant facilities, business interruption or third-party liability in respect of property or environmental damage arising from accidents on the Company’s property or relating to the Company’s operations. Whilst the Company has made no material payments for death or injury or loss of personal belongings and has not sustained any material uninsured losses since its establishment, there can be no assurance that claims or losses will not increase in the future or that any insurance cover that it may carry in the future will be sufficient to cover its exposures. The Company’s failure to carry business interruption insurance also means that if the Company suffers an interruption in its ability to operate, the Company will have reduced income available to pay its obligations. Until the Company obtains adequate insurance coverage, there is a risk that the loss or destruction of certain assets could have a material adverse effect on the Company’s business, financial condition and results of operations.

Risks relating to Information Technology Systems

The Company’s business is dependent on the successful and uninterrupted functioning of its information technology systems. The Company relies on these systems for complex logistical, dispatching and tracking tasks critical for its customers’ transportation needs and central to the Company’s business. Although the Company has an on-site back-up server with a real-time link to the Company’s main systems, the Company does not have off-site system redundancy for data protection. Although the Company has not experienced any significant failures or interruptions with respect to its information systems in the past, there can be no assurance that such a failure or interruption will not occur in the future. Failures or interruptions in the Company’s information

technology systems may compromise the Company’s ability to provide its value-added transportation, logistics and tracking services, as well as result in costly delays in the shipment of customer cargo, or otherwise lead to a significant loss of customer business, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

Risks Relating to Georgia

Emerging Market Risks

The Company is State-owned and conducts substantially all of its business activities in Georgia. Accordingly, an investment in the Notes should be considered as an investment bearing emerging market sovereign risk. Such an investment carries risks that are not typically associated with investing in more mature markets. Investing in securities involving emerging markets, such as Georgia, involves a higher degree of risk than investments in securities of corporate or sovereign issuers of more developed markets. These higher risks include, but are not limited to, higher volatility, limited liquidity, a narrow export base, current account deficits and changes in the political, economic, social, legal and regulatory environment. Emerging economies, such as the Georgian economy, are subject to rapid change and are vulnerable to market conditions and economic downturns elsewhere in the world. Emerging markets may also experience more instances of corruption of government officials and misuse of public funds than more mature markets. These risks may be compounded by incomplete, unreliable or unavailable economic and statistical data on Georgia, including elements of information provided in this Prospectus.

Prospective investors should exercise particular care in evaluating the risks involved and must decide for themselves whether, in light of those risks, their investment is appropriate. Generally, investment in emerging markets is suitable only for sophisticated investors who fully appreciate the significance of the risks involved. Prospective investors are urged to consult with their own legal and financial advisers before making an investment decision.

Global Financial Crisis

The credit markets, both globally and in Georgia, have faced significant volatility and liquidity constraints since the commencement of the global financial crisis. In response to the global financial crisis, governments in the United States, in many of the largest countries in Europe and elsewhere have announced, and in many cases introduced, significant rescue packages. Despite these measures, the volatility and market disruption in the global banking sector has continued. The continuation of turmoil in global credit markets may continue to adversely affect Georgia’s economy, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

Economic Instability

Since the dissolution of the Soviet Union in the early 1990s, Georgia’s society and economy have undergone a rapid transformation from a one-party state with a centrally-planned economy to a pluralist democracy with a market economy. This transformation has been marked by periods of significant instability resulting at various times in declines in GDP, hyperinflation, an unstable currency, high levels of state debt relative to GDP, the existence of a “black” and “grey” market economy, high unemployment and underemployment and the impoverishment of a large portion of the Georgian population.

Over the past five years, the Government has aggressively implemented economic reforms, which have resulted in increasing GDP growth and foreign direct investment, and a stable rate of inflation. There can be no assurance that these trends will continue or will not be reversed. For example, although from 2001 until 2008, the Lari generally appreciated against the U.S. Dollar and other world currencies, more recently the value of the Lari has depreciated. A material depreciation of the Lari relative to the U.S. Dollar, changes in monetary policy, inflation or other factors could adversely affect Georgia’s economy in the future, which could, in turn, result in a material adverse effect on the Company’s business, financial conditions and results of operations.

Political Risk

Since the restoration of its independence in 1991, Georgia has undergone a substantial political transformation from a constituent republic in a federal socialist state to an independent sovereign democracy. Political conditions in Georgia were highly volatile in the 1990s and in the early part of the 2000s. Since January 2004, 13

following the peaceful uprising in November 2003, known as the “Rose Revolution”, Mikheil Saakashvili has served as President of Georgia. Whilst President Saakashvili has managed to introduce policies oriented towards the acceleration of political and economic reforms, there can be no assurance that current Georgian government policies or economic or regulatory reforms will continue at the same pace or at all. President Saakashvili and his government face several challenges, including resolving the status of Abkhazia and South Ossetia, the improvement of relations with Russia, the implementation of further economic reforms and the maintaining of a political consensus. No assurance can be given that reform and economic growth will not be hindered as a result of the disruption of government continuity or any other changes affecting the stability of the government or as a result of a rejection or reversal of reform policies. Political instability in Georgia could have negative effects on the economy and thus could have a material adverse effect on the Company’s business, financial condition and results of operations.

Military Conflict with Russia; Regional Tensions

Since the restoration of its independence in 1991, Georgia has had ongoing violent disputes with local separatists in the Abkhazia and South Ossetia regions and with Russia. These disputes have led to sporadic violence and breaches of peace-keeping operations. In August 2008, the conflict with South Ossetia escalated as Georgian troops engaged with local separatist fighters and Russian forces that had crossed the border. In the days that followed the initial outbreak, Georgia declared a state of war as Russian forces launched bombing raids deep into Georgia, targeted and destroyed Georgian infrastructure (including railway assets of the Company), blockaded part of the Georgian coast, took control of Tskhinvali (the South Ossetian administrative centre) and the Abkhazia region and landed marines on the Abkhazia coast. After five days of heavy fighting, the Georgian forces were defeated, enabling the Russians to enter Georgia uncontested and occupy the cities of Poti, Gori, Senaki and Zugdidi. In August 2008, Georgia and Russia signed a French-brokered cease-fire that called for the withdrawal of Russian forces, but tensions continue. Russia’s subsequent recognition of the independence of Abkhazia and South Ossetia was condemned by Georgia, and Georgia withdrew from the CIS in August 2009.

Russia views NATO’s eastward expansion, potentially including ex-Soviet republics, such as Georgia, as hostile. Any future deterioration or worsening of Georgia’s relationship with Russia, including any major changes in Georgia’s relations with Western governments and institutions, in particular in terms of national security, Georgia’s importance to Western energy supplies, the amount of aid granted to Georgia or the ability of Georgian manufacturers to access world export markets, may have a negative effect on the Georgian economy and on the business, results of operations and financial condition of the Company.

Exchange Rates; Inflation

Historically there was significant volatility in the Lari-U.S. Dollar exchange rate. Whilst the Lari generally appreciated against the U.S. Dollar and other world currencies from 2001 to 2008, in 2008 and 2009 and to date in 2010, the value of the Lari has depreciated. The ability of the Government and the NBG to limit any volatility of the Lari will depend on a number of political and economic factors, including the NBG’s ability to control inflation, the availability of foreign currency reserves and foreign direct investment inflows. According to estimates provided by the Department of Statistics, inflation as measured by the period-average Consumer Price Index (“CPI”) in Georgia rose by 10.0% and 1.7% in 2008 and 2009, respectively. Any return to high and sustained inflation could lead to market instability, a financial crisis, a reduction in consumer purchasing power and erosion of consumer confidence, which could, in turn, lead to deterioration in the performance of Georgia’s economy and thus have a material adverse effect on the Company’s business, financial condition and results of operations.

Currency Policy

The Lari is generally not convertible outside Georgia. A market exists within Georgia for the conversion of Lari into other currencies, but it is limited in size. According to the NBG, in 2009, the total volume of trading by commercial banks in the Lari/U.S. dollar and Lari/Euro markets amounted to U.S.$11.9 billion and EUR 2.4 billion, respectively. The exchange rate of the Lari against the U.S. dollar is fixed on the Foreign Exchange Auction between commercial banks, which is used to determine the official exchange rate of the Lari against foreign currencies. According to the NBG, it had in excess of U.S.$2,116.2 million worth of gold and foreign currency reserves as at 30 April 2010. Whilst it is widely believed that these reserves will be sufficient to sustain the domestic currency market in the short term, there can be no assurance that a relatively stable market will continue indefinitely and that a lack of growth of this currency market may hamper the development of the

Company’s business and the businesses of its corporate clients, which could, in turn, have a material adverse effect on the Company’s business, financial condition and results of operations.

Social Risks

Since the dissolution of the Soviet Union in 1991, criminal activity has significantly increased in Georgia. Although levels of corruption and criminal activity have been significantly reduced following the peaceful uprising in November 2003, known as the “Rose Revolution”, there can be no assurance that this trend will continue or will not be reversed. Any claims that the Company has been involved in official corruption may in the future bring negative publicity and could disrupt the Company’s ability to conduct its business effectively, which could, in turn, have a materially adverse effect on the Company’s business, financial condition and results of operations.

Restructuring of the Georgian government by the Saakashvili administration has significantly reduced the number of state employees, adding to unemployment and social instability, despite substantially increased salaries for most remaining state workers. Unemployment, and the failure of salaries and benefits in the public and private sectors to keep pace with the increasing cost of living in Georgia, have led in the past, and could lead in the future, to labour and social unrest. Any consequences of social unrest could restrict the Company’s operations and lead to the loss of revenue, materially adversely affecting its business, financial condition and results of operations.

Developing Legal System

Georgia is still developing an adequate legal framework required for the proper functioning of a market economy. Several fundamental Georgian civil, criminal, tax, administrative and commercial laws have only recently become effective. The recent nature of much of Georgian legislation and the rapid evolution of the Georgian legal system place the quality, the enforceability and underlying constitutionality of laws in doubt and result in ambiguities and inconsistencies in their application.

In addition, the court system’s resources are strained, and judges and courts in Georgia are only now gaining experience in the area of business and corporate law. Enforcement of court judgments can, in practice, be time consuming in Georgia. The uncertainties of the Georgian judicial system could have a negative effect on the economy and on the Company’s business, financial condition and results of operations.

Legislative and Legal Risks

State authorities have a high degree of discretion in Georgia and at times may exercise their discretion arbitrarily, in a manner not fully consistent with established laws or regulations or on a selective basis. Such arbitrary or discriminatory State action, if directed at the Company, could have a material adverse effect on its business, financial condition and results of operations.

Uncertainties of Georgian Tax System

Under the new Georgian Tax Code, which came into force in January 2005 (the “2005 Tax Code”), the number of taxes has been reduced from 22 to seven and the administrative procedures simplified. In order to make the tax reform revenue-neutral, however, the tax base was broadened by eliminating many existing tax exemptions, excise tax rates were increased and tax collection efforts were strengthened. Whilst the VAT rate was reduced to 18% under the 2005 Tax Code, VAT exemptions were reduced to a minimum. The corporate profit tax rate has been reduced to 15%, whilst the individual income tax rate, which is a flat tax, was reduced to 20% and further reductions in tax rates to 15%, effective in 2013, have already been approved by Parliament. Nevertheless, there can be no assurance that the Company will not face increased or new taxes in the future.

In addition, Georgia faces considerable difficulties in ensuring the impartiality of its court system with respect to tax claims, especially when large amounts are being contested by tax payers. The inability of the Georgian court system to properly constrain the tax authorities in connection with certain tax matters has been notorious over the past several years. Although certain steps are being taken to remedy the current situation, there can be no assurance that such practices will not continue in the future, which could result in a material adverse effect on the Company’s business, financial condition and results of operations.

Risks Relating to an Investment in the Notes

Suitability of the Notes

Prospective investors must determine the suitability of an investment in Notes in the light of their own respective circumstances. In particular, each prospective investor should:

• have sufficient knowledge and experience to make a meaningful evaluation of the Notes and the merits and risks of investing in Notes;

• have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in Notes and the impact the Notes will have on their overall investment portfolios;

• have sufficient financial resources and liquidity to bear all of the risks of an investment in Notes;

• understand thoroughly the terms of the Notes and be familiar with the behaviour of any relevant indices and financial markets; and

• be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for currency, economic, interest rate and other factors that may affect their investments and ability to bear the applicable risks.

Enforcement of Judgments, including Foreign Judgments and Arbitral Awards

On the basis of certain precedents established by foreign judiciaries, it may not be possible to effect service of process against the Company in courts outside Georgia or in a jurisdiction to which the Company has not explicitly submitted. Pursuant to Article 68.2 of the Law of Georgia on Private International Law foreign court judgments against the Company will not be recognised and enforceable in Georgian courts if: (i) the matter is within exclusive competence of Georgia; (ii) there is a violation in the service of process or other procedures under the law of the country of the court which rendered the judgment; (iii) a dispute involving the same subject matter between the same parties has already been decided by a Georgian court or by a foreign court, judgment of which has been recognised in Georgia; (iv) the court rendering the judgment is not considered competent to adjudicate the dispute under Georgian legislation; (v) the country whose court has rendered the judgment does not recognise the judgments of Georgian courts; (vi) a dispute involving the same subject matter between the same parties is already being heard in a Georgian court; or (vii) the judgment of the foreign court contradicts fundamental legal principles of Georgia. No treaty exists between Georgia and most Western jurisdictions (including the United Kingdom) for the reciprocal enforcement of foreign court judgments. As a result, the Supreme Court of Georgia will decide whether to recognise a foreign judgment according to whether the relevant jurisdiction recognises a Georgian judgment, or by application of Article 68.3 of the Law of Georgia on Private International Law, which permits recognition of a foreign judgment even if the relevant foreign state does not recognise Georgian judgments so long as the judgment does not relate to property rights and the courts of Georgia do not have exclusive jurisdiction over the matter. If recognition is denied by the Supreme Court of Georgia, the claimant may be required to bring new proceedings in Georgia in respect of the matter covered by a judgment already obtained in a foreign jurisdiction against the Company. In addition, Georgian courts have relatively limited experience in the recognition and enforcement of foreign court judgments, and in general mandatory enforcement procedures take a considerable amount of time. The limitations described above, including the general procedural grounds set out in Georgian legislation for the refusal to recognise and enforce foreign court judgments in Georgia, as well as unofficial political resistance, may significantly delay the enforcement of any such judgment or potentially deprive a claimant of effective legal recourse for claims.

In addition, the Terms and Conditions of the Notes are governed by English law and provide that disputes arising from or in connection with the Notes may be settled by arbitration. Georgia is a party to the United Nations (New York) Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”). Therefore, an arbitration award obtained in a country which is also a party to the New York Convention, such as the United Kingdom, would be enforceable in Georgia, subject to the terms of the New York Convention and compliance with Georgian civil procedure regulations and other procedures and requirements established by Georgian legislation. It may be difficult, however, to enforce arbitral awards in Georgia due to a number of factors, including the lack of experience of Georgian courts in international

commercial transactions, certain procedural ambiguities, Georgian courts’ inability to enforce such orders and corruption, all of which could introduce delay and unpredictability into the process of enforcing any foreign arbitral award in Georgia.

Furthermore, the choice of English law as the governing law of the Notes and the transaction documents may not be given effect, and the recognition or enforcement of foreign court judgments and arbitral awards may be limited, by application of the Georgian law principle requiring compliance with mandatory provisions of the law of the country most closely connected to the transaction, including mandatory provisions of Georgian law. The nature and scope of such mandatory provisions are subject to a considerable degree of discretionary authority by the court in which recognition or enforcement of the judgment or arbitral award is being sought.

European Union Savings Directive

Under EC Council Directive 2003/48/EC on the taxation of savings income, each Member State is required to provide to the tax authorities of another Member State details of payments of interest (and/or other similar income) paid by a person within its jurisdiction to an individual or to certain other persons in that other Member State. However, for a transitional period, Luxembourg and Austria are instead required (unless during that period they elect otherwise) to operate a withholding system in relation to such payments (the ending of such transitional period being dependent upon the conclusion of certain other agreements relating to information exchange with certain other countries). A number of non-EU countries and territories including Switzerland have adopted similar measures (a withholding system in the case of Switzerland).

If a payment is made or collected through a Member State that has opted for a withholding system and an amount of, or in respect of, tax were to be withheld from that payment, neither the Company nor any Paying and Transfer Agent (as defined in “Terms and Conditions of the Notes” below) nor any other person is obliged to pay additional amounts with respect to any Note as a result of the imposition of such withholding tax. Under the Terms and Conditions of the Notes, the Company is required to maintain a Paying and Transfer Agent in a Member State that would not be obliged to withhold or deduct tax pursuant to the EU Savings Directive.

Volatility of the Trading Market

The market for the Notes will be influenced by economic and market conditions in Georgia and, to varying degrees, interest rates, currency exchange rates and inflation rates in other countries, such as the United States, the Member States of the EU and elsewhere. There can be no assurance that an active trading market for the Notes will develop, or, if one does develop, that events in Georgia or elsewhere will not cause market volatility or that such volatility will not adversely affect the liquidity or the price of the Notes or that economic and market conditions will not have any other adverse effect. If the Notes are traded after their initial issuance, they may trade at a discount to their offering price, depending upon prevailing interest rates, the market for similar securities, general economic conditions, the financial condition of the Company or other factors.

Pari Passu Securities

There is no restriction on the amount of securities that the Company may issue and which rank equally in right of payment with the Notes. The issue of any such securities may reduce the amount investors may recover in respect of the Notes in certain scenarios as the incurrence of additional debt could affect the Company’s ability to repay principal of, and make payments of interest on, the Notes.

Unsecured Obligations

The Notes constitute unsecured obligations of the Company, save to the extent required to be secured as provided in “Terms and Conditions of the Notes – Condition 3. Covenants”.

Governing Law

The Terms and Conditions of the Notes are based on the laws of England in effect as at the date of this Prospectus. There can be no assurance as to the impact of any possible judicial decision or change in law in England or administrative practice after the date of this Prospectus.

Credit Ratings

The Notes are expected to be rated B+ (outlook stable) by Fitch and B+ (outlook stable) by Standard & Poor’s. The Company cannot be certain that a credit rating will remain for any given period of time or that a credit rating will not be downgraded or withdrawn entirely by the relevant rating agency if, in its judgment, circumstances in the future so warrant. The Company has no obligation to inform Noteholders of any such revision, downgrade or withdrawal. A suspension, downgrade or withdrawal at any time of the credit rating assigned to the Company may adversely affect the market price of the Notes.

The ratings may not reflect the potential impact of the risks discussed above as well as any other factors that may affect the value of the Notes. A credit rating is not a recommendation to buy, sell or hold securities and may not be revised or withdrawn by its assigning rating agency at any time.

Exchange Rate Risks and Exchange Controls

The Company will pay principal and interest on the Notes in U.S. Dollars. This presents certain risks relating to currency conversions if an investor’s financial activities are denominated principally in a currency or currency unit (the “Investor’s Currency”) other than U.S. Dollars. These include the risk that exchange rates may significantly change (including changes due to the depreciation of the U.S. Dollar or appreciation of the Investor’s Currency) and the risk that authorities with jurisdiction over the Investor’s Currency may impose or modify exchange controls. An appreciation in the value of the Investor’s Currency relative to the U.S. Dollar would decrease (i) the Investor’s Currency-equivalent yield on the Notes; (ii) the Investor’s Currency-equivalent value of the principal payable on the Notes; and (iii) the Investor’s Currency-equivalent market value of the Notes.

Governments and monetary authorities may impose (as some have done in the past) exchange controls that could adversely affect an applicable exchange rate. As a result, investors may receive less interest or principal than expected, or no interest or principal at all.

Interest Rate Risks

An investment in the Notes involves the risk that subsequent changes in market interest rates may adversely affect the value of the Notes.

Legal Investment Considerations

The investment activities of certain investors are subject to legal investment laws and regulations, or review or regulation by certain authorities. Each potential investor should consult its legal advisers to determine whether and to what extent: (i) the Notes are legal investments for it; (ii) the Notes can be used as collateral for various types of borrowing; and (iii) other restrictions apply to its purchase or pledge of the Notes. Financial institutions should consult their legal advisers or the appropriate regulators to determine the appropriate treatment of the Notes under any applicable risk-based capital or similar rules.

Considerations related to the Notes in Global Form

The Notes will be represented by one or more Global Notes. Such Global Notes will be registered in the name of a nominee for, and deposited with a common depositary for, Euroclear and Clearstream, Luxembourg. Except in the circumstances described in the relevant Global Note, investors will not be entitled to receive definitive registered certificates. Euroclear and Clearstream, Luxembourg will maintain records of the beneficial interests in the Global Notes. Whilst the Notes are represented by one or more Global Notes, investors will be able to trade their beneficial interests only through Euroclear and Clearstream, Luxembourg.

Whilst the Notes are represented by one or more Global Notes, the Company will discharge its payment obligations under the Notes by making payments to a common depositary for Euroclear and Clearstream, Luxembourg for distribution to their account holders. A holder of a beneficial interest in a Global Note must rely on the procedures of Euroclear and Clearstream, Luxembourg to receive payments under the relevant Notes. The Company has no responsibility or liability for the records relating to, or payments made in respect of, beneficial interests in the Global Notes.

Modification and Waivers

The Terms and Conditions of the Notes contain provisions for calling meetings of Noteholders to consider matters affecting their interests generally. These provisions permit defined majorities to bind all Noteholders, including Noteholders who did not attend and vote at the relevant meeting and Noteholders, who voted in a manner contrary to the majority.

DESCRIPTION OF THE COMPANY’S BUSINESS

Overview

The Company is a limited liability company, established in Georgia on 21 December 1998 pursuant to the Law on Entrepreneurs, Georgia’s basic companies’ law. The Company is wholly owned by the State. All of the State’s shares in the Company are controlled by the EMA, an agency of the Ministry of Economic Development, which represents and acts on behalf of the State in respect of the Company, other than in respect of any decision to sell or otherwise dispose of the shares of the Company, which is reserved to the Ministry of Economic Development itself. See “—Relationship with the Government”.

The Company operates the national railway system through three principal SBUs: the Freight SBU, the Passenger SBU and the Infrastructure SBU. For the year ended 31 December 2009, the Freight SBU and the Passenger SBU accounted for 91% and 5%, respectively, of the Company’s total revenue of GEL 318.8 million. Although the Infrastructure SBU is responsible for train dispatching, which is one of the key operations in a railway business, it provides services only to the Freight SBU and the Passenger SBU and does not conduct business with third-party customers.

The Company owns and operates the tracks, infrastructure and rolling stock comprising the national railway system and the land adjoining the tracks. As at the date of this Prospectus, the rail assets of the Company comprise a railway network of 1,326 kilometres, of which 94% is electrified and comprises a 468 kilometre fully-electrified mainline from the Azerbaijan and Armenian borders to the Black Sea (of which 300 kilometres are double-track line); 114 stations; and 31 serviceable passenger locomotives, 92 serviceable electric freight locomotives, 58 serviceable diesel freight locomotives, 150 serviceable passenger coaches, 105 serviceable EMUs and 8,311 serviceable freight wagons. In 2009, the Company transported 17.1 million tonnes of freight, of which 11.4 million tonnes or 66.7% was transit freight, and carried 3.12 million passengers. As at 31 December 2009, the Company employed 14,956 people.

The Company benefits from its strategic location within the region. Its railway network comprises a key part of TRACECA corridor, forming part of the link that is the shortest route from the Caspian Sea and Central Asia to the Black Sea and the Mediterranean basin. Accordingly, the Company believes that it is uniquely positioned to capitalise on the increasing trade links between Europe and Central Asia, in particular, in relation to the carriage of bulk commodities, such as oil, which are transported most cost-efficiently by rail.

The Company’s registered office is at 15 Tamar Mephe Avenue, Tbilisi 0112, Georgia.

The following map sets forth the Company’s railway network as at 31 December 2009:

Relationship with the Government

The Government does not participate, either directly or indirectly through the EMA, in making decisions in respect of the Company’s business on a day-to-day basis.

The Company believes that the Government considers the Company to be a strategically important asset of Georgia, playing a critical role in meeting the Government’s key economic, social and political objectives, which include, in particular, the development of Georgia’s infrastructure, of which the Company’s railway network forms an important part. The Company submits periodic reports to the EMA in respect of the Company’s performance. The Company is required to get approval from the EMA for its budget and for any amendments to its budget. In addition, the State Transportation Committee, which is headed by the Prime Minister and includes the Minister of Finance, the Minister of Economic Development, the Minister of Infrastructural Development, the Chief Executive Officer of the Company, the Head of the Roads Department and representatives of Black Sea Port operators, was created with the objective of discussing all major transport issues within the country, and to make strategic decisions concerning the development of the transportation industry, including the national railway. Accordingly, the Government may also influence decisions of the Company’s management through the policies of the State Transportation Committee.

Article 3 of the Constitution of Georgia provides that the railways fall within the “exclusive competence” of the highest bodies of Georgia, being the Parliament, the President and the Georgian courts. The Company’s operations are governed by the Georgian Railway Code, which sets forth the rights, obligations and responsibilities of the parties involved in railway transportation in Georgia, including the Company.

History of the Company

In 1865, the Transcaucasian Railway Company, which was headquartered in Tbilisi, began construction on its railway network, a portion of which comprised the Company’s predecessor network. In 1871, the Transcaucasian Railway, which ran through Georgia, Armenia and Azerbaijan, commenced operations. By 1883, a connection was made between Tbilisi and Baku. In the 1890s, a tunnel was constructed, which allowed the rail transportation of oil from Azerbaijan through Georgia.

The Transcaucasian Railway was part of the much larger Soviet rail network, which was a core transportation component of the Soviet economy. The Soviet rail network functioned as part of a command economy emphasising regional specialisation and interdependence in production, rather than the immediate local transportation needs of the economy. At its peak in the late 1980s, the portion of the Transcaucasian Railway in

Georgia carried more than triple the freight volume and four times the passenger volume as it does today. Accordingly, the Company believes that it has substantial capacity for future growth.

Following the dissolution of the Soviet Union in 1991, the assets of the Transcaucasian Railway Company were split between the national railroad companies of Georgia, Armenia and Azerbaijan, and an independent Georgian railway was formed in 1992.

The Company’s network is part of TRACECA, an international transport programme that includes Georgia, the member states of the European Union and of the CIS (notably Armenia, Azerbaijan, Bulgaria, Iran, Kazakhstan, Kyrgyzstan, Moldova, Romania, Tajikistan, Turkmenistan, Turkey, Ukraine and Uzbekistan). TRACECA was established in 1993 to provide European Union technical assistance to develop an east-west corridor from Europe, across the Black Sea through the Caucasus and the Caspian Sea to Central Asia. TRACECA currently comprises a regional network of multi-modal transport routes linking Europe and Central Asia.

2005 Restructuring Programme

In 2005, the Company launched a restructuring programme (the “2005 Restructuring Programme”) based on the proposals of an independent consultant engaged by the Company for this purpose. The principal aim of the 2005 Restructuring Programme was to transform the Company into an efficient, vertically-integrated company with a strong focus on its core operations. In particular, in pursuing the 2005 Restructuring Programme, the Company sought to realign its corporate organisation and rationalise its asset base, expand and focus its investment programme and reorganise its financial accounts, as well as to achieve certain legal, regulatory and institutional reforms.

The Company has substantially completed the 2005 Restructuring Programme, as a result of which the Company has achieved the following:

• Corporate Structure Reorganisation: separating the Company’s freight, passenger and infrastructure operations into separate SBUs and reorganising the corporate and management structures of the Company;

• Asset Rationalisation: disposing of substantially all of the Company’s non-core and non- performing assets, in order to realign the Company’s asset base to allow the Company to focus on its core activities and meet expected demand; revaluing the Company’s assets; and creating a subsidiary to concentrate on more efficient asset utilisation;

• Refurbishing Operating Assets: investing in the refurbishment of its assets to meet the increasing demand for the services provided by the Company, including through increased investment in the Company’s Freight SBU and Infrastructure SBU, which has resulted in increased transportation speeds and improved locomotive and wagon utilisation;

• Financial Restructuring: creating separate accounts for the Company’s three SBUs in order to maximise free cash flow, control costs, monitor investment risks, enhance performance evaluation and promote co-ordinated decision-making; and implementing a performance- oriented financial management system (based on Economic Value Added principles) and improved financial staff competence to enable full transparency and compliance with the IFRS; and

• Increased Profitability and Cash Flow: increasing profitability and cash-generating potential, thereby permitting continuing investment in improvements in the Company’s operations, as well as the payment of dividends to the Company’s shareholder, subject to contractual restrictions.

The Company is currently pursuing additional reforms in order to further improve the efficient use of its assets. See “—Strategy”.

Recent Developments

For the three months ended 31 March 2010, the Company had consolidated revenue of GEL 87.9 million (U.S.$51.0 million, converted at GEL 1.722 per U.S.$1.00, the average of the daily rates reported by the NBG for the three months ended 31 March 2010) and profit after tax of GEL 14.3 million (U.S.$8.3 million, converted at GEL 1.722 per U.S.$1.00, the average of the daily rates reported by the NBG for the three months ended 31 March 2010), as compared to revenue of GEL 66.5 million and a loss after tax of GEL 1.6 million, respectively, for the three months ended 31 March 2009, reflecting a period-on-period increase of 32.2% in revenue and turning the loss for the 2009 period into a profit for the same period in 2010. As at 31 March 2010, total assets increased by 0.9% to GEL 1,825.6 million (U.S.$1,043 million, converted at GEL 1.749 per U.S.$1.00, the official exchange rate reported by the NBG as at 31 March 2010) from GEL 1,809.6 million (U.S.$1,073.4 million) as at 31 December 2009.

On 16 November 2009, an auction was held for the sale of the shares owned by the Company in Railway Telecom LLC, which comprise all of the share capital of Railway Telecom LLC. The winning bidder of this auction was Linx Telecom Georgia LLC. In accordance with the auction terms, the sale was to have been completed by 1 April 2010; when the transaction did not close by this deadline, the intended sale of the Railway Telecom LLC shares to Linx Telecom Georgia LLC was cancelled. On 24 May 2010, the Company entered into an agreement with the Ministry of Economic Development, pursuant to which the Company has transferred its shares in Railway Telecom LLC to the Ministry of Economic Development in exchange for an undertaking by the Ministry to increase the capital of the Company by an amount equal to the fair value of the shares (as agreed between the Company and the Ministry) no later than three years from the date of the agreement. The Ministry has further committed, pursuant to the agreement, to hold an auction for the shares no later than 24 August 2010 and, in the event an acceptable bid is not obtained in this auction, to hold a second auction within one year from the date of the first auction. The obligation of the Ministry to make the agreed capital contribution to the Company is not, however, contingent on the success of the auction.

On 17 March 2010, the Company entered into a loan agreement with the EBRD, pursuant to which the EBRD agreed to lend up to CHF 146.2 million to the Company to partly finance the Bypass Project. Under this loan agreement, the Company has agreed not to pay any dividend to the Government as its shareholder until the completion of the Bypass Project. See “—Strategic Projects—Bypass Project”. To date, the Company has not drawn down any amount under this facility.

Corporate Structure

The Company is organised into three strategic business units or SBUs: the Freight SBU, the Passenger SBU and the Infrastructure SBU. Each SBU is managed by a separate member of the Management Board, who is responsible for the short and long-term performance of the relevant SBU and who reports directly to the Chief Executive Officer of the Company. Each of the SBUs, in turn, maintains its own administrative divisions.

The following diagram illustrates the Company’s corporate organisational structure and principal management reporting lines:

Supervisory Board

Audit Committee

Management Board Internal Audit CEO

Freight SBU Infrastructure SBU

Passenger SBU Commercial Deputy CEO/CFO Track Department Department Strategic Projects Administration and Development Locomotive Department Department Electric Supply Department Office of the CEO Department

Passenger Accounting and Signalling Wagon Department Transportation PR Department Reporting Service Centralisation and Blockage Department Finance Department HR Technical Department Economics Service Dispatching Department Freight Transportation Traffic Safety Treasury Department Passenger Wagon Inspection Department Centre Technical Department Legal Service IT Locomotive Fire Safety Foreign Affairs Unit Assets Management Department Agency

Construction and Procurement Agency Maintenance Agency

Key Strengths

The Company believes that its principal competitive strengths are as follows:

• Strategic Geographic Location: The Company’s railway network comprises a key part of the TRACECA corridor, forming part of the link that is the shortest route from the Caspian Sea and Central Asia to the Black Sea and the Mediterranean basin. As such, the Company is one of the key participants in Euro-Asian freight traffic. The Company operates terminals on the Black Sea at Poti, Batumi and Kulevi. The Government has also initiated the construction of a new port at Anaklia. In addition, the Company has been granted the exclusive right to operate the planned railway connection linking Azerbaijan, Georgia and Turkey (the Baku-Tbilisi- Kars project), which is expected to be completed in 2012 and to improve access to transport services that will compete with the Iranian railway.

• Stable Demand for Services: Because the Company has existing capacity to meet increased demand, the Company believes it is well-positioned to capitalise on the consistently stable trade volumes between Europe, the Caspian Region and Central Asia. Diverse ownership (including by companies in Kazakhstan and Azerbaijan) of the ports on the Black Sea makes demand for the Company’s services stable in the long run.

• Monopoly Operator: The Company is the only operator of railways in Georgia and is an integrated operator, owning both infrastructure and rolling stock assets. Although in the past an “open access” policy in respect of the Company’s assets has been considered, the Company believes that there is little likelihood of private operators or even privately-owned locomotives seeking to, or being granted the right to, operate over the Company’s infrastructure assets in the short to medium-term.

• Strong Government Support: The Company benefits from strong support of the Government, which is its sole shareholder. See “—Relationship with the Government”. The Company believes that the Government considers the Company to be a strategically important State asset, playing a critical role in meeting the Government’s key economic, social and political objectives. In particular, the current Government has indicated that the development of the country’s infrastructure is one of its highest priorities and that the Company’s railway network is a critical component of that infrastructure. Moreover, the Company’s provision of critical passenger transportation services enables the State to promote regional development. The Company’s management believes that the Government will consistently support the Company’s operations since the Company provides services with important social benefits, such as affordable passenger transportation services, at a loss and without the benefit of State subsidies. Furthermore, the Company is the largest employer in Georgia, particularly in rural areas, where employment is significantly lower than in the major cities. In addition, the Company’s business supports other employment opportunities in the country, such as railcar repair factories, locomotive construction factories, concrete sleeper factories and similar manufacturing businesses. The Company understands that the Government does not currently intend to sell any portion of its ownership interest in the Company and the Government has stated that, in the event a future decision is taken to privatise a portion of the Company, the Government intends to continue to hold at least a 75% share in the Company throughout the life of the Notes. The Company’s management believes the Government’s continued ownership of the Company is an indication of the Government’s long-term support for the Company.

• Fully Deregulated Tariffs: Although railroad transportation in Georgia is a natural monopoly, the Company’s pricing policies are not subject to government regulation. Although, pursuant to the Prices Law, the State is authorised to establish freight tariffs through the Rail Transport Authority, the Rail Transport Authority has not yet been established and the Company is not aware of any current plans of the State to create this Authority. Accordingly, there are currently no freight tariffs in place. According to Article 64 of the Georgian Railway Code, the Government has delegated to the Company the authority to establish its own pricing policies, independently, for all types of services. The Company’s freight revenue, which accounts for 91% of the Company’s total consolidated revenue is based on the Company’s freight tariffs which are predominantly quoted in Swiss Francs, although settled in Lari.

• Strong Customer Relationships: The Company collaborates with freight forwarding companies to market its services to freight owners, thereby increasing demand for the transport of various types of cargo and diversifying the Company’s customer base. Freight forwarders often work on long-term contracts with freight owners, particularly in the case of liquid cargoes, which comprise a significant portion (48% in 2009) of the Company’s total freight transportation volume. Although the Company does not enter into direct long-term contracts with customers serviced by freight forwarders, the Company’s long-established relationships with freight forwarders do, in turn, foster long-term relationships between the Company and its customers. Moreover, the Company’s deregulated tariff policies allow it flexibility in pricing to enable it to attract and maintain customers, thereby increasing demand for the Company’s services.

• Management Experience and Expertise: The Company’s senior management team has extensive experience and technical expertise in infrastructure businesses. In addition, a majority of the Company’s executives have a long-track record of working together, with most of them having previously been employed by the same company and developing similar business orientations. The Company’s top four senior managers have a combined experience of a total of 29 years working in infrastructure businesses. These same four individuals have worked together, including at the Company and in prior positions, for over four years. See “Management and Employees”.

• Cash-flow and Profit Generation: The Company is one of the few railway companies in the world, which generates significant cash flow and profit. See “Selected Financial Information” and “Overview of the Company”. This financial success permits the Company to maintain its operational infrastructure in good operating condition, including through on-going maintenance and capital improvements, whilst also pursuing new investment projects to achieve further improved asset efficiency. To the extent cash generated from operating activities is not reinvested, the Company may also pay dividends to the Government as its shareholder, subject to any contractual restrictions on the Company’s right to pay dividends. See “—Recent Developments”.

• Open Business Climate: The Company benefits from an open business climate, which increases demand for its transportation services, in particular its freight transportation services. The Government’s stated policy is to encourage inward investment into Georgia by fostering a favourable business climate. To that end, the Government has significantly reduced both the number of taxes and the taxation rates applicable to companies operating in Georgia and has drafted, but not yet adopted, the Liberty Act, which creates legal caps for budget expenditures and deficits, as well as public debt. The Government has also created several free industrial zones, including around Poti, and abolished capital controls.

Strategy

The principal elements of the Company’s strategy are as follows:

• Operations Re-engineering: The Company intends to make substantial investments in order to re-engineer, develop and modernise its infrastructure further. In particular, the Company intends to pursue the Modernisation Project and, in this connection, has hired “SYSTRA” and Société Nationale des Chemins de fer français International (“SNCFI”) to conduct a full- scale feasibility study, a preliminary report on which has recently been completed, and an initial design study, which is expected to be delivered, in stages, by the end of 2010. See “— Modernisation Project”. The Modernisation Project is aimed at increasing the Company’s profitability and substantially reducing future capital investment requirements, whilst at the same time allowing the Company to significantly meet its growth targets in both freight and passenger volumes in Georgia over the short to medium-term.

• Fostering Competitiveness: The Company intends to continue to capitalise on its strategic location within the region, combined with its relatively low-cost and flexible services, to reinforce its competitive advantage over other modes of transport. The Company will also aim to provide attractive freight transportation services to direct customers and freight forwarders to increase its customer base.

• Business Excellence: The Company intends to strengthen its operational risk management and reporting methods and to enhance its productivity and efficiency. In particular, the Company intends to continue to invest in infrastructure maintenance and development in order to decrease costs and increase productivity, which will also increase transportation capacity and to improve safety.

• Further Improving Profitability: The Company’s main strategic goal is to further improve the Company’s profitability to or above global and regional industry averages. To this end, the Company aims to generate further cost savings by continuously working to improve its processes to reduce costs, increase efficiency and productivity and optimise liquidity. In

addition, the Company plans to increase passenger train speeds and create new passenger services to support planned increases in prices for passenger transportation.

Freight SBU

The Freight SBU conducts all of the Company’s freight operations, which comprise the transportation of goods and commodities within Georgia (except train dispatching, which is the responsibility of the Infrastructure SBU – see “Infrastructure SBU”). The Freight SBU’s activities include, but are not limited to, transportation management, locomotive and wagon fleet management, customer relationship management, pricing policy elaboration and billing and billing system management.

The Freight SBU is the principal source of the Company’s revenue accounting for 91% of the Company’s total revenue in 2009, as compared to 92% in 2008 and 93% in 2007.

Freight Revenue, Operating Expenses and Volumes

The following table sets forth the revenue, operating expenses, profit before taxes and volume of the Freight SBU for the periods indicated without allocating infrastructure access costs:

For the year ended 31 December 2009 2008 2007 (U.S.$ (GEL thousands)(1) thousands) (GEL thousands) Revenue ...... 174,407 291,334 312,420 303,089 of which: Freight transportation ...... 142,178 237,498 239,506 248,942 Freight handling services...... 21,941 36,651 55,258 41,350 Freight car rental...... 9,903 16,543 16,590 11,520 Other revenue ...... 384 642 1,067 1,277

Operating expenses...... 81,372 135,926 148,909 141,248 of which: Staff costs ...... 28,305 47,281 49,639 44,122 Depreciation and amortisation...... 23,966 40,033 41,448 48,506 Materials...... 2,538 4,239 5,045 8,626 Repair and maintenance...... 4,939 8,250 8,202 4,757 Electricity ...... 9,865 16,478 18,702 15,350 Fuel...... 3,369 5,628 8,916 6,229 Freight car rental...... 3,818 6,378 10,746 9,371 Security and other operating expenses...... 2,645 4,419 4,723 3,468 Taxes other than income taxes...... 1,928 3,220 1,487 819

Profit before infrastructure costs, central overheads, interest and income tax ...... 93,035 155,408 163,511 161,841

Freight volume (million tonnes) ...... 17.1 17.1 21.1 22.3

______Note: (1) For convenience, these figures have been translated into U.S.$ at the average GEL/U.S.$ exchange rate, based on rates published by the NGB, for 2009, which was GEL 1.670 per U.S.$1.00. Such translation should not be construed as a representation that the Lari amounts have been or could be converted into U.S. Dollars at this rate or any other rate.

Revenue from freight operations represented 91% of the Company’s cash inflows in 2009. Total freight revenue is derived from three types of freight services provided by the Company: (i) freight transportation, which accounted for 81.5% of total freight revenue in 2009; (ii) freight handling services, which accounted for 12.6% of total freight revenue in 2009; and (iii) freight car rental revenue, which accounted for 5.7% of total freight revenue in 2009. Freight transportation revenue is generated through the transportation for customers of cargoes

along the Company’s railway network. Customers may use either Company-owned or private wagons, which can be connected to Company-owned locomotives. Freight handling revenue is generated from stations that provide services including wagon marshalling and delivering to and from customer facilities. A major portion of freight car rental revenue is generated from charging foreign railway companies for the unscheduled use of the Company’s wagons. Freight car rental revenue is also generated from leasing wagons to the Company’s customers and leasing locomotives to other railway companies outside Georgia.

The Freight SBU’s revenue decreased by 6.7% in 2009, as compared to 2008, principally as a result of lower freight transportation volumes and a decline in freight handling services. The global economic slowdown has adversely impacted demand for freight transportation services provided by the Company. Accordingly, freight volumes decreased by 19.2% in 2009, as compared to 2008, after having decreased by 4.7% in 2008, as compared to 2007. See “Risk Factors—Risks Relating to Georgia—Global Financial Crisis”. In addition to the continuing impact of the global financial crisis, the year-on-year decrease in freight volumes in 2008, as compared to 2007, resulted from a decrease in lower transit traffic in 2008 following the opening of the BTC Pipeline in 2007 (see “—Freight Competition”) and the military conflict with Russia in 2008 (see “Risk Factors—Risks Relating to Georgia—Military Conflict with Russia; Regional Tensions”). The smaller percentage decline in freight revenue of 6.7% in 2009, as compared to 2008, relative to the 19.2% decrease in freight volumes over the same period, largely reflected the offsetting impact of the implementation of a tariff increase (see “—Regulation and Tariffs”), as well as the depreciation of the Lari against the Swiss Franc.

Revenue in 2008 was 3.1% higher than in 2007 largely due to higher freight handling revenue, which was the result of an increase in tariffs for various components of the freight handling services. The Company increased tariffs for freight handling services for profit maximisation purposes.

Staff costs decreased in 2009 by 5%, as compared to 2008. This decrease was primarily due to lower freight volumes, which, in turn, required fewer labour hours from Freight SBU employees, as well as the payment of fewer bonuses. The decrease in materials costs in 2009 by 16%, as compared to 2008, also principally resulted from the decrease in freight traffic volumes, as well as cost cutting measures implemented to offset the Company’s lower revenue.

Electricity is the major source of energy used in freight transportation. The decrease in electricity costs in 2009 is primarily due to decreased freight traffic volumes. Fuel is mostly consumed for shunting works and servicing clients for delivering wagons from and to sidings and to and from mainline tracks. The decrease in the annual fuel cost in 2009, as compared to 2008, is primarily due to the lower volume of freight traffic and the decline in oil and oil product prices in 2009. Freight car rental expenses decreased by 40.6% in 2009, as compared to 2008, as the Company used more of its own wagons after significant investment in capital repairs of wagons substantially increased the number of the Company’s own serviceable wagons.

Although the opening of the BTC Pipeline in 2007 resulted in some loss of volumes and revenue for the Company from the transportation of Azerbaijan crude oil, these losses in both volumes and revenue were partially offset by the transportation of additional crude oil originating from Kazakhstan and by increased transportation of dry cargoes (see “—Freight Competition”). In 2009, liquid cargo revenue represented 48% of freight transportation revenue, which was principally comprised of crude oil (38%) and oil products (62%). In 2008, liquid cargo revenue represented 43% of freight transportation revenue, which was principally comprised of revenue from the transportation of crude oil (36%) and oil products (64%). Crude oil represented 30.3%, 23.2% and 29.3% of the total tonnes transported in 2009, 2008 and 2007, respectively.

Types of Freight

The following table sets forth a breakdown of the Freight SBU’s freight transportation revenue and volume, by type of freight transported, for the periods indicated:

For the year ended 31 December 2009 2008 2007 Revenue Volume Revenue Volume Revenue Volume (U.S.$ (GEL (million (GEL (million (GEL (million millions)(1) millions) tonnes) millions) tonnes) millions) tonnes) Liquid cargoes ...... 68.8 115.0 9.7 102.8 10.1 119.3 11.5 of which: Crude oil ...... 26.3 44.0 5.2 36.5 4.9 53.5 6.5 Oil products ...... 42.6 71.1 4.5 66.3 5.2 65.8 5.0

Dry cargoes...... 73.3 122.5 7.4 136.7 11.1 129.6 10.7 of which: Grain...... 15.3 25.6 1.1 16.5 1.0 19.3 1.4 Construction freight...... 4.4 7.3 1.1 9.3 1.6 10.2 1.8 Cement...... 4.8 8.0 0.7 13.2 1.5 5.4 0.9 Industrial freight ...... 3.8 6.4 0.6 15.9 1.4 11.2 1.1 Ferrous metals and scrap ...... 7.8 13.1 0.8 14.8 1.0 16.6 1.0 Ores ...... 9.4 15.7 1.1 24.7 2.2 23.1 1.9 Sugar...... 6.1 10.2 0.5 8.0 0.6 8.7 0.7 Chemicals and fertilisers ...... 4.4 7.3 0.4 5.2 0.4 5.2 0.4 Other...... 17.3 28.9 1.1 29.0 1.4 29.8 1.5 Total ...... 142.2 237.5 17.1 239.5 21.2 248.9 22.2

Liquid Cargo

In 2009, revenue from the transportation of liquid cargo, including, in particular, crude oil and oil products, represented 48% of the Freight SBU’s revenue from freight transportation, which was principally comprised revenue from the transportation of crude oil (38%) and oil products (62%). The Company believes that oil products from Caspian Sea region exporter countries are most efficiently transported by railway rather than by alternative transportation modes and, as the operator of the shortest route from the Caspian Sea to the Black Sea Ports, the Company is well positioned to take advantage of this. The impact of the opening of the BTC pipeline in 2007 was largely reflected in the decreases in the Company’s revenue and volumes in 2008, as compared to 2007, when revenue from the transportation of crude oil decreased year-on-year by 32% and volume of crude oil transported decreased by 25%. In light of the increases in both revenue (by 20%) and volumes (by 6%) of crude oil transported by the Company in 2009, as compared to 2008, the Company’s management does not expect the BTC Pipeline or CPC Pipeline to have an impact on future revenue. Moreover, the Company believes that volumes and revenue from the transportation of crude oil and oil products should stabilise or grow as a result of the development of the Black Sea ports and oil terminals. In this respect, Azerbaijan and Kazakhstan, both of whom are major oil exporting countries, have made significant investments in facilities on the Black Sea coast at Kulevi and Batumi, respectively, which have resulted in increased traffic of crude oil and oil products from the Caspian Sea to Black Sea ports through the Company’s railway network. The Company understands that the State Oil Company of Azerbaijan Republic (SOCAR), the owner of the Kulevi port, has decided to invest in the expansion of the railway line connecting the port with the main railway line of the Company.

Dry Cargo

The Freight SBU also transports a variety of dry cargoes. In 2009, dry cargo revenue represented 52% of the Freight SBU’s total revenue from freight transportation and principally comprised revenue from the transportation of grain (21%), ores (13%), ferrous metals and scrap (11%), sugar (8%), construction freight (6%), cement (7%), chemicals and fertilisers (6%), industrial freight (5%) and other freight (24%). From 2005 through 2008, revenue from dry cargo as a percentage of total revenue increased from 43% to 57%, before decreasing by 52% in 2009 as compared to 2008. Similarly, dry cargo volumes increased from 2005 through 2008 (in both absolute terms and in comparison to liquid cargo volumes), before decreasing by 34% in 2009, as compared to 2008. The historical increases in both revenue and volumes of dry cargo were largely due to growth in demand in the Black Sea and Caspian Sea regions. In addition, the Company’s management believes that the establishment of the Poti port as a free industrial zone and the expansion of its cargo handling capacity from fewer than eight million tonnes per annum in 2009 to 20 million tonnes per year (expected in the next couple of years), together with the opening of the Tbilisi-Kars (Turkey) rail link in 2012, may significantly increase demand for the Company’s dry cargo transportation services. The decreases in 2009, as compared to 2008, in both revenue and volumes reflect the impact of the global financial crisis in 2009 and, in particular, the related decrease in demand for construction freight, cement, industrial freight and ores.

The Company’s management is seeking to further diversify the types of cargoes transported. For instance, the Company launched a container transportation line of business in 2009 and through its subsidiary, Railway TransContainers LLC, see “—Subsidiaries and Affiliates”; has negotiated forwarding of grain from Kazakhstan; and is hoping to attract customers seeking to forward cargo shipments from China to Europe once the Georgia- Turkey railroads are connected as expected in 2012.

The following table sets forth a breakdown of the Freight SBU’s freight transportation revenue, by the destination of freight transported, for the periods indicated:

For the year ended 31 December 2009 2008 2007 (U.S.$ (GEL millions)(1) millions) (GEL millions) Liquid cargoes ...... 68.8 115.0 102.8 119.3 of which: Local...... 0.3 0.5 0.4 0.2 Export ...... 0.8 1.4 0.7 1.0 Import ...... 7.4 12.4 9.0 8.4 Transit...... 60.3 100.7 92.7 109.8

Dry cargoes...... 73.3 122.5 136.7 129.6 of which: Local...... 5.9 9.9 16.0 20.9 Export ...... 11.7 19.6 13.5 11.4 Import ...... 11.6 19.3 21.1 23.1 Transit...... 44.1 73.7 86.1 74.2 Total...... 142.2 237.5 239.5 248.9

The Freight SBU is highly dependent on transit traffic, with transit traffic comprising 74% of total freight transportation revenue in 2007, 75% in 2008 and 73% in 2009.

Rolling Stock, Repair and Maintenance

The Freight SBU utilises 92 serviceable electric locomotives, 58 serviceable diesel locomotives and 8,311 serviceable wagons. Most of the Freight SBU’s locomotives are from the Soviet period, having been

commissioned by the Company’s predecessor prior to 1991. Through continuous investments in maintenance and capital repairs of the rolling stock fleet in past years, the Company was able to lease some of its locomotives to Azerbaijan Railway. Azerbaijan Railway leased up to 15 electric locomotives in 2009, contributing GEL 0.8 million to the Freight SBU’s revenue. The terms of the leases, which generally run for six-month periods, have historically been automatically renewed, and the Company has received no indications that renewals will cease in the future.

The following table sets forth the distribution of the Freight SBU’s locomotives by the remaining number of operating years as at 31 December 2009:

Operating years remaining (%) Less than 6 years...... 5.4 7 – 9 years...... 43.8 10 – 12 years...... 32.3 13 – 16 years...... 18.5

The expected life of a locomotive is approximately 35 to 50 years, assuming that necessary capital repairs are performed every 12 to 13 years. As part of the Modernisation Project, the Company is planning to purchase new locomotives, although the exact number and timing of the locomotive purchases, as well as the amount of capital expenditure to be made on repairs of existing locomotives, will be prescribed by the full-scale feasibility study now being completed for the Modernisation Project. See “—Strategic Projects—Modernisation Project”.

As at 31 December 2009, the Company had 8,311 serviceable wagons, as compared to 7,602 serviceable wagons as at 31 December 2008. This increase resulted primarily from capital repair investments.

The following table sets forth the distribution of the Freight SBU’s wagon fleet, by age, as at 31 December 2009:

Age (%) Less than 21 years...... 17.0 21 – 25 years...... 33.9 26 – 30 years...... 27.5 30 – 35 years...... 14.4 More than 35 years ...... 7.3

The expected life of a wagon is 24 to 32 years, although this period may be prolonged though capital repair investments to 36 to 48 years. As part of the Modernisation Project, the Company is planning to purchase new wagons, although the exact number and timing of the wagon purchases, as well as the amount of capital expenditure for repairs of existing wagons, will be prescribed by the full-scale feasibility study for the Modernisation Project.

The Company’s rolling stock undergoes regular repair and maintenance. The Company’s maintenance and repair work falls into two main categories: (i) scheduled repairs carried out according to applicable standards and regulations and (ii) unscheduled repairs carried out according to the condition of wagons. Scheduled repairs can be carried out on the basis of either the period of operation or the mileage of operation. The Company’s rolling stock is generally inspected on a continuous basis before loading, after unloading and during transportation through freight stations.

According to the Company’s procedures, routine depot repairs, which include minor repairs of rolling stock at a depot, are performed every two to three years after construction and, thereafter, once every two years. In addition, capital repairs, which are completed by outside companies, are performed once every 15 years on average after the initial construction of a car and, thereafter, every seven to 12 years. Further repairs are performed two years after each capital repair.

Unscheduled repairs are driven by the technical condition of the wagon and are directly related to the term and intensity of operation. In addition, the Company’s wagons receive routine technical inspections, as a result of which minor repairs are performed at repair shops throughout the Company’s network. According to the

Company’s estimates, on average, current repairs, which do not extend the life of the wagon, are performed every six to 24 months and capital repairs are performed, on average, every 10 to 12 years.

In 2009, the Company’s costs associated with repair and maintenance amounted to GEL 9.2 million (U.S.$5.5 million), as compared to GEL 10.5 million in 2008. The Company expects its repair and maintenance costs to increase with the increase in its freight traffic. One of the aims of the Modernisation Project is to determine a strategy of replacement and expansion of the fleet over the next three to five years in order to reduce repair and maintenance costs.

Regulation and Tariffs

Although railroad transportation in Georgia is a natural monopoly, the Company’s pricing policies are not subject to Government regulation. Although, pursuant to the Prices Law, the State is authorised to establish freight tariffs through the Rail Transport Authority, the Rail Transport Authority has not yet been established and the Company is not aware of any current plans of the State to create this Authority. Accordingly, as at the date of this Prospectus, the Company is not subject to any mandatory freight tariffs and, instead, has the right, pursuant to the Georgian Railway Code, to set its own tariff policy independently and without Government approval for all types of services, including, but not limited to, tariffs for freight transportation and freight transportation-related services, passenger services and luggage transportation.

The Company has a written tariff policy specifying methodologies and formulas for the determination of the various tariffs applicable to its services. The Company has three types of tariffs: (i) a transportation tariff, based on transportation from one station to another within Georgia; (ii) a station charge; and (iii) a 24-hour storage fee. The tariff policy is renewed and modified annually in light of changes in the Company’s strategic goals, market environment and industry and domestic and global economic developments.

Tariffs for freight transportation are based on the International Rail Transit Tariff, which is agreed among the signatories to the Tariff Agreement, including the Company and the railway companies of the CIS member states of Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan, as well as the railway companies of Lithuania, Latvia and Estonia. The parties to the Tariff Agreement hold annual conferences each autumn to work out base tariff rates for the next year. The tariffs for transit and domestic freight transportation are identical, except that certain countries enjoy discounts on particular types of cargo. Tariffs for import-export and transit freight between Georgia, Azerbaijan, Turkmenistan and Uzbekistan are charged at a 50% discount, whilst Armenia benefits from a 17% discount on transit and import-export cargo. In agreeing to base tariff rates, the Company and its peers analyse a combined set of macro- and micro-economic factors with a view to profit-maximisation in light of prevailing external and internal conditions. Each party declares tariffs denominated in Swiss Francs for railway transportation and states general rules allowing parties to modify tariffs. Tariffs agreed at the conference indicate the maximum level of base tariff rates that may be charged for the relevant year and the base tariffs are then subject to adjustment on a case-by-case basis by each country’s railway company for its customers. Individual railways have the right to increase tariffs on transit transportation only twice per year by notifying each party to the Tariff Agreement at least one month in advance, although in the case of an increase in tariffs for import-export transportation, there are no restrictions regarding the frequency of increases other than a 15-day notice period, which is required for any increase. Decisions by individual railway companies to decrease tariffs are not restricted. Based on the decisions made at the conference, the Company establishes the pricing policy for the next year and publishes it on its website.

Although historically the Company’s tariffs were quoted in U.S. Dollars in amounts translated from Swiss Francs (on an annual basis at the beginning of each year), in May 2008, due to the depreciation of the U.S. Dollar against most other major world currencies, the Company began quoting its tariffs only in Swiss Francs. As of the date of this Prospectus, substantially all of the Company’s tariffs are stated in Swiss Francs. Although tariffs are set in Swiss Francs, according to Georgian law, Georgian resident companies must pay in Georgian Lari at the actual CHF/GEL exchange rate established by the NBG on the billing date. Non-residents are allowed to pay in foreign currencies, including Swiss Francs, U.S. Dollars, Euros or Pounds Sterling at applicable spot exchange rates. All customers are required to make payment of all amounts billed before the Company will commence providing the related services.

In each of the past three years, the Company has raised its tariffs, thereby partially mitigating the year-on-year decreases in volumes over the same period. Further tariff increases are expected to be made in line with inflation.

The following table sets forth information in respect of the Company’s tariffs, by type of freight, for the periods indicated:

For the year ended 31 December 2009 2008 2007 (U.S.$ per 1,000 tonne/kilometre) Average Tariffs(1) Crude oil ...... 12.9 12.6 12.4 Oil products ...... 29.5 25.6 22.4 Dry cargo...... 39.2 32.7 30.5

______Note: (1) Average tariffs are calculated using a detailed formula for each individual transportation order, which takes into consideration, inter alia, the type of freight and the distance over which the cargo is carried.

To attract additional cargo, the Freight SBU offers liquid cargo transit customers whose annual volumes exceed four million tonnes volume-based discounts thereby decreasing the tariff to 5.85 Swiss Francs for each tonne of crude oil transported and to 8.4 Swiss Francs for each tonne of oil products transported.

Customers

The Freight SBU accepts freight both directly from customers and from freight forwarders. The Freight SBU works with freight forwarders in order to expand its marketing reach and to increase and diversify its customer base. In addition, as the Freight SBU does not enter into long-term obligations with customers served through freight forwarders, it is able to maintain operational flexibility and change prices in accordance with market conditions. All of the Freight SBU’s customers whether direct or through freight forwarders, are required to pay for transportation services in advance.

The owners of cargo transported through freight forwarding companies are various “blue-chip” companies, such as BP, Chevron and ExxonMobil Corporation. Although, in 2009, two freight forwarder-customers represented more than 35% of the Company’s total revenue, in the case of potential distress or default by a freight forwarding company, the Company believes that cargo transported by that forwarder on behalf of its customers will generally be easily absorbed by its competitors at no loss to the Company.

Liquid Cargo Customers

The Freight SBU transports a variety of liquid cargoes, including, in particular, oil and oil products.

The following table sets forth the volumes of oil and oil products transported, by principal customers, for the periods indicated:

For the year ended 31 December 2009 2008 2007 (million tonnes) Georgia Tranzit...... 5,674 7,269 10,214 BSI Trans...... 2,565 1,453 0 Socar Georgia Petroleum...... 426 383 186 Mika Georgia...... 209 224 206 Wissol Petroleum Georgia...... 124 119 71 Lukoil Georgia...... 93 97 101 Others ...... 637 517 754 Total...... 9,727 10,063 11,531

To attract additional cargo, the Freight SBU offers liquid cargo transit customers whose annual volumes exceed four million tonnes volume-based discounts. See “—Regulation and Tariffs”. The Freight SBU believes that these terms help the Company to compete with pipelines and other competitors. See “—Competition”.

Dry Cargo Customers

The Freight SBU transports a variety of dry cargoes with no major concentration on any single group of freight types.

The following table sets forth the volumes of dry cargo products transported, by principal customers, for the periods indicated:

For the year ended 31 December 2009 2008 2007 (million tonnes) Pace Georgia...... 752 1,975 1,748 BSI Trans...... 554 461 55 Saqcementi ...... 492 11 329 Energy Invest...... 407 384 366 Georgian Cement...... 351 1 42 Georgian Manganese ...... 339 316 286 Others ...... 4,482 7,971 7,873 Total...... 7,377 11,118 10,698

Freight Competition

The Freight SBU faces substantial competition in respect of its freight transportation services, particularly in respect of the transport of crude oil. As set forth in the following table, the Company has identified four oil pipelines, which compete directly with the Company in respect of the transportation of crude oil:

Pipeline Route Baku-Tbilisi-Ceyhan (BTC Baku, Azerbaijan on the coast of the Caspian Sea to Ceyhan, Turkey on the coast Pipeline) of the Mediterranean Sea Caspian Pipeline Tengiz, Kazakhstan on the coast of the Caspian Sea to Novorossiysk, Russia on Consortium (CPC Pipeline) the coast of the Black Sea Baku-Novorossiysk Baku, Azerbaijan on the coast of the Caspian Sea to Novorossiysk, Russia on the coast of the Black Sea Baku-Supsa (AL) Baku, Azerbaijan on the coast of the Caspian Sea to Supsa (AL), Georgia on the coast of the Black Sea

The Company believes that the CPC Pipeline and the BTC Pipeline pose the most significant competition to its liquid cargo business. The opening of the BTC Pipeline in 2007 resulted in a negative impact on the Company’s revenue from the transportation of oil and oil products in 2007 and 2008, which was only partially offset by increased oil exports from Kazakhstan transported by the Freight SBU and increases in the Company’s tariffs, see “—Freight Revenue, Operating Expenses and Volumes”. The Company does not believe, however, that any increases in capacity will further materially impact its competitive position or the revenue generated by its liquid cargo business.

The Company does not believe that either the Baku-Novorossiysk Pipeline or the Baku-Supsa Pipeline currently poses significant competitive threats to the Freight SBU. Both pipelines are considered to be undersized, and the Baku-Novorossiysk pipeline traverses Chechnya, which has had periodic episodes of instability in recent years.

Despite the competition posed by the pipelines, the Company believes that it is well-positioned to continue to attract significant volumes of oil and oil products for two reasons. First, only Azeri Light and low sulphur Kazakh oil may be transported by pipeline. High sulphur crude is generally not suitable for transport by pipeline as the high sulphur content spoils higher quality oil that may later be transported by the same pipeline. Accordingly, rail is the most appropriate method of transportation for high sulphur crude oil.

Second, in February 2008, a subsidiary of the Kazakhstan state-owned oil and gas company, JSC National Company KazMunayGas (“KMG”), completed the acquisition of a 100% ownership interest in Batumi Industrial Holdings Limited and Naftrans Capital Partners, which directly own and operate a marine export terminal facility and a seaport in Batumi. Accordingly, the Company believes that KMG has a significant

incentive to continue to use the Batumi port and, as a result, the transportation services offered by the Freight SBU.

Competition from other modes of transport, in particular, trucking, is minor. In addition, trucking only competes with the Company for container transportation. As in most countries, railway transportation is usually cheaper than road transportation only if the cargo is transported in bulk and for long distances. In Georgia, which is a relatively small country, local transportation of non-bulk cargo is usually cheaper by road. Whilst door-to-door transportation is an inherent advantage of road transport, which the Company cannot provide, road transport cannot substitute for railway transport in bulk product transportation and in long distances. According to the Ministry of Economic Development, cargo transported by road in 2008 totalled 0.6 billion tonne-kilometres, which was only 9.2% of the Company’s freight transportation volume in the same year.

At the end of 2009, the Company established Railway TransContainer LLC as a wholly owned subsidiary, in order to enter the fast-growing container transportation market. The subsidiary will invest in the construction of container terminals and appropriate infrastructure equipment with the aim of providing high-quality services in this market. See “—Subsidiaries and Affiliates”.

Passenger SBU

The Passenger SBU’s activities are primarily the transportation of passengers and luggage within Georgia. The Passenger SBU generates additional revenue from rental income from its real estate portfolio, which consists primarily of the central Tbilisi station and nearby facilities. The Passenger SBU accounted for 5% of the Company’s revenue in 2009, although, in common with other national railway companies in the region, it realised a net loss before infrastructure costs, central overheads, interest and income taxes of GEL 13.0 million (U.S$7.8 million). As at 31 December 2009, the Passenger SBU had 31 electric locomotives, 150 passenger coaches and 105 EMUs. The Passenger SBU transported 3.12 million passengers in 2009, as compared to 3.42 million passengers in 2008, a decrease of 8.8%. The Company aims in the medium-term to maintain a passenger service in Georgia that is financially self-sustaining. Accordingly, the Company plans to invest in new EMUs in order to reduce operating expenses, as well as to increase demand by improving speed and travel comfort, and thereby increase profitability.

Passenger Revenue, Operating Expenses and Numbers of Passengers

The following table sets forth the revenue and expenses of the Passenger SBU and the number of passengers transported for the periods indicated:

For the year ended 31 December 2009 2008 2007 (U.S.$ (GEL thousands)(1) thousands) (GEL thousands) Revenue...... 9,315 15,560 18,078 18,497 of which: Passenger traffic ...... 8,352 13,952 16,615 17,165 Other revenue ...... 963 1,609 1,462 1,332

Operating Expenses ...... (17,098) (28,561) (30,325) (28,027) of which: Staff costs ...... (7,442) (12,432) (11,606) (9,455) Depreciation and amortisation...... (5,021) (8,387) (9,263) (8,683) Materials, repairs and maintenance ...... (1,145) (1,913) (2,720) (4,074) Electricity and fuel...... (1,203) (2,010) (1,950) (1,523) Security and other operating expenses...... (1,755) (2,931) (4,400) (3,686) Taxes other than income taxes...... (532) (888) (385) (607)

Loss before infrastructure costs, central overheads, interest and income tax ...... (7,783) (13,001) (12,247) (9,531)

Number of passengers (millions)...... 3.12 3.12 3.42 3.88

The revenue of the Passenger SBU primarily comprises passenger traffic revenue generated from the transport of passengers within Georgia. Passenger traffic revenue in both 2008 and 2009 was adversely affected by the decrease in overall economic activity in Georgia, particularly in the regions outside of the major cities, decreasing by 16% in 2009, as compared to 2008, after having decreased by 3.2% in 2008, as compared to 2007. Other revenue of the Passenger SBU is derived principally from real estate rentals.

At the same time, the operating expenses of the Passenger SBU, which comprise principally staff costs and material, repairs and maintenance expenses, as well as depreciation and amortisation, decreased by 5.8% in 2009, as compared to 2008, whilst operating expenses in 2008 were 8.2% higher than in 2007. Staff costs increased in 2009, as compared to 2008, primarily due to the transfer of one railcar repair depot with its own staff from the Freight SBU to the Passenger SBU in the second half of 2008.

Electricity is the major source of energy for passenger trains. Electricity and fuel expenses increased slightly in 2009, as compared to 2008, as the Company did not decrease the number of trains in service during the year. Materials, repairs and maintenance expenses decreased primarily as a result of cost-cutting actions implemented by the Company’s management to partially offset the decreasing revenue.

Rolling Stock

As at 31 December 2009, the Passenger SBU had 31 serviceable passenger locomotives, 150 serviceable passenger coaches and 105 serviceable EMUs. The Company is working to increase passenger numbers and therefore revenue by increasing transportation speed and improving service quality. In 2010, the Company purchased three modern passenger trains for a total of GEL 16 million (U.S.$9.3 million). The Company intends to continue to replace older trains with additional modern EMUs in order to reduce costs.

Regulation and Tariffs

As in the case of freight transportation tariffs, the Company is not subject to government regulation in the establishment of its pricing policies for passenger transportation and luggage services. Unlike freight transportation tariffs, however, in many cases, although pricing is not legally mandated by the State, passenger transportation tariffs are not determined by market forces due to the significant social importance to the State of providing affordable passenger transportation services. Accordingly, notwithstanding increased operating expenses, passenger tariffs have remained relatively stable over the past five years, with only slight increases for fares along certain routes.

Tariffs for domestic transportation of passengers and luggage are approved by the Company’s Management Board and are denominated in Georgian Lari. Tariffs for international transportation of passengers and luggage services within the CIS are determined at the CIS Rail Transport Tariffs Conference.

Customers

More than 82% of the Passenger SBU’s customers during the last three years were transported within the country for distances of more than 50 kilometres, whilst only 3% of passengers travelled distances of less than 50 kilometres. Passengers travelling on international routes accounted for 3% of the total passenger revenue during the period from 2007 through 2009.

Passenger Competition

The Passenger SBU faces competition from other modes of domestic transportation, principally buses, mini- vans and passenger automobiles, as well as, to a lesser degree, airplanes. Since fares for bus and mini van travel are similar to passenger train fares, the passenger’s choice is dictated largely by personal travel preferences and unique needs rather than factors within the control of the Company.

Infrastructure SBU

The Infrastructure SBU operates, maintains and manages the Company’s principal infrastructure assets, including its track, embankments, signalling, land, electric power lines and equipment. Although the Infrastructure SBU is responsible for train dispatching, which is one of the key operations in a railway business, it is a cost centre providing services only to the Freight SBU and the Passenger SBU and does not conduct business with third-party customers.

The principal aims of the Infrastructure SBU are to ensure safety and promote the efficient use of the Company’s infrastructure assets, to establish a transfer pricing policy for the Freight SBU and the Passenger SBU and to decrease maintenance costs. The Infrastructure SBU promotes safety by setting speed and loading limitations on lines and at stations, controlling signalling and blocking systems and co-ordinating all train dispatching.

The Infrastructure SBU is not disclosed as a separate reportable segment in the Consolidated Financial Statements. Instead, Infrastructure SBU revenue, loss and operating expenses are included in other line items, as follows:

Infrastructure SBU Financial Statement Line Item Revenue...... Other revenues Loss ...... Other net unallocated expenses Operating expenses of which: Staff costs ...... Payroll expenses Depreciation and amortisation...... Depreciation expenses Materials ...... Other net unallocated expenses Repair and maintenance...... Other net unallocated expenses Electricity...... Other net unallocated expenses Fuel...... Other net unallocated expenses Security and other operating expenses...... Other net unallocated expenses Property tax...... Other net unallocated expenses

See Note 5(iv) to the 2009 Consolidated Financial Statements on page F-34.

The revenue generated by the Infrastructure SBU comprises non-operating revenue, including revenue from the realisation of scrap, the imposition of penalties on suppliers and rental income from the leasing of railway equipment and property, which is immaterial.

Infrastructure SBU Operating Expenses

The following table sets forth the operating expenses of the Infrastructure SBU for the periods indicated:

For the year ended 31 December 2009 2008 2007 (U.S.$ (GEL thousands) (1) thousands) (GEL thousands) Operating Expenses ...... (55,534) (92,765) (94,161) (104,708) of which: Staff costs ...... (20,886) (34,888) (35,843) (35,873) Depreciation and amortisation...... (26,880) (44,901) (45,564) (46,578) Materials ...... (3,915) (6,540) (5,388) (14,457) Repair and maintenance...... (219) (366) (249) (2,125) Electricity...... (554) (925) (1,506) (1,216) Fuel...... (1,103) (1,843) (2,018) (2,293) Property tax...... (1,044) (1,744) (860) (489) Security and other operating expenses...... (932) (1,557) (2,734) (1,678)

The largest components of the Infrastructure SBU’s operating expenses are staff costs, depreciation and amortisation and materials costs. Largely as a result of the Company’s cost reduction efforts in response to the global economic crisis, the Infrastructure SBU’s operating expenses decreased by 1.5% in 2009, as compared to 2008, after having decreased by 10.0% in 2008, as compared to 2007. Staff costs decreased in 2009, as compared to 2008, primarily due to the higher bonuses paid in the first half of 2008, whilst, in 2009, bonuses were paid only to a small number of employees. The cost of materials increased by 21.4% in 2009, as compared to 2008, primarily due to track repair works done by the track department of the Infrastructure SBU. Materials costs decreased by 62.7% in 2008, as compared to 2007, largely due to increased cost control and a change in the expense capitalisation policy.

Infrastructure Assets

The main infrastructure assets of the Company comprise a railway network of 1,326 kilometres, which is 94% electrified and includes a 468 kilometre fully-electrified mainline from the Azerbaijan border to the Black Sea (of which 300 kilometres are double-track line).

The Company’s railway network, which originally formed a part of the Transcaucasian Railway, was first built in the mid- to late-1800’s in compliance with then-applicable design standards. As at the date of this Prospectus, the principal design characteristics of the railway network are as follows:

• the track gauge on the main lines is 1,520 mm, whilst one small branch line has a track gauge of 912 mm;

• the design axle load on the main lines is 23.5 tonnes, whilst small branch lines have a lower limit per wagon; and

• the main-line tracks accommodate speeds of up to 100-120 kilometres per hour for passenger trains and up to 80 kilometres per hour for freight trains, whilst, in the gorge region, top speeds for both passenger and freight trains are significantly lower at up to 40 or 50 kilometres per hour depending on the specific terrain.

The Company expects to upgrade the design of its railway network in line with the recommendations of its consultants following their completion of the initial design study for the Modernisation Project. See “— Strategic Projects—Modernisation Project”.

The Infrastructure SBU faces significant challenges in maintaining the Company’s infrastructure assets due to the capital-intensive nature of the railway network and the terrain across which the tracks are laid. During the three years ended 31 December 2009, the Company spent GEL 263 million on purchases of property, plant and equipment to rehabilitate important infrastructure assets, including rail tracks, catenary poles and electric power supply lines, bridges and tunnels. The Company estimates that its existing infrastructure capacity is 28 million tonnes of freight per year.

Although no assurance can be given, the Company expects that the additional investments to be made in connection with the Modernisation Project will result in increased freight capacity and increased passenger speeds and reduced operating expenses. See “—Strategic Projects – Modernisation Project”.

Rail Safety

As at the date of this Prospectus, the Company operates under a “self-regulation” policy in respect of rail safety. The Georgian Railway Code delegates safety regulation to the Company. Accordingly, the Company has developed and implemented its own safety policies.

The Company has not experienced any events resulting in fatal accidents or property damage in excess of GEL 100,000 in the last six years.

Subsidiaries and Affiliates

The Company’s non-core activities are conducted principally through the following subsidiaries:

• Railway TransContainer LLC: Railway TransContainer LLC is a Georgian limited liability company established in October 2009, which has as its corporate objective strengthening the Company’s presence in the fast-growing container transportation market, primarily through the creation of necessary infrastructure to increase the competitive position of the Company within this market, particularly in and near Poti. The Company is in the process of developing the necessary infrastructure (trucks, terminals, service centres and other assets) across Georgia to assist this subsidiary in gaining market share and becoming one of the dominant players in the container transportation business.

• Railway Property Management LLC: Railway Property Management LLC is a Georgian limited liability company established in July 2009, which has as its corporate objective creating value for the Company from its remaining obsolete or under-performing railway assets, such as land depots and stations not currently in use.

• Georgian Railway Construction LLC: Georgian Railway Construction LLC is a Georgian limited liability company established in December 2009, which has as its corporate objective providing construction services to the Company and other customers. It is expected that Georgian Railway Construction LLC will act as the main contractor for the construction works required in connection with the Bypass Project. The Company intends to transfer up to 3,000 of its employees to Georgian Railway Construction LLC to provide the necessary human resources to permit this subsidiary to fulfil its contracting role in connection with the completion of the Bypass Project. The Company is planning to transfer its shares in Georgian Railway Construction LLC to the State upon completion of the Bypass Project.

• Railway Telecom LLC: Railway Telecom LLC is a Georgian limited liability company established in August 2004, which has as its corporate objective providing cable leasing and internet services using its own fibre-optic infrastructure. With effect from 24 May 2010, the Company transferred its shares in Railway Telecom LLC to the Ministry of Economic Development in exchange for an undertaking by the Ministry to increase the capital of the Company by an amount equal to the fair value of the shares following a further auction, but in any event within three years of the transfer. See “—Recent Developments”.

Property

The Company has substantial real property assets, including buildings and land, related to the infrastructure required to operate the railway and otherwise.

Buildings

As at 31 December 2009, the Company owned 1,141 structures, approximately 650 of which were stand-alone buildings and the remainder of which were other constructions, such as platforms and yards. As at the same date, of the stand-alone buildings, approximately 150 were passenger stations, 140 were passenger support structures (such as open-air shelters and retail shops), 130 were for luggage or freight storage, 90 were control and signalling buildings and 55 were administrative or residential buildings.

Land

As at 31 December 2009, the Company held title to 4,520 hectares of land, comprising 99% of the Company’s total land in use, principally in and immediately around its right-of-ways.

The Company intends to dispose of up to 86 hectares of land owned by it in central Tbilisi once the Bypass Project is completed. See “—Strategic Projects”.

Strategic Projects

Modernisation Project

Having largely completed the 2005 Restructuring Programme, as a part of its on-going business strategy, the Company plans to undertake the Modernisation Project, which is intended to upgrade the Company’s engineering technology, optimise its operations, reduce operating costs and upgrade infrastructure assets, including through the rehabilitation of tracks and electric cables, the installation and upgrading of signalling equipment, the improvement of safety features and level crossings, the procurement of new rolling stock and the construction and improvement of tunnels and bridges. In addition, the Modernisation Project will, as a natural by-product of improved efficiency and operations, increase freight transit capacity, which may become important if transit demand develops as expected.

Initially, the Company had planned to fund the Modernisation Project out of internally-generated cash over a period of eight to 10 years. In order to reduce future capital expenditures and realise the expected benefits of the

Modernisation Project earlier, however, the Company’s management has decided to expedite the completion of the Modernisation Project to a period of three to four years. To demonstrate the financability of the Modernisation Project, the Company has completed a pre-feasibility study. In addition, pursuant to an international tender, the Company has engaged SYSTRA and SNCFI to undertake a full-scale feasibility study, a preliminary report of which has been recently completed, and an initial design study, which is expected to be delivered, in stages, by the end of 2010. The findings set forth in the preliminary report support management’s expectations that the Modernisation Project should have a positive impact on the Company’s efficiency and profitability.

The Modernisation Project will focus primarily on the mainline that runs from Tbilisi to the Black Sea, in particular to the terminals at Poti and Batumi. The total cost of the Modernisation Project is expected to be U.S.$340 million. The Company expects the completion of the Modernisation Project to result in a decrease in the Company’s operating costs by up to 40% by optimising traffic, improving the efficiency of the Company’s infrastructure assets, improving safety and reducing operational risks, increasing freight capacity and increasing transportation speeds. In addition, due to upgraded passenger trains and increased track speeds, the Company expects to be able to offer better quality passenger services, which will support increased prices and help the Company to convert the Passenger SBU into a profitable business line. The Government has announced its strong support for the Modernisation Project.

Tbilisi Bypass Project

The Bypass Project is intended to relocate certain railway infrastructure components from the centre of Tbilisi to the northern part of the city.

Upon the completion of the Bypass Project, commercially valuable land comprising 86 hectares in the centre of Tbilisi is expected to become available for sale and development. Because this development is expected to foster growth and economic improvements within the city and, in particular, to create local jobs, as well as to reduce the risk of future environmental contamination since trains will no longer transit through the centre of the city, the Municipality of Tbilisi has agreed to develop infrastructure on the land, including the construction of highways, utilities and other key infrastructure elements, at its expense. It is expected that a 10-hectare portion of this 86-hectare land plot will be transferred to the Government by way of a reduction in the Company’s capital.

The Company commenced the construction tender process for the Bypass Project in December 2009 and has announced the winning bidder, a joint venture between China Railway Construction Corporation, the national railway company of China, and JSC “Khidmsheni”, a Georgian construction company. Under the terms of the winning bid, the Company expects the Bypass Project to be completed by the end of 2013. The bypass railroad comprising part of the Bypass Project will feature double track and will involve the construction of 30 km of new railway lines and the reconstruction of 10 km of the existing line. All existing passenger trains (except one summertime train from Yerevan, Armenia to Batumi, which already bypasses Tbilisi) terminate at the existing central passenger station in Tbilisi. As part of the Bypass Project, this central station will be closed, and passengers will instead be required to disembark at one of the other two existing Tbilisi stations, one for west- bound traffic at Didube and the other for east-bound traffic at Navtlugi, which are connected by an existing public metro line.

The total cost of the Bypass Project is expected to be U.S.$270 million. The Company may fund this cost, in part, through application of a portion of the proceeds from the sale of the Notes. In the alternative, the Company may draw down all or some of the necessary funds under an existing loan agreement signed with the EBRD pursuant to which the Company may borrow up to CHF 146.2 million. Under this loan agreement, the Company has agreed to certain covenants, including an undertaking not to pay any dividend to the Government as its shareholder until the completion of the Bypass Project and a restriction on the incurrence of additional indebtedness. The Company has obtained the consent of EBRD to incur indebtedness in the form of the Notes, subject to certain conditions, the satisfaction of all of which are fully within the control of the Company. The Company will also dedicate various internal resources to the Bypass Project, such as labour, materials and managerial expertise. The Company expects that its cash flow, combined with the expected proceeds from the sale of the land plot to be made available by the Bypass Project, will be sufficient to cover the costs of the Bypass Project, including the repayment of related financing. In this connection, investors should note that, due to the strategic significance of the Bypass Project, the Company understands that the Government is willing to purchase the 86-hectare land plot (less the 10 hectares to be transferred to the Government by way of a reduction in capital) that will become available upon completion of the Bypass Project at a price to be agreed based on the

Company’s funding requirements in the event that the Company is unable to find another buyer at a suitable price.

The Company understands that the Government strongly supports the Bypass Project in light of the increased employment and economic development in the city of Tbilisi, as well as the enhancement of the city’s transportation system, which are expected to result from the Bypass Project. Initially, the Company received a grant from the Neighbourhood Investment Facility, a fund set up by the European Commission under the European Neighbourhood Policy, to fund the preparation of the master plan for the Bypass Project. In addition, the Government has agreed to make an in-kind capital contribution of 140 hectares of land that will comprise 40% of the land required to support the bypass railroad and related assets. The remaining 60% of the land will be acquired from private owners pursuant to a re-settlement action plan agreed with the support of the Government. The Company anticipates that the total cost to it for the purchase of this land from private owners will be EUR 17 million (which will be paid to the landowners in GEL at the relevant spot rate at the date of completion) and that the related re-settlement action plan will be fully effected by January 2011.

Environment

The Environmental Protection Unit of the Company, which is a sub-division of the Traffic Safety Department of the Infrastructure SBU, is staffed by 10 employees. The Environmental Protection Unit is responsible for the planning, implementation, monitoring and execution of the Company’s environmental strategy and any contingencies that may occur from time-to-time. This Department is also responsible for overseeing the Company’s compliance with applicable environmental law and regulations promulgated by the Ministry of Environment.

Pursuant to applicable Georgian environmental laws and regulations imposed by the Ministry of Environment and Natural Resources, the Company is required to carry out clean-up and rehabilitation works in respect of any environmental damage caused by its operations. The Company has special rolling stock, known as “repairing trains”, equipped to conduct environmental works. The Company has not experienced any material claims relating to environmental pollution.

Insurance

The Company does maintain health insurance covering its employees and their families, as well as directors and officers’ liability insurance. In addition, the Company has entered into a contract with a security service company, which provides for the payment of compensation to the Company for stolen or damaged assets or goods as a result of vandalism.

Information Technology

The importance and sophistication of the logistics, dispatching, rolling stock tracking and freight tracing components of the Company’s services require the employment of advanced information technology systems and software.

Most of the Company’s software and information systems are developed in-house to meet the specific demands of the Company. These systems include a centralised billing and electronic document management system used for document handling for freight transportation; an automated system that monitors and controls rolling stock in real time; software designed to monitor movements of containers, wagons and trains in stations; a ticket sales and accounting system for passenger transportation; and a centralised multi-module software for internal bookkeeping, which improves internal processing of initial accounting documents with electronic signature authorisations, for financial and tax accounting, budgeting and treasury operations.

The Company has three operating servers in use at all times, including a main server, a substitute server and a back-up server with a real-time link to the main server. All operations at the head office and throughout the organisation are connected on a real-time basis and there is only a 7-27-second delay in the transfer of data from the main server to the back-up server. The Company does not, however, have any off-site system redundancy for data protection.

Whilst the Company’s management believes that the Company’s current systems are sufficient for the Company’s current needs and are scalable to support the expected growth in the Company’s operations, a top priority of the Modernisation Project is aimed at improving and upgrading the Company’s IT systems to state- of-the-art technologies in line with the Company’s current and expected business activities.

Legal Proceedings

The Company is, from time to time, subject to legal proceedings and other investigations in the ordinary course of its business. As at the date of this Prospectus, the Company has not been involved in any governmental, legal or arbitration proceedings (including such proceedings which are pending or threatened of which the Company is aware) during the previous 12 months that may have, or have had in the recent past, significant effects on the financial position or profitability of the Company or the Company and its consolidated subsidiaries, taken as a whole.

MANAGEMENT AND EMPLOYEES

Governance Bodies

The Company’s management structure consists of its sole shareholder, the State of Georgia, its Supervisory Board and its Management Board, the last of which is responsible for the day-to-day management of the Company.

Sole Shareholder

The Company is 100% owned by the State. It is organised and registered as a limited liability company pursuant to the Law on Entrepreneurs, Georgia’s basic business entities statute. Since the Company is State-owned and it, in turn, owns and operates the railway tracks infrastructure and rolling stock of the national railway, as well as the land adjoining the tracks, the Company is considered to be an asset of national importance.

The Company is subject to a body of laws and legal requirements that do not usually constrain private corporations. State involvement in the governance of the Company, through the EMA of the Ministry of Economic Development, has evolved at an accelerated pace since Georgian independence in 1991. Initially, responsibility rested with the Railway Administration, modelled on the Soviet Railways Ministry. In the mid- 1990s, the Railway Administration became part of the Ministry of Transport, later the Ministry of Transport and Communications. In the course of rapid political changes pursuant to the Rose Revolution, the Ministry of Transport and Communications was dismantled in 2004 and its functions combined with the Ministry of Construction and Urbanisation to form the Ministry of Infrastructure and Development, which is now the Ministry of Economic Development.

Whilst nominally under the control of the Ministry of Economic Development, the EMA has semi-independent status by virtue of: (i) its standing as a separate legal public entity; (ii) its independent funding (derived from a 15% share of the State’s dividends from enterprises in which the State has an ownership interest); (iii) the appointment of its Chairman directly by the President; and (iv) its presidentially-approved statute, which grants it a degree of independence from ministries and other state agencies.

Although the EMA has the general power to act on behalf of the State as the 100% shareholder in the Company, it does not have the power to dispose of the State’s share. The power to privatise the State’s interest in the Company is reserved to the Ministry of Economic Development in accordance with the procedures set forth in the Law on Privatisation and its implementing regulations.

General Meeting of Shareholders

The Company’s sole shareholder exercises its rights through the General Meeting of Shareholders (the “General Meeting”). The General Meeting is the supreme governing body of the Company. It is held at least once annually and may be convened either by the EMA (on behalf of the Ministry of Economic Development), any member of the Supervisory Board or the General Director (Chief Executive Officer) of the Company. Resolutions adopted at the General Meeting are reflected in the minutes of the General Meeting. The EMA may adopt written resolutions instead of holding General Meetings.

Pursuant to the Charter of the Company, which is the basic constitutional document of the Company (the “Charter”), the functions of the General Meeting are to:

• undertake new or terminate existing lines of business;

• approve changes to the Charter;

• approve the application of net profits (if any) of the Company;

• approve the annual financial results of the Company;

• approve reports of the Supervisory Board and the Management Board;

• approve the business plan of the Company;

• appoint and discharge members of the Supervisory Board;

• appoint auditors of the Company;

• issue general powers of attorney;

• approve acquisitions and transfers of property by the Company;

• approve any reorganisation and liquidation of the Company; and

• approve loans and similar facilities.

Supervisory Board

The Supervisory Board reports to the EMA. The Supervisory Board monitors the operations and activities of the Company. Supervisory Board meetings are generally held weekly and there is frequent interaction between the Supervisory Board and the Management Board. Pursuant to the Charter, the functions of the Supervisory Board are, inter alia, to:

• control the performance of the Management Board;

• oversee the Company’s performance;

• control and examine the financial documentation and assets of the Company;

• hold meetings, as necessary, in the interests of the Company;

• examine annual reports and proposals on profit distribution and report to the General Meeting;

• appoint and discharge members of the Management Board, pursuant to written approval from the EMA;

• discuss and agree with the sole shareholder the obligations of the Company, which separately or jointly exceed 10% of the value of the Company’s total assets;

• discuss issues that are not within the ordinary course of the Company’s business; and

• discuss, on a quarterly basis, issues concerning the execution of the Company’s business plan.

Members of the Supervisory Board are appointed by a resolution of the sole shareholder for an indefinite term, subject to the right of the EMA to remove any Supervisory Board member at any time in its discretion. As at the date of this Prospectus, the Supervisory Board consists of 15 members pursuant to the Charter. The chairman of the Supervisory Board is Mr Giorgi Bezarashvili.

As at the date of this Prospectus, the Company’s Supervisory Board consists of the following members:

First Name Age Appointed Current Position Giorgi Bezarashvili...... 38 2009 Chairman of the Supervisory Board Mikheil Gogishvili...... 43 2010 Deputy Chairman of the Supervisory Board Pavle Tsadzikadze ...... 49 2008 Member of the Supervisory Board Edvard Surmanidze...... 45 2008 Member of the Supervisory Board Giorgi Ukleba ...... 39 2008 Member of the Supervisory Board Koba Pkhakadze ...... 45 2008 Member of the Supervisory Board Zurab Abuladze ...... 40 2008 Member of the Supervisory Board Nikoloz Natsvlishvili...... 34 2008 Member of the Supervisory Board Nikoloz Nachkebia ...... 37 2008 Member of the Supervisory Board Pridon Rukhaia ...... 52 2008 Member of the Supervisory Board Merab Botsvadze ...... 57 2008 Member of the Supervisory Board Zviad Gogitidze ...... 43 2008 Member of the Supervisory Board Kakhaber Rusia ...... 44 2008 Member of the Supervisory Board Megi Gotsiridze ...... 39 2008 Member of the Supervisory Board Albeg Zurabiani...... 50 2008 Member of the Supervisory Board

Giorgi Bezarashvili. Mr. Bezarashvili was born in 1971 and qualified as a Civil Engineer (Water-Supply and Drainage) from the Technical University of Georgia in 1994. In 1998, he graduated from the College of Government Officials with a qualification in Constitutional Law and Legislative Activity. He began his career in 1988 as a technician with the Project Institute Sakagromrecvmsheni. In 1994 Mr. Bezarashvili worked as a Provision Chief at the Svetitskhoveli Firm. Between 1994 and 2002, he worked as a Master of Network for Municipal Production at Tbilckalkanali. In 2002, he worked as a mechanical engineer for Tbiltskalkanali LLC Control Dispatching Service. From 2002 to 2004, he worked as Deputy Chief of the Water-Supply Operation Service at Tbiltskalkanali LLC. Between 2004 and 2008, Mr. Bezarashvili served as a Member of the Georgian Parliament and as Vice-President of the Committee of Natural Resources and Environment. From 2008 to 2009 he worked as Chairman of the Supervisory Board of the Tbilisi International Airport. In 2009, Mr. Bezarashvili was appointed to his current position as Chairman of the Supervisory Board.

Mikheil Gogishvili. Mr. Gogishvili was born in 1966 and graduated from the Faculty of International Law and International Relations of the Tbilisi State University. In 1993, he began his career as a leading specialist at the Legal Department of the Apparatus of the Parliament of Georgia. In 1995, he served as State Adviser to the Head of the State Legal Department. From 1996 to 1999, he served as State Adviser to the President of Georgia in relation to the Parliament Conserning Legislative State Affairs with the Chancellery of Georgia. From 1999 to 2000, Mr. Gogishvili served as a Judge of the Chamber of Administrative Affairs at the Tbilisi District Court. In 2000, he was appointed Judge at the Supreme Court of Georgia (Chamber of Civil, Enterprise, and Insolvency Affairs). In June 2005 he was appointed Deputy Head of the Supreme Court of Georgia and Head of the Civil Law Chamber. In 2010, he was appointed to his current position as member of the Supervisory Board.

Pavle Tsadzikadze. Mr. Tsadzikadze was born in 1960 and graduated from the Vladikavkaz Agricultural Academy in 1982. In 1987, he completed his postgraduate studies at the Vladikavkaz Agricultural Academy and graduated with a doctorate in Agricultural Sciences. In 1996, he graduated from the Secondary Department of Law and, in 1997, from the State Security Academy of Georgia. In 1988, Mr. Tsadzikadze began his career as Chief Researcher at the Georgian Zoological Veterinary Institute. Between 1991 and 1993, he worked for the Central Apparatus of State Security. From 1993 to 2000 he served as Head of the Kazbegi Regional Unit at the Ministry of Security. In 2000, Mr. Tsadzikadze served as Head of the Akhmeta Regional Unit for the Regional Administration of the Ministry of Security. From 2000 to 2002, he served as Head of the Akhmeta Region. Between 2002 and 2003, he served as Head of the Department for the Ministry of Security. From 2004 to 2008 he was a member of Parliament of Georgia. In 2008, Mr. Tsadzikadze was appointed to his current position as member of the Supervisory Board.

Edvard Surmanidze. Mr. Surmanidze was born in 1964 and studied philology and law at the Batumi Pedagogical Institute, of the Tbilisi State University. He began his career as a laboratory assistant at a Public School at Keda, in 1981. From 1983 to 1985, he worked at the Methodological Unit of the Regional Committee of the Board of the Young Communist League. Between 1985 and 1987, Mr. Surmanidze performed his Military Service. Between 1987 and 1989, he held various positions at the Regional Committee of the Board of 46

the Young Communist League. From 1993 to 1994, he was Secretary of the “AcharaMomarageba” State Company. From 1994 to 1995, he was Head of Department for Youth Affairs of the Autonomous Republic of Adjara. From 1995 to 2004, he served as member of Parliament of Georgia and from 1995 to 2000 as Deputy Chairman of Parliament. In 2008, Mr. Surmanidze was appointed to his current position as member of the Supervisory Board.

Giorgi Ukleba. Mr. Ukleba was born in 1971 and qualified as Technical Engineer from the Kutaisi Technical University in 1989. He graduated from the Tbilisi Political Academy with a degree in political science in 2000. He began his career in 1987 as an Administrator for the Railway Club. From 1997 to 2001 he worked for the NGO “The Club of Young Political Scientists”. Between 1999 and 2000, he worked as Head of Section at the JSC “SakKvesadgurMsheni”. Since 2002, he has served as a member of the United National Movement. From 2004 to 2008, he served as a member of Parliament of Georgia. In 2008, he was appointed member of the Supervisory Board.

Koba Pkhakadze. Mr. Pkhakadze was born in 1965 and graduated from the Professional Technical School in 1982. Between 1982 and 1987, he attended the Georgian Technical University. From 1990 to 1992, he attended the Tbilisi Business High-School and graduated with a degree in construction management. Mr. Pkhakadze started his career in 1981 as an assistant worker with the Workers Co-operative Society of the Gardabani Region. In 1987 and 1988, Mr. Pkhakadze worked as a mechanical engineer with the No. 32 Tunnel Crew of “Tbilgvirabmsheni”. In 1988 and 1989, he worked as an engineer with the Construction and Maintenance Department No. 1. Between 1989 and 1998, Mr. Pkhakadze worked as a senior engineer at the “Tbilzniiepi” Design Institute. From 1998 to 2001, he was an engineer with the Social Investments Fund of Georgia. From 2001 to 2004 Mr. Pkhakadze worked as an engineer-economist with the “GanviTareba” Union. Between 2004 and 2008, he served as a member of Parliament of Georgia and a member of the Committee on Social Affairs and Health. In 2008, he was appointed to his current position as member of the Supervisory Board.

Zurab Abuladze. Mr. Abuladze was born in 1969 and graduated from the History Department of the Tbilisi Pedagogical University in 2001. He began his career in 1988 by working as a brigade leader with the Construction and Maintenance Department. From 1991 to 1994, he worked as a forwarding agent with the “Burji” Commercial Shop. In 1994, he worked as an Inspector with for the Tbilisi Administrative Inspection. In 1994 and 1995 he was Superintendent of Works at “Kolkheti” Ltd. From 1995 to 1998, Mr. Abuladze worked as an advertising agent with “Irakli S.G.” Ltd. From 1998 to 2003, he worked as an engineer with “Arba” Ltd. and from 2003 to 2004, as Superintendent of Works for “C.P.” Ltd. Between 2006 and 2008, he served as a member of Parliament of Georgia. In 2008, Mr. Abuladze was appointed to his current position as member of the Supervisory Board.

Nikoloz Natsvlishvili. Mr. Natsvlishvili was born in 1975 and graduated from the Tbilisi Humanitarian Institute in 1998. From 1993 to 1998 he worked for the Tbilisi Humanitarian-Economic Institute. In 2008, Mr. Natsvlashvili was appointed to his current position as member of the Supervisory Board.

Nikoloz Nachkebia. Mr. Nachkebia was born in 1972 and graduated from the Economics Department of the Tbilisi State University in 1995. In 2004, he trained at the Euro Caucasian International University for Disciplinary Studies. From 2006 to 2007 he attended the Tbilisi School for Political Studies. In 1989, he began his career as a concrete worker, with Constructing-Montage Administration, Trust No. 2. From 1991 to 1994, Mr. Nachkebia worked for the Administration for Air Conditioning and Ventilation. Between 1994 and 1996, he worked as a controller and registrar with the “Mimino” Airline Company. From 1997 to 2000, he worked as an engineer and inspector for the Treasury Unit of the Department for Material-Technical and Financial Support of the Ministry of Internal Affairs of Georgia. From 2000 to 2003, Mr. Nachkebia worked as Chief Inspector for the Security Department for the Isani-Samgori District under the Ministry of Internal Affairs of Georgia. Between 2003 and 2005, he was an inspector with the Samegrelo-Zemo Svaneti Regional Service of the United National Movement of Georgia. From 2005 to 2008, Mr. Nachkebia served as a member of Parliament of Georgia. In 2008, he was appointed to his current position as member of the Supervisory Board.

Pridon Rukhaia. Mr. Rukhaia was born in 1958 and graduated from the Georgian Polytechnical Institute in 1976. From 1978 to 1979 he worked at the Preparatory Department of the Georgian Polytechnical Institute. From 1979 to 1984 he was in the Department of Geology at the Georgian Polytechnical Institute. Mr. Rukhaia started his career in 1986 as an assistant at the Georgian Polytechnical Institute. Between 1991 and 1995, he was a senior teacher at the Georgian Polytechnical Institute. From 1995 to 1996, he worked as an inspector with the Transport Police Department of the Ministry of Internal Affairs of Georgia and from 1996 to 2000, Head of the Transport Police Department. In 2001 and 2002, he worked as an inspector for the Anti-Corruption and

Economic Crime Department of the Ministry of Internal Affairs of Georgia. In 2001 and 2002 he was Head of Customs at “Poti”. In 2002 to 2003, he was Head of Regional Customs at “Dasavleti”. In 2008, Mr. Rukhaia was appointed to his current position as member of the Supervisory Board.

Merab Botsvadze. Mr. Botsvadze was born in 1952 and graduated from the Institute of Theatre and Cinema of Georgia in 1974. He started his career in 1974 as an actor with the Ministry of Culture of Georgia. From 1996 to 2002, he worked as a consultant with “Kaspiis Auzi” Ltd. From 2002 to 2004, he was Chairman of the United Nationals Movement of Georgia for the Samgori Region. Between 2004 and 2008, he served as member of Parliament of Georgia. In 2008 Mr. Botsvadze was appointed to his current position as member of the Supervisory Board.

Zviadi Gogitidze. Mr. Gogitidze was born in 1966 and graduated from the Tbilisi Sulkhan-Saba Orbeliani Pedagogical Institute in 1991. Mr. Gogitidze started his career in 1984 as a producer’s assistant with the Georgian Broadcasting Committee. From 1993 to 2001, he held the position of Manager of International Freight with “Giorgobela” Ltd. From 2001 to 2006, he held the position of Deputy Director for Technical Matters of “Dillijans” Ltd. In 2006 and 2007 Mr. Gogitidze held the position of Chief Specialist at the Inspection Department for Environment Protection at the Ministry of Environment and Natural Resources of Georgia. In 2007 and 2008, he was a member of Parliament of Georgia. In 2008, he was appointed to his current position as member of the Supervisory Board.

Kakhaberi Rusia. Mr. Rusia was born in 1966 and graduated from the Georgian Subtropical Institute. From 1992 to 1996, he was a Director of the Senaki Carpet Plant. Between 1996 and 2003, he served as State Representative at the Supervisory Board of Senaki Carpet Plant. From 2002 to 2003, Mr. Rusia served as Head of the Senaki Government. In 2008, he was appointed to his current position as member of the Supervisory Board.

Megi Gotsiridze. Ms. Gotsiridze was born in 1971 and graduated from the Department of Electrochemistry Technology of the Georgian Technical University in 1988. She began her career in 1987 as an assistant kindergarten tutor. From 1993 to 2001, she worked as a laboratory assistant with the Department of Inorganic Chemistry at the Georgian Technical University. Between 1999 and 2001, she was a Director of “Qedani” Ltd. In 2002, she worked for the Red Cross Organisation of Georgia. From 2002 to 2004, she was Chairman of the NGO “Gza Momavlisa”. In 2004, she served as Head of the Pension Fund of the Isani-Samgori region of the United State Fund of Social Insurance of Georgia. Between 2004 and 2008, Ms. Gotsiridze served as a member of the Parliament of Georgia. In 2008, she was appointed to her current position as member of the Supervisory Board.

Albeg Zurabiani. Mr. Zurabiani was born in 1959 and qualified as a food commodity expert from the Tbilisi State University in 1980. He started his career in 1981 by working as a trading inspector with the Workers Supplying Unit at “SamtoKimia”. From 1990 to 1991, he was Deputy Director of the Kaspi Zeolites Plant at “SamtoKimia”. From 1991 to 2004, he worked as Commercial Director of the Judo Federation of Georgia. From 2004 to 2005, he worked as Sports Director of the Judo Federation of Georgia. Between 2005 and 2008, Mr. Zurabiani served as a member of the Parliament of Georgia. In 2008, he was appointed to his current position as member of the Supervisory Board.

The business address of each of the members of the Supervisory Board is the registered office of the Company at 15 Tamar Mephe Avenue, Tbilisi 0112, Georgia.

Audit Committee

The Audit Committee, which was established in February 2010, is an advisory body of the Supervisory Board. The Audit Committee is charged with making recommendations to the Supervisory Board on the efficiency of the internal control and risk management systems of the Company and its corporate governance and compliance with applicable auditing requirements under Georgian law (including recommendations on the appointment of external auditors). The Audit Committee consists of three members, of which at least two members must be independent. As at the date of this Prospectus, the Audit Committee consists of the following members:

Name Position Mikheil Gogishvili...... Head of the Audit Committee Vacant...... Member of the Audit Committee Vacant...... Member of the Audit Committee

The Company intends to fill the vacancies on the Audit Committee within the next two to three months.

Management Board

The Management Board is responsible for the day-to-day management and administration of the Company, subject to the supervision of the Supervisory Board and the sole shareholder. The members of the Management Board are vested with the authority to legally bind the Company.

As at the date of this Prospectus, the Company’s Management Board consists of four members pursuant to the Charter. The Supervisory Board appoints the members of the Management Board, with the written approval of the EMA. Each member of the Management Board serves for an indefinite term, subject to the right of the EMA or Supervisory Board to remove any such member at any time in its discretion.

As at the date of this Prospectus, the Company’s Management Board consists of the following members:

Name Age Position with the Company Irakli Ezugbaia...... 32 Chief Executive Officer and Chief Financial Officer Teimuraz Bulia ...... 49 Director of Passenger SBU Giorgi Gurgenidze ...... 28 Director of Infrastructure SBU David Jinjolia...... 30 Director of Freight SBU

Irakli Ezugbaia. Mr. Ezugbaia was born in 1978 and graduated from the Caucasus School of Business with a Master of Business Administration in Finance in 2009. He graduated from the Georgian Technical University in 2002 with a Master of Economics in International Economic Relations. In 2001, he completed the Management Development Programme at the Caucasus School of Business. In 1997, he completed the Accounting and Taxation system training at the Institute of Social and Economic Research. He began his career in 1997 as an economist-consultant with the NGO “Alliance of Farmers”. From 1998 to 2000, he was a senior consultant for the Chief of Relations of the Department of West Countries at the Centre of International Affairs. From 2000 to 2001, he worked as a Financial Administrator with JSC “AES-Telasi”. From 2001 to 2003, he worked as a Digomi Business-Center Manager with JSC “AES-Telasi”. In 2005, Mr. Ezugbaia was the Adviser to the Prime Minister of Georgia. In 2005, he was appointed to his current position as Chief Executive Officer and Chief Financial Officer of the Company.

Teimuraz Bulia. Mr. Bulia was born in 1961 and graduated from the Georgian Technical University in 1983, as an engineer in hydro-technical construction. In 2000, he graduated as an economist from the Finance and Credit Faculty of the Economic-Humanitarian Institute of Georgia. From 1989 to 1996, he worked as Deputy General Director and Technical Director for the Research-and-Production Community “Complex”. Between 1996 and 1999, he served as Deputy Public Attorney of Samtskhe-Javakheti, Manager of socio-economic development programmes and Chairman of the Permanent Committee on Georgian-Turkish Border Issues. From 1999 to 2004, Mr. Bulia served as Deputy Director at the Examination and Utilisation Department, Counselor of State and Head of the Accounting Documentations Department at the Ministry of Finance of Georgia. From 2005 to 2007, he served as Deputy Director, Head of the Transportation Management and Operations Department at the Passenger Operations Branch of the Company. In 2007, he was appointed Director of the Passenger SBU.

Giorgi Gurgenidze. Mr. Gurgenidze was born in 1982 and graduated from the Tbilisi State University, having specialised in international law and received his qualification as a lawyer in 2004. He graduated from the Georgian Institute of Public Affairs, School of Public Administration and graduated with a Masters in Public Administration in 2005. He began his career in 2002 by working as an assistant to a judge at the Supreme Court of Georgia. From 2005 to 2006, he worked as a senior specialist in the Department of Legal Affairs of the Company. In 2006, he was appointed Head of the Department of Court and Law Enforcement Affairs of the Company. Between 2006 and 2007, he was appointed Head of the Procurement Agency of the Company. In 2007, he served as an adviser to the Director General of the Company. In 2007, Mr. Gurgenidze was appointed Deputy and Acting Director of Infrastructure of the Company. In 2007, he was appointed Director of the Infrastructure SBU.

David Jinjolia. Mr. Jinjolia was born in 1980 and graduated with a degree in International Economics in 2003 from the Georgian Technical University. He graduated from the Tbilisi State University in 2001 with a BBA in Labour Force Management. In 2000, he pursued U.S. Common and Contract Law studies as part of the Civil Education Project of the Central European University. Mr. Jinjolia graduated from the Caucasus School of Business in 2001 with a BBA in Finance and Accounting. In 1997, he began his career by working as Manager of Employment and Vice-President of the Youth Fund Center of Employment. From 1999 to 2000, he worked as Marketing Manager of “Personal Service” Ltd. Between 2000 and 2002, he worked as Regional Finance Manager of JSC “AES-Telasi”. In 2002, he was Head of Regional Commission of Claims and Dispatches with JSC “AES-Telasi”. From 2002 to 2003, Mr. Jinjolia was the Planning and Institutional Development Project Manager of JSC “TbilUniversalBank”. In 2003, he worked as the Planning and Analyses Group Leader with JSC “AES-Telasi”. In 2003, he was Revenue Department Manager for JSC “AES-Telasi”. From 2003 to 2004 Mr. Jinjolia worked as Head of the Financial Department of JSC “AES-Telasi”. In 2004, he worked as Deputy Director in the Corporate Solution Department of “United Global Technologies” Ltd. Between 2005 and 2006, he served as adviser to the Minister of Economics and Privatisation of Georgia. In 2005, he was Deputy General Director and General Director of JSC “Tbilgazi”. In 2005, he was appointed Director of the Freight SBU.

The business address of each of the members of the Management Board is the registered office of the Company at 15 Tamar Mephe Avenue, Tbilisi 0112, Georgia.

Conflicts of Interest

There are no actual or potential conflicts of interest between any duties owed to the Company by members of the Supervisory Board or the Management Board and their private interests or other duties.

Employees

The following table shows the approximate numbers of persons employed by the Company, by SBU, as at the dates indicated:

As at 31 December 2009 2008 2007 Administrative Centre...... 713 843 629 Freight SBU...... 6,344 6,586 6,890 Passenger SBU ...... 1,839 1,861 1,633 Infrastructure SBU...... 6,060 6,139 6,152 Total...... 14,956 15,429 15,304

The Company has experienced no material labour disputes or strikes and believes employee relations to be good.

An agreement has been reached between the Company and the Georgian Railway Workers’ Union, which represents approximately 90% of the Company’s workforce and regulates the Company’s labour relations and social policies. Through the union, the Company is committed to providing material, legal and moral support to employees and also organises cultural and recreational activities.

Under the 2005 Restructuring Programme, the Company reduced the number of its employees from 18,000 in 2005 to 14,956 in 2009. The Company expects that it will reduce its head count by up to a further 3,000

employees in connection with completion of the Bypass Project. The reduction will be made possible with the expected transfer of such employees to Georgian Railway Construction LLC, the Company’s subsidiary responsible for the construction phase of the Bypass Project and the subsequent planned transfer of the Company’s shares in this subsidiary to the State upon completion of the Bypass Project. The Company expects to achieve further staff reductions through natural attrition reflecting reduced staffing needs based on the increased efficiency and improved quality of its operations pursuant to the Modernisation Project. The Company does not expect to incur material restructuring charges in connection with any such reductions.

In 2009, the Company engaged a human resources consultant to develop an efficient human resources policy and create and streamline the Company’s human resource systems. The scope of the project included: (i) the creation of new job descriptions; (ii) the analysis of the optimal quantities of staff members in major units of organisation; (iii) the development of a new remuneration system; (iv) the development of a performance management system; (v) the development of a recruitment system; and (vi) the development of an educational masters programme tailored for middle level managers. The implementation of the project recommendations is on-going and expected to be completed in the third quarter of 2010.

USE OF PROCEEDS

The net proceeds of the issue of the Notes, expected to be approximately U.S.$247,542,500.00, will be used for general corporate purposes, which may include financing, in whole or in part, for the Modernisation Project and the Bypass Project.

TERMS AND CONDITIONS OF THE NOTES

The following are the terms and conditions in the form in which they will be endorsed on the Notes:

The issue of the Notes was authorised by a resolution of the Supervisory Board of Georgian Railway LLC (the “Issuer”) passed on 8 June 2010, by a resolution of the Management Board of the Issuer passed on 1 June 2010 and by a resolution of the Issuer’s sole shareholder passed on 18 June 2010. A fiscal agency agreement dated 22 July 2010 (the “Fiscal Agency Agreement”) has been entered into in relation to the Notes between the Issuer, Citibank, N.A. as fiscal agent and principal paying and transfer agent, and Citigroup Global Markets Deutschland AG & Co. KGaA, as registrar and a paying and transfer agent. The fiscal agent, the paying and transfer agents and the registrar for the time being are referred to below respectively as the “Fiscal Agent”, the “Paying and Transfer Agents” and the “Registrar”. The expression “Paying and Transfer Agents” shall include the Fiscal Agent. The Fiscal Agency Agreement includes the form of the Notes. Copies of the Fiscal Agency Agreement are available for inspection during normal business hours at the specified offices of the Paying and Transfer Agents. The holders of Notes (the “Noteholders”) are deemed to have notice of all the provisions of the Fiscal Agency Agreement applicable to them.

1. Form, Denomination, Title and Status

(a) Form and denomination: The Notes are in registered form, serially numbered and in principal amounts of U.S.$100,000 and integral multiples of U.S.$1,000 in excess thereof (each, an “authorised denomination”).

(b) Title: Title to the Notes will pass by transfer and registration as described in Condition 2. The holder (as defined below) of any Note will (except as otherwise required by law or as ordered by a court of competent jurisdiction) be treated as its absolute owner for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any interest in it or its theft or loss (or that of the related certificate, as appropriate) or anything written on it or on the certificate in respect of it (other than a duly executed transfer thereof)) and no person will be liable for so treating the holder. For this purpose, “holder” shall mean the person in whose name a Note is registered in the Register (as defined in Condition 2(a)).

(c) Status: The Notes constitute direct, unconditional, general and (subject to Condition 3) unsecured obligations of the Issuer and rank, and shall at all times rank, pari passu and without any preference among themselves. The payment obligations of the Issuer under the Notes shall, save for such exceptions as may be provided by applicable legislation and subject to Condition 3, at all times rank equally in all respects with all other present and future unsecured obligations of the Issuer.

2. Registration and Transfer of Notes

(a) Registration: The Issuer will cause a register (the “Register”) to be kept at the specified office of the Registrar outside the United Kingdom on which will be entered the names and addresses of the holders of the Notes and the particulars of the Notes held by them and of all transfers and redemptions of Notes.

(b) Transfer: Notes may, subject to the terms of the Fiscal Agency Agreement and to Conditions 2(c) and 2(d), be transferred in whole or in part in an authorised denomination by lodging the relevant Note (with the form of application for transfer in respect thereof duly executed and duly stamped where applicable) at the specified office of the Registrar or any Paying and Transfer Agent.

No transfer of a Note will be valid unless and until entered on the Register. A Note may be registered only in the name of, and transferred only to, a named person (or persons, not exceeding four in number).

The Registrar will within seven business days (as defined in Condition 6(c)), in the place of the specified office of the Registrar, of any duly made application for the transfer of a Note, deliver a new Note to the transferee (and, in the case of a transfer of part only of a Note, 53

deliver a Note for the untransferred balance to the transferor) at the specified office of the Registrar or (at the risk and, if mailed at the request of the transferee or, as the case may be, the transferor otherwise than by ordinary mail, at the expense of the transferee or, as the case may be, the transferor) mail the Note by uninsured mail to such address as the transferee or, as the case may be, the transferor may request.

(c) Formalities free of charge: Any such transfer will be effected without charge subject to (i) the person making such application for transfer paying or procuring the payment of any taxes, duties and other governmental charges in connection therewith, (ii) the Registrar being satisfied with the documents of title and/or identity of the person making the application and (iii) such reasonable regulations as the Issuer may from time to time agree with the Registrar.

(d) Closed Periods: Neither the Issuer nor the Registrar will be required to register the transfer of any Note (or part thereof) (i) during the period of 15 calendar days ending on and including the day immediately prior to 22 July 2015 (the “Final Maturity Date”); or (ii) during the period of seven calendar days ending on (and including) any Record Date (as defined in Condition 6(a)) in respect of any payment of interest on the Notes.

3. Covenants

So long as any Note remains outstanding (as defined in the Fiscal Agency Agreement):

(a) Negative pledge: the Issuer will not, and will ensure that no Material Subsidiary will, create or permit to subsist any mortgage, charge, pledge, lien or other form of encumbrance or security interest (“Security Interest”) (other than a Permitted Security Interest) upon the whole or any part of its present or future undertaking, assets or revenues (including any uncalled capital) to secure any Indebtedness, or any guarantee of or indemnity in respect of any Indebtedness, unless, at the same time or prior thereto, the Issuer’s obligations under the Notes (i) are secured equally and rateably therewith or benefit from a guarantee or indemnity in substantially identical terms thereto, as the case may be, or (ii) have the benefit of such other security, guarantee, indemnity or other arrangement as shall be approved by an Extraordinary Resolution (as defined in the Fiscal Agency Agreement) of the Noteholders;

(b) Reorganisation etc.: the Issuer shall: (i) not enter into any reorganisation (by way of a merger, accession, division, separation or transformation (as such terms may be construed for the purposes of the laws of Georgia) or any other method or procedure for reorganisation contemplated, or as may be contemplated from time to time, by the laws of Georgia); and (ii) ensure that no Material Subsidiary enters into any reorganisation (whether by way of a merger, accession, division, separation or transformation (as such terms may be construed for the purposes of the laws of Georgia or any other laws under which any such subsidiary may be incorporated) or any other method or procedure for reorganisation contemplated, or as may be contemplated from time to time, by the laws of Georgia or any such other laws), if, in the case of (i) or (ii) above, any such reorganisation could reasonably be expected to be materially prejudicial to the interests of the Noteholders;

(c) Financial statements: (i) within nine months of its most recent financial year-end, the Issuer shall send to the Fiscal Agent a copy of its audited annual consolidated financial statements for such financial year, together with the report thereon by the Issuer’s independent auditors, (ii) within 45 days of the end of each of the first three fiscal quarters of a financial year, the Issuer shall send to the Fiscal Agent a copy of its unaudited interim consolidated financial statements as at, and for the period ending on, the end of such quarter, certified by two directors of the Issuer as presenting fairly the financial position of the Issuer and its consolidated subsidiaries as at the relevant date, and the results of operations and changes in financial position of the Issuer and its consolidated subsidiaries for the relevant period then ended, each prepared and presented in accordance with International Financial Reporting Standards (“IFRS”) (as issued by the International Accounting Standards Board), consistently applied, and (iii) the Issuer shall procure that the Fiscal Agent delivers a copy of such financial statements, together with, in respect of any audited annual consolidated financial statements, the relevant auditors’ report thereon, to any Noteholder promptly upon request by such Noteholder;

(d) Ratio of Net Financial Indebtedness to EBITDA: the Issuer shall ensure that, as at each Balance Sheet Date, the amount of its Net Financial Indebtedness does not exceed more than four times its EBITDA; and

(e) Compliance Certificate: (i) the Issuer shall, concurrently with the delivery of each of the annual and interim consolidated financial statements referred to in Condition 3(c), provide to the Fiscal Agent a certificate signed by two directors of the Issuer confirming compliance with Condition 3(d) as at the relevant Balance Sheet Date and also setting out in reasonable detail the computations necessary to demonstrate such compliance as at such Balance Sheet Date and (ii) the Issuer shall procure that the Fiscal Agent delivers a copy of such certificate to any Noteholder promptly upon request by such Noteholder.

The Fiscal Agent shall have no obligation towards, or relationship of agency or trust with, any Noteholder and shall not be responsible or obliged to review the contents of any financial statement or certificate referred to in Conditions 3(c) and 3(e) above. In addition, the Fiscal Agent shall be under no obligation to enforce any obligation of the Issuer under Condition 3(c) or 3(e).

For the purposes of these Conditions:

(i) “Available Credit Facilities” means, as at a Balance Sheet Date, the amount available to be drawn by the Issuer under any committed credit facility available to it as at such Balance Sheet Date;

(ii) “Balance Sheet Date” means each 31 March, 30 June, 30 September and 31 December or other quarterly date as at which the Issuer prepares its audited or unaudited consolidated financial statements;

(iii) “Cash” means, as at a Balance Sheet Date, the amount of cash and cash equivalents shown in the balance sheet as at a Balance Sheet Date contained in the Issuer’s audited or unaudited consolidated financial statements;

(iv) “EBITDA” means, as at any Balance Sheet Date, the consolidated earnings of the Issuer from operating activities before interest, income taxes, depreciation and amortisation for the 12 month period ending on such Balance Sheet Date;

(v) “Financial Indebtedness” means, as at a Balance Sheet Date, the aggregate amount shown in the balance sheet contained in the Issuer’s audited or unaudited consolidated financial statements, for or in respect of:

(1) moneys borrowed;

(2) any amount raised by acceptance under any acceptance credit facility;

(3) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;

(4) the amount of any liability in respect of any lease or hire purchase contract, which would in accordance with IFRS be treated as a finance or capital lease;

(5) receivables sold or discounted (other than any receivables to the extent they are sold on a non-recourse basis);

(6) any amount raised under any other transaction (including any forward sale or purchase agreement) having the commercial effect of borrowing, which is treated as an obligation in accordance with IFRS;

(7) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, standby or documentary letter of credit or any other instrument issued by a bank or financial institution; and 55

(8) the amount of any liability in respect of any guarantee or indemnity for any of the items referred to in items (1) to (7) inclusive above;

(vi) “Hedging Obligations” means, with respect to the Issuer or any Material Subsidiary, the obligations of such entity pursuant to:

(1) any interest rate swap agreement, interest rate cap agreement or interest rate collar agreement or any other agreement or arrangement designed to protect such entity against fluctuations in interest rates; or

(2) any foreign currency futures contract or option agreement or any other agreement or arrangement designed to protect such entity against fluctuations in foreign currency rates;

(vii) “Indebtedness” means any present or future indebtedness for moneys borrowed or raised (whether or not evidenced by bonds, debentures, notes or other similar instruments);

(viii) “Material Subsidiary” means, at any time, any Subsidiary:

(1) whose total assets exceed 5% of the consolidated total assets of the Issuer; or

(2) whose total revenues exceeds 5% of the consolidated total revenues of the Issuer.

For these purposes:

(3) all calculations shall be determined in accordance with IFRS in the preparation of:

(A) the then latest annual audited consolidated financial statements of the relevant Subsidiary (in the case of a Subsidiary preparing consolidated financial statements) or the then latest annual audited financial statements of the relevant Subsidiary (in the case of a Subsidiary preparing non-consolidated financial statements); and

(B) the then latest annual audited consolidated financial statements of the Issuer;

(4) upon a Material Subsidiary transferring all or substantially all of its assets or business to another Subsidiary, the transferor shall cease to be a Material Subsidiary on the effective date of such transfer and thereupon the transferee shall be deemed to be a Material Subsidiary until the date of its next annual audited consolidated financial statements or, as the case may be, annual audited financial statements are prepared after which whether it is or is not a Material Subsidiary shall be determined in accordance with paragraphs (1) and (2) above; and

(5) subject to paragraph (4) above, if, as a result of any transfer, reconstruction, amalgamation, reorganisation, merger or consolidation, a company, which satisfied either of the tests set forth in paragraphs (1) or (2) above immediately before such transfer, reconstruction, amalgamation, reorganisation, merger or consolidation, but, which no longer satisfies either such test immediately after such transfer, reconstruction, amalgamation, reorganisation, merger or consolidation, shall immediately cease to be a Material Subsidiary;

(ix) “Net Financial Indebtedness” means Financial Indebtedness less (1) Cash and (2) Available Credit Facilities; 56

(x) “Permitted Security Interest” means:

(1) any Security Interest outstanding as of the Issue Date;

(2) any Security Interest granted in favour of the Issuer by any Material Subsidiary;

(3) any Security Interest arising by operation of law which has not been foreclosed or otherwise enforced against the assets to which it applies;

(4) any Security Interest upon assets created for the purpose of financing the acquisition of such assets;

(5) any Security Interest existing on assets at the time of their acquisition or securing Indebtedness of a person existing at the time that such person is merged into or consolidated with the Issuer or becomes a Material Subsidiary, provided that such Security Interest (i) was not created in contemplation of such acquisition, merger or consolidation or event and (ii) in the case of a merger or consolidation, does not extend to any assets or property of the Issuer or any Material Subsidiary, as the case may be (other than those of the person acquired and its subsidiaries (if any));

(6) any Security Interest created for the purpose of any Project Financing provided that such Security Interest is upon (i) assets which are the subject of such Project Financing and (ii) revenues or claims which arise from the operation, failure to meet specifications, exploitation, sale or loss of, or failure to complete, or damage to, such assets;

(7) any Security Interest granted pursuant to Hedging Obligations of the Issuer or a Material Subsidiary;

(8) a right of set-off, a right to combine accounts or any analogous right, which any bank or other financial institution may have relating to any credit balance of the Issuer or any Material Subsidiary;

(9) a Security Interest incurred, or pledge and deposit in connection with workers’ compensation, unemployment insurance and other social security benefits, and leases, appeal bonds and other obligations of substantially similar nature in the ordinary course of business;

(10) a Security Interest for ad valorem, income or property taxes or assessments and similar charges, which either is not delinquent or is being contested in good faith by appropriate proceedings for which the Issuer has set aside on its books reserves to the extent required by IFRS;

(11) an easement, right of way, restriction (including zoning restriction), reservation, permit, servitude, minor defect or irregularity in title and other similar charge or encumbrance, and any Security Interest arising under leases or subleases granted to others, in each case not interfering in any material respect with the business of the Issuer or any Material Subsidiary and existing, arising or incurred in the ordinary course of business;

(12) any Security Interest created pursuant to the loan agreement dated 17 March 2010 between the Issuer and the European Bank for Reconstruction and Development for the sole purpose of financing the Bypass Project (as defined and described in the Prospectus dated 20 July 2010 relating to the issue of the Notes);

(13) any Security Interest not otherwise permitted by the preceding paragraphs (1) to (12) (inclusive), provided that the aggregate principal amount of the 57

Indebtedness secured by such Security Interest does not at any time exceed the greater of U.S.$10,000,000 or 1% of the consolidated total assets of the Issuer, as determined by reference to the audited consolidated balance sheet of the Issuer prepared in accordance with IFRS as at the end of the most recent financial year of the Issuer; or

(14) the renewal or extension of any Security Interest described in the preceding paragraphs (1) to (12) (inclusive), provided that (x) the principal amount of the Indebtedness secured thereby is not increased, (y) such renewal or extension shall be no more restrictive than the original Security Interest and (z) the Security Interest has not been extended to any additional assets;

(xi) “Project Financing” means any arrangement for the provision of funds which are to be used solely to finance the acquisition, construction, development or exploitation of any assets pursuant to which the persons providing such funds agree that the principal source of repayment of such funds will be the project and the revenues (including insurance proceeds) generated by such project; and

(xii) “Subsidiary” means any entity whose financial statements at any time are required by law or in accordance with IFRS to be fully consolidated with those of the Issuer.

4. Interest

Each Note bears interest from and including 22 July 2010 at the rate of 9.875% per annum payable semi-annually in arrear on 22 January and 22 July in each year (each an “Interest Payment Date”), commencing on 22 January 2011. Each Note will cease to bear interest from and including the due date for redemption thereof unless, upon due presentation, payment of principal is improperly withheld or refused. In such event it shall continue to bear interest at such rate (both before and after judgment) up to but excluding whichever is the earlier of (i) the day on which all sums due in respect of such Note up to that day are received by or on behalf of the relevant holder and (ii) the day which falls seven days after the Fiscal Agent has notified Noteholders of receipt of all sums due in respect of all the Notes up to that seventh day (except to the extent that there is failure in the subsequent payment to the relevant Noteholders under these Conditions).

If interest is required to be calculated for a period of less than an Interest Period (as defined below), it will be calculated on the basis of a 360-day year consisting of 12 months of 30 days each and, in the case of an incomplete month, the actual number of days elapsed. The period beginning on and including 22 July 2010 and ending on but excluding the first Interest Payment Date and each successive period beginning on and including an Interest Payment Date and ending on but excluding the next succeeding Interest Payment Date is called an “Interest Period”.

5. Redemption and Purchase

(a) Redemption: Unless previously redeemed or purchased and cancelled, the Notes will be redeemed at their principal amount on the Final Maturity Date, together (if applicable) with interest accrued and unpaid to but excluding the Final Maturity Date.

(b) Redemption at the option of Noteholders (Put Option): If a Change of Control Event (as defined below) occurs, the Issuer shall, at the option of the holder of any Note, upon the holder of such Note giving notice to the Issuer as provided in Condition 5(c) at any time during the Redemption Period, redeem such Note on the Redemption Date at its principal amount together (if applicable) with interest accrued and unpaid to but excluding the Redemption Date.

(c) Change of Control Notice: Immediately upon the Issuer becoming aware that a Change of Control Event has occurred, the Issuer shall give notice (a “Change of Control Notice”) to the Noteholders in accordance with Condition 13 specifying the nature of the Change of Control Event and the procedure for exercising the put option contained in Condition 5(b).

To exercise the put option pursuant to Condition 5(b), a holder must deposit the certificate representing the Note(s) to be redeemed with the Registrar or any Paying and Transfer Agent at its specified office, together with a duly completed option exercise notice (“Exercise Notice”) in the form obtainable from any Paying and Transfer Agent or the Registrar within the Redemption Period. An Exercise Notice, once given, shall be irrevocable.

If 90% or more in principal amount of the Notes then outstanding has been redeemed pursuant to Condition 5(b), the Issuer may, on not less than 30 or more than 60 days’ notice to the Noteholders given within 30 days after the Redemption Date, redeem, at its option, the remaining Notes as a whole at their principal amount, together with interest accrued and unpaid to but excluding the date of such redemption. Such notice to the Noteholders shall specify the date fixed for redemption, the redemption price and the manner in which redemption will be effected.

For the purpose of this Condition 5:

(i) a “Change of Control Event” will occur if at any time Georgia ceases to own, directly or indirectly, more than 50% of the issued share capital of the Issuer or otherwise ceases to control, directly or indirectly, the Issuer. For the purpose of this Condition, Georgia will be deemed to “control” the Issuer if (whether directly or indirectly and whether by the ownership of share capital, the possession of voting power, contract, trust or otherwise) it or its government has the power to appoint and/or remove the majority of the members of the board of directors or other governing body of the Issuer or otherwise controls, or has the power to control, the affairs and policies of the Issuer;

(ii) “Redemption Date” means, in respect of any Note, the date which falls 14 days after the date on which the relevant holder exercises its option in accordance with this Condition 5; and

(iii) “Redemption Period” means the period from and including the date on which a Change of Control Event occurs (whether or not the Issuer has given a Change of Control Notice in respect of such event) to and including the date falling 60 days after the date on which such Change of Control Notice is given, provided that if no Change of Control Notice is given, the Redemption Period shall not terminate.

(d) Purchase: The Issuer or any Subsidiary may at any time purchase Notes in the open market or otherwise at any price. Any Notes so purchased, while held by or on behalf of the Issuer or any Subsidiary, shall not entitle the holder to vote at any meeting of Noteholders and shall not be deemed to be outstanding for the purposes of calculating quorums at meetings of Noteholders or for any other purpose pursuant to Condition 8 or 11.

(e) Cancellation: All Notes purchased by or on behalf of the Issuer or any Subsidiary may be cancelled or held and resold, provided that any Notes so purchased, while held by or on behalf of the Issuer or any Subsidiary, shall not entitle the holder to vote at any meeting of the Noteholders. Any Notes so purchased and cancelled may not be re-issued or resold.

6. Payments

(a) Method of payment: Payment of principal in respect of the Notes will be made to the persons shown in the Register at the close of business on the Record Date and subject to the surrender of the Notes at the specified office of any Paying and Transfer Agent. Payments of interest will be made to the persons shown in the Register at close of business on the relevant Record Date. For this purpose, “Record Date” means the seventh business day, in the place of the specified office of the Registrar, before the due date for the relevant payment. Each such payment will be made by transfer to a U.S. dollar account maintained by the payee with a bank in outside the United States.

(b) Payments subject to fiscal laws: All payments are subject in all cases to any applicable fiscal or other laws and regulations, but without prejudice to the provisions of Condition 7. No commissions or expenses shall be charged to the Noteholders in respect of such payments.

(c) Delay in payment: Noteholders will not be entitled to any interest or other payment for any delay after the due date in receiving the amount due (i) as a result of the due date not being a business day or (ii) if the holder is late in surrendering (where so required) the relevant Note(s).

(d) In these Conditions “business day” means a day on which commercial banks and foreign exchange markets are open in the relevant city and (where such surrender is required by these Conditions) in the place of the specified office of the relevant Paying and Transfer Agent to whom the relevant Note is surrendered.

(e) Paying and Transfer Agents: The initial Registrar and Paying and Transfer Agents and their initial specified offices are listed below. The Issuer reserves the right at any time to vary or terminate the appointment of any Paying and Transfer Agent and/or the Registrar and appoint additional or other Paying and Transfer Agents, provided that it will maintain (i) a Registrar and a Fiscal Agent, (ii) Paying and Transfer Agents having specified offices in at least two major European cities and (iii) a Paying and Transfer Agent with a specified office in a European Union member state that will not be obliged to withhold or deduct tax pursuant to any law implementing European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN Council meeting of 26-27 November 2000, to the extent such a Paying and Transfer Agent is not already maintained pursuant to (ii) above.

7. Taxation

All payments of principal and interest by or on behalf of the Issuer in respect of the Notes shall be made free and clear of, and without withholding or deduction for, any taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or within Georgia or any political subdivision thereof or any authority therein or thereof having power to tax, unless such withholding or deduction is required by law. In that event, the Issuer shall pay such additional amounts as will result in receipt by the Noteholders of such amounts as would have been received by them had no such withholding or deduction been required, except that no such additional amounts shall be payable in respect of any Note:

(a) Other connection: to a holder, or to a third-party on behalf of a holder, who is liable to such taxes, duties, assessments or governmental charges in respect of such Note by reason of his having some connection with Georgia other than the mere holding of the Note; or

(b) Surrendered for payment more than 30 days after the Relevant Date: surrendered for payment more than 30 days after the Relevant Date except to the extent that the holder of it would have been entitled to such additional amounts on surrender of such Note for payment on the last day of such period of 30 days; or

(c) Payment to individuals: where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN Council meeting of 26-27 November 2000 on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such Directive; or

(d) Payment by another Paying and Transfer Agent: by or on behalf of a Noteholder who would have been able to avoid such withholding or deduction by surrendering the relevant Note to another Paying and Transfer Agent in a Member State of the European Union.

In these Conditions “Relevant Date” means whichever is the later of (i) the date on which such payment first becomes due and (ii) if the full amount payable has not been received by the Fiscal Agent as provided in the Fiscal Agency Agreement on or prior to such due date, the date on which, the full amount having been so received, notice to that effect shall have been given to the Noteholders. Any

reference in these Conditions to principal and/or interest shall be deemed to include any additional amounts which may be payable under this Condition 7.

8. Events of Default

If any of the following events (each an “Event of Default”) occurs and is continuing:

(a) Non-payment: the Issuer fails to pay any amount of interest or principal on any of the Notes when due and such failure continues for a period of 10 days (in the case of interest) or 7 days (in the case of principal); or

(b) Breach of other obligations: the Issuer does not perform or comply with any one or more of its other obligations in the Notes which default is incapable of remedy or if capable of remedy, is not remedied within 30 days after notice of such default shall have been given to the Issuer (with a copy to the Fiscal Agent at its specified office) by any Noteholder; or

(c) Cross-acceleration: (i) any Indebtedness of the Issuer or any Subsidiary becomes due and payable prior to its stated maturity by reason of any actual or potential default, event of default or the like (howsoever described), or (ii) any Indebtedness of the Issuer or any Subsidiary is not paid when due or, as the case may be, within any originally applicable grace period, or (iii) the Issuer or any Subsidiary fails to pay when due any amount payable by it under any present or future guarantee for, or indemnity in respect of, any Indebtedness of any other person, provided that the aggregate amount of any Indebtedness, guarantees and indemnities in respect of which one or more of the events mentioned above in this paragraph (c) have occurred equals or exceeds U.S.$10,000,000 or its equivalent (on the basis of the middle spot rate for the relevant currency against the U.S. dollar as quoted by any leading bank on the day on which this paragraph operates); or

(d) Enforcement proceedings: a distress, attachment, execution or other legal process is levied, enforced or sued out on or against all or any material part of the property, assets or revenues of the Issuer or any Material Subsidiary and is not discharged or stayed within 60 days; or

(e) Security enforced: any mortgage, charge, pledge, lien or other encumbrance, present or future, created or assumed by the Issuer or any Material Subsidiary over all or any material part of the property, assets or revenues of the Issuer or such Material Subsidiary, as the case may be, becomes enforceable and any step is taken to enforce it (including the taking of possession or the appointment of a receiver, manager or other similar person) and is not discharged within 60 days; or

(f) Insolvency: the Issuer or any Material Subsidiary is (or is, or could be, deemed by law or a court to be) insolvent or bankrupt or unable to pay its debts, stops, suspends or threatens to stop or suspend payment of all or a material part of its debts, proposes or makes any agreement for the deferral, rescheduling or other readjustment of all or a material part of its debts or proposes or makes a general assignment or an arrangement or composition with or for the benefit of the relevant creditors in respect of all or a material part of its debts; or a moratorium is agreed or declared in respect of or affecting all or a material part of the debts of the Issuer or any Material Subsidiary; or

(g) Winding-up: an order is made or an effective resolution passed for the winding-up or dissolution of the Issuer or any Material Subsidiary, or the Issuer ceases or threatens to cease to carry on all or substantially all of its business or operations, except for the purpose of and followed by a reconstruction, amalgamation, reorganisation, merger or consolidation (i) on terms approved by an Extraordinary Resolution of the Noteholders, or (ii) in the case of a Material Subsidiary, whereby the undertaking and assets of the Material Subsidiary are transferred to or otherwise vested in the Issuer or another Subsidiary; or

(h) Performance prevented: it is or will become unlawful for the Issuer to perform or comply with any of its obligations under or in respect of the Notes or the Fiscal Agency Agreement or any of such obligations shall be or become unenforceable or invalid; or

(i) Consents etc.: any regulation, decree, consent, approval, licence or other authority necessary to enable the Issuer to perform its obligations under the Notes or the Fiscal Agency Agreement or for the validity or enforceability thereof expires or is withheld, revoked or terminated or otherwise ceases to remain in full force and effect or is modified in a manner which adversely affects any right or claim of any of the Noteholders in respect of any payment due to them pursuant to these Conditions; or

(j) Analogous events: any event occurs which under the laws of any relevant jurisdiction has an analogous effect to any of the events referred to in any of the foregoing paragraphs of this Condition 8,

then the holders of at least 25% in aggregate principal amount of the outstanding Notes may, by notice in writing to the Issuer (with a copy to the Fiscal Agent), declare all the Notes to be immediately due and payable, whereupon they shall become immediately due and payable at their principal amount together with accrued interest without further action or formality. Notice of any such declaration shall promptly be given to all other Noteholders by the Fiscal Agent (acting on behalf of the Issuer) in accordance with Condition 13.

9. Prescription

Claims in respect of principal and interest shall be prescribed and will become void unless made within a period of 10 years in the case of principal and five years in the case of interest from the appropriate Relevant Date.

10. Replacement of Notes

If any Note is lost, stolen, mutilated, defaced or destroyed it may be replaced at the specified office of the Fiscal Agent, subject to all applicable laws and stock exchange or other relevant authority requirements, upon payment by the claimant of the expenses incurred in connection with such replacement and on such terms as to evidence, security, indemnity and otherwise as the Issuer may reasonably require. Mutilated or defaced Notes must be surrendered before replacements will be issued.

11. Meetings of Noteholders, Written Resolutions

(a) Meetings of Noteholders: The Fiscal Agency Agreement contains provisions for convening meetings of Noteholders to consider matters relating to the Notes, including (subject to Condition 11(c) below) the modification of any provision of these Conditions or the provisions of the Fiscal Agency Agreement. Such a meeting may be convened by the Issuer or the Fiscal Agent in its discretion and shall be convened by the Issuer or the Fiscal Agent at any time upon the request in writing of holders of at least 10% of the aggregate principal amount of the outstanding Notes. For the avoidance of doubt, notwithstanding any provision contained in these Conditions, the Notes or in the Fiscal Agency Agreement, no modification or amendment of these Conditions, the Notes or the Fiscal Agency Agreement may be made without the prior written consent of the Issuer.

(b) Quorum: The quorum for any meeting convened to consider an Extraordinary Resolution will be two or more persons holding or representing a clear majority in principal amount of the Notes for the time being outstanding or for any adjourned meeting, two or more persons being or representing Noteholders whatever the principal amount of the Notes held or represented, unless the business of such meeting includes consideration of proposals, inter alia, (i) to modify the maturity of the Notes or the dates on which interest is payable in respect of the Notes, (ii) to reduce or cancel the principal amount of or interest on or to vary the method of calculating the rate of interest on, the Notes, (iii) to change the currency of payment of the Notes, or (iv) to modify the provisions concerning the quorum required at any meeting of Noteholders or the majority required to pass an Extraordinary Resolution, in which case the necessary quorum will be two or more persons holding or representing not less than 75%, or at any adjourned meeting not less than 25%, in principal amount of the Notes for the time being outstanding. Any Extraordinary Resolution duly passed shall be binding on Noteholders (whether or not they were present at the meeting at which such resolution was passed).

(c) Written resolutions: The Fiscal Agency Agreement provides that a resolution in writing signed by or on behalf of the holders of not less than 75% in principal amount of the Notes outstanding shall for all purposes be as valid and effective as an Extraordinary Resolution passed at a meeting of Noteholders duly convened and held. Such a resolution in writing may be contained in one document or several documents in the same form, each signed by or on behalf of one or more Noteholders. Notwithstanding any provision contained in these Conditions or in the Fiscal Agency Agreement, no modification or amendment of these Conditions or the Fiscal Agency Agreement may be made without the prior written consent of the Issuer.

(d) Modification of these Conditions and the Fiscal Agency Agreement: The Notes, these Conditions and the provisions of the Fiscal Agency Agreement may be amended without the consent of the Noteholders to correct a manifest error or to make any other modification of a minor or technical nature; provided that, for the avoidance of doubt, no modification or amendment of the Notes, these Conditions and the provisions of the Fiscal Agency Agreement may be made without the prior written consent of the Issuer and the Issuer shall only permit any modification of, or any waiver or authorisation of any breach or proposed breach of or any failure to comply with, these Conditions, the Notes or the Fiscal Agency Agreement, if to do so could not reasonably be expected to be materially prejudicial to the interests of the Noteholders.

12. Further Issues

The Issuer may from time to time without the consent of the Noteholders create and issue further securities either having the same terms and conditions as the Notes in all respects (or in all respects except for the first payment of interest on them) and so that such further issue shall be consolidated and form a single series with the outstanding securities of any series (including the Notes) or upon such terms as the Issuer may determine at the time of their issue. References in these Conditions to the Notes include (unless the context requires otherwise) any other securities issued pursuant to this Condition and forming a single series with the Notes.

13. Notices

All notices to Noteholders shall be mailed to them at their respective addresses appearing in the Register and shall be deemed to have been given on the fourth weekday (excluding Saturday and Sunday) after the date of mailing.

14. Currency Indemnity

United States dollar (the “Contractual Currency”) is the sole currency of account and payment for all sums payable by the Issuer under or in connection with the Notes, including damages. Any amount received or recovered in a currency other than the Contractual Currency (whether as a result of, or of the enforcement of, a judgment or order of a court of any jurisdiction or otherwise) by any Noteholder in respect of any sum expressed to be due to it from the Issuer shall only constitute a discharge to the Issuer to the extent of the Contractual Currency amount which the recipient is able to purchase with the amount so received or recovered in that other currency on the date of that receipt or recovery (or, if it is not practicable to make that purchase on that date, on the first date on which it is practicable to do so). If that Contractual Currency amount is less than the Contractual Currency amount expressed to be due to the recipient under any Note, the Issuer shall indemnify such recipient against any loss sustained by it as a result. In any event, the Issuer shall indemnify the recipient against the cost of making any such purchase. For the purposes of this Condition, it will be sufficient for the Noteholder to demonstrate that it would have suffered a loss had an actual purchase been made. These indemnities constitute a separate and independent obligation from the Issuer’s other obligations, shall give rise to a separate and independent cause of action, shall apply irrespective of any indulgence granted by any Noteholder and shall continue in full force and effect despite any other judgment, order, claim or proof for a liquidated amount in respect of any sum due under any Note or any other judgment or order, until paid in full.

15. Contracts (Rights of Third Parties) Act 1999

No person shall have any right to enforce any term or condition of the Notes under the Contracts (Rights of Third Parties) Act 1999.

16. Governing Law

(a) Governing law: The Fiscal Agency Agreement and the Notes and any non-contractual obligations arising out of or in connection with them are governed by, and shall be construed in accordance with, English law.

(b) Jurisdiction: The Issuer irrevocably agrees for the benefit of the Noteholders that the courts of England are to have jurisdiction to settle any disputes which may arise out of or in connection with the Fiscal Agency Agreement or the Notes and that accordingly any suit, action or proceedings arising out of or in connection therewith (together referred to as “Proceedings”) may be brought in the courts of England.

(c) No objection to Proceedings: The Issuer irrevocably and unconditionally waives and agrees not to raise any objection which it may have now or subsequently to the laying of the venue of any Proceedings in the courts of England and any claim that any Proceedings have been brought in an inconvenient forum and further irrevocably and unconditionally agrees that a final non-appealable judgment in any Proceedings brought in the courts of England shall be conclusive and binding upon the Issuer and may, subject to the proviso in paragraph (f) below, be enforced in the courts of any other jurisdiction to which the Issuer is or may be subject. Nothing in this Condition shall limit any right to take Proceedings against the Issuer in any other court of competent jurisdiction, nor shall the taking of Proceedings in one or more jurisdictions preclude the taking of Proceedings in any other jurisdiction, whether concurrently or not.

(d) Agent for service of process: The Issuer irrevocably appoints Jordans International Limited of 20-22 Bedford Row, London WC1R 4JS as its agent in England to receive service of process in any Proceedings in England. If for any reason such agent shall cease to be such agent for service of process, the Issuer shall appoint a new agent for service of process in England and deliver to the Fiscal Agent a copy of the new agent’s acceptance of that appointment within 30 days.

(e) Arbitration: The Issuer irrevocably and unconditionally agrees that any disputes which may arise out of or in connection with the Notes (including any questions regarding their existence, validity or termination) may be referred to and finally resolved by arbitration under the Rules of the LCIA (formerly the London Court of International Arbitration). The place of such arbitration shall be London and the language English.

(f) Waiver of immunity: To the extent that the Issuer or any of its assets has (on the date of issue of the Notes), or thereafter may acquire, any right to immunity from set-off, legal proceedings, attachment prior to judgement, other attachment or execution of judgement on the grounds of sovereignty or otherwise, the Issuer hereby irrevocably waives any such right to immunity and any similar defence, and irrevocably consents to the giving of any relief or the issue of any process, including, without limitation, the making, enforcement or execution against any property whatsoever of any order, award or judgment made or given in connection with any Proceedings.

PROVISIONS RELATING TO THE NOTES WHILST IN GLOBAL FORM

Amendments to Terms and Conditions of the Notes

The Global Note contains provisions that apply to the Notes that it evidences, some of which modify the effect of the Terms and Conditions of the Notes. The following is a summary of those provisions.

Payments

Payments of principal and interest in respect of Notes evidenced by the Global Note will be made to the person who appears in the Register at the close of business on the Clearing System Business Day immediately prior to the date for payment as holder of the Notes against presentation for endorsement by the Fiscal Agent and, if no further payment falls to be made in respect of the relevant Notes, surrender of such Global Note to or to the order of the Fiscal Agent or such other Paying and Transfer Agent as shall have been notified to the relevant Noteholders for such purpose. A record of each payment so made will be endorsed in the appropriate schedule to the Global Note, which endorsement will be prima facie evidence that such payment has been made in respect of the relevant Notes. “Clearing System Business Day” for the purposes of this paragraph means Monday to Friday, inclusive, except 25 December and 1 January.

Notices

So long as any Notes are evidenced by a Global Note and such Global Note is held by or on behalf of a clearing system, notices to Noteholders may be given by delivery of the relevant notice to that clearing system for communication by it to entitled account holders in substitution for delivery thereof as required by the Terms and Conditions of the Notes.

Meetings

The holder of the Global Note will be treated as being two persons for the purposes of any quorum requirements of, or the right to demand a poll at, a meeting of Noteholders and in any such meeting as having one vote in respect of each integral U.S.$1,000 in principal amount of Notes.

Cancellation

Cancellation of any Note required by the Terms and Conditions of the Notes to be cancelled will be effected by reduction in the principal amount of the Global Note.

Prescription

Claims against the Company in respect of principal and interest on the Notes whilst the Notes are represented by a Global Note will become void unless it is presented for payment within a period of 10 years (in the case of principal) and five years (in the case of interest) from the appropriate Relevant Date (as defined in Condition 7 (Taxation)).

Default

The Global Note provides that the holder may cause the Global Note or a portion of it to become due and payable in the circumstances described in Condition 8 (Events of Default) by stating in the notice to the Fiscal Agent the principal amount of Notes which is being declared due and payable. If principal in respect of any Note is not paid when due and payable, the holder of the Global Note may elect that the Global Note becomes void as to a specified portion and that the persons entitled to such portion, as accountholders with a clearing system, acquire direct enforcement rights against the Company under further provisions of the Global Note executed by the Company as a deed poll.

Put Option

The Noteholders’ put option in Condition 5(b) (Redemption and Purchase) may be exercised by the holder of the Global Note, giving notice to the Fiscal Agent of the principal amount of Notes in respect of which the

option is exercised and presenting the Global Note for endorsement of exercise within the time limits specified in Condition 5(d) (Redemption and Purchase).

Exchange for Individual Definitive Certificates.

Exchange

The Global Note will be exchangeable, free of charge to the holder, in whole but not in part, for definitive registered certificates (“Note Certificates”) if: (i) it is held by or on behalf of a clearing system and such clearing system is closed for business for a continuous period of 14 calendar days (other than by reason of holidays, statutory or otherwise) or announces an intention permanently to cease business or does in fact do so, by the holder giving notice to the Registrar; or (ii) if the Company would suffer a material disadvantage in respect of the Notes as a result of a change in the laws or regulations (taxation or otherwise) of any jurisdiction referred to in Condition 7 (Taxation), which would not be suffered were the Notes in definitive form, by the Company giving notice to the Registrar and the Noteholders, in each case, of its intention to exchange interests in the Global Note for Note Certificates on or after the Exchange Date (as defined below) specified in the notice.

“Exchange Date” means a day falling not later than 60 calendar days after that on which the notice requiring exchange is given and on which banks are open for business in the city in which the specified office of the Registrar or the relevant Paying and Transfer Agent is located.

The Registrar will not register the transfer of, or exchange of interests in, the Global Note for Note Certificates for a period of 15 calendar days ending on the date for any payment of principal or interest in respect of the Notes.

Delivery

If any of the events described in “—Exchange” above occurs, the Global Note shall be exchangeable in full but not in part for Note Certificates and the Company will, free of charge to the Noteholders (but against such indemnity as the Registrar or any relevant Paying and Transfer Agent may require in respect of any tax or other duty of whatever nature which may be levied or imposed in connection with such exchange), cause sufficient Note Certificates to be executed and delivered to the Registrar for completion and despatch to the relevant Noteholders. A person having an interest in the Global Note must provide the Registrar with a written order containing instructions and such other information as the Company and the Registrar may require to complete, execute and deliver such Note.

TAXATION

The following discussion summarises certain Georgian tax considerations that may be relevant to holders of Notes. It also includes a limited discussion of certain European Union considerations. This summary is based on the Issuer’s understanding of laws, regulations, rulings and decisions now in effect and is subject to changes in, and differing interpretations of, tax law and practice, including changes, interpretations and applications that could have a retroactive effect. Certain statements made below as to the possible tax treatment of holders of Notes should be read in this context.

This summary does not describe all of the tax considerations that may be relevant to holders of Notes, particularly holders of Notes subject to special tax rules. Holders of Notes are advised to consult their own professional advisers as to the consequences of purchasing Notes under the tax laws of the country of which they are resident.

Georgian Tax

The analysis below is a general overview of certain tax implications related to the Notes prepared in accordance with Georgian tax legislation. As with other areas of Georgian legislation, tax law and practice in Georgia is not as clearly established as that of more developed jurisdictions. It is possible, therefore, that changes may be made in the law or in the current interpretation of the law or current practice, including changes that could have a retroactive effect. Accordingly, it is possible that payments to be made to the holders of the Notes could become subject to taxation, or that rates currently in effect with respect to such payments could be increased, in ways that cannot be anticipated as at the date of this Prospectus. Each prospective purchaser of Notes should also consider the further tax implications for it under laws and regulations of those countries which will be applicable to its purchase, holding and sale of Notes.

Withholding Tax on Interest

Pursuant to the Tax Code of Georgia, as amended, inter alia, by the Law of Georgia on Making Amendments to the Tax Code No. 3067, dated 4 May 2010, payments of interest on Notes will be exempt from withholding tax so long as the Notes are listed on a “recognised stock exchange”. The Georgian tax authorities would be expected to apply this exemption based on a list of “recognised stock exchanges” adopted by the NBG. Although the NBG has not yet published the relevant list, the Company believes that the London Stock Exchange will be treated as a ”recognised stock exchange” for this purpose.

Enforceability of Tax Gross-up under the Terms and Conditions of the Notes

Pursuant to Condition 7. Taxation, in the case of withholding or deduction of any taxes (subject to certain customary exceptions) in respect of any payment on the Notes, the Company is required to increase the amount of the relevant payment by such amount as would result in the receipt by the relevant Noteholder of the amount which would have been received by it had no such withholding or deduction been required. The Tax Code of Georgia neither prohibits nor permits the inclusion of tax gross-up clauses (such as that set out in Condition 7. Taxation) in agreements or instruments made by Georgian companies. In practice, however, such gross-up provisions are widely respected by the tax authorities in Georgia.

Taxation on sale of Notes

Taxation on sale of Notes by non-resident legal entities to residents of Georgia

Legal entities in Georgia are subject to profit tax at the rate of 15%, calculated based on the taxable income of the relevant entity. Under Article 170 of the Tax Code of Georgia, taxable income, for these purposes, is defined as the difference between the gross income of the entity and the deductions granted or permitted under the Tax Code of Georgia. The same rate may be applicable to non-resident legal entities of Georgia if they realise a capital gain on the sale of Notes to Georgian taxpayers, where the gain is calculated as the difference between the initial acquisition and subsequent sale prices. Non-residents may be obliged to report and pay tax to the Georgian tax authorities. The applicability of profit tax may be affected by a double tax treaty between Georgia and the country of residence of the seller.

Taxation on sale of Notes by non-resident natural persons to residents of Georgia

Natural persons in Georgia are subject to income tax at the rate of 12%. Non-resident natural persons selling Notes to residents of Georgia may be obliged to report and pay tax to the Georgian tax authorities. As above, the applicability of income tax may be affected by a double tax treaty between Georgia and the country of residency of the seller.

Taxation on sale of Notes by residents of Georgia to non-resident entities or natural persons

In the event of a sale of Notes by a resident of Georgia to a non-resident natural person or legal entity, no tax burden will fall on the purchaser. A sale of Notes by a Georgian resident taxpayer may be subject to 15% profit tax (for a legal entity) or 12% income tax (for an individual), with the tax being calculated based on the difference between the relevant initial acquisition price and the subsequent sale price. There may, however, be some uncertainty relating to the interpretation of the applicable provisions of the Tax Code of Georgia regarding the Notes. An aggressive interpretation of the tax law by local tax authorities may result in the imposition of additional tax obligations. The Georgian tax authorities may adopt the view that such taxes are to be assessed on the full amount of the sale price.

Certain exemptions from the 12% income tax may be available to an individual Noteholder if such Noteholder has held Notes for more than two calendar years, although varying interpretations may preclude the applicability of this exemption.

Taxation on purchase of Notes by residents of Georgia

Generally, the Tax Code of Georgia does not impose any tax burden on a purchaser of Notes who is a resident of Georgia whether the purchaser is a legal entity or an individual. The tax authorities may, however, in limited circumstances, attempt to interpret certain provisions of the Tax Code of Georgia in such a way as to ensure that the seller complies with its tax obligations (as outlined above) by assessing the corresponding amount of withholding tax on the purchaser.

Value Added Tax

The Tax Code of Georgia considers the sale of Notes as a financial operation, which is exempt from value-added-tax.

EU Savings Directive

Under EC Council Directive 2003/48/EC on the taxation of savings income, each Member State is required, from 1 July 2005, to provide to the tax authorities of another Member State details of payments of interest or other similar income paid by a person within its jurisdiction to, or collected by such a person for, an individual resident in that other Member State. However, for a transitional period, Luxembourg and Austria are instead required (unless during that period they elect otherwise) to operate a withholding system in relation to such payments (the ending of such transitional period being dependent upon the conclusion of certain other agreements relating to information exchange with certain other countries). A number of non-EU countries and territories including Switzerland have adopted similar measures (a withholding system in the case of Switzerland).

SUBSCRIPTION AND SALE

J.P. Morgan Securities Ltd. and Merrill Lynch International (each, a “Joint Lead Manager” and, together, the “Joint Lead Managers”) have, in a subscription agreement dated 20 July 2010 (the “Subscription Agreement”) and upon the terms and subject to the conditions contained therein, jointly and severally agreed to subscribe and pay for the Notes at their issue price of 99.517% of their principal amount. The Company has agreed to pay to the Joint Lead Managers a fee in respect of their agreement to subscribe and pay for the Notes. The Joint Lead Managers are entitled in certain circumstances to be released and discharged from their obligations under the Subscription Agreement prior to the closing of the issue of the Notes.

United States

The Notes have not been and will not be registered under the Securities Act and, subject to certain exceptions, may not be offered or sold within the United States.

The Notes are being offered and sold outside of the United States in reliance on Regulation S.

In addition, until 40 days after the commencement of the offering of the Notes, an offer or sale of the Notes within the United States by any dealer (whether or not participating in the offering) may violate the registration requirements of the Securities Act.

United Kingdom

Each Joint Lead Manager has represented and agreed that:

(a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000 (the “FSMA”) received by it in connection with the issue or sale of the Notes in circumstances in which Section 21(1) of the FSMA does not apply to the Company; and

(b) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom.

Georgia

Each Joint Lead Manager has represented and agreed that it has complied and will comply with all applicable provisions of Georgian law with respect to anything done by it in relation to the Notes in, from or otherwise involving Georgia.

General

No action has been, or will be, taken by the Company or the Joint Lead Managers that would, or is intended to, permit a public offer of Notes in any country or jurisdiction where any such action for that purpose is required. Accordingly, each Joint Lead Manager has undertaken that it will comply, to the best of its knowledge and belief and in all material respects, with all applicable securities laws and regulations in each jurisdiction in which it purchases, offers, sells or delivers Notes or has in its possession or distributes this Prospectus.

GENERAL INFORMATION

Authorisation

The Company has obtained all necessary consents, approvals and authorisations in Georgia in connection with the issue and performance of the Notes. The issue of the Notes was authorised by a resolution of the Supervisory Board of the Company passed on 8 June 2010, by a resolution of the Management Board of the Company passed on 1 June 2010 and by a resolution of the Company’s sole shareholder passed on 18 June 2010.

Listing

It is expected that listing of the Notes on the Official List and admission of the Notes to trading on the Market will be granted on or about 22 July 2010, subject only to the issue of the Global Note. The Global Note is expected to be issued on or about 22 July 2010. Prior to official listing and admission to trading, dealings in the Notes will be permitted by the London Stock Exchange in accordance with its rules. The listing of the Notes on the Official List will be expressed as a percentage of their nominal amount (exclusive of accrued interest). Transactions will normally be effected for settlement in U.S. Dollars and for delivery on the third working day after the day of the transaction. The listing expenses in connection with the issue of the Notes are expected to be approximately U.S.$10,800.

No Significant Change

There has been no significant change in the financial or trading position of the Company or the Company and its consolidated subsidiaries taken as a whole and no material adverse change in the financial position or prospects of the Company or the Company and its consolidated subsidiaries taken as a whole since 31 December 2009.

Clearing Systems

The Notes have been accepted for clearance through Euroclear and Clearstream, Luxembourg under the Common Code No. 052394775 and the ISIN XS0523947751.

The address of Euroclear is 1 Boulevard du Roi Albert II, B-1210 Brussels, Belgium, and the address of Clearstream, Luxembourg is 42 Avenue JF Kennedy, L-1855 Luxembourg.

Litigation

The Company has not been involved in any governmental, legal or arbitration proceedings (including such proceedings which are pending or threatened of which the Company is aware) during the previous 12 months that may have, or have had in the recent past, significant effects on the financial position or profitability of the Company or the Company and its consolidated subsidiaries, taken as a whole.

Documents

For the period of 12 months starting on the date on which this Prospectus is made available to the public, copies (and English translations where the documents in question are not in English) of the following documents will be available, during usual business hours on any weekday (Saturdays and public holidays excepted), for inspection at the offices of the Company:

(a) the Charter of the Company;

(b) the Consolidated Financial Statements;

(d) the Agency Agreement.

This Prospectus will be published on the website of the Regulatory News Service operated by the London Stock Exchange at www.londonstockexchange.com/exchange/prices-and-news/news/market-news/market-news-home.html.

Auditors

The Tbilisi branch of KPMG CIS Limited of 6 Ketagurov Street, Tbilisi, 0102, Georgia have audited, and rendered an unqualified audit report on, the audited consolidated financial statements of the Company and its consolidated subsidiaries as at and for the year ended 31 December 2009.

Deloitte & Touche LLC of 36 a Lado Asatiani Street, Tbilisi, 0105, Georgia (Chartered Accountants) have audited, and rendered a qualified audit report on, the audited consolidated financial statements of the Company and its consolidated subsidiaries as at and for the year ended 31 December 2008. See pages F-58 and F-59 for full details of the qualification.

LN 511453.9

INDEX TO FINANCIAL STATEMENTS

Unaudited Consolidated Interim Condensed Financial Statements of Georgian Railway LLC as at and for the three-month period ended 31 March 2010...... F-2 Independent Auditors’ Report ...... F-4 Consolidated Interim Condensed Statement of Financial Position...... F-5 Consolidated Interim Condensed Statement of Comprehensive Income...... F-6 Consolidated Interim Condensed Statement of Changes in Equity ...... F-7 Consolidated Interim Condensed Statement of Cash Flows...... F-8 Notes to the 2010 Consolidated Interim Condensed Financial Statements ...... F-9 Audited Consolidated Financial Statements of Georgian Railway LLC as at and for (1) the Year Ended 31 December 2009 ...... F-14 Independent Auditors’ Report ...... F-16 Consolidated Statement of Financial Position ...... F-18 Consolidated Statement of Comprehensive Income...... F-19 Consolidated Statement of Changes in Equity...... F-20 Consolidated Statement of Cash Flows...... F-21 Notes to the 2009 Consolidated Financial Statements ...... F-22 Audited Consolidated Financial Statements of Georgian Railway LLC as at and for the Year Ended 31 December 2008 ...... F-55 Independent Auditors’ Report ...... F-58 Consolidated Statement of Comprehensive Income ...... F-60 Consolidated Statement of Financial Position ...... F-61 Consolidated Statement of Changes in Equity...... F-63 Consolidated Statement of Cash Flows ...... F-64 Notes to the 2008 Consolidated Financial Statements...... F-65

(1) The comparative data as at and for the year ended 31 December 2008, which is included in the Company’s 2009 Consolidated Financial Statements, has been restated to adjust for a prior period error identified by the Company's management in 2009 and relating to the calculation of deferred taxes for property, plant and equipment and prepayments given as at 31 December 2007 and 31 December 2008. Accordingly, this data differs in certain respects from the corresponding data set forth in the 2008 Consolidated Financial Statements. Investors should be aware that, unless otherwise stated, financial data for the Company as at and for the year ended 31 December 2008 set forth in this Prospectus is presented on the basis of the restated data included in the 2009 Consolidated Financial Statements.

F-1

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Georgian Railway LLC

Consolidated Interim Condensed Financial Statements for the three-month period ended 31 March 2010

Georgian Railway LLC

Contents

Independent Auditors’ Report 3 Consolidated Interim Condensed Statement of Financial Position 4 Consolidated Interim Condensed Statement of Comprehensive Income 5 Consolidated Interim Condensed Statement of Changes in Equity 6 Consolidated Interim Condensed Statement of Cash Flows 7 Notes to the Consolidated Interim Condensed Financial Statements 8

Georgian Railway LLC Consolidated Interim Condensed Statement of Financial Position as at 31 March 2010

’000 GEL Note 31 March 2010 31 December 2009 Unaudited ASSETS Non-current assets Property, plant and equipment 6 1,702,518 1,699,940 Investment property 9,926 9,926 Other non-current assets 13,234 12,817 Total non-current assets 1,725,678 1,722,683

Current assets Inventories 22,020 23,725 Trade and other receivables 22,838 22,194 Prepayments and other current assets 35,970 35,061 Cash and cash equivalents 18,544 1,361 Current tax assets 577 4,615 Total current assets 99,949 86,956 Total assets 1,825,627 1,809,639

EQUITY AND LIABILITIES Equity 7 Charter capital 966,910 967,207 Non-cash owner contribution reserve 25,311 25,311 Retained earnings 570,478 556,165 Total equity 1,562,699 1,548,683

Non-current liabilities Loans and borrowings 8 24,900 24,900 Trade and other payables 38,125 28,853 Deferred tax liabilities 73,464 74,817 Total non-current liabilities 136,489 128,570

Current liabilities Loans and borrowings 8 1,953 3,855 Trade and other payables 59,968 66,035 Liabilities to owners 27,839 26,636 Provisions 6,088 6,088 Other taxes payable 22,579 21,794 Other current liabilities 8,012 7,978 Total current liabilities 126,439 132,386 Total liabilities 262,928 260,956 Total equity and liabilities 1,825,627 1,809,639

The consolidated interim condensed statement of financial position is to be read in conjunction with the notes to, and forming part of, the condensed consolidated interim financial statements set out on pages 8 to 12.

Georgian Railway LLC Consolidated Interim Condensed Statement of Changes in Equity for the three-month period ended 31 March 2010

Charter Non-cash owner Retained Total ’000 GEL capital contribution reserve earnings equity

Balance at 1 January 2009 933,635 33,752 576,357 1,543,744 Total comprehensive income for the period Loss and total comprehensive income for the period (unaudited) - - (1,562) (1,562) Transactions with owners, recorded directly in equity Non-cash contributions by and distributions to owners (unaudited) 27,212 (26,654) - 558 Balance at 31 March 2009 (unaudited) 960,847 7,098 574,795 1,542,740

Balance at 1 January 2010 967,207 25,311 556,165 1,548,683 Total comprehensive income for the period Profit and total comprehensive income for the period (unaudited) - - 14,313 14,313 Transactions with owners, recorded directly in equity Non-cash contributions by and distributions to owners (unaudited) (297) - - (297) Balance at 31 March 2010 (unaudited) 966,910 25,311 570,478 1,562,699

The consolidated interim condensed statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the condensed consolidated interim financial statements set out on pages 8 to 12. Georgian Railway LLC Consolidated Interim Condensed Statement of Cash Flows for the three-month period ended 31 March 2010

Three-month period Three-month period ended ended ’000 GEL 31 March 2010 31 March 2009 Unaudited Unaudited Cash flows from operating activities Cash receipts from customers 90,604 71,365 Cash paid to suppliers and employees (45,568) (47,421) Cash flows from operations before income taxes and interest paid 45,036 23,944 Income tax paid - (220) Interest paid (38) (678) Net cash from operating activities 44,998 23,046

Cash flows from investing activities Acquisition of property, plant and equipment (26,096) (15,459) Other 134 - Net cash used in investing activities (25,962) (15,459)

Cash flows from financing activities Repayment of borrowings (1,902) (5,096) Net cash used in financing activities (1,902) (5,096)

Net increase in cash and cash equivalents 17,134 2,491 Cash and cash equivalents at 1 January 1,361 3,196 Effect of exchange rate fluctuations on cash and cash equivalents 49 114 Cash and cash equivalents at 31 March 18,544 5,801

The consolidated interim condensed statement of cash flows is to be read in conjunction with the notes to, and forming part of, the condensed consolidated interim financial statements set out on pages 8 to 12. Georgian Railway LLC Notes to the Consolidated Interim Condensed Financial Statements for the three-month period ended 31 March 2010

1 Background

(a) Business environment

Georgian business environment

Georgia has been experiencing political and economic change that has affected, and may continue to affect, the activities of enterprises operating in this environment. The conflict between Georgia and the Russian Federation in August 2008 has created additional uncertainty. The Group’s operations and assets could be at risk as a result of negative changes in the political, economic or business environment within Georgia and between Georgia and the Russian Federation. Consequently, operations in Georgia involve risks that typically do not exist in other markets. In addition, the contraction in the capital and credit markets and its impact on the economy of Georgia have further increased the level of economic uncertainty in the environment. These consolidated interim condensed financial statements reflect management’s assessment of the impact of the Georgian business environment on the operations and the financial position of the Group. The future business environment may differ from management’s assessment.

(b) Organisation and operations

Georgian Railway LLC (the “Company”) and its subsidiaries (the “Group”) comprise Georgian limited liability companies as defined in the Civil Code of Georgia. The Company was established as a state-owned enterprise in December 1998 by the Decree of President of Georgia # 929 as an entity engaged in the provision of railway transportation services in Georgia.

The Company’s registered office is 15 Queen Tamar Avenue, Tbilisi 0112, Georgia.

The Group’s principal activity is the operation of a nationwide railway system providing freight and passenger transportation services, maintenance and development of railway infrastructure and construction of railway lines within Georgia.

The Group is wholly owned by the State of Georgia represented by the State Enterprise Management Agency of the Ministry of Economic Development of Georgia.

2 Basis of preparation

(a) Statement of compliance

These consolidated interim condensed financial statements have been prepared in accordance with International Financial Reporting Standard IAS 34 Interim Financial Reporting. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group as at and for the year ended 31 December 2009.

(b) Functional and presentation currency

The national currency of Georgia is Georgian Lari (“GEL”), which is the Company’s functional currency and the currency in which these consolidated interim condensed financial statements are presented. All financial information presented in GEL has been rounded to the nearest thousand.

8 Georgian Railway LLC Notes to the Consolidated Interim Condensed Financial Statements for the three-month period ended 31 March 2010

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these consolidated interim condensed financial statements, the significant judgements made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as at and for the year ended 31 December 2009.

3 Significant accounting policies

The accounting policies applied by the Group in these consolidated interim condensed financial statements are the same as those applied by the Group in its consolidated financial statements as at and for the year ended 31 December 2009.

4 Financial risk management

The Group’s financial risk management objectives and policies are consistent with those disclosed in the consolidated financial statements as at and for the year ended 31 December 2009.

5 Operating segments

The Group has two reportable segments, as described below, which are the Group’s strategic business units. The strategic business units offer different products and services, and are managed separately because they require different technology and marketing strategies. For each of the strategic business units, the Group’s Management Board reviews internal management reports on at least a quarterly basis. The following summary describes the operations in each of the Group’s reportable segments:

 Freight transportation. Includes transportation of goods and commodities and related services.  Passenger transportation. Includes transportation of passengers and luggage.

Other operations include provision of internet services, leasing of fibre-optic and other cable and telephone services.

9 Georgian Railway LLC Notes to the Consolidated Interim Condensed Financial Statements for the three-month period ended 31 March 2010

(i) Information about reportable segments for the three-month period ended 31 March (unaudited)

Freight Passenger transportation transportation Other Total ’000 GEL 2010 2009 2010 2009 2010 2009 2010 2009

External revenues 83,362 59,420 3,372 3,674 2,689 2,968 89,423 66,062

Reportable segment profit/(loss) before infrastructure costs, central overheads, interest and income tax 49,368 24,197 (3,273) (3,468) 151 586 46,246 21,315

(ii) Reconciliation of reportable segment profit or loss for the three-month period ended 31 March (unaudited)

’000 GEL 2010 2009 Unaudited Unaudited

Total profit or loss for reportable segments 46,095 20,729 Other profit or loss 151 586 Payroll expenses – infrastructure and headquarters (11,570) (12,240) Depreciation expenses – infrastructure and headquarters (11,530) (11,625) Net finance costs (427) (1,351) Other net unallocated (expenses)/income (4,196) 2,063 Consolidated profit/(loss) before income tax 18,523 (1,838)

There have been no changes to the basis of segmentation or the measurement basis for the segment profit or loss since 31 December 2009.

There have been no material changes in segment assets from the amounts disclosed in the consolidated financial statements of the Group as at and for the year ended 31 December 2009.

6 Seasonality of operations

The Group’s operations are not materially affected by seasonality. The Group’s revenues remain relatively stable during the year with relative increase of around 5 to 10% in March to September on average.

7 Income tax (expense)/benefit

Income tax is recognised based on management’s best estimate of the weighted average annual income tax rate expected for the full financial year applied to the pre-tax income of the interim period. The Group’s consolidated effective tax rate for the three months ended 31 March 2010 was 15 percent (three months ended 31 March 2009: 15 percent).

10 Georgian Railway LLC Notes to the Consolidated Interim Condensed Financial Statements for the three-month period ended 31 March 2010

8 Property, plant and equipment

Acquisitions

During the three-month period ended 31 March 2010 the Group acquired assets with a cost of GEL 25,706 thousand (three-month period ended 31 March 2009: GEL 27,769 thousand).

Capital commitments

As at 31 March 2010 the Group had entered into contracts to purchase plant and equipment for GEL 44,093 thousand (31 March 2009: GEL 77,686 thousand).

9 Equity

Dividends

No dividends were declared and paid by the Group during the three-month period end 31 March 2010 (three-month period ended 31 March 2009: Nil). No dividends have been proposed after 31 March 2010.

10 Loans and borrowings

The following loans and borrowings (non-current and current) were repaid during the three-month period ended 31 March 2010:

Nominal Face Carrying ’000 GEL Currency interest rate value amount Balance at 1 January 2010 28,755 Repayments (unaudited) Unsecured bank facility USD LIBOR+1% (1,902) (1,902) Balance at 31 March 2010 (unaudited) 26,853

On 17 March 2010 a loan agreement was signed between the Group and the European Bank for Reconstruction and Development (“EBRD”), by which EBRD agreed to lend up to CHF 146.2 million to partly finance the EUR 300 million Tbilisi bypass project. The Tbilisi bypass project is intended to relocate certain railway infrastructure components from the centre of Tbilisi to the northern part of the city. The Group has not yet borrowed any funds under this loan facility.

The Group should pay to EBRD a front-end commission of 1.25% of the principal amount of the loan. Such front-end commission shall be due and payable on the earlier of the date falling three days before the date of the first disbursement or 30 days after the date of the agreement.

On 12 February 2010 the Group signed an agreement with J.P. Morgan Securities Ltd. and Bank of America Merrill Lynch International in connection with:

 assisting the Group in relation to its proposal to obtain initial credit ratings from Standard & Poor’s Ratings Group, a division of McGraw-Hill Companies, Inc, and Fitch ratings Ltd.; and  the proposed issuance, offering and sale by the Group in the international capital markets of up to USD 550 million of debt securities.

11 Georgian Railway LLC Notes to the Consolidated Interim Condensed Financial Statements for the three-month period ended 31 March 2010

This issuance is to be used for the implementation of a large scale modernization project, including upgrading the Group’s infrastructure assets, including, through the rehabilitation of tracks and electric cables, the installation and upgrading of signaling equipment, the improvement of safety features and level crossings, the procurement of new rolling stock and the improvement of tunnels and bridges; increasing freight transit capacity; upgrading the Group’s engineering technology; and reducing operating costs and otherwise optimizing operations.

11 Contingencies

(a) Insurance

The insurance industry in Georgia is in a developing state and many forms of insurance protection common in other parts of the world are not yet generally available. The Group does not have full coverage for its plant facilities, business interruption, or third party liability in respect of property or environmental damage arising from accidents on Group property or relating to Group operations. Until the Group obtains adequate insurance coverage, there is a risk that the loss or destruction of certain assets could have a material adverse effect on the Group’s operations and financial position.

(b) Taxation contingencies

The taxation system in Georgia is relatively new and is characterised by frequent changes in legislation, official pronouncements and court decisions, which are sometimes unclear, contradictory and subject to varying interpretation. In the event of a breach of tax legislation, no liabilities for additional taxes, fines or penalties may be imposed by the tax authorities after six years have passed since the end of the year in which the breach occurred.

These circumstances may create tax risks in Georgia that are more significant than in other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Georgian tax legislation, official pronouncements and court decisions. However, the interpretations of the relevant authorities could differ and the effect on these consolidated interim condensed financial statements, if the authorities were successful in enforcing their interpretations, could be significant.

In the ordinary course of business, the Group is subject to legal actions, litigations and complaints. Management believes that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial condition or the results of future operations.

12 Events subsequent to the reporting date

On 16 November 2009 an auction for the sale of 100% of shares of the Railway Telecom LLC (a subsidiary of the Company) was held. The winner of the auction was Linx Telecom Georgia LLC. In accordance with the auction terms the sales transaction was to have been completed by 1 April 2010. The sales transaction was not completed by 1 April 2010 and the transaction was, accordingly, cancelled. On 6 April 2010 the Management Board of the Company decided to initiate the process of transferring 100% of shares of the Railway Telecom LLC to the Government of Georgia.

Georgian Railway LLC

Consolidated Financial Statements for the year ended 31 December 2009

Georgian Railway LLC

Contents

Independent Auditors’ Report 3 Consolidated Statement of Financial Position 5 Consolidated Statement of Comprehensive Income 6 Consolidated Statement of Changes in Equity 7 Consolidated Statement of Cash Flows 8 Notes to the Consolidated Financial Statements 9

Tbilisi Branch of KPMG CIS Limited Telephone +995 (32) 935695 6, Khetagurov Street, Fax +995 (32) 935713 Tbilisi, 0102, Internet www.kpmg.ge Georgia

Independent Auditors’ Report

To the Supervisory Board Georgian Railway LLC

We have audited the accompanying consolidated financial statements of Georgian Railway LLC (the “Company”) and its subsidiaries (the “Group”), which comprise the consolidated statement of financial position as at 31 December 2009, the consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatements, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2009, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards.

Tbilisi Branch of KPMG CIS Limited, a branch incorporated under the Laws of Georgia and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

Georgian Railway LLC Consolidated Statement of Financial Position as at 31 December 2009

’000 GEL Note 2009 2008 1 January 2008 Restated Restated ASSETS Non-current assets Property, plant and equipment 11 1,699,940 1,635,482 1,635,190 Investment property 9,926 13,287 13,247 Other non-current assets 12,817 14,454 9,309 Total non-current assets 1,722,683 1,663,223 1,657,746

Current assets Inventories 12 23,725 33,734 27,858 Current tax assets 4,615 - - Trade and other receivables 13 22,194 19,220 7,968 Prepayments and other current assets 14 35,061 28,555 33,178 Restricted cash - - 9,868 Cash and cash equivalents 1,361 3,196 4,211 Total current assets 86,956 84,705 83,083 Total assets 1,809,639 1,747,928 1,740,829

EQUITY AND LIABILITIES Equity 15 Charter capital 967,207 933,635 935,588 Non-cash owner contribution reserve 25,311 33,752 9,397 Retained earnings 556,165 576,357 500,294 Total equity 1,548,683 1,543,744 1,445,279

Non-current liabilities Loans and borrowings 16 24,900 3,701 7,068 Trade and other payables 17 28,853 - - Deferred tax liabilities 18 74,817 81,783 90,564 Total non-current liabilities 128,570 85,484 97,632

Current liabilities Loans and borrowings 16 3,855 18,379 3,832 Trade and other payables 17 66,035 41,877 32,711 Liabilities to the owners 15 26,636 25,881 32,389 Provisions 6,088 7,904 7,414 Other taxes payable 19 21,794 14,226 13,466 Other current liabilities 7,978 6,492 105,905 Current tax liabilities - 3,941 2,201 Total current liabilities 132,386 118,700 197,918 Total liabilities 260,956 204,184 295,550 Total equity and liabilities 1,809,639 1,747,928 1,740,829

The consolidated statement of financial position is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 9 to 41.

Georgian Railway LLC Consolidated Statement of Changes in Equity for the year ended 31 December 2009

Charter Non-cash owner Retained Total ’000 GEL capital contribution reserve earnings equity

Balance at 1 January 2008, as previously reported 935,588 9,397 484,332 1,429,317 Restatement (see note 27) - - 15,962 15,962 Restated balance at 1 January 2008 935,588 9,397 500,294 1,445,279 Total comprehensive income for the year Restated profit and total comprehensive income for the year - - 36,063 36,063 Transactions with owners, recorded directly in equity Decrease of dividends declared in 2007 - - 40,000 40,000 Other non-cash contributions by and distributions to owners (see note 15) (1,953) 24,355 - 22,402 Total contributions by and distributions to owners (1,953) 24,355 40,000 62,402 Restated balance at 31 December 2008 933,635 33,752 576,357 1,543,744

Balance at 1 January 2009 933,635 33,752 576,357 1,543,744 Total comprehensive income for the year Profit and total comprehensive income for the year - - 15,808 15,808 Transactions with owners, recorded directly in equity Dividends to equity holders - - (36,000) (36,000) Other non-cash contributions by and distributions to owners (see note 15) 33,572 (8,441) - 25,131 Total contributions by and distributions to owners 33,572 (8,441) (36,000) (10,869) Balance at 31 December 2009 967,207 25,311 556,165 1,548,683

The consolidated statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 9 to 41. Georgian Railway LLC Consolidated Statement of Cash Flows for the year ended 31 December 2009

’000 GEL 2009 2008

Cash flows from operating activities Cash receipts from customers 336,695 353,934 Cash paid to suppliers and employees (200,350) (222,799) Cash flows from operations before income taxes and interest paid 136,345 131,135 Income tax paid (18,043) (13,661) Interest paid (1,604) (1,913) Net cash from operating activities 116,698 115,561

Cash flows from investing activities Acquisition of property, plant and equipment (89,976) (78,021) Other 622 387 Net cash used in investing activities (89,354) (77,634)

Cash flows from financing activities Proceeds from borrowings 27,900 24,014 Repayment of borrowings (21,146) (12,891) Decrease in restricted cash - 9,868 Dividends paid (36,000) (60,000) Net cash used in financing activities (29,246) (39,009)

Net decrease in cash and cash equivalents (1,902) (1,082) Cash and cash equivalents at 1 January 3,196 4,211 Effect of exchange rate fluctuations on cash and cash equivalents 67 67 Cash and cash equivalents at 31 December 1,361 3,196

The consolidated statement of cash flows is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 9 to 41. Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

1 Background

(a) Business environment

Georgian business environment

Georgia has been experiencing political and economic change that has affected, and may continue to affect, the activities of enterprises operating in this environment. The conflict between Georgia and the Russian Federation in August 2008 has created additional uncertainty. The Group’s operations and assets could be at risk as a result of negative changes in the political, economic or business environment within Georgia and between Georgia and the Russian Federation. Consequently, operations in Georgia involve risks that typically do not exist in other markets. In addition, the contraction in the capital and credit markets and its impact on the economy of Georgia have further increased the level of economic uncertainty in the environment. These consolidated financial statements reflect management’s assessment of the impact of the Georgian business environment on the operations and the financial position of the Group. The future business environment may differ from management’s assessment.

(b) Organisation and operations

The Company’s registered office is 15 Queen Tamar Avenue, Tbilisi 0112, Georgia.

The Group is wholly owned by the State of Georgia represented by the State Enterprise Management Agency of the Ministry of Economic Development of Georgia. Related party transactions are disclosed in note 24.

2 Basis of preparation

(a) Statement of compliance

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”).

(b) Basis of measurement

The consolidated financial statements are prepared on the historical cost basis except that property, plant and equipment was revalued to determine deemed cost as part of the adoption of IFRSs.

The national currency of Georgia is Georgian Lari (“GEL”), which is the Company’s functional currency and the currency in which these consolidated financial statements are presented. All financial information presented in GEL has been rounded to the nearest thousand.

9 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

(d) Use of estimates and judgments

The preparation of consolidated financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from those estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year is included in the following notes:

 Note 3(d) – useful lives of property, plant and equipment  Note 11 – impairment of property, plant and equipment  Note 20(b) – impairment allowances for trade and other receivables

In the opinion of management, there are no other areas where critical judgements are involved in applying accounting policies that have a significant effect on amounts recognised in the consolidated financial statements.

(e) Changes in accounting policies and presentation and adoption of new standards

With effect from 1 January 2009, the Group changed its accounting policies and adopted new standards in the following areas:

 accounting for borrowing costs;  determination and presentation of operating segments; and  presentation of financial statements.

(i) Accounting for borrowing costs

In respect of borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or after 1 January 2009, the Group capitalises borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Previously the Group immediately recognised all borrowing costs as an expense. This change in accounting policy was due to the adoption of IAS 23 Borrowing Costs (2007) in accordance with the transitional provisions of such standard; comparative figures have not been restated.

(ii) Determination and presentation of operating segments

As at 1 January 2009 the Group determined and presented operating segments based on the information that internally is provided to the Management Board, which is the Group’s chief operating decision maker. This policy is due to the adoption of International Financial Reporting Standard 8 Operating Segments. Previously the Group was not required to disclose information about operating segments. The new accounting policy in respect of operating segment disclosures is presented as follows.

Comparative segment information has also been presented in accordance with International Financial Reporting Standard 8 Operating Segments.

10 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. An operating segment’s operating results are reviewed regularly by the Management Board to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

Segment results that are reported to the Management Board include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly railway infrastructure, corporate assets (primarily the Group’s headquarters), head office expenses, financial income and expenses, tax expenses and tax assets and liabilities. Items related to infrastructure are not allocated as the Group has not implemented systems for such allocations.

Segment capital expenditure is the total cost incurred during the year to acquire property, plant and equipment.

(iii) Presentation of financial statements

The Group applies revised IAS 1 Presentation of Financial Statements (2007), which became effective as at 1 January 2009. The revised standard requires a presentation of all owner changes in equity to be presented in the statement of changes in equity, whereas all non-owner changes in equity are presented in the consolidated statement of comprehensive income.

Comparative information has been re-presented so that it also is in conformity with the revised standard.

3 Significant accounting policies

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities, except as explained in note 2(e), which addresses changes in accounting policies.

Certain comparative amounts have been restated to adjust for prior period errors identified by management in the current year (see note 27).

(a) Basis of consolidation

(i) Subsidiaries

Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group.

(ii) Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealised income and expenses arising from intra- group transactions, are eliminated in preparing the consolidated financial statements.

(b) Foreign currency

(i) Foreign currency transactions

Transactions in foreign currencies are translated to the functional currency of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange

11 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the reporting period. Foreign currency differences arising in retranslation are recognised in profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.

Financial instruments comprise trade and other receivables, cash and cash equivalents, loans and borrowings, and trade payables.

(i) Non-derivative financial assets

The Group initially recognises loans and receivables and cash and cash equivalents on the date that they are originated.

The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability.

Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. Loans and receivables comprise trade and other receivables.

Cash and cash equivalents comprise cash balances and call deposits with original maturities of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.

(ii) Non-derivative financial liabilities

The Group initially recognises debt securities issued on the date that they are originated. All other financial liabilities are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument.

The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.

The Group has the following non-derivative financial liabilities: loans and borrowings and trade and other payables.

Such financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortised cost using the effective interest method.

12 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

(iii) Charter capital

Charter capital is classified as equity.

Reduction of charter capital

Charter capital reductions and non-cash distributions are recognised at the carrying amount of the assets distributed.

Increase of charter capital

When charter capital is increased, any difference between the registered amount of charter capital and the fair value of the assets contributed is recognised as a separate component of equity as non- cash owner contribution reserve.

(d) Property, plant and equipment

(i) Recognition and measurement

Items of property, plant and equipment, are measured at cost less accumulated depreciation and impairment losses. Items of property, plant and equipment contributed by the shareholder are initially measured at fair value. The cost of property, plant and equipment at 1 January 2007, the date of transition to IFRSs, was determined by reference to its fair value at that date.

Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located, and capitalised borrowing costs (see note 2(e)(i)). Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment.

When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.

Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment, and are recognised net within “other income” in profit or loss.

(ii) Subsequent costs

The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred.

13 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

Maintenance and repair expenses are recognised as follows:

 Rolling stock:

− current maintenance expenses during the useful life of equipment (repair work on spare parts and replacement of unusable and missing parts) are recorded as operating expenses in profit or loss as incurred; − expenses under multi-year major overhaul programmes are capitalised as a separate overhaul component and depreciated; − overhauls performed near the end of the useful life of an asset, together with refurbishment and transformation costs, are capitalised when they extend the useful life of the underlying asset.

 Fixed installations:

− current maintenance and repair expenses (technical inspections, maintenance contracts, etc.) are recognised as operating expenses in profit or loss as incurred; − labour, materials and other costs (associated with the installation of rails, sleepers and ballast) under multi-year major building or infrastructure maintenance programmes are capitalised through the partial or total replacement of each component concerned; − costs associated with infrastructure improvements are capitalized to the extent that they increase the functionality (traffic working speed) of the asset.

(iii) Depreciation

Depreciation is calculated over the depreciable amount, which is the cost of an asset, or other amount substituted for cost.

Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Land is not depreciated.

The estimated average useful lives for the current and comparative periods are as follows:

 Buildings and constructions 44 years  Rail track infrastructure 23 years  Transport, machinery, equipment and other 12 years

Depreciation methods and useful lives are reviewed at each financial year end and adjusted if appropriate.

(e) Inventories

Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the first-in first-out principle, and includes expenditure incurred in acquiring the inventories, conversion costs and other costs incurred in bringing them to their existing location and condition.

Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

14 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

(f) Impairment

(i) Financial assets

A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.

Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Group on terms that the Group would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, the disappearance of an active market for a security.

The Group considers evidence of impairment for receivables at both a specific asset and collective level. All individually significant receivables are assessed for specific impairment. All individually significant receivables found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Receivables that are not individually significant are collectively assessed for impairment by grouping together receivables with similar risk characteristics.

In assessing collective impairment the Group uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends.

An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against receivables. Interest on the impaired asset continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.

(ii) Non-financial assets

The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”).

The Group’s corporate assets do not generate separate cash inflows. If there is an indication that a corporate asset may be impaired, then the recoverable amount is determined for the cash generating unit to which the corporate asset belongs.

15 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated to reduce the carrying amount of the assets in the unit (group of units) on a pro rata basis.

Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

(g) Employee benefits

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.

A liability is recognised for the amount expected to be paid under short-term cash bonus or profit- sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.

(h) Provisions

A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as finance cost.

(i) Revenue

(i) Transportation activities

Freight and passenger transportation revenue is recognized in profit or loss according to the percentage of completed service method based on transit time of freight and passengers moving from the original location to the final destination.

Revenue from services rendered in stations is recognised in profit or loss when the service is rendered.

(ii) Rental income

Rental income from investment property or other assets rented is recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income, over the term of the lease.

(j) Other expenses

(i) Lease payments

Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease.

16 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

(ii) Social expenditure

To the extent that the Group’s contributions to social programs benefit the community at large and are not restricted to the Group’s employees, they are recognised in profit or loss as incurred.

(k) Finance income and costs

Finance income comprises interest income on funds invested and foreign currency gains. Interest income is recognised as it accrues in profit or loss, using the effective interest method.

Finance costs comprise interest expense on borrowings, unwinding of the discount on provisions, foreign currency losses and impairment losses recognised on financial assets. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest method.

Foreign currency gains and losses are reported on a net basis.

(l) Income tax

Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive income.

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.

A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

(m) Segment reporting

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. All operating segments’ operating results are reviewed regularly by the Group’s Management Board to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available (see note 2(e)(ii)).

There are no inter-segment charges.

17 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

(n) New Standards and Interpretations not yet adopted

A number of new Standards, amendments to Standards and Interpretations are not yet effective as at 31 December 2009, and have not been applied in preparing these consolidated financial statements. Of these pronouncements, potentially the following will have an impact on the Group’s operations. The Group plans to adopt these pronouncements when they become effective.

 Revised IAS 24 Related Party Disclosures (2009) introduces an exemption from the basic disclosure requirements in relation to related party disclosures and outstanding balances, including commitments, for government-related entities. Additionally, the standard has been revised to simplify some of the presentation guidance that was previously non-reciprocal. The revised standard is to be applied retrospectively for annual periods beginning on or after 1 January 2011. The Group has not yet determined the potential effect of the amendment.

 IFRS 9 Financial Instruments will be effective for annual periods beginning on or after 1 January 2013. The new standard is to be issued in several phases and is intended to replace International Financial Reporting Standard IAS 39 Financial Instruments: Recognition and Measurement once the project is completed by the end of 2010. The first phase of IFRS 9 was issued in November 2009 and relates to the recognition and measurement of financial assets. The Group recognises that the new standard introduces many changes to the accounting for financial instruments and is likely to have a significant impact on Group’s consolidated financial statements. The impact of these changes will be analysed during the course of the project as further phases of the standard are issued.

 IFRIC 17 Distributions of Non-cash Assets to Owners addresses the accounting for non-cash dividend distributions to owners. The interpretation clarifies when and how a non-cash dividend should be recognised and how the difference between the dividend paid and the carrying amount of the net assets distributed should be recognised. IFRIC 17 became effective for annual periods beginning on or after 1 July 2009.

 Various Improvements to IFRSs have been dealt with on a standard-by-standard basis. All amendments, which result in accounting changes for presentation, recognition or measurement purposes, will come into effect not earlier than 1 January 2010. The Group has not yet analysed the likely impact of the improvements on its financial position or performance.

4 Determination of fair values

A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and for disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.

(a) Property, plant and equipment

The fair value of property, plant and equipment contributed by the shareholder is based on market values. The market value of property is the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably and willingly. The fair value of items of plant, equipment, fixtures and fittings is based on market approach and cost approaches using quoted market prices for similar items when available.

18 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

When no quoted market prices are available, the fair value of property, plant and equipment is primarily determined using depreciated replacement cost. This method considers the cost to reproduce or replace the property, plant and equipment, adjusted for physical, functional or economical depreciation, and obsolescence.

(b) Trade and other receivables

The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. This fair value is determined for disclosure purposes.

Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date.

5 Operating segments

 Freight transportation. Includes transportation of goods and commodities and related services.  Passenger transportation. Includes transportation of passengers and luggage.

Other operations include provision of internet services, leasing of fibre-optic and other cable and telephone services.

There are no inter-segment charges. The accounting policies of the reportable segments are the same as described in notes 2 and 3.

Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit before infrastructure costs, central over heads, interest and income tax, as included in the internal management reports that are reviewed by the Group’s Management Board. Segment profit is used to measure performance as management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries.

19 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

(i) Information about reportable segments

Freight Passenger transportation transportation Other Total ’000 GEL 2009 2008 2009 2008 2009 2008 2009 2008

External revenues 291,334 312,420 15,560 18,078 11,231 9,710 318,125 340,208

Depreciation and amortization (40,033) (41,448) (8,387) (9,263) (651) (326) (49,071) (51,037)

Reportable segment profit/(loss) before infrastructure costs, central over heads, interest and income tax 155,408 163,511 (13,001) (12,247) 614 2,379 143,021 153,643

Reportable segment assets 379,167 332,428 98,895 96,350 8,494 3,329 486,556 432,107 Capital expenditure and other additions to non-current assets 89,860 34,886 12,011 12,221 2,285 3,208 104,156 50,315

(ii) Geographical information

Substantially all of the Group’s revenue is from and the non-current assets of the Group are located in Georgia.

(iii) Major customers

In 2009 two customers of the Group’s freight transportation segment represented approximately 35% of the Group’s total revenue (GEL 69,399 thousand and GEL 42,079 thousand). In 2008, revenue from one customer of the Group’s freight transportation segment represented approximately 23% (GEL 79,260 thousand) of the Group’s total revenue.

20 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

(iv) Reconciliations of reportable segment revenues, profit or loss and assets and other material items

’000 GEL 2009 2008 Revenues Total revenue for reportable segments 306,894 330,498 Other revenue 11,944 10,390 Consolidated revenue 318,838 340,888

Profit or loss Total profit or loss for reportable segments 142,407 151,264 Other profit or loss 614 2,379 Payroll expenses – infrastructure and headquarters (45,411) (46,789) Depreciation expenses – infrastructure and headquarters (47,040) (47,848) Net finance costs (4,161) (11,905) Other net unallocated expenses (27,732) (4,726) Consolidated profit before income tax 18,677 42,375

Assets Total assets for reportable segments 478,062 428,778 Other assets 8,494 3,329 Property, plant and equipment - infrastructure and headquarters 1,221,911 1,215,041 Other unallocated assets 101,172 100,780 Consolidated total assets 1,809,639 1,747,928

(v) Other material items 2009

Reportable Infrastructure Consolidated ’000 GEL segment totals and headquarters Other totals Capital expenditure and other additions to non-current assets 101,871 61,550 2,285 165,706 Depreciation and amortization 48,420 47,040 651 96,111

(vi) Other material items 2008

Reportable Infrastructure Consolidated ’000 GEL segment totals and headquarters Other totals Capital expenditure and other additions to non-current assets 47,107 51,857 3,208 102,172 Depreciation and amortization 50,711 47,848 326 98,885

21 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

6 Revenue

’000 GEL 2009 2008 Freight traffic 274,150 294,764 Freight car rental 16,543 16,590 Passenger traffic 13,952 16,615 Revenue from internet services 5,677 4,697 Revenue from fiber-optic cable lease 4,785 4,019 Other 3,731 4,203 318,838 340,888

Railroad transportations in Georgia is a natural monopoly, however the pricing policy is not subject to government regulation. According to clause 64, which came into force on 1 July 2005, of the Railway Code of Georgia, the Government of Georgia has delegated the Group independence in setting of the pricing policy for all types of services provided, including freight transportation, freight transportation related additional services, passenger and luggage transportation.

Tariffs for freight transportation are based on the International Rail Transit Tariff. The Group is a co-signatory of the Tariff Agreement together with CIS countries, Latvia, Lithuania and Estonia. The member parties of the Agreement hold annual conferences to work out the tariff policy for the following year: each party declares tariffs denominated in Swiss Francs for railway transportation and states general rules that apply to and modify tariffs. The agreed tariffs indicate the maximum level of tariffs applicable.

7 Raw materials and consumables used

’000 GEL 2009 2008 Electricity 19,311 22,319 Materials 13,345 11,793 Fuel 7,659 11,775 40,315 45,887

22 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

8 Other expenses

’000 GEL 2009 2008 Taxes other than income tax 16,591 3,633 Repairs and maintenance 9,176 10,573 Write off of property, plant and equipment and investment property 6,622 - Security 6,541 6,238 Freight car rental 6,378 10,746 Internet expenses 3,894 3,227 Cable lease expenses 3,222 1,844

Inventory write-downs due to obsolescence 2,668 96 Other 9,047 16,330 64,139 52,687

9 Finance income and finance costs

’000 GEL 2009 2008 Recognised in profit or loss Interest income 610 884 Finance income 610 884

Impairment loss on trade receivables (3,235) (8,937) Interest expense on financial liabilities measured at amortised cost (1,525) (1,800) Net foreign exchange loss (11) (1,168) Finance costs (4,771) (11,905) Net finance costs recognised in profit or loss (4,161) (11,021)

23 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

10 Income tax expense

The Group’s applicable income tax rate is the income tax rate of 15% for Georgian companies (2008: 15%).

’000 GEL 2009 2008 Restated Current tax expense Current year 9,835 15,093

Deferred tax expense Origination and reversal of temporary differences (6,966) (8,781) 2,869 6,312

Reconciliation of effective tax rate:

2009 2008 ’000 GEL % ’000 GEL % Restated Profit before income tax 18,677 100 42,375 100 Income tax at applicable tax rate 2,802 15 6,356 15 Net non-deductible expenses 67 - - - Net non-taxable income -- (44) - 2,869 15 6,312 15

24 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

11 Property, plant and equipment

Transport, Buildings machinery, and Rail track equipment and Construction ’000 GEL Land constructions infrastructure other in progress Total Cost or deemed cost Balance at 1 January 2008 427,834 125,693 639,141 417,765 131,406 1,741,839 Additions 27,131 447 1 3,648 70,945 102,172 Disposals (152) (2,129) (78) (829) - (3,188) Transfers - 12,133 21,946 65,811 (99,890) - Balance at 31 December 2008 454,813 136,144 661,010 486,395 102,461 1,840,823

Balance at 1 January 2009 454,813 136,144 661,010 486,395 102,461 1,840,823 Additions 27,144 656 107 105,249 32,550 165,706 Disposals (740) (4) - (1,172) - (1,916) Transfers - 1,767 20,559 777 (23,103) - Write offs - - - - (3,261) (3,261) Balance at 31 December 2009 481,217 138,563 681,676 591,249 108,647 2,001,352

Depreciation Balance at 1 January 2008 - 3,748 36,631 66,270 -106,649 Depreciation for the year - 3,930 36,251 58,694 - 98,875 Disposals - (129) (7) (47) - (183) Balance at 31 December 2008 - 7,549 72,875 124,917 -205,341

Balance at 1 January 2009 - 7,549 72,875 124,917 -205,341 Depreciation for the year - 3,996 36,155 56,243 - 96,394 Disposals - - - (323) - (323) Balance at 31 December 2009 - 11,545 109,030 180,837 -301,412

Carrying amounts At 1 January 2008 427,834 121,945 602,510 351,495 131,406 1,635,190 At 31 December 2008 454,813 128,595 588,135 361,478 102,461 1,635,482 At 31 December 2009 481,217 127,018 572,646 410,412 108,647 1,699,940

25 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

(a) Impairment assessment

At 31 December 2009, following the decline in the volume of freight transportation, the Group determined that there was an indication of impairment of its property, plant and equipment. The Group estimated the recoverable amount of the property, plant and equipment based on its value in use. In assessing the value in use, the Group estimated future cash flows and discounted them to their present value using a pre-tax discount rate that reflected current market assessment of the time value of money and the risks specific to the assets. The estimated recoverable amount did not result in an impairment loss being recognized in these consolidated financial statements.

For the impairment testing purposes the management considered Freight transportation and Passenger transportation operations as one cash generating unit as these operations are interdependent and a substantial part of cash outflows cannot be allocated to these operations on a reasonable basis for impairment testing purposes.

The following key assumptions were used in estimating the recoverable amount:

 cash flows are projected based on the operating plan for the next 12 years and excluded the effects of inflation. Forecasted prices for transportation were based on prices prevailing in 2009.  anticipated annual traffic volume growth included in the cash flow projections is based on average growth levels experienced from 2004 to 2009 and an analysis of the regional demand for railroad transportation, reflecting an expectation of recovery in the economy at the end of 2010.  the terminal value of expected cash flows after 12 years was estimated by discounting for perpetuity with a growth rate of 1.5%.  a discount rate of 10.6% was applied, which excludes the effects of inflation. The discount rate was estimated based on the weighted average cost of capital, which was based on a debt financing of approximately 25% of the total invested capital, a cost of equity of approximately 13% and a borrowing rate of approximately 9%.

The values assigned to key assumptions represent management’s assessment of future trends in the business and are based on both external and internal sources.

The estimates above are particularly sensitive in the following areas:

 an increase of one percentage point in the discount rate used would have resulted in an impairment of GEL 73,243 thousand.  a 10% decrease in the forecasted volume of freight transportation would have resulted in an impairment of GEL 99,407 thousand.

(b) Security

At 31 December 2009 properties with a carrying amount of GEL 3,954 thousand (2008: nil) were pledged as collateral to secure trade payables under the settlement agreement between the Group, Vagonmshenebeli Company LLC and TBC Bank JSC, Bank Republic JSC and Bank of Georgia JSC (see note 17).

26 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

12 Inventories

’000 GEL 2009 2008 Materials 17,365 22,343 Rails 6,528 12,562 Fuel 3,215 1,041 Other 2,103 606 29,211 36,552 Allowance for inventory obsolescence (5,486) (2,818) 23,725 33,734

Inventory write-downs during the year are disclosed in note 8.

13 Trade and other receivables

’000 GEL 2009 2008 Trade receivables 87,307 81,890 Other receivables 1,224 432 88,531 82,322 Impairment loss on trade receivables (66,337) (63,102) 22,194 19,220

The Group’s exposure to credit and currency risks and impairment losses related to trade and other receivables are disclosed in note 20.

14 Prepayments and other current assets

’000 GEL 2009 2008 VAT recoverable 31,448 23,443 Prepaid taxes other than income tax 2,600 4,377 Advances paid to suppliers 1,001 723 Other current assets 12 12 35,061 28,555

27 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

15 Equity and liabilities to the owners

(a) Charter capital

Charter capital represents the nominal amount of capital in the founding documentation of the Company and is subject to state registration.

The owners of charter capital are entitled to receive dividends as declared from time to time and are entitled to the number of votes corresponding to the percentage of shareholding in the Company at meetings of the Company.

’000 GEL 2009 2008 Balance at 1 January 933,635 935,588 Contribution of property, plant and equipment 35,843 2,445 Withdrawal of property, plant and equipment (2,271) (4,398) 967,207 933,635

(b) Non-cash owner contribution reserve

The difference between the nominal amount of registered charter capital for non-cash assets contributed by the shareholder and the fair value of the contributed assets are recognised in the non-cash owner contribution reserve.

Non-cash assets registered in the charter capital as future contribution by the shareholder but not yet registered under the ownership of the Group are recorded in the non-cash owner contribution reserve until the ownership registration is complete.

’000 GEL 2009 2008 Balance at 1 January 33,752 9,397 Fair value adjustment of non-cash owner contributions 18,686 20,871 Registration under the ownership of the Group of the contributed property, plant and equipment - 3,484 Contribution of property, plant and equipment not registered under the ownership of the Group (27,127) - 25,311 33,752

Liabilities to the owners represent liabilities in the form of property, plant and equipment which are withdrawn as a reduction in charter capital but not yet transferred formally to the Government of Georgia. These liabilities are recorded at the carrying amount of assets to be transferred to the Government of Georgia.

(d) Dividends

In accordance with Georgian legislation the Company’s distributable reserves are limited to the balance of retained earnings as recorded in the Company’s statutory financial statements prepared in accordance with IFRSs. As at 31 December 2009 the Company had retained earnings, including the profit for the current year, of GEL 552,872 thousand (2008: GEL 573,880 thousand - restated).

28 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

16 Loans and borrowings

This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings, which are measured at amortised cost. For more information about the Group’s exposure to interest rate, foreign currency and liquidity risk, see note 20.

’000 GEL 2009 2008 Non-current liabilities Unsecured bond issue 24,900 - Unsecured bank loan - 3,701 24,900 3,701 Current liabilities Unsecured bank loan 3,773 18,379 Unsecured bond issue 82 - 3,855 18,379

(a) Terms and debt repayment schedule

Terms and conditions of outstanding loans were as follows:

31 December 2009 31 December 2008 Nominal Year of Face Carrying Face Carrying ’000 GEL Currency interest rate maturity value amount value amount Unsecured bond issue GEL 13.50% 2011 24,982 24,982 - - Unsecured bank facility USD LIBOR+1% 2010 3,773 3,773 7,527 7,527 Unsecured bank facility GEL 17.00% 2009 - - 8,018 8,018 Unsecured bank facility GEL 15.25% 2009 - - 6,535 6,535 28,755 28,755 22,080 22,080

29 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

17 Trade and other payables

’000 GEL 2009 2008 Non-current liabilities Trade payables 28,853 - 28,853 -

Current liabilities Trade payables 56,540 31,820 Advances received from customers 9,495 10,057 66,035 41,877

Included in trade payables are amounts payable to TBC Bank JSC, Bank Republic JSC and Bank of Georgia JSC (the “Banks”) of GEL 23,917 thousand which were transferred to the Banks under a factoring agreement with rolling-stock repair companies with a total amount of GEL 30,798 thousand. The Group has mortgaged its own real estate (land and buildings) located at Queen Tamar Avenue, Tbilisi to secure these liabilities towards the banks (see note 11(b)).

The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 20.

18 Deferred tax assets and liabilities

(a) Recognised deferred tax assets and liabilities

Deferred tax assets and liabilities are attributable to the following:

Assets Liabilities Net ’000 GEL 2009 2008 2009 2008 2009 2008 Restated Restated Restated Property, plant and equipment and investment property - - (93,586) (99,046) (93,586) (99,046) Inventories 5,613 4,350 - - 5,613 4,350 Trade and other receivables 9,836 9,347 - - 9,836 9,347 Prepayments and other current assets 2,261 2,343 - - 2,261 2,343 Other non-current assets 146 35 - - 146 35 Loans and borrowings - - - (8) - (8) Provisions 913 1,186 - - 913 1,186 Trade and other payables - 10 - - - 10 Net tax assets/(liabilities) 18,769 17,271 (93,586) (99,054) (74,817) (81,783)

30 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

(b) Movement in temporary differences during the year

’000 GEL 1 January 2009 Recognised in income 31 December 2009 Restated Property, plant and equipment and investment property (99,046) 5,460 (93,586) Inventories 4,350 1,263 5,613 Trade and other receivables 9,347 489 9,836 Prepayments and other current assets 2,343 (82) 2,261 Other non-current assets 35 111 146 Loans and borrowings (8) 8 - Provisions 1,186 (273) 913 Trade and other payables 10 (10) - (81,783) 6,966 (74,817)

’000 GEL 1 January 2008 Recognised in income 31 December 2008 Restated Restated Restated Property, plant and equipment and investment property (105,412) 6,366 (99,046) Inventories 2,935 1,415 4,350 Trade and other receivables 8,007 1,340 9,347 Prepayments and other current assets 1,881 462 2,343 Other non-current assets 537 (502) 35 Loans and borrowings - (8) (8) Provisions 1,112 74 1,186 Trade and other payables - 10 10 Other current liabilities 376 (376) - (90,564) 8,781 (81,783)

19 Other taxes payable

’000 GEL 2009 2008 Property tax liabilities 11,463 3,328 Personal income tax payable 1,407 1,967 Other taxes payable 8,924 8,931 21,794 14,226

31 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

20 Financial instruments and risk management

(a) Overview

The Group has exposure to the following risks from its use of financial instruments:

 credit risk  liquidity risk  market risk

This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and managing risk, and the Group’s management of capital. Further quantitative disclosures are included throughout these consolidated financial statements.

Risk management framework

The Management Board has overall responsibility for the establishment and oversight of the Group’s risk management framework.

The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.

(b) Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers.

(i) Trade and other receivables

The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. Approximately 22% (2008: 23%) of the Group’s revenue is attributable to sales transactions with a single customer.

Credit risk is managed by requesting prepayments from freight and passenger transportation customers. Accordingly the Group’s trade receivables mainly consist of receivables from other railways. Credit risk related to receivables from other railways is managed through the monthly monitoring of the respective receivable balances and requiring immediate repayment of the debt when the balance approaches specific limits set for each individual counterparty. No collateral in respect of trade and other receivables is generally required.

The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The main component of this allowance is a specific loss component that relates to individually significant exposures.

32 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

(ii) Exposure to credit risk

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:

Carrying amount ’000 GEL 2009 2008 Trade receivables 20,970 18,788 Cash and cash equivalents 1,264 3,025 Other receivables 1,224 432 23,458 122,245

The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was:

Carrying amount ’000 GEL 2009 2008 CIS countries 12,706 11,298 Domestic 8,202 7,490 United States 62 - 20,970 18,788

The Group’s most significant 5 customers account for GEL 13,367 thousand of the trade receivables carrying amount at 31 December 2009 (2008: GEL 15,263 thousand).

Impairment losses

The aging of trade receivables at the reporting date was:

Gross Impairment Gross Impairment ’000 GEL 2009 2009 2008 2008 Not past due 199 - - - Past due 0-90 days 4,788 - 5,319 1,760 Past due 91-180 days 3,178 - 1,459 647 Past due 181-365 days 7,769 2,709 5,354 2,968 Past due more than one year 71,373 63,628 69,758 57,727 87,307 66,337 81,890 63,102

33 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

The movement in the allowance for impairment in respect of trade receivables during the year was as follows:

’000 GEL 2009 2008 Balance at beginning of the year 63,102 54,165 Increase during the year 3,235 8,937 Balance at end of the year 66,337 63,102

Based on historic default rates, the Group believes that no impairment allowance is necessary in respect of trade receivables not past due or past due by up to 180 days; 39% of the net balance, which includes the amount owed by the Group’s most significant customers (see above), relates to customers that have a good track record with the Group.

The allowance account in respect of trade receivables is used to record impairment losses until all possible opportunities for recovery have been exhausted; at that point the amounts are written off against the financial asset directly. At 31 December 2009 the Group does not have any collective impairments on its trade receivables (2008: nil).

Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.

The Group ensures that it has sufficient cash on demand to meet expected operational expenses for a period of three months, including the servicing of financial obligations; this excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters.

The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements. It is not expected that the cash flows included in the maturity analysis could occur significantly earlier, or at significantly different amounts.

2009 Carrying Contractual 0-6 6-12 1-2 ’000 GEL amount cash flows months months years Non-derivative financial liabilities Unsecured bond issues 24,982 31,750 1,688 1,688 28,374 Unsecured bank facility 3,773 3,876 52 3,824 - Trade and other payables 85,393 85,393 38,300 18,240 28,853 Other current liabilities 7,978 7,978 7,978 - - 122,126 128,997 48,018 23,752 57,227

2008 Carrying Contractual 0-6 6-12 1-2 ’000 GEL amount cash flows months months years Non-derivative financial liabilities Unsecured bank facility 22,080 23,658 7,677 12,130 3,851 Trade and other payables 31,820 31,820 28,691 3,129 - Other current liabilities 6,492 6,492 6,492 - - 60,392 61,970 42,860 15,259 3,851 34 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

(d) Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return.

The Group incurs financial liabilities in order to manage market risks. The Group does not apply hedge accounting in order to manage volatility in profit or loss.

(i) Currency risk

The Group is exposed to currency risk on sales, purchases and borrowings that are denominated in a currency other than GEL. The currencies in which these transactions primarily are denominated are U.S. Dollars (USD) and Swiss Francs (CHF).

In respect of monetary assets and liabilities denominated in foreign currencies, the Group ensures that its net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates when necessary to address short-term imbalances.

Exposure to currency risk

The Group’s exposure to foreign currency risk was as follows based on notional amounts:

USD- CHF - USD- CHF- ’000 GEL denominated denominated denominated denominated 2009 2009 2008 2008 Cash and cash equivalents 387 45 902 - Trade receivables 233 13,477 527 11,297 Unsecured bank facility (3,773) - (7,527) - Trade payables (16,770) (1,813) (403) (151) Net exposure (19,923) 11,709 (6,501) 11,146

The following significant exchange rates applied during the year:

in GEL Average rate Reporting date spot rate 2009 2008 2009 2008 USD 1 1.67 1.49 1.69 1.67 CHF 1 1.54 1.38 1.63 1.59

35 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

Sensitivity analysis

A strengthening of the GEL, as indicated below, against the following currencies at 31 December would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis is based on foreign currency exchange rate variances that the Group considered to be reasonably possible at the end of the reporting period. The analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2008.

’000 GEL Equity Profit or loss 2009 USD (10% strengthening) 1,693 1,693 CHF (10% strengthening) (995) (995) 2008 USD (10% strengthening) 553 553 CHF (10% strengthening) (947) (947)

A weakening of the GEL against the above currencies at 31 December would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant.

(ii) Interest rate risk

Changes in interest rates impact primarily loans and borrowings by changing either their fair value (fixed rate debt) or their future cash flows (variable rate debt). Management does not have a formal policy of determining how much of the Group’s exposure should be to fixed or variable rates. However, at the time of raising new loans or borrowings management uses its judgment to decide whether it believes that a fixed or variable rate would be more favourable to the Group over the expected period until maturity. Profile At the reporting date the interest rate profile of the Group’s interest-bearing financial instruments was:

Carrying amount ’000 GEL 2009 2008 Fixed rate instruments Financial liabilities 24,982 14,553 Variable rate instruments Financial liabilities 3,773 7,527

Fair value sensitivity analysis for fixed rate instruments

The Group does not account for any fixed rate financial assets and liabilities at fair value. Therefore a change in interest rates at the reporting date would not affect profit or loss and equity.

36 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

(e) Fair values versus carrying amounts

Management believes that the fair value of the Group’s financial assets and liabilities approximates their carrying amounts.

The basis for determining fair values is disclosed in note 4.

(f) Capital management

The Group has no formal policy for capital management but management seeks to maintain a sufficient capital base for meeting the Group’s operational and strategic needs, and to maintain confidence of market participants. This is achieved with efficient cash management, constant monitoring of the Group’s revenues and profit, and long-term investment plans mainly financed by the Group’s operating cash flows. With these measures the Group aims for steady profits growth.

The Group’s debt to capital ratio at the end of the reporting period was as follows:

’000 GEL 2009 2008 1 January 2008 Total liabilities 260,956 204,184 295,550 Less: cash and cash equivalents (1,361) (3,196) (4,211) Net debt 259,595 200,988 291,339

Total equity 1,548,683 1,543,744 1,445,279 Debt to capital ratio at 31 December 0.17 0.13 0.20

There were no changes in the Group’s approach to capital management during the year.

Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements.

21 Operating leases

Non-cancellable operating lease receivables are to be received as follows:

’000 GEL 2009 2008 Less than one year 3,378 3,198 Between one and five years 7,266 14,344 More than five years 37,403 57,424 48,047 74,966

Operating leases mainly relate to investment property owned by the Group with lease terms of between 10 to 50 years, as well as the rental of other buildings, containers, locomotives and fittings. Lessees do not have an option to purchase the property at the end of the lease term.

37 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

22 Capital commitments

As at 31 December 2009 the Group had entered into contracts to purchase plant and equipment for GEL 36,234 thousand (2008: GEL 62,207 thousand).

23 Contingencies

(a) Insurance

(b) Taxation contingencies

These circumstances may create tax risks in Georgia that are more significant than in other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Georgian tax legislation, official pronouncements and court decisions. However, the interpretations of the relevant authorities could differ and the effect on these consolidated financial statements, if the authorities were successful in enforcing their interpretations, could be significant.

38 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

24 Related party transactions

(a) Control relationships

The Group is wholly owned by the State of Georgia represented by the State Enterprise Management Agency of the Ministry of Economic Development of Georgia.

(b) Transactions with management

Key management received the following remuneration during the year (included in payroll expenses):

’000 GEL 2009 2008 Salaries and bonuses 880 830

The Group’s other related party transactions are disclosed below.

(i) Revenue

Transaction Transaction Outstanding Outstanding ’000 GEL value value balance balance 2009 2008 2009 2008 Services provided: State-owned companies and government bodies 6 1,251 2 816

All outstanding balances with related parties are to be settled in cash within six months of the reporting date. None of the balances are secured.

(ii) Expenses and purchases

Transaction Transaction Outstanding Outstanding ’000 GEL value value balance balance 2009 2008 2009 2008 Purchase of goods: State-owned companies and government bodies 2,479 4,014 436 2,388 Services received: State-owned companies and government bodies 9,614 9,698 1,083 1,275 12,093 13,712 1,519 3,663

All outstanding balances with related parties are to be settled in cash within six months of the reporting date. None of the balances are secured.

39 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

(iii) Other balances

’000 GEL 2009 2008 Liabilities to the owners 26,636 25,881

Liabilities to the owners relate to property, plant and equipment that has been withdrawn but not yet transferred formally to the Government of Georgia. These liabilities are recognised at the carrying amount of assets to be transferred to the Government of Georgia.

25 Significant subsidiaries

2009 2008 Subsidiary Country of incorporation Ownership/voting Ownership/voting Railway Telecom LLC Georgia 100% 100%

26 Events subsequent to the reporting date

On 12 February 2010 the Group signed an agreement with J.P. Morgan Securities Ltd. and Bank of America Merrill Lynch International in connection with:

On 16 November 2009 an auction for the sale of 100% of shares of the Railway Telecom LLC was held. The winner of the auction was Linx Telecom Georgia LLC. As at 31 December 2009 the sale transaction had not been finalised. In accordance with the auction terms the sales transaction was to have been completed by 1 April 2010. The sales transaction was not completed by 1 April 2010 and the transaction was, accordingly, cancelled. On 6 April 2010 the Management Board of the Company decided to initiate the process of transferring 100% of shares of the Railway Telecom LLC to the Government of Georgia.

40 Georgian Railway LLC Notes to the Consolidated Financial Statements for the year ended 31 December 2009

27 Correction of prior period error

In 2009 management identified errors relating to the calculation of deferred taxes for property, plant and equipment and prepayments given as at 31 December 2007 and 31 December 2008. The Group’s management restated the comparative information in these consolidated financial statements. This has resulted in the following changes in the comparative information reported previously:

GEL’000 Consolidated statement of financial position as at 1 January 2008

Liabilities Deferred tax liabilities as previously reported 106,526 Restatement (15,962) Restated deferred tax liabilities as at 1 January 2008 90,564

Equity Retained earnings as previously reported 484,332 Restatement 15,962 Restated retained earnings as at 1 January 2008 500,294

Consolidated statement of financial position as at 31 December 2008

Liabilities Deferred tax liabilities as previously reported 99,496 Restatement (17,713) Restated deferred tax liabilities as at 31 December 2008 81,783

Equity Retained earnings as previously reported 558,644 Restatement 17,713 Restated retained earnings as at 31 December 2008 576,357

Consolidated statement of comprehensive income for the year ended

31 December 2008

Income tax expense as previously reported 8,063 Restatement (1,751) Restated income tax expense for the year ended 31 December 2008 6,312

Profit for the year, as previously reported 34,312 Restatement 1,751 Restated profit for the year ended 31 December 2008 36,063

41 [THIS PAGE IS INTENTIONALLY LEFT BLANK]

Georgian Railway LLC

Consolidated Financial Statements For the Year Ended 31 December 2008

GEORGIAN RAILWAY LLC

TABLE OF CONTENTS

Page

STATEMENT OF MANAGEMENTS RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS 1

INDEPENDENT AUDITORS REPORT 2-3

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008:

Consolidated statement of operations 4

Consolidated balance sheet 5-6

Consolidated statement of changes in equity 7

Consolidated statement of cash flows 8

Notes to the consolidated financial statements 9-45

GEORGIAN RAILWAY LLC

CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2008 (in Georgian Lari and in thousands)

Notes 31 December 31 December 2008 2007 ASSETS

Non-current assets Property, plant and equipment 13 1,635,482 1,635,190 Investment property 14 13,287 13,247 Other non-current assets 15 12,433 7,288 Investments 16 2,021 2,021

Total non-current assets 1,663,223 1,657,746

Current assets Cash and cash equivalents 17 3,196 4,211 Restricted cash 18 - 9,868 Trade and other receivables, net 19 19,220 7,968 Prepayments and other current assets 20 28,555 33,178 Inventories 21 33,734 27,858

Total current assets 84,705 83,083

TOTAL ASSETS 1,747,928 1,740,829

LIABILITIES AND EQUITY

Capital and reserves Charter capital 22 933,635 935,588 Land Fund 22 33,752 9,397 Retained earnings 558,644 484,332

Total Equity 1,526,031 1,429,317

Non-current liabilities Deferred tax payable 12 99,496 106,526 Long-term loan 25 3,701 7,068

Total non-current liabilities 103,197 113,594

The notes on pages 9 - 45 are an integral part of these consolidated financial statements

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

1. GENERAL INFORMATION AND DESCRIPTION OF THE BUSINESS

These consolidated financial statements include financial statements of Georgian Railways LLC (the Company) and its subsidiaries (collectively, the Group).

Limited Liability Company Georgian Railway was created in December 1998 by the Decree of President of Georgia # 929 as entity engaged in provision of railway transportation services in Georgia.

The legal address of the Company is: 15 Queen Tamar Avenue, Tbilisi 0112, Georgia.

The Company is fully owned by the State of Georgia represented by the State Enterprise Management Agency.

The Company operates the nationwide railway system providing freight and passenger traffic, maintenance of railway infrastructure and construction of railway lines within Georgia.

The Company controls a number of the entities operating in Georgia as at 31 December 2008. These entities are consolidated subsidiaries for the purposes of reporting under International Financial Reporting Standards (IFRS).

These entities as at 31 December 2008 and 2007 were as follows:

Name Legal Nature of Ownership form business interest 2008 2007 Railway Telecom LLC Communication 100% 100% Sak Rkinigza Project LLC Construction 100% 100% Refrigerated and Isothermal Transportation Company LLC Transportation - 100%

The Group employed approximately 15 thousand employees in 2008 and 2007.

Pricing policy

Railroad transportations in Georgia is a natural monopoly, however the pricing policy is not subject to government regulation: according to the 64th clause (came into force on 1st July 2005) of Railway Code of Georgia, government of Georgia has delegated Georgian Railway LLC to set up the pricing policy independently for all types of services provided, including freight transportation, freight transportation related additional services, passenger and luggage transportation.

A. Tariffs for freight transportation and related additional services Tariffs for freight transportation are based on the International Rail Transit Tariff. Georgian Railway is the co-signatory of Tariff Agreement (concluded on 17 February 1993) together with CIS, Latvian and Estonian railways. The member parties of the agreement hold annual conferences to work out the tariff policy for the next year: each party declares tariffs denominated in Swiss Francs for railway transportation and states general rules that apply to and modify tariffs. Mentioned tariffs indicate maximum level. Based on the shared information and decisions made on the conference Georgian Railway establishes the pricing policy for the next year that is published on the official web site of the Company.

According the pricing policy of the company local and international freight (import, export, transit) transportation tariffs and related additional service fees are based on unified base parameters. 9

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

During 2007 base tariffs for freight transportation and related additional services (except fees for station service above 24 hour, that were stated in Georgian Lari and annual revenue of which amounts to 5% of total freight revenue) were stated in US Dollar by converting Swiss Franc at the last three months CHF/USD average exchange rate of the previous year. Starting May 2008 the Company changed pricing policy and set all tarrifs (except fees for station services above 24 hour) in Swiss Francs.

According to the Georgian Legislation, residents of the country must pay in national currency Georgian Lari, but non-residents are allowed to pay in foreign currencies: USD, Euro, Pound Sterling or Swiss Franc. Georgian resident clients of the company pay in national currency at the actual USD/GEL, and starting from May 2008 at the actual CHF/GEL exchange rate established by the National Bank of Georgia every business day.

B. Tariffs for transportation of passengers and luggage

Pricing policy for passenger transportation and luggage as well as for freight transportation fees is not subject to government regulation. Tariffs for domestic transportation of passengers and luggage Tariffs for domestic transportation of passengers and luggage are prescribed by Decrees approved by the General Director of the Georgian Railway, Tariffs are denominated in Georgian Lari. Tariffs for international transportation of passengers and luggage International tariff base for CIS countries are determined by the CIS Rail Transport Tariffs Conference; tariffs for non-CIS countries (East-West tariffs) are determined by specific international agreements. All tariffs are denominated in Swiss Franc.

2. ADOPTION OF NEW AND REVISED STANDARDS

Standards and interpretations in issue not yet adopted At the date of authorisation of these consolidated financial statements, the following Standards and Interpretations were in issue but not yet effective:

x IFRS 3 (Revised) Business Combinations (effective for annual periods beginning on or after 1 July 2009); x IFRS 8 Operating Segments (effective for annual periods beginning on or after 1 January 2009); x IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2013); x IAS 1 (Revised) Presentation of Financial Statements (effective for annual periods beginning on or after 1 January 2009); x IAS 23 (Revised) Borrowing Costs (effective for annual periods beginning on or after 1 January 2009); x IAS 24 (Revised) Related Party Disclosures (effective for annual periods beginning on or after 1 January 2011); x IAS 27 (Revised) Consolidated and Separate Financial Statements (effective for annual periods beginning on or after 1 July 2009); x IFRIC 13 Customer Loyalty Programmes (effective for annual periods beginning on or after 1 July 2008); x IFRIC 15: Agreements for the Construction of Real Estate (effective for annual periods beginning on or after 1 January 2009) 10

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

x IFRIC 17: Distributions of Non-cash Assets to Owners (effective for annual periods beginning on or after 1 July 2009) x IFRIC 18: Transfer of Assets from Customers (effective for annual periods beginning on or after 1 July 2009) The management is considering effect of the adoption of these Standards and Interpretations in future periods on the consolidated financial statements of the Group.

3. SIGNIFICANT ACCOUNTING POLICIES

Statement of compliance

The consolidated financial statements for the year ended 31 December 2008 have been prepared in accordance with International Financial Reporting Standards.

Basis of preparation

The consolidated financial statements have been prepared on the historical cost and accrual basis. The principal accounting policies are set out below.

The Group maintains its accounting records in accordance with the Georgian tax code. Georgian tax code accounting principles differ from IFRS. Accordingly, the accompanying consolidated financial statements, which have been prepared from the Groups accounting records, reflect adjustments necessary for such consolidated financial statements to be presented in accordance with IFRS.

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries controlled by the Company. Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.

Where necessary, adjustments are made to the consolidated financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group.

All intra-group transactions, balances, income and expenses are eliminated in full on consolidation.

Property, plant and equipment

Land and buildings held for use in the production or supply of goods or services, or for administrative purposes, are stated in the balance sheet at their deemed cost, less any subsequent accumulated depreciation. Depreciation on buildings is charged to profit or loss. Freehold land is not depreciated.

Properties in the course of construction for production or for purposes not yet determined, are carried at cost. Cost includes professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Groups accounting policy. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.

Fixtures and equipment are stated at cost less accumulated depreciation and accumulated impairment losses.

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

Depreciation is charged so as to write off the cost or valuation of assets, other than freehold land and properties under construction, over their estimated useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at each year end, with the effect of any changes in estimate accounted for on a prospective basis.

The following depreciation rates are used:

Useful life, Group of assets years

Buildings and construction 15 100 Rail Track infrastructure 20 90 Transport, machinery, equipment and other 5 40

The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss.

Investment property

Investment property, which is property held to earn rentals, is measured initially at its cost, including transaction costs. Subsequent to initial recognition, investment property is measured at fair value. Gains and losses arising from changes in the fair value of investment property are included in profit or loss in the period in which they arise.

Intangible Assets

Intangible assets acquired separately are reported at cost less accumulated amortisation and accumulated impairment losses. Amortisation is charged on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each annual reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

Impairment of tangible and intangible assets

At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash- generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in consolidated income statement, unless the relevant asset is carried at a revalue amount, in which case the impairment loss is treated as a revaluation decrease.

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash- generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in the consolidated income statement, unless the relevant asset is carried at a revalue amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

Equity investments

Equity investments represented by investments in subsidiaries and associate are carried in the balance sheet at cost, less any impairment in the value of individual investments.

A subsidiary is an entity controlled by the Company. Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

An associate is an entity over which the Company has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policies decisions of the investee but is not control or joint control over those policies.

Inventories

Inventories are stated at the lower of cost and net realizable value. Costs, including an appropriate portion of fixed and variable overhead expenses, are assigned to inventories by the most appropriate to the particular class of inventory, being valued on first-in-first-out (FIFO) basis. Net realizable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale.

Cash and cash equivalents

Cash and cash equivalents include cash on hand and cash at bank. Cash equivalents include all highly liquid investments with original maturity of three months or less at the time of purchase.

Restricted cash

Restricted cash represent funded letter of credits arrangements and are separately noted in the consolidated financial statements of the Group.

Financial instruments

The Group recognises financial assets and liabilities on its balance sheet when it becomes a party to the contractual obligation of the instrument. Regular way purchase and sale of the financial assets and liabilities are recognised using settlement date accounting. Regular way purchases of financial instruments that will be subsequently measured at fair value between trade date and settlement date are accounted for in the same way as for acquired instruments.

Financial assets and liabilities are initially recognised at fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to acquisition or issue of the financial asset or financial liability. The accounting policies for subsequent re-measurement of these items are disclosed in the respective accounting policies set out below.

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

Financial assets and financial liabilities are only offset and the net amounts are reported in the balance sheet when the Group has a legally enforceable right to set-off the recognised amounts and intends to either settle on a net basis, or to realise the asset and settle the liability simultaneously.

Financial assets

Financial assets are recognised and derecognised on trade date where the purchase or sale of an asset is under a contract whose terms require delivery of the asset within the timeframe established by the market concerned, and are initially measured at fair value, plus transaction costs, except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value.

Financial assets of the Group are classified as loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Effective interest method - The effective interest method is a method of calculating the amortised cost of a financial asset or liability and of allocating interest income or expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset or liability, or, where appropriate, a shorter period.

Loans and receivables Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short- term receivables when the recognition of interest would be immaterial.

Impairment of financial assets Financial assets are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted.

The objective evidence of impairment could include:

x significant financial difficulty of the issuer or counterparty; or x default or delinquency in interest or principal payments; or x it becoming probable that the borrower will enter bankruptcy or financial re-organisation.

For certain categories of financial assets, such as trade receivables, assets that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Groups past experience of collecting payments, as well as observable changes in national or local economic conditions that correlate with default on receivables.

For financial assets carried at amortised cost, the amount of the impairment is the difference between the assets carrying amount and the present value of estimated future cash flows, discounted at the financial assets original effective interest rate.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in consolidated income statement.

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through consolidated income statement to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

Derecognition of financial assets The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire; or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.

Financial liabilities

Classification as debt or equity Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.

Other financial liabilities Other financial liabilities, including trade and other payables, borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis.

Derecognition of financial liabilities The Group derecognises financial liabilities when, and only when, the Groups obligations are discharged, cancelled or they expire.

Equity

Inputs and withdrawals of capital are based upon the decrees of the Government. They are in the form of property, plant and equipment, inventory, and investments in subsidiaries. The value of the input or withdrawal of the capital is based upon the net book value of assets given or withdrawn or the net assets of subsidiaries given or withdrawn

Dividends

Dividends are declared and paid based upon the decree from the Government. The Dividend decrees occur throughout the year based upon the Government policy

Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

Corporate taxes

Income tax

Income tax expense is based on the taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Groups liability for current tax is calculated in accordance with the tax regulations of Georgia by applying the statutory tax rate of 15%. Current tax is recognised as an expense or benefit in the Statement of Operations, except when they relate to items credited or debited directly to equity, in which case the tax is also recognised directly in equity.

Deferred tax

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realised, based on tax rates (and tax laws) that have been enacted by the balance sheet date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

Current and deferred tax are recognised as an expense or income in consolidated income statement, except when they relate to items credited or debited directly to equity, in which case the tax is also recognised directly in equity, or where they arise from the initial accounting for a business combination. In the case of a business combination, the tax effect is taken into account in calculating goodwill or in determining the excess of the acquirers interest in the net fair value of the acquirees identifiable assets, liabilities and contingent liabilities over the cost of the business combination.

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

Value added tax

Value added tax (VAT) payable represents VAT related to sales payable to tax authorities upon collection of receivables from customers net of VAT on purchases which have been settled at the balance sheet date. In addition, VAT related to sales which have not been settled at the balance sheet date (VAT deferred) is also included in VAT payable. Where allowance has been made for impairment of receivables, impairment loss is recorded for the gross amount of the debtor, including VAT. The related VAT deferred liability is maintained until the debtor is written off for tax purposes.

VAT recoverable relates to purchases which have not been settled at the balance sheet date. VAT recoverable is reclaimable against sales VAT upon payment for the purchases.

The tax authorities permit the settlement of sales and purchases VAT on a net basis.

Commitments and contingencies

Commitments and contingencies are not recognised in the consolidated financial statements. They are disclosed in the notes to the consolidated financial statements unless the possibility of an outflow of resources embodying economic benefits is remote.

Contingent assets are not recognised in the consolidated financial statements but disclosed when an inflow of economic benefits is probable.

Revenue recognition

Revenue is recognised when it is probable that the economic benefits associated with the transaction will flow to the enterprise and the amount of revenues can be measured reliably.

Revenue is accounted for at the time the actual flow of related goods and services occurs and transfer of risks and rewards has been completed, regardless of when cash or its equivalent is received or paid, and are reported in the statement of operations in the period to which they relate.

Revenue related to international freight and passenger transportations is recognised when the border of Georgia is been crossed.

For the services related to freight transportation, revenue is recognised upon completion of the respective services.

Revenue is measured at the fair value of the consideration received or receivable.

When the fair value of consideration received cannot be measured reliably, the revenue is measured at the fair value of the goods or services given up.

Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

The Group as a lessor

Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and charged on a straight-line basis over the lease term.

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

The Group as a lessee

Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are

recognised as an expense in the period in which they are incurred.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.

All other borrowing costs are recognised in consolidated income statement in the period in which they are incurred.

Foreign currencies The functional and presentation currency of these consolidated financial statements of the Group is the Georgian Lari (GEL). These consolidated financial statements are presented in thousands of Georgian Lari, unless otherwise indicated. Transactions in currencies other than functional currency of the Group are treated as transactions in foreign currencies. In preparing the financial statements of the individual entities, transactions in currencies other than the entitys functional currency (foreign currencies) are recorded at the rates of exchange prevailing at the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing at the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of initial transaction. Exchange differences are recognised in consolidated income statement in the period in which they arise.

The exchange rates at the year-end used by the Group in the preparation of the consolidated financial statements were as follows:

31 December 31 December 2008 2007

Georgian Lari/1 US Dollar 1.6670 1.5916 Georgian Lari/1 Euro 2.3648 2.3315 Georgian Lari/1 Swiss franc 1.5849 1.4029

Average exchange rates for the year ended 31 December 2008 and 2007 were as follows:

Average for Average for 2008 2007

Georgian Lari/1 US Dollar 1.4902 1.6703 Georgian Lari/1 Euro 2.1886 2.2862 Georgian Lari/1 Swiss franc 1.3785 1.3920

Reclassifications Certain reclassifications were made in the notes to the comparative information in the 2007 consolidated financial statements to conform to the 2008 presentation.

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

4. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

In the application of the Groups accounting policies, which are described in Note 3, the management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

Key sources of estimation uncertainty

Useful lives of property, plant and equipment

The most significant estimates relate to the estimation of useful lives of property, plant and equipment, assessment of impairment of financial assets and assessment of provisions.

The estimation of the useful life of an item of property, plant and equipment is a matter of management judgement based upon experience with similar assets. In determining the useful life of an asset, management considers the expected usage, estimated technical obsolescence, physical wear and tear and the physical environment in which the asset is operated. Changes in any one of these conditions or estimates may result in adjustments to future depreciation rates.

As described in Note 3 above, the Group assesses the remaining useful lives of items of property, plant and equipment at least at each financial year-end. If expectations differ from previous estimates, the changes are accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. These estimates may have a material impact on the amount of the carrying values of property, plant and equipment and on depreciation recognised in profit or loss.

Impairment provision for accounts receivable

The impairment provision for accounts receivable and other receivables is based on the Groups assessment of the collectability of specific customer accounts. If there is deterioration in a major customers creditworthiness or actual defaults are higher than the estimates, the actual results could differ from these estimates.

If the Group determines that no objective evidence exists that impairment has incurred for individually assessed accounts receivable, whether significant or not, it includes the account receivable in a group of accounts receivable with similar credit risk characteristics and collectively assesses them for impairment.

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

For the purposes of a collective evaluation of impairment accounts receivable are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of accounts receivable that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets and the experience of management in respect of the extent to which amounts will become overdue as a result of past loss events and the success of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past periods and to remove the effects of past conditions that do not exist currently.

Taxes – de-installed equipment

As part of the operations of the Group, old used equipment is often de-installed. Equipment that is subsequently found to be re-usable is transferred to inventory class other and carried at a nominal value of GEL 1 for IFRS purposes. However as per the ruling of the Georgian Tax Authorities, for tax purposes the inventory should be valued at fair value. As a result the Group hired a local audit company to evaluate de-installed inventory as of 31 December 2008. Valuation of the de-installed inventory was determined to be GEL 26,005 thousand for tax purposes, with a subsequent resulting deferred tax asset of GEL 3,900 thousand for financial statement purposes. However, the tax authorities reserve the right to re-determine this valuation at the time of their tax inspection, with the result that future adjustments may be appropriate.

Critical judgements in applying accounting policy

The following are the critical judgments that the management has made in the process of applying the entitys accounting policies and that have the significant effect on the amounts recognised in consolidated financial statements.

Accounting for non-production property, plant and equipment

Included in property, plant and equipment are social infrastructure and other non-production assets, such as hostels, residencies etc. Management believes that expenditures incurred in respect of acquisition or construction of such assets qualify for the recognition as an asset on the premises that such expenditures are capable of contributing indirectly to the flow of cash and cash equivalents to the Group through a reduction of cash outflows related primarily to wages and salaries expenses. This is driven by the fact that such non-production assets are employed by the Group to provide in- kind benefits to its employees, which replace cash outflows on wages and salaries.

5. REVENUE

An analysis of the Groups revenue for the year is as follows:

Year ended Year ended 31 December 31 December 2008 2007

Freight traffic 294,764 290,292 Passenger traffic 16,615 17,165

Total 311,379 307,457

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

6. INVESTMENT REVENUE

Year ended Year ended 31 December 31 December 2008 2007 Operating lease rental revenue: Carriages 16,590 11,520 Investment properties 1,738 1,682 Other 1,304 1,408 Buildings 467 688

20,099 15,298

Interest revenue: Bank deposits - 1,669

- 1,669

Revenue from services provided by Railway Telecom: Revenue from internet services 4,697 1,578 Revenue from fibre operating lease 4,019 1,153 Other 694 -

9,410 2,731

Total 29,509 19,698

7. OTHER GAINS AND LOSSES, NET

Year ended Year ended 31 December 31 December 2008 2007

Other gains 5,267 1, 399 Net foreign exchange gain 1,168 208 Gain on investment property revaluation 40 41 Gain on sale of investments in shares - 534

Total 6,475 2,182

8. PROFIT FOR THE YEAR

Profit for the year has been arrived at after charging (crediting):

8.1 Employee benefit expense

Year ended Year ended 31 December 31 December 2008 2007

Salary and bonuses expenses (103,977) (99,725) Other related expenses (4,770) (5,582)

Total (108,747) (105,307)

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

8.2 Depreciation and amortisation

Year ended Year ended 31 December 31 December 2008 2007

Depreciation of Property, Plant and Equipment (98,875) (106,649) Amortisation of intangible assets (10) (9)

Total (98,885) (106,658)

8.3 Movement in provision for impairment

Year ended Year ended 31 December 31 December 2008 2007

Movement of provisions for impairment (11,998) (2,476)

Total (11,998) (2,476)

9. RAW MATERIALS AND CONSUMABLES USED

Year ended Year ended 31 December 31 December 2008 2007

Electricity (22,319) (18,192) Fuel (11,793) (9,530) Materials (11,775) (24,662)

Total (45,887) (52,384)

10. OTHER EXPENSES

Year ended Year ended 31 December 31 December 2008 2007

Freight car rental (10,746) (9,371) Repair and maintenance (10,573) (12,323) Security (6,238) (6,857) Taxes other than income tax (3,633) (7,527) Internet expense (3,227) - Cable lease expense (1,844) - Passenger transportation cost (848) (732) Other provision (479) (1,999) Tax fines (83) (1,433)

Total (37,671) (40,242)

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

11. FINANCE COSTS

Year ended Year ended 31 December 31 December 2008 2007

Interest on bank loans (1,800) (792)

Total (1,800) (792)

12. INCOME TAXES

The corporate income tax rate decreased from 20% for the year ended 31 December 2007 to 15% for the year ended 31 December 2008. The main components of the income tax for the years ended 31 December 2008 and 2007 were as follows:

Year ended Year ended 31 December 31 December 2008 2007

Current income tax expense (15,093) (22,324) Deferred tax benefit 7,030 40,030

Total (8,063) 17,706

The reconciliation between profit before tax multiplied by the statutory tax rate and income tax expense for the years ended 31 December 2008 and 2007 were as follows:

Year ended Year ended 31 December 31 December 2008 2007

Profit before income tax 42,375 21,478

Theoretical income tax expense at the tax rate of 15% (2007: 20%) (6,356) (4,296)

Tax effect of:

Effect of revaluations of assets for taxation purposes and non- deductable expenses (1,739) (14,403) Non-taxable income 32 151 Effect of change in income tax rate from 20% to 15% - 36,254

Income tax expense (8,063) 17,706

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

As of 31 December 2008 and 2007 deferred tax assets and liabilities were as follows:

31 December 31 December 2008 2007 Temporary differences resulting in deferred tax assets, due to:

Allowance for irrecoverable accounts receivables 62,313 53,377 Inventory 26,179 16,843 Contingency provisions 7,904 7,414 Allowance for inventory obsolescence 2,818 2,722 Allowance for impairment of investment 202 - Other current assets 31 3,131 Other short-term liabilities - 2,503 Allowance for other non-current assets - 448

Total difference resulting in deferred tax assets 99,447 86,438

Temporary differences resulting in deferred tax liabilities, due to:

Property, plant and equipment and investment property (761,925) (796,594) Trade Receivables (830) - Other receivables - (17)

Total difference resulting in deferred tax liabilities (762,755) (796,611)

Total temporary difference, net (663,308) (710,173)

Deferred tax liability at 15% (99,496) (106,526)

Movement in carrying amount of deferred tax liabilities for the years ended 31 December 2008 and 2007 were as follows:

2008 2007

Deferred tax liability as of beginning of the year (106,526) (146,556

Decrease in deferred tax liability 7,030 40,030

Deferred tax liability as of end of the year (99,496) (106,526)

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

13. PROPERTY, PLANT AND EQUIPMENT

The movement on property, plant and equipment for the year ended 31 December 2008 was as follows:

Land Buildings and Rail track Transport, Capital Construction Total construction infrastructure machinery, in progress equipment and other Cost Deemed cost as at 1 January 2007 45,445 129,457 639,114 397,742 54,132 1,265,890

Additions 373,005 30 71 20,073 77,274 470,453 Additions to land fund 9,384 - - - - 9,384 Disposals - (54) (44) (50) - (148) Transfer to investment property - (3,740) - - - (3,740)

Balance 31 December 2007 427,834 125,693 639,141 417,765 131,406 1,741,839

Additions 2,776 447 1 3,648 70,945 77,817 Additions to land fund 24,355 - - - - 24,355 Disposals (152) (2,129) (78) (829) - (3,188) Transfers from construction in progress - 10,798 16,690 35,250 (62,738) -

Balance 31 December 2008 454,813 134,809 655,754 455,834 139,613 1,840,823

Accumulated depreciation Balance as at 1 January 2007 ------

Depreciation charge for the year - (3,748) (36,631) (66,270) - (106,649)

Balance 31 December 2007 - (3,748) (36,631) (66,270) - (106,649)

Depreciation charge for the year - (3,930) (36,251) (58,694) - (98,875) Eliminated on disposals of assets - 129 7 47 - 183

Balance 31 December 2008 - (7,549) (72,875) (124,917) - (205,341)

Carrying amount as at 31 December 2007 427,834 121,945 602,510 351,495 131,406 1,635,190

Carrying amount as at 31 December 2008 454,813 127,260 582,879 330,917 139,613 1,635,482

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

On the 1 January 2007 GR became a first time adopter of IFRS. As such GR elected, as allowed under IFRS 1 First-time Adoption of International Financial Reporting Standards, to use the fair value, as derived at 31 December as deemed cost as at the 1 January 2007.

The revaluation of the Group's property, plant and equipment was performed as at 31 December 2006 by an independent appraiser Grant Thornton Amyot LLC according to International Valuation Standards.

The fair value was determined using a depreciated replacement cost approach for buildings and constructions, rail track infrastructure and machinery. Equipment was revalued using market value approach. Transport, consisting of wagons and locomotives, and land are revalued using sales comparison method.

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

14. INVESTMENT PROPERTY

31 December 31 December 2008 2007

Balance as at the beginning of the year 13,247 9,466 Transfer from property, plant and equipment - 3,740 Gain from fair value adjustment 40 41

Balance as at the end of the year 13,287 13,247

The fair value of the Groups investment property as at 31 December 2008 has been arrived at on the basis of a valuation carried out at that date by Grant Thornton Amyot LLC, independent appraiser that is not related to the Group. The valuation, which conforms to International Valuation Standards, was arrived at by reference to discounted cash flows of lease agreements.

Investment properties of the Group are land and buildings that are leased to LLC Tbilisi Central till the year 2055 and to JSC Elit Electronics till the year 2056 and container terminal leased to LLC Intertrans till year 2016.

The cost of investment property as at 31 December 2008 and 2007 is GEL 13,206 thousand.

15. OTHER NON-CURRENT ASSETS

Other non-current assets as at 31 December 2008 and 2007 were as follows:

31 December 31 December 2008 2007 Advances paid for acquisition of non-current assets 18,082 7,710 Intangible assets 10 26 18,092 7,736 Less: allowance for irrecoverable amounts (5,659) (448)

Total 12,433 7,288

16. INVESTMENTS

31 December 31 December 2008 2007 Investments in shares 2,021 2,021

Total 2,021 2,021

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

Investments as at 31 December 2008 and 31 December 2007 were as follows:

Nature of Ownership 31 December Ownership 31 December business interest in 2008 interest in 2007 2008 2007 Chitakhevi-Borjomi JSC Energy 25% 2,021 25% 2,021 Absolute Bank JSC Banking - 159 - 159 2,180 2,180 Less: allowance for impairment (159) (159) Total 2,021 2,021

As at 31 December 2008 Chitakhevi-Borjomi JSC is not associated to the Group, as in November 2007 year Energo-Pro Georgia JSC purchased 71% of share of Chitakhevi-Borjomi JSC and the Group has lost significant influence over Chitakhevi-Borjomi JSC. The investment in Absolute Bank JSC was fully impaired as at 31 December 2008.

17. CASH AND CASH EQUIVALENTS

Cash and cash equivalents as at 31 December 2008 and 2007 were as follows:

31 December 31 December 2008 2007 Cash at banks 3,025 3,905 Cash on hand 171 306 Total 3,196 4,211

18. RESTRICTED CASH

31 December 31 December 2008 2007 Restricted Cash - 9,868 Total - 9,868

The Group had restricted cash in the form of funded letters of credit with TBC Bank as of 31 December 2007.

19. TRADE AND OTHER RECEIVABLES, NET

Trade and other receivables as at 31 December 2008 and 31 December 2007 were as follows:

31 December 31 December 2008 2007 Trade receivables 73,358 57,803 Other receivables 8,964 4,330 82,322 62,133

Less: allowance for irrecoverable amounts (63,102) (54,165) Total 19,220 7,968 28

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

Trade receivables disclosed above are classified as loans and receivables and are therefore measured at amortised cost.

The largest part of the Groups sales of cargo and passenger transportation services provided in 2008 year is made on prepayment basis, therefore its not usual practice to have trade receivables as of the end of the year. Trade receivables of the Group mainly consist of sales recognised before 2005 year and accounts receivables due from other railways. Due to inability of the Group to write off uncollectable receivables as a result of being government entity, the most part of these receivables was impaired and allowance for estimated irrecoverable amounts was recognised by the Group, except for receivables from other railways and other trade and other receivables that management believes are recoverable.

Allowances for doubtful debts are recognised against all trade receivables over 180 days based on estimated irrecoverable amounts determined by reference to past default experience of the debt settlements by the individual counterparty and an analysis of the counterpartys current financial position.

Trade receivables disclosed above include amounts (see below for aged analysis) which are past due as at the end of the reporting period but against which the Group has not recognised an allowance for doubtful receivables because there has not been a significant change in credit quality and the amounts are still considered recoverable. The Group does not hold any collateral or other credit enhancements over these balances nor does it have a legal right of offset against any amounts owed by the Group to the counterparty.

Ageing of past due but not impaired trade and other receivables as at 31 December 2008 and 31 December 2007 were as follows:

31 December 31 December 2008 2007

From 6 months to 1 year 4,088 2,236 More than 1 year 6,416 4,555

Total 10,504 6,791

Movement in the allowance for doubtful debts for the years ended 31 December 2008 and 31 December 2007 were as follows: Year ended Year ended 31 December 31 December 2008 2007

Balance as at beginning of the year (54,165) (52,530)

Accrued during the year (8,937) (1,635)

Balance as at end of the year (63,102) (54,165)

In determining the recoverability of a trade receivable, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and unrelated. Accordingly, the directors believe that there is no further credit provision required in excess of the allowance for doubtful debts.

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

Impaired trade accounts receivable in light of maturity date as at 31 December 2008 and 31 December 2007 were as follows:

31 December 31 December 2008 2007

Up to 3 months 1,760 1,572 From 3 months to 6 months 647 1,239 From 6 months to 1 year 2,968 1,960 More than 1 year 57,727 49,394

Total 63,102 54,165

20. PREPAYMENTS AND OTHER CURRENT ASSETS

Prepayments and other current assets as at 31 December 2008 and 2007 were as follows:

31 December 31 December 2008 2007 Refundable VAT 37,165 35,600 Advances paid to suppliers 10,688 17,272 Prepaid taxes other than income tax 4,377 6,911 Other current assets 12 20 52,242 59,803 Less: allowance for irrecoverable amounts (23,687) (26,625) Total 28,555 33,178

21. INVENTORIES

Inventories as at 31 December 2008 and 2007 were as follows:

31 December 31 December 2008 2007

Materials 22,343 25,240 Rails 10,527 1,396 Fuel 3,076 3,548 Other 606 396

36,552 30,580

Less: allowance for inventory obsolescence (2,818) (2,722)

Total 33,734 27,858

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

22. CHARTER CAPITAL

The charter capital contributed by the State of Georgia was equal to GEL 933,635 thousand and GEL 935,588 thousand as at 31 December 2008 and 2007, respectively:

Capital Description

Balance as at 1 January 2007 586,481

Contribution of land 372,994 Charter capital increased Withdrawal of Property, plant and equipment 10,910 Charter capital increased Withdrawal of investment (34,797) Charter capital decreased

Balance as at 31 December 2007 935,588

Contribution of land 1,240 Charter capital increased Contribution of property, plant and equipment 1,205 Charter capital increased Withdrawal of property, plant and equipment (3,834) Charter capital decreased Withdrawal of investment (564) Charter capital decreased

Balance as at 31 December 2008 933,635

During year 2008 the State of Georgia, the 100% owner, withdrew from Georgia Railways investments and property, plant and equipment by decree of the State Property Management Agency.

Land Fund

During 2008 the Group received from the government plots of land nominally valued at GEL 1,240 thousand (2007: GEL 372,994 thousand), which were subsequently valued at fair value by normative cost and market value approach. The gain after valuation at the amount of GEL 24,355 thousand (2007: GEL 9,397 thousand) was transferred to land fund.

23. DIVIDENDS DECLARED AND PAID

Minister of Finance and Minister of Economic Development are liable for distribution of net profit of State-owned entities according to the Order of Ministry of Finance and Ministry of Economic Development # 589, N1-1/91 as of 14-15 September, 2004.

According to the Government Order # 7 between Minister of Finance and Minister of Economic Development as of 18 July 2008, amount of dividends declared in year 2007 was decreased by GEL 40,000 thousands and dividends amounted to GEL 60,000 thousands were paid to the Government in year 2008, therefore dividends payable to the State as of 31 December 2008 amounted to GEL 0 in comparison with GEL 100,000 thousand as of 31 December 2007. For the year ended 31 December 2007 the Group paid dividends in the amount of GEL 12,450 thousand.

24. RETAINED EARNINGS CAPITALISATION

As a result of a decree by the government, in 2007 retained earnings of the Company, as per local accounting standards, were capitalised into charter capital in the amount of GEL 15,656 thousand. There was no retained earnings capitalisation for the year ended 31 December 2008.

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

25. BORROWINGS

Bank borrowings as at 31 December 2008 and 31 December 2007 were as follows:

As at 31 December 2008 As at 31 December 2007

Loans Currency Rate Outstanding Outstanding Outstanding Outstanding Outstanding Outstanding balance, original balance, balance with balance, balance, GEL balance with currency GEL accrued original accrued expenses, currency expenses, GEL GEL

LIBOR EBRD (i) USD +1% 4,441 7,402 7,527 6,663 10,604 10,900 Bank of Georgia (ii) GEL 15.25% 6,492 6,492 6,535 - - - Bank of Georgia (iii) GEL 17% 8,000 8,000 8,018 - - -

Total 21,894 22,080 10,604 10,900

Long-term portion of loans and borrowings 3,701 7,068 7,068

Current portion of loans and borrowings 18,193 3,536 3,832

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

Groups loans and borrowings as at 31 December 2008 and 31 December 2007 are repayable as follows: 31 December 31 December 2008 2007

Due within three months 6,678 2,064 Due from three to six months - - Due from six to twelve months 11,701 1,767

Total current portion repayable in one year 18,379 3,832

Due in second year 3,701 3,534 Due thereafter - 3,534

Total long term portion 3,701 7,068

Grand total, in thousands 22,080 10,900

(i) EBRD. A long-term USD denominated loan obtained by the Group under a non-revolving credit line agreement signed with the European Bank for Reconstruction and Development (EBRD) on 22 December 1998 and ratified by the Parliament of Georgia on 30 July 1999. The total amount of the credit line was equal to USD 20 million.

The repayment schedule set forth under the loan agreement requires payment of semi-annual equal instalments of USD 1,110 thousand. The final instalment is due in August 2010.

The interest rate is LIBOR + 1%. The loan is secured by a guarantee from the State of Georgia represented by the Ministry of Finance.

The carrying amount of long-term bank borrowings is considered to be a reasonable estimate of their fair value as the nominal interest rate on long-term bank borrowings is considered to be a reasonable approximation of the fair market rate with reference to loans with similar credit risk level and maturity period as at the reporting date.

According to the abovementioned loan agreement, the Group has to comply with the following financial covenants at all times beginning from the year of 2000: debt service coverage ratio at a minimum of 1.5, working ratio at a maximum of 0.9, and borrowers debtor days at a maximum of 90 days. The Group complies with all the financial covenants as at 31 December 2008 and 31 December 2007.

Calculation of compliance with covenants is presented below:

31 December 2008 31 December 2007 Covenant Required Actual Required Actual

Debt to Service Coverage Ratio At least 1.50 9.77 At least 1.50 27.26 Working Ratio Maximum 0.90 0.59 Maximum 0.90 0.62 Borrowers Debtor Maximum Maximum Days 90 days 69 90 days 74

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

(ii) Bank of Georgia. GEL denominated loan with initial amount of GEL 15,000 thousand obtained according to the agreement #447732 as of 13 February 2008. Interest rate is 15.25% per annum. The loan is unsecured. The loan was repayable by the Group on demand and was due on 13 February 2009. Subsequently to the balance sheet date credit line was prolonged till 13 May 2009 and fully repaid as of the date of issuance of these financial statements.

(iii) Bank of Georgia. GEL denominated credit line with maximum limit of 8,000 thousands obtained according to the agreement # 662244 as of 26 December 2008. Interest rate is 17% per annum. The loan is unsecured. The loan is repayable by the Group on demand due on 31 December 2009.

26. LIABILITY TO THE OWNERS

Liability to the owners as at 31 December 2008 and 2007 were as follows:

31 December 31 December 2008 2007

Liability to the owner 25,881 32,389

Total 25,881 32,389

During year 2008 liability to the owner decreased due to the fact that the Group transferred part of property, plant and equipment and investments not formally transferred to government as at 31 December 2007 and therefore accrued as a liability to owners as at 31 December 2007. The decrease in liability is mainly represented by withdrawal of the Presidents helicopter (GEL 7,415 thousand). There were no Government decisions on material items of property or investments for the year ended 31 December 2008, total amount of fixed assets withdrawal was GEL 3,834 thousand, for details refer to Note 22.

27. PROVISIONS

Litigation and employee disability provisions accrued as at 31 December 2008 and 2007 were as follows:

31 December 31 December 2008 2007

Employee disability benefits 3,402 4,142 Litigations 4,502 3,272

Total 7,904 7,414

As at 31 December 2008 provision for litigation at the amount of GEL 4,502 thousand (2007: GEL 3,272 thousand) consists of court cases that management believes that it is probable that they will not successfully defend.

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

28. TRADE PAYABLES AND ADVANCES RECEIVED

31 December 31 December 2008 2007

Trade payables 31,820 24,563 Advances received from customers 10,057 8,148

Total 41,877 32,711

Trade payables as of 31 December 2008 and 2007 are mainly denominated in GEL.

The average credit period on purchasing of majority of inventories and substantial portion of services is 20 days. In rare cases trade accounts payable are due more than 20 days and usually related to purchasing of non-current assets or special kinds of services.

As at 31 December 2008 advances received from customers mainly relate to advances received for freight transportation in the amount of GEL 9,215 thousand.

Trade payables consist of the following as at 31 December 2008 and 2007:

31 December 31 December 2008 2007

Current trade payables 31,444 23,739 Balance of settlement accounts with other railways 376 824

Total 31,820 24, 563

Ageing of trade payables and advances received as at 31 December 2008 and 2007 was as follows:

31 December 31 December 2008 2007

Up to 3 months 31,028 19,017 3 month to 6 month 1,343 7,532 6 month to 1 year 1,242 2,852 More then 1 year 8,264 3,310

Total 41,877 32,711

29. OTHER TAXES PAYABLE

Other taxes payable as at 31 December 2008 and 2007 were as follows:

31 December 31 December 2008 2007

Provision for tax liability 8,802 9,406 Property tax Liability 3,328 3,303 Personal income tax withheld 1,967 394 Other tax 129 363

Total 14,226 13,466

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

30. CURRENT INCOME TAX PAYABLE

31 December 31 December 2008 2007

Current income tax payable 3,941 2,201

Total 3,941 2,201

31. OTHER LIABILITIES

Other liabilities as at 31 December 2008 and 2007 were as follows:

31 December 31 December 2008 2007

Salaries payable 5,907 5,579 Other short-term liabilities 585 326 Dividends payable - 100,000 Total 6,492 105,905

32. PENSIONS AND RETIREMENT PLANS

Employees of the Group receive pension benefits from the State in accordance with the laws and regulations of Georgia. No post-employment benefit liabilities exist for the Group.

33. RELATED PARTY BALANCES AND TRANSACTIONS

Related parties or transactions with related parties, as defined by IAS 24 Related Party Disclosures, represent:

(a) Parties that directly, or indirectly through one or more intermediaries: control, or are controlled by, or are under common control with, the Group; have an interest in the Group that gives then significant influence over the Group; and that have joint control over the Group; (b) Associates enterprises on which the Group has significant influence and which is neither a subsidiary nor a joint venture of the investor; (c) Joint ventures in which the Group is a venturer; (d) Members of key management personnel of the Group or its parent (e) Close members of the family of any individuals referred to in (a) or (d) (f) Parties are entities that are controlled, jointly controlled or significantly influenced by, or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e); or (g) Post-employment benefit plans for the benefit of employees of the Group, or of any entity that is a related party of the Group.

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

The following companies are considered to be related parties to the Group:

Name of the related party Nature of relation Nature of business

State-owned companies Companies under common Companies under control of the control Enterprise Management Agency

Government bodies Government authorities under Ministries and other government common control bodies

In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form. The Group had the following balances outstanding as of 31 December 2008 and 31 December 2007 and transactions for the year ended 31 December 2008 and 31December 2007 with state-owned companies and government bodies:

State-owned companies and government bodies 31 December 08 31 December 07

Balances: Trade and other receivables, net 816 954 Prepayments and other current assets 37 304 Trade payables and advances received 653 3,640

Transactions: Cargo and passenger revenues 1,251 1,014 Electricity, maintenance and other services purchased 3,378 12,805 Dividends paid, refer to note 23 60,000 11,450

Settlement of liabilities by the entity on behalf of another party 1,788 2,558

Transfers of FA and other assets with Enterprise Management Agency :

Balances: Accounts payables for property transferred to Enterprise Management Agency, refer to note 27 25,881 32,389 Dividends payable - 100,000

Transactions: Receipt of land and property, plant and equipment, refer to note 22 2,445 383,904 Disposal of property, refer to note 22 2,527 1,604 Transfer of investment, refer to note 22 564 38,145 Uzufruct (gratuitous assignment) 545 545

Compensation of key management personnel

Total key management remuneration for the years ended 31 December 2008 and 31 December 2007 comprised short-term compensation amounted to GEL 617,115 and GEL 325,976

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

respectively, and was included into Employee benefit expense.

Dividends

Dividends payable to the State as of 31 December 2008 amounted to GEL 0 in comparison with GEL 100,000,000 as of 31 December 2007. The Group paid GEL 60,000,000 for the year ended 31 December 2008 and Government decreased amount of dividends to be paid on GEL 40,000,000.

34. FINANCIAL RISK MANAGEMENT

Management of risk is fundamental to the Groups business and is an essential element of the Groups operations. The main risks inherent to the Groups operations are those related to:

x Foreign currency risk x Interest rate risk x Credit risk x Liquidity risk

The Group recognises that it is essential to have efficient and effective risk management processes in place. To enable this, the Group has established a risk management framework, whose main purpose is to manage risk and allow it to achieve its performance objectives. Through the risk management framework, the Group manages the following risks.

Capital risk management

The Group manages its capital to ensure that the Group will be able to continue as a going concern while maximising the return to the shareholder through the optimisation of the debt and equity balance. The management of the Group reviews the capital structure on a regular basis. In addition, the Group is subject to externally imposed capital requirements under the loan covenants, which are used for capital monitoring. There were no changes in the objectives, policies and processes during year 2008.

Major categories of financial instruments - The Groups principal financial liabilities comprise loans and borrowings and trade and other payables. The main purpose of these financial instruments is to raise finance for the Groups operations. The Group has various financial assets such as trade and other receivables, cash and cash equivalents, restricted cash.

The Groups major financial assets and liabilities as of 31 December 2008 and 2007 were as follows:

31 December 31 December 2008 2007

Financial assets

Trade and other receivable, net 19,220 7,968 Cash and cash equivalents 3,196 4,211 Restricted cash - 9,868

Total financial assets 22,416 22,047

Financial liabilities

Trade payables (31,820) (24,563) Short-term borrowings and current portion of long term loan (18,379) (3,806) Other liabilities (6,492) (105,905) Long-term loan (3,701) (7,068)

Total financial liabilities (60,392) (141,342) 38

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

Total net position (37,976) (119,295) The main risks arising from the Groups financial instruments are foreign currency, interest rate, credit and liquidity risks.

Foreign currency risk Currency risk is the risk that the fair value or future cash flows of a financial instrument of the Group will fluctuate because of changes in foreign exchange rates to which the Group is exposed. The Group undertakes certain transactions denominated in foreign currencies. The Group does not use any derivatives to manage foreign currency risk exposure, at the same time the management of the Group is trying to mitigate such risk by managing monetary assets and liabilities in foreign currency at the same (more or less stable) level.

The carrying amounts of the Groups foreign currency denominated monetary assets and liabilities as at 31 December 2008 were as follows (in original currency):

GELUSDEUR CHF RUR Financial assets

Trade and other accounts receivable, net 7,368 316 12 7,128 - Cash and cash equivalents 1,274 541 431 - - Restricted cash - - - - -

Total financial assets 8,642 857 443 7,128 -

Financial liabilities

Trade accounts payable (30,740) (403) (16) (151) (2,317) Short-term borrowings and current portion of (14,553) (2,295) - - - long term loan Other liabilities (6,492) - - - - Long term loan - (2,220) - - -

Total financial liabilities (51,785) (4,918) (16) (151) (2,317)

Total net position (43,143) (4,061) 427 6,977 (2,317)

The carrying amounts of the Entitys foreign currency denominated monetary assets and liabilities as at 31 December 2007 were as follows (in original currency):

GELUSD EUR CHF Financial assets

Trade and other accounts receivable, net 5,542 - - 3,369 Restricted cash - 6,200 - - Cash and cash equivalents 1,083 1,756 - 45

Total financial assets 6,625 7,956 - 3,414

Financial liabilities

Trade accounts payable (22,231) - (1,064) (587) Other liabilities (4,045) - - - Current portion of borrowings - (2,222) - - Long term loan - (4,441) - -

Total financial liabilities (26,276) (6,663) (1,064) (587)

Total net position (19,651) 1,293 (1,064) 2,827 39

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

The following table details the Groups Sensitivity to a 10% increase and decrease in the foreign currency against the GEL. 10% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents managements assessment of the possible change in foreign currency exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the end of the period for a 10% change in foreign currency rates. Impact on net profit and equity based on net position of assets and liabilities as at 31 December 2008 and 31 December 2007 was as follows:

2008 2007 GEL/USD GEL/USD GEL/USD GEL/USD -10% +10% -10% +10%

Profit or (loss) 406 (406) 129 (129)

2008 2007 GEL/EUR GEL/EUR GEL/EUR GEL/EUR -10% +10% -10% +10%

Profit or (loss) (43) 43 (106) 106

2008 2007 GEL/CHF GEL/CHF GEL/CHF GEL/CHF -10% +10% -10% +10%

Profit or (loss) (698) 698 283 (283)

2008 2007 GEL/RUR GEL/RUR GEL/RUR GEL/RUR -10% +10% -10% +10%

Profit or (loss) 232 (232) - -

Interest rate risk Interest rate risk arises from the possibility that changes in market interest rates will affect the fair value or future cash flows of the financial instruments. The Group borrows on both a fixed and variable rate basis. The primary source of the Groups loan on variable basis is tied to LIBOR interest rate.

The following table presents a sensitivity analysis of interest rate risk, which has been determined based on reasonably possible changes in the risk variable. The level of these changes is determined by management and is contained within the risk reports provided to key management personnel.

2008 2007 Interest Interest Interest Interest rate + 5% rate – 5% rate + 5% rate – 5%

Profit or (loss) (376) 376 (530) 530

Limitations of sensitivity analysis - The above tables demonstrate the effect of a change in a key assumption while other assumptions remain unchanged. In reality, there is a correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results.

The sensitivity analyses do not take into consideration that the Groups assets and liabilities are actively managed. Additionally, the financial position of the Group may vary at the time that any actual market movement occurs. 40

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

Other limitations in the above sensitivity analyses include the use of hypothetical market movements to demonstrate potential risk that only represent the Groups view of possible near-term market changes that cannot be predicted with any certainty; and the assumption that all interest rates move in an identical fashion.

Credit risk The Group is exposed to credit risk which is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss.

Cash held in banks and bank deposits are considered to have minimal risk of default. Financial assets, which are potential subject of the Group to credit risk, consist principally of trade and other accounts receivable. The carrying amount of these financial assets, net of allowance for estimated irrecoverable amounts, represents the maximum amount exposed to credit risk.

The largest part of the Groups sales of cargo and passenger transportation services provided in 2008 is made on prepayment basis. Accordingly, the Groups trade receivables mainly consist of sales recognised before 2005 and accounts receivables due from other railways. Due to inability of the Group to write off uncollectable receivables as a result of being government entity, the most part of these receivables was impaired and allowance for estimated irrecoverable amounts was recognised by the Group, except receivables from other railways.

Maximum Exposure The Groups maximum exposure to credit risk varies significantly and is dependant on both individual risks and general market economy risks.

The following table presents the maximum exposure to credit risk of balance sheet financial assets. For financial assets in the balance sheet, the maximum exposure is equal to the carrying amount of those assets prior to any offset or collateral.

Maximum exposure as of 31 December 2008 and 2007 were as follows:

Note 2008 2007 Cash and cash equivalents 17 3,196 4,211 Trade and other accounts receivable, net 19 19,220 7,968 Restricted cash 18 - 9,868 22,416 22,047

The financial assets and other credit exposures of the Group are not rated i.e. do not have a rating issued by internationally recognised rating agencies.

The Groups ten largest customers in terms of sales for the year ended 31 December 2008:

Sales for 31 December 2008 2008 outstanding balance Georgia Transit 79,260 (1,751) Pace Georgia 32,183 (874) BSI Trans 26,545 (890) Rail Trans Group 14,581 (181) KavkasiaTrans 9,472 (437) Energy Invest 8,577 (37) Barvil Georgia 7,567 (86) Mika Georgia 7,222 (236) Sokar Georgia Petroleum 6,541 64 Apaven 4,977 (360)

196,925 (4,788) 41

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

The Groups ten largest customers in terms of sales for the year ended 31 December 2007:

Sales for 31 December 2007 2007 outstanding balance Georgia Transit 99,233 62 Pace Georgia 27,204 (1,182) International Railway Expedition 8,794 44 Rail Trans Group 6,784 (475) Mika Georgia 6,574 (256) Intertrans 5,300 (150) Castor Nautical Trading 5,036 (198) Apaven 5,014 (396) Energy Invest 4,846 (255) Mezhtrans Service 3,569 (1)

172,354 (2,807)

The summary below shows outstanding balances and the turnover of top five counterparties as at 31 December 2008

31 December 2008 2008 Outstanding Sales balance Railway of Turkmenistan 6,831 3,809 Haidelberg Caucasus 3,512 9,775 Railway of Azerbaidjan 1,747 4,099 Tbilisi Central LLC 1,683 746 Railway of Uzbekistan 1,490 477

15,263 18,906

The summary below shows outstanding balances and the turnover of top five counterparties as at 31 December 2007

31 December 2007 2007 Outstanding Sales balance Moravia Georgia 2,446 - Alioni 1,749 - Georgian Sugar 1,082 111 Silk Road Group 926 122 Inter 580 197

6,783 430

Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. The Groups liquidity position is carefully monitored and managed. The Group has in place a detailed budgeting and cash forecasting process to help ensure that it has adequate cash available to meet its payment obligations.

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

An analysis of the liquidity risk of financial liabilities as of 31 December 2008 was as follows:

Up to 3 months to 6 6 month to 1 More then 1 Maturity Total 3 months month year year undefined Trade accounts payable 28,691 - 561 2,568 - 31,820 Short-term borrowings and current portion of long term loan 6,678 - 11,701 - - 18,379 Other liabilities 6,492 - - - - 6,492 Long-term loan - - - 3,701 - 3,701

Total 41,861 - 12,262 6,269 - 60,392

An analysis of the liquidity risk of financial liabilities as of 31 December 2007 was as follows:

Up to 3 months to 6 6 month to 1 More then 1 Maturity Total 3 months month year year undefined Trade accounts payable 24,563 - - - - 24,563 Short-term borrowings and current portion of long term loan 2,064 - 1,768 - - 3,832 Other liabilities 105,905 - - - - 105,905 Long-term loan - - - 7,068 - 7,068

Total 132,532 - 1,768 7,068 - 141,368

35. COMMITMENTS AND CONTINGENCIES

Capital commitments

As at 31 December 2008 and 2007 the Group had capital commitments as follows.

31 December 31 December 2008 2007

Within 1year 62,207 30,044 Longer than 1 year and not longer than 5 years - - Longer than 5 years - -

Total 62,207 30,044

Capital commitments are primarily the construction of stations in Batumi, Poti and Zestafoni; modernisation of rail track infrastructure; modernisation of wagons; reconstruction of Railway Bridge in Khobi, locomotives and wagon capital repairs.

Contingent Liabilities

31 December 31 December 2008 2007

Litigation - 2,099

Total - 2,099

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

Contingent assets

31 December 31 December 2008 2007

Taxes 32,403 32,403 Litigation 24,461 24,433

Total 56,864 56,836

Operating environment

The Groups principal business operations are within Georgia. Due to the recent conflict between Georgia and the Russian Federation, the business environment is uncertain and may be subject to rapid change. The Groups operations and assets could be at risk due to negative changes in the political, economic or business environment within Georgia and between Georgia and the Russian Federation. These consolidated financial statements do not contain any adjustments, if any, that may arise from the realisation of this uncertainty.

Leasing agreements

Operating leases relate to the investment property owned by the Company with lease terms of between 10 to 50 years. The lessee does not have an option to purchase the property at the expiry of the lease period.

The property rental income earned by the Group from its investment property, all of which is leased out under operating leases, amounted to GEL 2,342 thousand (GEL 1,682 thousand in 2007).

As at 31 December 2008 and 2007, non-cancellable operating lease receivables of the Group were as follows:

31 December 31 December 2008 2007

Within 1year 3,903 3,800 Longer than 1 year and not longer than 5 years 17,876 17,579 Longer than 5 years 85,959 85,404

Total 107,738 106,783

Litigation

The Group is involved in litigations and other claims that are in the ordinary course of its business activities. Management believes that the resolution of matters, other than the matters already provided for, refer note 28, will not have a material impact on its financial position or operating results.

GEORGIAN RAILWAY LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (in Georgian Lari and in thousands)

Taxation

The Georgian tax authorities are increasingly directing their attention to the business community as the result of overall economic environment in Georgia. Because of that, local and national tax environment in Georgia is constantly changing and is subject to inconsistent application, interpretation, and enforcement. Non-compliance with Georgian laws and regulations can lead to the imposition of severe penalties and interest. Future tax inspections could result in additional commitments being revealed, which do not comply with the Groups tax records. Such commitments could be represented by taxes, penalties, and interest and their amounts could be material. While the Enterprise believes that it has complied with local tax legislation, there have been many new tax laws introduced in recent years, which are not always clearly written.

36. EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE

Recent volatility in global and Georgian financial markets

In 2009 a number of major economies around the world have continued to experience volatile capital and credit markets. A number of major global financial institutions have been taken over by other financial institutions and/or supported by government funding. As a consequence of the recent market turmoil in capital and credit markets both globally and in Georgia, notwithstanding any potential economic stabilisation measures that may be put into place by the Georgian government and the National bank of Georgia, there exists as at the date these consolidated financial statements are authorised for issue economic uncertainties surrounding the continual availability, and cost, of credit both for the Group and its counterparties, the potential for economic uncertainties to continue in the foreseeable future and, as a consequence, the potential that assets may be not be recovered at their carrying amount in the ordinary course of business, and a corresponding impact on the Groups profitability.

In June 2009, the Company signed agreement on transfer to Vagonmshenebeli Company LTD receivable from Eleqtrovagonshemketebeli Factory JSC at the amount of GEL 30,798 thousand. And TBC Bank JSC, Bank Republic JSC and Bank of Georgia JSC transferred their receivable rights (by factoring) with Eleqtrovagonshemketebeli Factory JSC to the Company at the total amount of GEL 30,798 thousand. Therefore, the Company takes on the liability of paying the receivables amount of GEL 30,798 thousand to the Banks. In case if payment to any of the banks becomes overdue for more than 60 days, or the payment schedule is violated twice, banks are permitted to cancel the agreement and demand remuneration of the unpaid amount immediately. In addition to all these conditions, all Eleqtrovagonshemketebeli Factory JSC property mortgage rights shall be transferred to the Company and appropriate agreements shall be concluded with the Factory. In turn, the Company mortgages its own real estate (land and buildings), located at Queen Tamar Avenue, Tbilisi.

In July 2009, the Company signed agreement with Eleqtrovagonshemketebeli Factory JSC on netting off mutual receivables at the amount of GEL 3,345. Besides, the Company transfers the right to demand this amount from Eleqtrovagonshemketebeli Factory JSC to Vagonmshenebeli Company LTD, along with mortgaging rights. Hence, Vagonmshenebeli Company LTD becomes listed, as a secured creditor.

37. APPROVAL OF CONSOLIDATED FINANCIAL STATEMENTS

These consolidated financial statements were approved by the management and authorised for issue on 7 December 2009.

THE COMPANY

Georgian Railway LLC Tamar Mephe av. 15 Tbilisi, 0112 Georgia

FISCAL AGENT AND PRINCIPAL PAYING REGISTRAR AND PAYING AND AND TRANSFER AGENT TRANSFER AGENT

Citibank, N.A. Citigroup Global Markets Deutschland AG & Co. Citigroup Centre KGaA Canada Square, Canary Wharf Reuterweg 16 London E14 5LB 60323 Frankfurt United Kingdom Germany

LEGAL ADVISERS

To the Company as to English law To the Company as to Georgian law

Dewey & LeBoeuf BLC (Professional Legal Services) No.1 Minster Court 4, Gudiashvili Square Mincing Lane Tbilisi, 0105 London EC3R 7YL Georgia United Kingdom

To the Joint Lead Managers as to English law To the Joint Lead Managers as to Georgian law

Linklaters LLP BGI Legal One Silk Street 18 Rustaveli Avenue, II Floor London EC2Y 8HQ Tbilisi, 0108 United Kingdom Georgia

AUDITORS OF THE COMPANY

The Tbilisi branch of KPMG CIS Limited 6 Ketagurov Street Tbilisi, 0102 Georgia

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