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AFI Development Annual Report

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					                          AFI Development PLC Annual Report 2010


Contents

Section 1: Executive Summary

Section 2: Chairman‘s Statement

Section 3: Executive Director‘s Statement

Section 4: Principal Risks and Uncertainties Affecting the Company

Section 5: Operational Review
        Our Market
        Our Strategy
        Our Portfolio

Section 6: Board of Directors and Corporate Governance

Section 7: Financial Statements
        Management Discussion and Analysis
        Audited Report and Consolidated Financial Statements
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Section One: Executive Summary

MISSION STATEMENT


The mission of AFI Development is to be one of the leading property developers focused on
Moscow, Russia. Our key priority is timely execution of existing projects to achieve the best return
for our shareholders. AFI Development aims to achieve this objective through its long standing
real estate investment experience, qualified local staff and flexible and structured approach to
project management, coupled with the highest standards of design, construction and quality of
customer service.



Developments during 2010
       Significantly expanded portfolio of completed projects following completion of AFIMALL
        City (formerly Mall of Russia) with approximately 75% of the retail shops in the Mall let to a
        wide mix of tenants.
       Aquamarine Hotel on Ozerkovskaya Embankment, which was opened at the end of 2009,
        started its operations in the beginning of 2010 and achieved high levels of occupancy by
        year end.
       Completion of Paveletskaya I Office Complex with significant progress on pre-leasing.
       Significant progress on development at the fully-financed Ozerkovskaya Embankment
        Phase III project which remains on track for completion in 2011.
       Commencement of development of the Kalinina Hotel in Zheleznovodsk following
        completion of the tender for, and appointment of, the project‘s general contractor and
        approval of the full development budget of US$20 million. Full financing for the project was
        secured through a Russian rouble loan from Sberbank.

Market landscape
       2010 was a turning point in the Moscow real estate sector as demand, rental levels and
        valuations returned to growth.
       Prime rents in Moscow were among the highest in Europe following a 5% increase in
        2010. Prime base rates are now the most expensive in Europe, at US$4,000 per sqm per
        year (around 10% higher than London).

       Effective vacancy rate for the highest quality office space in Central Moscow is at a very
        low estimated level of 5% with take-up rates for modern office space up by 82% over
        2009. The level of prime base rents is one of the highest in Europe, at US$ 900 per sqm
        per year, only exceeded by Paris and London, increasing by 29% in 2010.
       Residential real estate remains in high demand, reflected in the return of elite residential
        segment volumes to pre-crisis levels (430 apartments per annum) and prices to 25%
        below pre-crisis levels.
       Economic growth is creating demand for quality space that is currently lacking and supply
        is not yet coming forward in order to rebalance the market in the coming years. If recent
        positive economic trends are sustained, demand will expand at an even faster rate,
        leading to further upward pressure on values.

       Given its position as the country‘s financial and commercial centre, Moscow is expected to
        benefit from the overall improvement in market conditions going forward, with higher
        growth in all real estate segments expected compared to other parts of the country.

Strategy

       Management‘s priority is to generate a return for shareholders through the development of
        real estate projects with a current focus on Moscow. In 2010, we continued to focus on
        developing our fully-funded core projects including AFIMALL City, Ozerkovskaya
        Embankment (Phase III), Paveletskaya Office Complex and Kalinina Hotel.
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       Our success at bringing projects to completion in 2010 means that we have been able to
        realise value through sales, especially of residential properties, with seven apartments
        sold at the Four Winds and eighteen at the Ozerkovskaya Embankment Phase 2
        developments. Our expectation in the medium-term is that the Moscow real estate market
        will continue to offer one of the highest development potentials in Europe due to its size
        and its position as the largest financial centre in Russia, with high volumes of business
        activity and one of the largest capital centres in Europe. We therefore plan to maintain our
        development focus on Moscow until market conditions improve further and at the same
        time continue to review our land bank outside Moscow and reactivate select projects
        based on availability of financing and strength of demand.

Premium listing on the London Stock Exchange
       The Company obtained a Premium Listing of its B shares on the London Stock Exchange
        (―Listing‖), which commenced trading on 5 July 2010 under the ticker AFRB, the first
        company focused on Russian real estate to obtain such a listing.
       The Company‘s commitment to corporate governance was reiterated through the
        appointment of a further two independent non-executive directors, Michael Sarris and
        Panayiotis Demetriou, to the Board of Directors in 2010.

2010 Financial highlights

       Adjusted Net Asset Value per share of US$1.65, up by 7.1% from US$1.54 as at 30 June
        2010 and 1.4% from US$1.62 as at 31 December 2009.
       Net Asset Value of US$1.73 billion, up 1.4% from US$1.70 billion as at 31 December
        2009 (based on the valuation of our projects portfolio independently verified by Jones
        Lang LaSalle LLC and project costs).
       Investment portfolio valued at US$2.31 billion as at 31 December 2010, an increase of
        20% since the last valuations carried out on 31 December 2009 and 31 May 2010 of
        US$1.92 billion.
       Profit for the year of US$25.88 million in comparison to a loss of US$2.66 million in 2009.
       US$93.92 million gain from revaluation of investment portfolio as opposed to a gain of
        US$38.92 million in 2009 driven mainly by revaluation of AFIMALL City (up by US$96.23
        million), Ozerkovskaya phase III (up by US$66.65 million) and Four Winds (up by
        US$20.01). The Company decided to write-off the Kuntsevo project (US$79.89 million)
        due to project uncertainties.

       Strong cash position retained at US$129.84 million and the Company continues to access
        debt financing for its development projects.



Forward--looking Statements
This document and the documents following may contain certain ―forward-looking statements‖ with
respect to the Company‘s financial condition, results of operations and business, and certain of the
Company‘s plans and objectives with respect to these items.
Forward-looking statements are sometimes, but not always, identified by their use of a date in the
future or such words as ―anticipates‖, ―aims‖, ―due‖, ―could‖, ―may‖, ―should‖, ―expects‖, ―believes‖,
―intends‖, ―plans‖, ―targets‖, ―goal‖ or ―estimates.‖ By their very nature forward-looking statements
are inherently unpredictable, speculative and involve risk and uncertainty because they relate to
events and depend on circumstances that will occur in the future.
There are a number of factors that could cause actual results and developments to differ materially
from those expressed or implied by these forward-looking statements. These factors include, but
are not limited to, changes in the economies and markets in which the Company operates;
changes in the regulatory and competition frameworks in which the Company operates; changes
in the markets from which the Company raises finance; the impact of legal or other proceedings
against or which affect the Company; and changes in interest and exchange rates.
Any written or verbal forward-looking statements, made in this document or made subsequently,
which are attributable to the Company or persons acting on their behalf are expressly qualified in
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their entirety by the factors referred to above. The Company does not intend to update any
forward-looking statements.
                                                                                                    4


Section Two: Chairman’s Statement



I am pleased to report that 2010 has been a year of significant achievements for AFI
Development. Against the background of an improving real estate sector in Russia, we
demonstrated our position as one of the strongest operators in the Russian property development
sector through our ability to complete and progress projects across the breadth of our portfolio. In
addition to bringing projects to completion, including our major AFIMALL City development, and
advancing other developments to their final stages, we continued residential sales and opened a
four star hotel.

After two difficult years when Moscow property markets felt the impact of the global financial crisis,
the market‘s recovery gathered pace in 2010. The recovery of the Russian economy has directly
influenced the Moscow property market as rental levels have started to rise again, increasing by
up to 15% for retail properties in 2010. The vacancy rate for Moscow shopping centres averaged
7% through 2010. The office segment slowed considerably during the crisis, but we now see high
demand for quality Class A space and rental levels have returned to growth. Base rates in
Moscow continue to be among the highest in Europe. At the same time, we have observed
increased interest in Moscow among domestic and international real estate investors.

As our progress in 2010 and strong market position demonstrate, only developers with high quality
projects in good locations and good relationships with lenders have been able to come through the
last few years able to advance their developments effectively.

Our projects are strongly positioned within the Moscow market. They consist of quality
developments in well--chosen locations and thus benefit from the high levels of demand for such
properties, which remain in short supply. On this basis, we are implementing our long-term
strategy, focused on Moscow and differentiating between completed developments to hold and to
sell. We intend to retain our high quality commercial properties, growing our commercial portfolio
and generating cash flow, while we will sell our residential developments.

The success of our projects has been reflected in our financial performance. The Company
returned to profitability in 2010 and maintained a strong cash position with approximately US$130
million at year-end. Reflecting the recovery in the real estate sector. during 2010, Net Asset Value
grew by 1.4% and total revenues increased by 19% to US$75 million.

AFI Development is well placed among Russian developers, with its ability to realise major
projects in the heart of Moscow. In 2010, we obtained a Premium Listing for the Company on the
London Stock Exchange, becoming the only company focused on Russian real estate
development to have such a Listing.

As part of our commitment to strengthen our corporate governance, we have appointed a further
two independent directors, Michael Sarris and Panayiotis Demetriou. Michael and Panayiotis bring
to the Board a high level of experience from their backgrounds at the World Bank and the
European Parliament, respectively.

These appointments increased the number of independent directors on the Company‘s Board to
five and consequently the majority of the members of the Board of Directors are independent non-
-executive directors. On behalf of the Board, we welcome their appointments and also wish to
record the thanks of the Board to Nadav Grinshpon and Avraham Barzilay, who resigned as
directors in 2010, having made a significant contribution to the growth of the Company in recent
years.

Following the debt restructuring performed by our parent company, Africa Israel Investments Ltd,
and its bondholders, the free float of the company has increased to 36%, which is expected to
benefit all our shareholders through the potential for increased liquidity in our stock.

During our ten years of operating in Russia we have shown our capacity to deliver large--scale
developments that are transformative of their local environments. AFI Development is proud to be
a part of building Moscow as a leading global centre for the 21st Century and has already
completed real estate projects with a combined total of over 400,000 sqm of commercial and
residential space. Amongst these is AFIMALL City, our largest project, placing us at the heart of
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Moscow‘s new financial district, which is less than half completed, but already attracts over 50,000
workers and visitors daily.

We see many more years of growth ahead for Moscow and intend to be present in the market for
the long-term, bringing forward major developments that meet the evolving needs of the city. We
take our responsibilities as a developer very seriously and insist on the highest standards from our
employees and contractors, so that AFI Development makes a positive contribution to the living
and working environment of Moscow‘s inhabitants.

We look forward to 2011 as another year of growth in the Moscow property sector. We anticipate a
significant level of rental revenue this year coming from our newly opened retail project AFIMALL
City. We intend to continue the development of our core projects and selectively activate new
projects within our pipeline, ready to meet demand at the right time. We believe we are well
positioned within the Moscow real estate sector and on this basis we will create value for all our
shareholders. In addition, we remain committed to further strengthening our corporate governance
policies and enhancing our internal controls and disclosure procedures.

We have an established track record as a developer of major projects but increasingly we will be
positioned as the owner of completed high quality real estate developments in central Moscow.
We intend to grow our portfolio of revenue generating properties in the coming years.

On behalf of the Board of Directors of AFI Development I would like to thank all our shareholders,
customers and employees for their support of the Company. As we look around Moscow we can
see the results of our work and co-operation taking shape as part of the city‘s commercial and
residential landscape. AFI Development intends to be part of Moscow‘s future, to the benefit of all
its stakeholders.
                                                                                                    6


Section Three: Executive Director’s Statement


The Company demonstrated in 2010 its position as one of the strongest operators in the Russian
property development sector through an ability to complete and progress projects across the
breadth of our portfolio. We have completed projects, continued residential sales and commenced
operation of a four star hotel which opened at the end of 2009.

Our projects are strongly positioned within the Moscow market, being quality developments in
well--chosen locations and benefiting from the high levels of demand for such properties, which
remain in short supply.

With the passing of the global financial crisis, the Moscow real estate sector has started to grow
again, interest rates are falling and banks are expanding their lending portfolios. However, recent
years have tested Moscow‘s developers and only those companies that emerged successfully
from the global financial crisis are able fully to take advantage of this new situation. AFI
Development has managed its way through all these challenges and stands with its reputation and
relationships enhanced. Now, as activity in the market revives, we are able to move ahead in a
very competitive manner.

On this basis we are implementing our long term strategy and differentiating between completed
developments to hold and to sell. We intend to retain our high quality commercial properties,
growing our commercial portfolio and generating cash flow, while we will sell our residential
developments.

Portfolio Highlights - 2010

AFIMALL City
Our major accomplishment in 2010 was the completion of construction of AFIMALL City. With a
total gross building area (GBA) of nearly 180,000 sqm, and gross leasable area (GLA) of 107,000
sqm, occupied by a shopping gallery of nearly 400 shops and a 11-screen movie theatre and with
a number of additional outstanding leisure facilities, AFIMALL City is one of Europe‘s largest and
most ambitious retail developments in recent years. AFIMALL City introduces a new standard of
quality to the Russian retailing sector and will offer visitors a combined shopping, food and
entertainment experience unmatched by any one location in Moscow.

On March 25, 2011, we reached a non--binding understanding with the Moscow City
administration regarding the purchase from the City of Moscow of its 25% share in AFIMALL City
and 2,700 parking lots adjacent to AFIMALL City, for a total consideration of approximately US$
310 million. This is a substantial achievement which will allow us to not only complete the fit-out of
the parking facility to make it fully available to customers, but also provide us with 100% of the
rental income from this highly promising real estate development.

Ozerkovskaya Embankment
The Aquamarine Hotel officially opened on Ozerkovskaya Embankment in 2010. As a four star
hotel in a key location, it has seen occupancy levels of up to 70% for its 159 rooms and is
positioned in the upper mid scale segment, the fastest growing sector of the Moscow hotel market.

Paveletskaya
Construction at the Paveletskaya Business Park is now completed and is expected to open
shortly.

On March 22, 2011, we leased the Paveletskaya Office Complex to a single tenant ZAO
GREENATOM, a subsidiary of the State Atomic Energy Corporation ROSATOM. An 11-month
lease agreement was signed with ZAO GREENATOM, which will roll over a 3-year period once the
ownership certificate has been obtained, which is expected before the end of the year. The lease
will yield annualised revenue of US$4.7 million, excluding VAT.

Ozerkovskaya Embankment Phase III
Our Ozerkovskaya Embankment Phase III project is expected to be completed this year on
schedule. During 2010, the Company secured financing for the final stages of the project in the
form of a loan from Sberbank of US$74 million. Negotiations with potential tenants are now
intensively underway.
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Tverskaya Zastava Shopping Centre
On March 25, 2011, the Company announced that it had reached a non-binding understanding
with the Moscow City administration to transfer its development rights in the
 Tverskaya Zastava Shopping Centre to the City of Moscow in exchange for being fully
compensated for its development costs incurred in the project to date. Such compensation may
take the form of the City of Moscow granting additional building rights for the Company's other
projects. The City of Moscow intends to convert the retail space into an underground parking
 facility at its own expense.

As part of the non-binding understanding reached with the City of Moscow, it is intended that AFI
Development will remain the owner of the projects surrounding Tverskaya, equating to nearly
350,000 of commercial and residential space. It is also intended that such projects will retain their
key development criteria and it is the Company's understanding that the current planning
documentation will remain in place.

Kossinskaya
In August 2009, this completed project was sold to a third party for US$195 million, with the
Company receiving approximately US$70 million by 31 December 2009. During 2010, the buyer
served AFI Development with a warrant for indictment, submitted in the District Court of Nicosia,
Cyprus, whereby the buyer has demanded, inter alia, repayment of approximately US$25 million
and approximately US$47 million out of the purchase price, reimbursement in the amount of
approximately US$17 million for damages and additional reimbursement of US$2.5 million per
each month of delay in the aforementioned payments. As of the date of this statement, the buyer
has submitted a statement of claim, but has not yet submitted any supporting documentation in
relation to these claims. AFI Development intends to serve its response within the time frames set
forth under the applicable law. According to the legal advisors of the Company, the chances of
defending the claim are more than 50%. Nonetheless, AFI Development is currently negotiating
with the buyer regarding possible settlement options.

Kalina Hotel -Zheleznovodsk
Inspired by the success of Plaza Spa in Kislovodsk, the Company started the development of
another similar project in the Russia‘s southern region in the city of Zheleznovodsk: the Kalina
Hotel. The project envisages renovation of an existing building to a 3--star hotel with sanatorium
facilities.

During 2010, AFI Development completed a tender for and appointed the project‘s general
contractor and approved the full development budget of US$20 million. Full financing for the
project was secured through a Russian rouble loan from Sberbank.


Valuation

As at 31 December 2010, Jones Lang LaSalle LLC (―JLL‖), our independent appraisers, valued
our portfolio of yielding properties at US$161.65 million, our portfolio of commercial and residential
projects under development at US$1,605.20 million, our portfolio of residential properties at
US$58.10 million, our hotel portfolio at US$97.90 million and our land bank portfolio at US$385.85
million.

Consequently, the total value of our investment portfolio, as valued by JLL, as at 31 December
2010, is US$2.31 billion. This figure represents a 20% increase in the value of our portfolio since
the last valuations by JLL as at 31 December 2009 and 31 May 2010.

Major drivers of the revaluation include the positive progress achieved on our major project
AFIMALL City, which was fully constructed by the end of 2010 and 75% pre-leased, progress on
Ozerkovskaya and Paveletskaya projects as well as increased prices for our remaining residential
space for sale at Four Winds and Ozerkovskaya Embankment Phase II. Improving market
conditions that we observed in Russia in 2010 also had a positive influence on our appraiser‘s
views of rent levels and property yields in Moscow. The aforementioned increase of the total value
of our portfolio takes into account the write--off of the Kuntsevo project, along with several
additional smaller projects.

Management‘s priority is to generate a return for shareholders through the development of
Moscow real estate projects. Our success at bringing projects to completion in 2010 means that
we have been able to realise values through sales, especially of residential properties. Sales of
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premium class residential property continued, with seven apartments sold at the Four Winds and
eighteen at the Ozerkovskaya Embankment Phase II developments.

Throughout our existence we have maintained a conservative stance on valuations. After a period
of declining valuations following the global financial crisis we now see signs of a sustained
recovery enabling us to realise value for shareholders through growth in asset value in the coming
years.

Looking Forward

We believe 2011 will represent new opportunities in the Moscow real estate sector and
consequently, as property value and rental levels have improved we are reactivating projects from
our extensive land bank, such as Bolshaya Pochtovaya. We intend to commence work on the
residential project at the Paveletskaya development, on three new projects adjacent to Tverskaya
Zastava and on Otradnoye, a residential development in the Moscow region. Our land bank
represents a pipeline of potential projects into the future, with a focus on attractive Moscow
locations. Our intentions for future developments as stated above are subject to market conditions
at the relevant time, and our ability to obtain financing for these projects.

We welcome the focus of the new Mayor of Moscow on upgrading the city‘s infrastructure, which
will be positive for our existing and planned developments. This focus will benefit companies with
existing portfolios of projects and track records of accomplishing complex district developments,
so we believe this objective fits very well with AFI Development‘s approach.

We have calibrated the implementation of our project portfolio against market demand and returns,
so that it consists of different groups of developments, defined by their stage of completion.
Construction work on developments such as AFIMALL and the Paveletskaya Business Park has
finished and these projects will be income generating in 2011. Construction work is continuing at
developments such as Ozerkovskaya Embankment and Tverskaya Zastava.

AFI Development retains the financial strength and flexibility to adapt to market conditions as they
evolve. Its leverage remains relatively low, with a debt to equity ratio of 25%. This is due to the
Company‘s ability to balance liquidity from a number of sources, including cash proceeds from the
IPO and sales of completed projects, as well as bank loans to projects with an outstanding
balance of approximately US$453 million (at the Rouble/Dollar exchange rate as at 31 December
2010). All of our current projects are fully-funded to completion through secured credit facilities
from a diverse range of Russian and international banks, while we retain strong liquidity with cash
holdings of approximately US$130 million. Our ability to secure credit financing even in recent
uncertain conditions is testimony to the degree of trust AFI Development has built up within the
banking sector.

Our strategy is bringing results, creating value and generating a return on our assets. With our
resources and our understanding of the market, we will continue to realise the opportunities for
value creation in 2011 and the coming years.
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Section Four: Principal Risks and Uncertainties Affecting the Company

This section presents information about the Company‘s exposure to each of the risks listed below,
and the Company‘s objectives, policies and processes for measuring and managing risks.

Risk management framework

The Board of Directors has overall responsibility for the establishment and oversight of the
Company‘s risk management framework and is responsible for developing and monitoring the
Company‘s risk management policies.

The Company‘s risk management policies are established to identify and analyse the risks faced
by the Company, 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 Company‘s activities. The Company, through its training and management
standards and procedures, aims to develop a disciplined and constructive risk control environment
in which all employees understand their roles and obligations.

The Company‘s Audit Committee overseas how management monitors compliance with the
Company‘s risk management policies and procedures, and reviews the adequacy of the risk
management framework in relation to the risks faced by the Company. The Company‘s Audit
Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular
and ad hoc reviews of risk management controls and procedures, the results of which are reported
to the Audit Committee. Further information relating to the Company‘s Risk Management
Processes is set out in ―Corporate Governance‖.

Credit risk

Credit risk is the risk of financial loss to AFI Development if a customer or counterparty to a
financial instrument fails to meet its contractual obligations and arises principally from the
Company‘s receivables from customers and investment securities.

Trade and other receivables

Financial assets that are potentially subject to credit risk consist principally of trade and other
receivables. The carrying amount of trade and other receivables represents the maximum amount
exposed to credit risk. Credit risk arises from cash and cash equivalents as well as credit
exposures with respect to rental customers, including outstanding receivables. The Company has
policies in place to ensure that, where possible, rental contracts are made with customers with an
appropriate credit history. Cash transactions are limited to high-credit-quality financial institutions.
The utilisation of credit limits is regularly monitored.

AFI Development has no other significant concentrations of credit risk. Although collection of
receivables could be influenced by economic factors, the management team believes that there is
no significant risk of loss to the Company.

Investments

The Company limits its exposure to credit risk by investing only in liquid securities and only with
counterparties that have a high credit rating. Management actively monitors credit ratings and
given that the Company only has invested in securities with high credit ratings, management does
not expect any existing counterparty to fail to meet its obligations, except as disclosed in note 33
to the Company's Audited Financial Statements for 2010.
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Guarantees

The Company‘s policy is to provide financial guarantees only to wholly-owned subsidiaries. As at
31 December 2010, there was one guarantee outstanding under the non-revolving credit line from
VTB Bank for RUR 8,448 million and one under the Joint Stock Commercial Savings Bank of the
Russian Federation (―Sberbank‖) loan for US$20 million.

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they
fall due. AFI Development‘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 Company‘s reputation.
Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding
through an adequate amount of committed credit facilities and the ability to close out market
positions. Due to the dynamic nature of the underlying businesses, the Company aims to maintain
flexibility in its funding requirements by keeping cash and committed credit lines available.

AFI Development‘s liquidity position is monitored on a daily basis by the management, which takes
necessary actions if required. The Company structures its assets and liabilities in such a way that
liquidity risk is minimised.

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 Company‘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 available returns for shareholders.
We are exposed to market risks from changes in both foreign currency exchange rates and
interest rates. We do not use financial instruments, such as foreign exchange forward contracts,
foreign currency options and forward rate agreements, to manage these market risks. To date, we
have not utilised any derivative or other financial instruments for trading purposes.

Interest rate risk

We are subject to market risk deriving from changes in interest rates, which may affect the cost of
our current floating rate indebtedness and future financing. As of 31 December 2010, 80% of our
indebtedness was fixed rate. For more detail see note 23 to our consolidated financial statements.

Currency risk

The Company is exposed to currency risk on future commercial transactions, recognised monetary
assets and liabilities and net investments in foreign operations that are denominated in a currency
other than the respective functional currencies of AFI Development‘s entities, primarily the US
Dollar and Russian Rouble. The currency in which these transactions are primarily denominated is
the Euro.

Operational risk

Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated
with the Company‘s processes, personnel, technology and infrastructure, and from external factors
other than credit, market and liquidity risks such as those arising from legal and regulatory
requirements and generally accepted standards of corporate behaviour. Operational risks arise
from all of the Company‘s operations.

The Company‘s objective is to manage operational risk so as to balance the need to avoid
financial losses and damage to the Company‘s reputation with overall cost effectiveness.

The primary responsibility for the development and implementation of controls to address
operational risk is assigned to senior management within each business unit. This responsibility is
supported by the development of overall Company standards for the management of operational
risk. Compliance with Company standards is supported by a programme of periodic reviews
undertaken by way of internal audits. The results of the internal audit reviews are discussed with
the management of the business unit to which they relate, with summaries submitted to the Audit
Committee and senior management of the Company. The company has also outsourced its
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internal audit process to a certified accountant in Israel and such internal auditor is responsible for
the recommendation of an auditing plan to the Audit Committee.
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Section Five: Operational Review

Our Market
During 2010, real growth of the Russian economy outpaced the rates seen in 2009 by 4%1. The
improving labour market, positive income growth and the increased volumes of consumer
financing led to a 4.45% year-on-year increase in retail sales over the period2. Rising real
disposable income has had a direct impact on all retailers and is expected to benefit non--food
retailers in particular, as discretionary spending on items such as clothing, furniture and consumer
electronics increases. In the context of these trends, Russian retailers are continuing with their
accelerated store rollouts.

In the commercial real estate sector 2010 represented a turning point in the market, across all
segments, including hotels and warehouses. Investor interest is strongly focused on Moscow, our
core market, which represented 94% of current Russian real estate investment. With the total
volume of investment transactions standing at US$3.5 billion3, Moscow is the third largest real
estate market in Europe, after London and Paris. The large majority of these transactions (more
than 85%) took place within the office sector.

However, the majority of international investors remained cautious in 2010 and, as a result, FDI
rates remained well below those seen in 20084. Nevertheless, the return of foreign capital to the
market is expected in 2011 driven by rising rental rates, shrinking vacancies and increasing
availability of quality premises for sale.

Throughout 2010, as activity grew, the estimated average capitalisation rates fell from 13% across
the sector at the beginning of the year to 9% for offices, 10% for retail and 10.5% for the
warehouse and industrial segment5. This trend is expected to continue in 2011. Given its position
as the country‘s financial and commercial centre, Moscow in particular is expected to benefit from
the overall improvement in market conditions going forward, with higher growth in all real estate
segments expected compared to other parts of the country.



                                                                                Russia’s macro data annual and forecast

                             units           2006        2007         2008        2009        2010       2011F         2012F

    Nominal GDP            US$/bn             990        1 300       1 667       1 232       1 465        1 676         1 849

    Real GDP growth           %                8.2         8.5          5.2        -7.9         4.0         4.3           4.5

    GDP per capita           US$           13 295      14 879       16 059      14 925      15 624      16 562         17 731

    CPI (end period)          %                9.0        11.9         13.3         8.8         8.8         8.3           7.0

    Trade balance          US$/mln       139 269      130 915     179 742      111 585     149200       170042     154414
    International
    reserves               US$/mln       303 732      478 762     426 283      439 447     466859       516101     543989
    Exchange rate
    (average)              Rb/US$           27,19        25,58       24,85       31,74       30,38        30,31         30,19
    Lending interest
    rates                     %              10.4         10.0         12.2        15.3       11.5         12.0          11,7




1
  Rosstat preliminary estimates
2
  For the period of January to November 2010, Russian Real Estate Investment Market Q4 2010, Jones Land LaSalle
3
  Marketbeat: An overview of the Russian property market: Q4 2010, Cushman &Wakefield
4
  Marketbeat: An overview of the Russian property market: Q4 2010, Cushman &Wakefield
5
  Marketbeat: An overview of the Russian property market: Q4 2010, Cushman &Wakefield
                                                                                                          13


                                                                                     Source: EIU, February 2011

                                                                      Economic Growth Forecast – Russia

                              units           2010      2011F     2012F     2013F     2014F      2015F

     Real GDP growth            %               4.0        4.3       4.5       4.4       4.3        4.2
     Industrial
     production growth          %               7.6        4.6       4.4       4.3       4.2        4.0
     Gross fixed
     investment growth          %               3.5        7.0       7.8       8.5       9.4       10.0
     Crude oil & NGL
     production             ‘000 b/d        10 090      10 290    10 500    10 730    10 970    11 003



     Natural gas
     production               ktoe         513 231     521 956   531 874   542 511   553 361   564 428
         Unemployment
                  rate          %               7.5        6.8       6.2       5.9       5.4        5.1
     Consumer price
     inflation                  %               8.8        8.3       7.0       6.4       6.0        5.7

                                                                             Source: EIU, February 2011


The fundamentals of supply and demand in the Moscow real estate market are expected to
continue to drive its long-term expansion. Economic growth is creating demand for quality space
that is currently lacking and supply is not yet coming forward in order to rebalance the market in
the coming years.

This undersupply is apparent in all segments. In residential property, higher disposable incomes
and the easier availability of mortgage finance have restored purchase and rental prices, which
have returned to growth. The scale of the Moscow real estate sector is demonstrated by its
population of over 13 million people, making it the largest city in Europe.

Within the office segment both Russian and international companies are seeking more and better
space, as the Russian economy expands and more international businesses seek a Moscow
base. Moscow is already one of the five largest financial centres in Europe and the financial sector
is likely to expand as capital markets develop.

Retailing has been one of the best performing sectors of the Russian economy in recent years.
The fundamental shift to modern shopping formats and the release of pent-up consumer demand
through higher incomes has led to huge expansion of the sector. The Russian consumer has the
highest per capita incomes in Eastern Europe (at US$ 1,600 per month) and has very active
purchasing habits, spending an average of 68% of income on consumption6. These factors
translate into high levels of income for retail landlords, who typically are able to charge not only
monthly rents but also a percentage of turnover. In addition to the specific factors supporting the
sector in each of its main segments, supply within Moscow will be further constrained in future by
limitations on new urban development in Moscow. This is likely to mean that existing portfolios of
properties within Central Moscow will become even more attractive in terms of demand and
valuations, as new development is encouraged beyond the Third Ring Road in Moscow.

The fundamental character of the market, where a limited pipeline of supply contrasts with
economic growth pushing demand ever higher, creates significant opportunities for developers to
realise value, especially in quality segments in Central Moscow.




6
    Moscow Retail Market Q4 2010, Jones Lang LaSalle
                                                                                                                     14


Retail Real Estate

During 2010, the retail market in Moscow stabilised with increased activity returning to the market
during the second half of the year. Total shopping centre completions for 2010 were equivalent to
391,000 sqm7.

Prime rents8 in Moscow remained among the highest in Europe with a 5% increase registered over
the course of the year9. Following constant levels during the financial crisis, rental rates in the
most successful shopping centres in Moscow started to increase again. Prime base rates are now
the most expensive in Europe, standing at US$4,000 per sqm per year (around 10% higher than
London) and are expected to increase by up to 7% in 2011. Average rents in high--quality
shopping centres are estimated at US$1,200 per sqm per year10

Russian consumer spending has been sustained at high levels relative to total income for several
years, even through the global financial crisis, and is expected to increase in real terms as the
middle class grows. The catch-up of Russian living standards to those in Western Europe creates
demand across all retail segments and increasingly for durable goods and other ―big ticket‖ items,
where Russian households are relatively under-equipped.

Consequently, Moscow retail spending is growing faster than the increase in GDP for the economy
and growing faster than retail spending in the rest of the economy. Despite the significant growth
of recent years, the supply of retail space in Moscow remains modest relative to the size of the
city. Vacancy rates at Moscow‘s shopping centres averaged around 7% at the end of 2010 and
are expected to decline further in 2011 as a result of improving retailer demand and lack of new
projects coming to the market. The global financial crisis created difficulties for many developers
operating in the market, meaning that they lack the financing to complete or initiate retail projects,
further constraining supply, while demand is bolstered by new international retailers looking to
enter the market. 11

In 2011, based on the macroeconomic forecasts, this segment should see continued stable market
conditions with no deterioration in consumer demand.




7
  Moscow Retail Market Q4 2010, Jones Lang LaSalle
8
  Rents for a single unit of 100 sqm GLA located on the ground floor of retail gallery. Rents exclude VAT and OPEX
9
  Moscow Retail Market Q4 2010, Jones Lang LaSalle
10
   Moscow Retail Market Q4 2010, Jones Lang LaSalle
11
   Moscow Retail Market Q4 2010, Jones Lang LaSalle
                                                                                                  15




Office Real Estate
2010 saw a recovery in the office real estate market which registered the highest number of all
investment transactions in the market. With the return of business confidence, average rental rates
saw a positive trend whilst vacancy rates decreased further and the practice of pre--leasing
returned. A significant change took place in the character in the market, as office tenants once
more upgraded their quality requirements; whereas in 2009 the primary concern of tenants was
cost, 2010 saw the revival of demand for quality space, from both Russian and international
companies. Larger companies in particular have been seeking premises and this has been
reflected in the shortage of large space (i.e. above 10,000 sqm).

Total Class A office completions in 2010 represented 295,630 sqm, while vacancy rates for
Moscow stood at 15.2%12. Nevertheless, the effective vacancy rate for the highest quality space in
Central Moscow is very low at an estimated level of 5% and take-up rates for all Class A and B
space in 2010 was very high. A total of 1,463,530 sqm of modern office space was taken up in
201013, the second largest amount in Europe, after Paris. This level of take-up was an increase of
82% as compared to 2009 and approached the pre-crisis record volume of over 1,400,000 sqm in
2007. Despite recent dynamic growth, the overall stock level remains relatively moderate
compared to other major European cities.

Taking Class A and B space together, on a per capita basis the supply of modern office stock in
Moscow is one of the lowest in Europe, behind not only Western European capitals, but also
Warsaw, Prague and Budapest. The level of prime base rents is thus one of the highest in
Europe, at US$ 900 per sqm per year, only exceeded by Paris and London, increasing by 29% in
2010. 14

As the positive economic growth continues to drive demand for quality office space, the supply of
which is not expected to increase in the short-term due to a continued lack of financing, rent levels
are expected to rise further over the course of 2011. The total volume of new modern office space
12
     Moscow Office Market Q4 2010, Jones Lang LaSalle

13
     Moscow Office Market Q4 2010, Jones Lang LaSalle
14
     Moscow Office Market Q4 2010, Jones Lang LaSalle
                                                                                                  16

created by project completions in 2010 was 45% lower than the volume of completions in 2009, as
                                                                                            15
new projects failed to start or conclude, constrained by more difficult financial conditions .




Residential Real Estate
Residential real estate remains in high demand which is reflected in the return of elite residential
segment volumes to pre-crisis levels (430 apartments per annum) and prices to 25% below pre-
crisis levels16.
At the same time, business class volumes in 2010 were 18% higher than in 2009 and prices in
U.S. dollar terms were up by 8% year-on-year. Residential real estate has recovered strongly as
consumer confidence returns and mortgage finance becomes more easily available. As in other
property sectors, the financial crisis reduced the financing available to developers and the effects
of this are now apparent in the reduced supply of new residential projects. Although new
residential building grew rapidly in the pre-crisis period, Russia‘s average living space remains 20-
-30% below the European average and requires significant refurbishment. An estimated additional
                                                                           17
2 billion sqm of housing stock is required to meet the population‘s needs .
With limited supply of high and mid-end properties, low per capita footage and favourable
macroeconomic conditions, a positive price trend is expected in 2011.




15
   Moscow Office Market Q4 2010, Jones Lang LaSalle
16
   Moscow Residential Market H2 2010, Miel
17
   Moscow Residential Real Estate Overview, Q4 2010: IntermarkSavills
Residential prices for newly built residential
                                                 17
                                                                                                    18


Our Strategy
We are focused on developing and redeveloping high quality, integrated large-scale, complex
commercial and residential real estate assets including offices, shopping centres, hotels, mixed-
-use properties and residential projects. As part of our strategy, we aim to sell the residential units
we develop and to lease the commercial properties, whilst not excluding opportunistic sales of
select developments. We are committed to growing our high quality income generating real estate
portfolio.
In addition to being of a large scale and highly complex, our projects are regenerative for their
local environments and involve significant improvements to infrastructure. As such, they increase
the overall value for their neighbourhoods, creating more comfortable living and working
conditions.

Moscow is a rapidly expanding city in an economy that is undergoing a period of sustained growth.
AFI Development has been part of this expansion for the last ten years and aims to develop
projects that meet the needs of a growing, global city. We create new urban environments in the
districts we develop, changing the everyday experience of Muscovites for the better.

During our years of successful operations in Moscow, we have worked closely with the City
authorities. Our complex, multi-use projects incorporate a major infrastructure component, meeting
the needs of the City and the local community by, for example, providing traffic light free roads and
intersections, and underground parking. As such, Moscow‘s authorities have long recognised the
high value added of our projects and we have every confidence in our continued successful
cooperation with the authorities going forward.
Our experienced management team, with strong knowledge and a proven track record of
operating in the Russian market, aims to maintain a diversified portfolio whilst using a flexible,
phased development approach. This enhances our ability to leverage our development platform
and complete our projects on a cost-efficient basis while making our projects cash-generative at
the earliest possible opportunity.

The high quality of our developments enables us to attract the most desirable international and
local tenants on favourable terms. To ensure high retention rates, we aim to sign leases of
increasing length with our tenants and place greater emphasis on on-going tenant relations.

In 2010, we continued to focus on developing our fully-funded core projects including AFIMALL
City (known during the construction phase as the Mall of Russia), Ozerkovskaya Embankment
(Phase III), Paveletskaya Office Complex and Kalinina Hotel Construction of AFIMALL City and
Paveltskaya Office Complex were completed at the end of 2010.

In 2011, we plan to complete the development of Ozerkovskaya Embankment (Phase III) and
Kalinina Hotel, continue development of the Tverskaya surroundings projects and initiate design
and concept development of several projects in Moscow, starting with the multi-use complex on
Bolshaya Pochtovaya residential complex on Paveletskaya and residential complex in Odintsovo
(Otradnoye). For further information relating to these projects see ―Our Portfolio‖ (subject to
market conditions at the relevant time, and our ability to obtain financing for the projects

Our expectation in the medium-term is that the Moscow real estate market will continue to offer
high volume of business activity, a high development potential due to its size, position as the
largest financial centre in Russia and one of the largest capital centres in Europe. As such, we
plan to maintain our development focus on this market until market conditions improve further. At
the same time, we will continue to review our land bank outside of Moscow and reactivate select
projects based on availability of financing and strength of demand.

Our Portfolio




                        Type             Ownership      Completed      GLA/GSA
                                                        (year)         unsold
                                                                       (sqm) for
                                                                       100%

 AFIMALL City           Retail                   75%           2010        107,080
                                                                                                 19

 H2O                   Office                 100%           2006            8,996
 Four Winds Office     Office                  50%           2008          22,043
 Berezhkovskaya        Office                  74%           2006          10,136
 Four Winds            Residential            100%           2008     956 unsold
                                                                     apartments
                                                                       space and
                                                                            37 car
                                                                           parking
                                                                          spaces.
                                                                            (AFID
                                                                            share)
 Ozerkovskaya II       Residential            100%           2008    2,617 sqm
                                                                       of unsold
                                                                     apartments
                                                                      space, 87
                                                                        sqm of
                                                                     commercial
                                                                      space and
                                                                        193 car
                                                                        parking
                                                                        spaces.
                                                                         (AFID
                                                                        Share)
 Aquamarine            Hotel                  100%           2009      159 rooms
 Plaza Spa             Hotel                   50%           2006      274 rooms
 Paveletskaya          Office                                2010          14,035



AFI Development‘s strategy is supported by two pillars. The Company both holds a portfolio of
completed properties and develops new projects.

Real Estate Portfolio (Completed Projects)

AFI Development has acquired a portfolio of quality properties through its own development
activity. In this way, it retains all the development gain from these projects for its shareholders,
maximising current and future capital values of the portfolio.

As the size of our portfolio of completed properties grows, the nature of AFI Development evolves
and the Company has become a significant holder of Central Moscow property as well as an
active developer. Our property holdings will provide us with a stable income stream and we aim to
maximise our revenue through a rigorous focus on landlord-tenant relationships and marketing at
each property. We aim to use effective marketing channels, not only working through international
property consulting firms but also actively advertising through billboards and direct marketing.

AFI Development understands the requirements of Russian and international businesses for their
Moscow properties, both office and retail. We work with them to provide the quality space they
need to realise the growth opportunities of the Russian market. Our retail tenants include global
leaders such as Marks & Spencer, H&M, Uniqlo, American Eagle, Zara and GAP whilst our office
tenants include Morgan Stanley, Barclays Capital, Navtaq, Gefest, Total and Evraz.

While holding properties maximises our long-term capital gain, at the same time we are using the
completed properties to generate cash-flow. We are gradually increasing the length of our leases,
to secure visible cash flows for the coming years. In some cases we have retained unsold
residential units in these properties which will be available for sale to maximise revenue, creating
an income stream into the future.

Where appropriate, we will crystallise capital gains through selective sales of projects. We
constantly monitor the state of the market and judge when the trends in supply and demand are
working to make sales the right strategic option for the Company.

The AFI Development project portfolio produced a significant increase in income in 2010 as
compared to 2009, reflecting the growth of our portfolio and the strengthening of the market.
Rental levels improved across the market and tenants no longer sought rent reductions as had
                                                                                                   20

been the case in the most difficult periods on 2009. Our office developments are fully occupied
with only structural vacancies, reflecting the demand for quality developments, professionally
managed in attractive locations.

Our portfolio expanded with the completion during 2010 of AFIMALL City and the Paveletskaya
Office Complex and the official February 2010 opening of the Aquamarine Hotel which had
achieved a level of 70% occupancy by year end.

The retail units at AFIMALL City have been let at attractive rates to new tenants and are expected
to make a major contribution to cash flow in 2011. In addition, the Paveletskaya Office Complex
was let to a single tenant ZAO GREENATOM, a subsidiary of the State Atomic Energy
Corporation ROSATOM, on 22 March 2011. We consequently expect further increases in revenue
to result from the Real Estate Portfolio for this year.

1. AFIMALL City
  Use                                    Shopping centre
  Gross building area (sqm)              179,930
  Ownership                              75%
  Leasable area (sqm)                    107,080
  Number of stores                       c.400
  Area of the site                       4.4 ha
  % of shops area leased*                75%
  Valuation (75%)* (US$)                 732,400,000

*as of December 31, 2010

About AFIMALL City

Our major accomplishment in 2010 was the completion of construction of AFIMALL City. With a
GBA of nearly 180,000 sqm, and GLA of 107,000 sqm, occupied by a shopping gallery of nearly
400 stores and an 11-screen movie theatre and with a number of additional outstanding leisure
facilities, AFIMALL City is one of Europe‘s largest and most ambitious retail developments in
recent years. The mall introduces a new standard of quality to the Russian retail sector and will
offer visitors a combined shopping, food and entertainment experience unmatched by any one
location in Moscow.

The shopping and entertainment centre is strategically located at the heart of the Moscow City
development project, the Russian capital‘s newest business district, which is the first of its kind in
Russia comprising innovative architectural approaches and multi-functional infrastructure. Moscow
City forms part of an evolving upscale district, with a concentration of consumer spending power.

AFIMALL City is expected to feature the first IMAX cinema in the Moscow city centre, the largest
glass roof in a shopping centre in the world and the first fountain in a Russian mall, whose waters
will reach a height of 30 metres.

AFIMALL City has a high-quality tenant mix, with a wide range of high quality brands. Key tenants
at AFIMALL City include Formula Kino Cinema, Marks & Spencer, H&M, L&G Department Store,
UNIQLO, Snezhnaya Koroleva, Zara, Green Perekrestok Supermarket, Holding Centre, GAP,
New Yorker, Sportmaster, as well as X5, Russia‘s largest retail company, and Eldorado
Electronics, the country‘s leading consumer electronics retailing group. For a number of the
international brands, including Banana Republic and American Eagle, their AFIMALL City outlets
will represent their first stores in Russia, whilst certain retailers, such as Eldorado Electronics,
have chosen AFIMALL City as their flagship location.

About Moscow City
(Source: OJSC “CITY”, Moscow government company managing Moscow International Business
Centre “Moscow-City”)

Moscow City is a unique development scheme set on 40 hectares of land intended to become the
largest business district of Moscow to be built using the most advanced standards of modern
design, energy efficiency and with high attention to the environment.
                                                                                                    21


The development is intended to provide prime quality office and living space, an abundance of
recreational facilities and easy transportation access by metro and train to Sheremetyevo airport to
an estimated 350,000-500,000 residents and visitors.

The complex nature of the project makes this a unique development, not only in Moscow but in the
whole of Russia.

The project will encompass 14 multifunctional complexes with approximately 4 million sqm of
office, retail and residential space. Of this, approximately 1 million sqm of space is currently being
completed with the area already attracting over 50,000 workers and visitors every day. The new
exhibition and conference centre is expected to play host to 2.5 million visitors a year.

                               Site     total area         Completed and     Under             Not started
                                                           operating         construction


  Moscow Authority building    15       806 433                                                806 433
  Capital City                 9        288 680            288 680
  Central Core (AFI Mall, hotel 6,7,8   530 000            180 000           350 000
  and concert hall)
  Naberezhnaya Tower            10      265 602            265 602
  Federation Tower             13       417 589            154 958           262 631
  Eurasia Tower                12       208 264                              208 264
  Northern tower               19       139 323            139 323
  City Palace                  2,3      169 000                                                169 000
  Multifunctional complex      16       430 000                                                430 000
  Imperia Tower                4        281 245                              281 245
  Transport Terminal           11       228 000                                                228 000
  Mercury City Tower           14       158 528                              158 528
  Tower 2000                   n/a      61 057             61 057
  City Exhibition Centre       20       179 612                                                179 612
                                        4 163 333          1 089 620         1 260 668         1 813 045




Continued growth of this strategically placed business district will make AFIMALL City uniquely
positioned to reap the benefits of the increasing population of and growing visitor numbers to the
area.

Progress in 2010

Construction of AFIMALL CITY was completed in early December 2010, following which the
Company applied to the City authorities of Moscow for the final permit necessary to open the mall
to the public. The Company has received all necessary approvals from the City of Moscow
authorities and the technical opening of the mall took place on March 10th 2011.

As a result of successful marketing efforts and the unique nature of the project, approximately
75% of retail shops in the Mall were leased during the year. Rental levels currently stand at up to
US$6,000 per sqm for stores and up to US$12,000 per sqm for kiosks.

At year-end, fit-out works for the retail units were underway with 160 stores due to open during the
course of March-April 2011.

Next Steps
AFI Development is currently in advanced negotiations with potential tenants for the remaining
retail and entertainment space in AFIMALL City. The Company is also responsible for in--house
management of the mall with great emphasis being placed on tenant relations.
                                                                                               22

As development within Moscow City continues, direct access to the mall from the second metro
station ―Mezhdunarodnaya‖ is expected to be completed in 2012.

On March 25, 2011, the Company announced that it had reached a non-binding understanding
with the Moscow City administration regarding the purchase from the City of Moscow of its 25%
share in AFIMALL City and 2,700 parking lots adjacent to AFIMALL City, for a total consideration
of approximately US$ 310 million.


2. Four Winds Plaza
Use                                             Mixed-use office
                                                complex
Ownership                                       50%

Gross building area (sqm)                       31,000

Leasable area (sqm)                             22,043




Valuation as at 31.12.2010 (US$)*               119,300,000



*AFI Development share only

Four Winds Plaza is a modern class A office complex which consists of two 10-torey buildings with
three independent entrances, reception areas and lift blocks. The full leased complex is extremely
well positioned in the heart of Moscow‘s business, commercial and cultural centre.

3. Berezhkovskaya – Riverside Station
Use                                      Business centre

Ownership                                74%

Gross building area (sqm)                11,612

Leasable area (sqm)                      10,259



Valuation as at 31.12.2010 (US$)*        24,600,000


*AFI Development share only

This development consisting of four B+ office buildings is located in the centre of Moscow between
the Garden Ring and the Third Transport Ring.
                                                                                                  23

4. H20 Office Complex
Use                                       Business centre

Ownership                                 100%

Gross building area (sqm)                 10,698

Leasable area (sqm)                       8,996




Valuation as at 31.12.2010 (US$)          15,200,000



H2O Office Complex is a Class B business centre located in a dynamically developing business
area on the border of Moscow's Central and Southern Administrative Districts. The building was
acquired in 2006. It was completely renovated and leased.


5. Paveletskaya Office Complex
Use                                       Business park

Ownership                                 100%

Total area (sqm)                          16,512

Leasable area (sqm)                       14,035



Valuation as at 31.12.2010 (US$)          21,600,000


The overall Paveletskaya Embankment development comprises 10 centrally located commercial
buildings which will be redeveloped into a Class B+ business park and residential complex.
Paveletskaya Office Complex is the first phase of the overall development involving a
reconstruction of a former printing house facility into an office centre. The complex is fully leased
to ZAO GREENATOM, a subsidiary of the State Atomic Energy Corporation, ROSATOM, which
lease will roll over a 3 year lease term.

6. Aquamarine Hotel
  Use                                   Hotel
  Ownership                             100%
  Total area (sqm)                      11,130
  Number of rooms                       159

  Valuation as at 31.12.2010 (US$)      42,800,000


The four-star hotel, which offers a full range of business and leisure facilities, is located in the
historical centre of Moscow, near the Kremlin, and forms part of AFI Development‘s major
Ozekovskaya Embankment development, comprising both office and residential property. The
Aquamarine Hotel is operated by Africa Israel Hotels Ltd. Since it started operating in 2010, the
hotel has achieved occupancy rates of up to 70%.


7. Plaza Spa Hotel
  Use                                   Hotel
  Ownership                             50%
                                                                                               24

  Total area (sqm)                     25,000
  Number of rooms                      275

  Valuation as at 31.12.2010 (US$)*    30,600,000

*AFI Development share only

Plaza Spa Hotel in Kislovodsk is a four star hotel located on a 1.5 hectare plot of land. Operated
by Africa Israel Hotels, it comprises two hotel buildings, a spa, a health and fitness centre, a
swimming pool, saunas, restaurants and conference facilities. Located in the Caucasus mineral
region, the Plaza Spa caters to guests seeking treatments for disturbances of the cardiovascular
and nervous systems, as well as respiratory problems.

8. Aquamarine Residential Complex
  Use                                       Residential

  Ownership                                 50%

  Total area (sqm)                          41,980

  Residential sales area (sqm)              16,711

  Number of apartments                      114




  Valuation as at 31.12.2010 (US$)*,        30,000,000
  2,617 sqm left (AFID share)
*AFI Development share only

The Aquamarine residential complex is located on the Moscow River embankment, not far from
the Kremlin. The development is equipped with multi--level security systems with its own services
and maintenance. The complex also has its own amenities including a courtyard with a
playground, a recreational area, flower garden and lawns, and a 240 sqm pond which is serves as
an ice skating rink in winter.

9. Four Winds Residential Complex
Use                                       Mixed--use residential complex



Ownership                                 50%
Total area (sqm)                          41,364

Residential sales area (sqm)              18,272

Number of apartments                      111

Fitness & Retail sellable area (sqm)      4,595 (sqm)



Valuation as at 31.12.2010 (US$)*         28,100,000

*AFI Development share only which as at the valuation date totals 956 sqm of unsold apartments
space and 37 car parking spaces. Long term leases have been signed in regards to fitness centre
and retail units.

Four Winds is a centrally located luxury residential building in Moscow with 111 apartments
surrounded by retail units, a fitness centre and underground parking.
                                                                                                  25

Development Portfolio (Projects in Progress)
The second major pillar of the Company‘s strategy is the development of new projects from land
bank to completion. At any one point in time the Company aims to balance its revenue generating
portfolio of completed projects with a number of developments in progress, at various stages of
construction, ready to be brought to the market at the right moment.

1. Ozerkovskaya Embankment (Phase III)
  Use                                     Office building

  Ownership                               50%

  Total area (sqm)                        78,647

  Leasable area (sqm)                     46,394

  Valuation as at 31.12.2010*(US$)        140,450,000


*AFI Development share only
The Ozerkovskaya Embankment development site comprises four individual development projects
referred to as Phases I, II, III and IV. The high quality canal-side development in the centre of the
city known as Phase III of the development includes a class A office building. The project is
located in one of the most prestigious business areas in the capital within the Moscow Central
Business District, which is served by two metro stations.

Progress in 2010

Construction of the development continued throughout 2010 and is expected to be completed on
schedule during 2011.During 2010, the Company secured financing for the final stages of the
project in the form of a US$74 million loan from Sberbank and is currently in negotiations with
potential tenants.

Next Steps
Ahead of planned project completion in 2011, works on facades, internal engineering systems and
fit--out are underway. At the same time, the Company is actively engaged in pre-leasing initiatives
to ensure a high occupancy rate at completion.

2. Tverskaya Zastava
  Use                               Multi-use
  Ownership                         100%
  Total area (sqm)                  308,687
  Leasable area (sqm)               204,962
  Valuation as at 31.12.2010* (US$) 323,700,000
*Excluding Tverskaya Zastava Shopping Centre

Tverskaya Zastava projects include the development of an underground shopping mall beneath
the Tverskaya Zastava square in the centre of Moscow, as well as multi-use commercial and
residential real estate in the Tverskaya square surrounding areas (Tverskaya Plazas), namely
Butirsky Val, Gruzinsky Val and Brestskaya streets.

The projects are located in the Tverskoy District, one of Moscow‘s most central areas with a good
concentration of prime residential real estate and an established office submarket, home of
Moscow‘s top landmark projects in office real estate including Four Winds Plaza, Dukats and
White Square.

Progress in 2010

During 2010, construction of the Tverskaya Zastava Shopping Centre with a total area of 113,200
sqm and gross leasable area of 36,303 sqm continued with a focus on external walls and the
relocation of utility lines along with the City‘s general contractor.
                                                                                                26

On March 25, 2011, the Company reached a non-binding understanding with the Moscow City
administration to transfer its development rights in the Tverskaya Zastava Shopping Centre to the
City of Moscow in exchange for being fully compensated for its development costs incurred in the
project to date. Such compensation may take the form of the City of Moscow granting additional
building rights for the Company's other projects. The City of Moscow intends to convert the retail
space into an underground parking facility at its own expense.

As part of the non--binding understanding reached with the City of Moscow, it is intended that AFI
Development will remain the owner of the projects surrounding Tverskaya, equating to over
300,000 sqm of commercial and residential space. It is also intended that such projects will retain
their key development criteria and it is the Company's understanding that the current planning
documentation will remain in place.

Next Steps

Subject to signing the above agreement with the Moscow City, we plan to complete planning and
design documentation for Tverskaya Plazas during 2011 and start construction in 2012.

3. Kalinina Hotel
  Use                                     Hotel
  Ownership                               100%
  Total area (sqm)                        12,665
  Number of rooms                         175
  Valuation as at 31.12.2010 (US$)        7,600,000

Inspired by the success of Plaza Spa in Kislovodsk, the Company started the development of
another similar project in the Russia‘s southern region in the city of Zheleznovodsk. The project
envisages the renovation of an existing building to a 3--star hotel with sanatorium facilities. The
hotel is expected to occupy a site of approximately 0.1 hectares and will include 175 guest rooms,
of which 14% are expected to be suites. A spa area will occupy approximately 1,100 sqm, which
will include 45 treatment rooms, two saunas, a jacuzzi, an indoor swimming pool and extensive
medical and diagnostic facilities.


Progress in 2010
In 2010, AFI Development completed a tender for the project‘s general contractor and approved
the full development budget of US$20 million. Full financing for the project was secured through a
Russian rouble loan from Sberbank.

Next Steps
Construction of the project has commenced and is expected to be completed by the end of 2011.
Upon opening, it is planned that the hotel will be managed by Africa Israel Hotels.


Land bank
In addition to yielding assets and projects under development, AFI Development has an extensive
land bank, or projects that the Company is currently not developing.

Whilst retaining full flexibility regarding future development of these projects, the Company
remains well placed to benefit from further recovery in the regional real estate markets. Given its
strong track record in bringing projects to completion, this represents a significant competitive
advantage for AFI Development.

The Company‘s strategy with respect to its land bank is to activate projects upon securing
necessary financing and after fully evaluating the level of demand from prospective tenants or
buyers.
                                                                                                                        27

In 2011, AFI Development intends to progress development of three of its land bank projects:-
Otradnoye (Odintsovo); the residential complex on Paveletskaya;18 and the office complex on
Bolshaya Pochtovaya, which it feels offer the greatest current development potential at this time.




 Project                           Type                Land        GBA upon          B/S value,        MV upon
                                                       (ha)        completion        31                           19
                                                                                                       completion
                                                                   (sqm)             December          (US$)
                                                                                     2010
 Kosinskaya*                       Office                  8.07          111,770      144,250,000         212,852,008
 Ozerkovskaya IV**                 Office                  0.04            1,864        2,550,000           2,550,000
 Botanic Garden*                   Residential              3.2          192,555       68,841,949         491,368,578
 Odintsovo (Otradnoye)*            Residential            31.75          703,317      105,962,436       1,371,234,786
 Park Plaza Kislovodsk***          Hotel resort             5.3           40,000        8,386,050         101,948,591
 Versailles, Kislovodsk***         Hotel resort             0.6           11,762        7,980,000          29,000,000
 Ruza                              Mixed use              387.0              n/a        4,108,753          63,700,000
 St. Petersburg                    Retail                  3.07              n/a        1,850,000           1,850,000
 Bolshaya Pochtovaya               Office                   4.5          143,000      212,400,000       1,405,249,955
 Boryspol                          Residential            130.7              n/a       13,500,000          13,500,000
 Total                                                    635.6        2,146,488      569,829,188       3,693,253,918

            Note: For valuation purposes and due to IFRS accounting rules, in the MD&A section
            projects are classed as:

            * Projects under development (Kossinskaya, Botanic Garden, Odintsovo/Otradnoye)
            **Income producing properties (Ozerkovskaya IV) )
            ***Hotels (Park Plaza Kislovodsk, Versailles Kislovodsk

Overview of Development Process in Moscow

AFI Development has many years‘ experience of the development process in Moscow, from initial
concept to operation or sale. The table below defines the development process and shows how
the Company realises projects on the basis of its existing land bank.




18
     This project represents the second phase of the Paveletskaya project where the Company built Paveletskaya Office
      Complex. This project does not have a separate balance sheet value.
19
     Valuation by Jones Land LaSalle as at 31 December 2010.
                                                                                                                             28



Development stage Activity                                          Results                                       Timeline

                       Search of land plot for development          Project parameters established
                       Analysis of possible use of selected land    Preliminary budget estimated
Opportunity             based on City‘s General Plan/ land tenure    Preliminary timeline for construction
identification                                                                                                        1-4 months
                        & development regulations                     set
                       Highest and best use analysis
                       Feasibility studies
                         Concept development                        Preliminary concept prepared
                         Architectural design                       ―Regulation Album‖, which includes
                         Master planning work                        general development plan of real
                         Dialogue with City authorities –            estate, height, footage, floor plans,
                          Development of ―Regulation Album‖ for       traffic flows, visualisations, fitting in
                          submission to special ―Moscow‘s City        the surrounding community and
                          Architectural Agency‘s                      project economics approved by the
Initial permitting
                          (Moscomarchitektura) ―The Project           City.                                            3 months
(pre project stage)
                          Approvals Committee‖                       Moscomarchitektura issues ―Town
                                                                      planning Permit‖ (GPZU) (other City‘s
                                                                      agencies are involved in approvals of
                                                                      this permit)
                                                                     Investment contract signed



                       More detailed architectural design           Each section of project
                       Work on project documentation for             documentations requires separate
                        submission to ―The Moscow State               approvals.
                        Expertise‖                                   Sections include legal, General plan,
                       Documentation is prepared in sections         architecture, construction solutions,
Project permitting
                                                                      technological solutions, internal &            8 – 12 months
(project stage)
                                                                      external engineering, fire prevention,
                                                                      power efficiency, environmental
                                                                      protection and security
                                                                     Upon approval, construction permit
                                                                      issued
                       Work with banks to secure debt financing     Real estate delivered and
                       Work with general contractor to develop       commissioned
                        ―working documentation‖, or detailed         Property rights received
                        specifications for construction work         Efficient legal structure in place
Construction                                                                                                           2-3 years
                       Monitoring construction progress and
                        budget
                       Cost control
                       Preleasing/preselling/ advertising
                         Leasing/preselling remainder space         Fully operating income generating
                         Property management (own or outsource)      business                               Any, depending on
Operation
                         Rent collection                            Sustainable value through high quality    the strategy
                         Tenant relations                            product and strong tenant mix
                       Marketing the property                       Property sold
                       Organising the tender process amongst        Funds reinvested in future
Disposal                                                                                                             6 – 12 months
                        willing buyers                                development
                       Support in buyer due diligence
                                                                                               29


Section 6: Board of Directors and Corporate Governance

The members of the Board of Directors as at 31 December 2010 and at the date of this report are
set out below. The term of each Director will expire on the date of the next annual general
meeting of the shareholders but all of the directors are eligible for re-election. There were no
significant changes in the assignment of responsibilities of the Board of Directors in 2010.


As at the date of this report, the members of the Board and their positions are as follows:


Lev Leviev, Chairman of the Board
Mr Leviev has served as the Chairman of the Board of Directors since 1 January 2008. He holds a
47.23% stake in Africa Israel Investments Ltd and also serves as its Chairman. He is also the
owner and the President of the LLD Diamonds Ltd Group and President of the Federation of
Jewish Communities in Russia and CIS.

Alexander Khaldey, Executive Director
Mr Khaldey is one of the co-founders of the Company and serves as the Chairman of the Board of
Directors of AFI RUS and of Stroyinkom-K. Mr. Khaldey has over 30 years of experience in the
real estate industry including experience attained at the Zhiliiproekt Institute and the
Ukrspetsstalkonstruktsia Construction Union. He graduated from Dneprepetrovsk Metallurgical
Institute in 1973, with a degree in Industrial Heat Power Engineering.

Izzy Cohen, Non--Executive Director
Mr Cohen has been a director since 27 August 2008 and the CEO of Africa Israel Investments
since 15 June 2008. Prior to his appointment at Africa Israel Investments Ltd, Mr Cohen was CEO
of Migdal Insurance and Financial Holdings Ltd for ten years. He also worked as Head of Generali
Group Innovation Lab. Mr Cohen holds a BA in Statistics and Computer Sciences from the
Hebrew University of Jerusalem.

Christakis Klerides, Independent Non-Executive Director; Chairman of the Audit
Committee, Senior Independent Director

Mr Klerides has served as an independent non-executive director and is the chairman of the Audit
Committee. Mr Klerides was the Minister of Finance of Cyprus from March 1999—to February
2003 and currently provides finance and business consultancy services through his family-owned
company, CMK Eurofinance Consultants Limited. Mr Klerides is a Fellow of the Chartered
Association of Certified Accountants.

Moshe Amit, Independent Non-Executive Director; Chairman of the Remuneration
Committee and the Nomination Committee
Mr Amit has served as an independent director and is the chairman of the Remuneration
Committee. He is the Chairman of the Board of Directors of Delek - the Israel Fuel Corporation Ltd
and also holds board memberships in a number of companies including Blue Square Chain
Properties & Investments Ltd. Mr Amit holds a banking diploma from the Israeli Banking Institute
and a Bachelors degree in political science and sociology from Bar-Ilan University, Israel.

John Porter, Independent Non-Executive Director
Mr Porter has served as an independent non-executive director. Among other directorships, he is
also the Chairman of Sinocare Group, which owns and operates hospitals in the PRC. Sinocare
serves the broad community and aims to raise the standard of health care for the Chinese middle
class. Mr Porter has had a history of involvement with the life sciences, helping to found Natus
Medical and serving for 5 years as a director of Ivax Corpnow (now part of Teva). Mr Porter holds
degrees from the Universities of Oxford, Paris and Stanford. He serves on the Board of Advisors
to the Said Business School, Oxford and has served two terms on the Board of Advisors to
Stanford Business School.

Michael Sarris, Independent Non-Executive Director
Mr Sarris has served an independent non-executive director. He is a former Minister of Finance of
the Republic of Cyprus and previously held a senior position with the World Bank. In the course of
his career, his work covered a broad range of sectors in Africa, Latin America and East Asia.
During his tenure as Minister of Finance, Cyprus, Mr. Sarris prepared for and successfully
introduced the Euro as its national currency. Mr Sarris received his B.Sc. in Economics at the
                                                                                                   30

London School of Economics. He continued his studies in the United States where he obtained his
Doctorate in Economics.

Panayiotis Demetriou, Independent Non-Executive Director

Mr Demetriou has served as an independent non-executive director. He is trained as a lawyer in
both Cyprus and London (Barrister at Law). Mr Demetriou is a former Member of Cyprus
Parliament and of the European Parliament, Honorary Member of Parliamentary Assembly of the
Council of Europe. He currently provides legal services through the Law Office: Panayiotis
Demetriou & Associates LLC.

Corporate Governance

Although the Company is incorporated in Cyprus, its shares are not listed on the Cyprus stock
exchange, and therefore it is not required to comply with the corporate governance regime of
Cyprus. However, pursuant to the Listing Rules, the Company is required to comply with section 1
of the Combined Code on Corporate Governance as updated in June 2008 (the ―Code‖) or explain
its reasons for non-compliance. The Company's policy is to achieve best practice in our standards
of business integrity in all our activities around the world. This includes a commitment to follow the
highest standards of corporate governance throughout the Company's group.

The Directors consider that, save as set out below, the Company has complied with the main
principles of the Code and the provisions set out in section 1 of the Code throughout the year
ended 31 December 2010.


The Chairman is not independent (as required under section A2.2 of the Code) as he is a major
shareholder of the Company. Mr. Leviev holds a controlling stake in Africa Israel Investments
Ltd., the major shareholder of the Company. Nonetheless, the Directors consider Mr. Leviev is a
key member of the Company's leadership and that his oversight, management role and business
reputation are important factors to the Company's success. The Directors therefore consider that
Mr. Leviev should remain the Chairman of the Company's board and that this will be beneficial for
the Company.

The Board in its current composition was only established shortly before Listing and therefore no
performance evaluation of the Board, the Chairman, the Committees or the individual Directors
took place in 2010 (as required under section A6.1 of the Code). The Chairman will be assessing
informally how the Board is performing on an ongoing basis and it is intended that formal
performance appraisal processes will be developed and implemented during 2011 and
performance evaluations required under the Code will take place during 2011.

The Directors‘ letters of appointment do not set out the expected time commitment or a contract
period (as required under section A4.4 of the Code). However, all of the Directors are expected to
spend sufficient time to comply with their duties during the entire respective terms of their
appointment. In addition, in accordance with the Company's Articles of Association, the Directors
are appointed for terms of three years. The Company intends to include the expected time
commitment and a contract period in new letters of appointment, which will be issued to each and
any director appointed or re-elected since the beginning of 2011.

There is no formal induction process in place for newly appointed Directors (as required under
section A5.1 of the Code), however the Company intends to develop a comprehensive and
tailored induction programme for new Directors during 2011.

The Company has not designed a formal performance-related remuneration scheme for the
Directors nor has a full remuneration policy been implemented (as required under sections B.1
and B.2 of the Code).The Remuneration Committee reviews the remuneration policies from time to
time.

The Company does not have in place a process to formally review the effectiveness of the system
of internal control. The Company is currently working on establishing a process to formally review
the effectiveness of the system of internal control and intends to finalise and implement such
process during 2011.

There is currently no formal whistle blowing policy in place. However the Company intends to
introduce a formal whistle blowing policy during 2011.
                                                                                                  31


The Company is working towards full compliance with the Code in 2011, save in respect of the
independence of the Chairman, and a formal performance related remuneration scheme for the
Directors for the reasons set out above

Balance of Directors

Throughout 2010, the Company had a strong non-executive representation on the Board, which
currently consists of eight directors, six of whom are non-executive directors and five of whom are
independent nonexecutive directors.. Christakis Klerides has been appointed Senior Independent
Director. The Board is satisfied that no one individual or group of directors has unfettered powers
of discretion and that an appropriate balance exists between the executive and non--executive
members of the Board and that between them, the directors bring the range of skills, knowledge
and expertise necessary to lead the Company.

The roles of the Chairman and Executive Director are split and clearly defined. The Chairman is
generally responsible for the overall leadership and governance of the Board, for facilitating the
effective contribution of all Directors and for ensuring the Board members are aware of the views
of major shareholders. In addition, the Chairman is a key member of the Company's leadership
and has an oversight management role in the Company, and his business reputation contributes
to the Company's success. The Executive Director is responsible for all aspects of the operation
and management of the Company and its business. His role includes developing, for Board
approval, an appropriate business strategy and ensuring that the agreed strategy is implemented
in a timely and effective manner

Board Practices

The Company‘s Board of Directors normally meets on at least four occasions during the course of
the year to review trading performance and budgets, funding, to set and monitor strategy, examine
acquisition opportunities and report to shareholders. The Board has a formal schedule of matters
specifically reserved to it for decisions. which are available on its website:              www.afi-
development.ru.
To enable the Board of Directors to perform its duties, each director had full access to all relevant
information. It is the Chairman‘s responsibility to ensure that the Board is provided with accurate,
timely and clear information in relation to the Company and its business.


Attendance at Board Meetings in 2010 was as follows:


Name                        Board              Audit        Remuneration        Nomination
                                            Committee         Committee         Committee


Lev Leviev                     3                  -                 -                 -
Alexander Khaldey              6                  -                 -                 -
Izzy Cohen                    13                  -                 -                 -
Christakis Klerides           14                 3                 2                  4
Moshe Amit                    13                 4                 1                  4
John Porter                   12                 3                 1
Michael Sarris                10                 3                  -                 -
Panayiotis                    10                  -                1                  -
Demetriou
Avinadav                       6                  -                 -                 2
Grinshpon
Avi Barzilay                  11                  -                 -                 -
Dates held             18.1; 11.2; 7.3;   27.5; 18.8;       27.5; 18.8        20.5; 27.5;
                                                                                                32

                       22.3; 26.4; 20.5;   17.11; 20.12                       18.11; 20.12
                       27.5; 15.6; 15.7;
                       18.8; 1.9; 17.11;
                       18.11; 20.12;
                       21.12
No.   of   meetings            15                 4                2                 4
held during 2010

*       Where '-' is shown, the director listed is not a member of the committee.

The matters discussed at the board meetings included: approval of financial statements, approval
of business plans, approval of various transactions (including general contractor agreements with
Denya Cebus PM),approval of matters related to the                Listing, review of committee
recommendations, appointment of directors and officers, and approval of audit reports and
financial statements.

All Directors, the Board and each of the Board Committees are authorised to obtain independent
legal or other professional advice as necessary, to secure the attendance of external advisers at
their meetings and to seek information from any employees of the Company in order to perform
their duties.

Terms of appointment

Non-executive directors have been invited to join the Board for a three-year period, subject to re-
election by shareholders as provided for in the Company's articles of association.


The Board has adopted a policy and procedures for managing and, where appropriate, approving
conflicts or potential conflicts of interest.

At the Board meeting held on 11 February 2010 certain general contractor agreements with Danya
Cebus PM, a related party, were approved. Only the independent non-executive directors
attended the Board meeting.
At the meeting held on 18 August 2010, the Remuneration Committee reviewed the summary of
the employment terms of Mrs. Tzviya Leviev-Elazarov as the Head of Marketing and
Administration and recommended the Board approve the remuneration package as proposed. The
Board approved the appointment and remuneration package recommended by the Remuneration
Committee. The Chairman, who had an interest in the subject matter of the Board meeting
because of his family connection to Mrs. Leviev-Elazarov, did not attend.

At the meeting held on 18 November 2010, the Nomination Committee recommended that Mr.
Avinadav Grinshpon not be re-appointed as director at that time. The Board accepted said
recommendation. The Chairman, who was deemed to have interest in the subject matter of the
Board meeting did not attend thereat.

At the Nomination Committee meeting held on 20 May 2010, Mr Christakis Klerides declared his
interest regarding his appointment as the senior independent director and therefore was not
involved in the discussions held in that regard.
Insurance cover is in place to protect board members and officers against liability arising from
legal actions taken against them in the course of their duties.

The appointment and removal of the Company Secretary is a matter for the Board. All directors
have access to the advice and services of the Company Secretary.

Resignations from the Board

Mr Nadav Grinshpon notified the Board of his decision to step down as a director with effect from
30 June 2010.

Mr Avraham Barzilay resigned as a director of the Company with effect from 31 December 2010.
Mr Barzilay served as the Chief Financial Officer of AFI Development until 27 July 2010.
                                                                                              33

Committees

In accordance with the Code, the Company has established an Audit Committee, a Nomination
Committee and a Remuneration Committee, each of which has defined terms of reference which
are summarised below and are available on the Company‘s website: www.afi-development.ru.
The members of these committees are appointed principally from among the independent
directors. Each committee and each Director has the authority to seek independent professional
advice where necessary to discharge their respective duties in each case at the Company‘s
expense.


Nomination Committee

The Nomination Committee comprises Moshe Amit (Chairman) and Christakis Klerides. The
Nomination Committee meets at least once a year and more frequently if required and is
responsible for preparing selection criteria and appointment procedures for members of the Board
of Directors and reviewing on a regular basis the structure, size and composition of the Board of
Directors. In undertaking this role, the Committee refers to the skills, knowledge and experience
required of the Board of Directors given the Company‘s stage of development and makes
recommendations to the Board of Directors as to any changes. When considering candidates, the
Committee used, and continues to use, objective criteria. All appointments are made on merit. The
Nomination Committee also considers future appointments and makes recommendations
regarding the membership of the Audit and Remuneration Committees.

Between Listing and 31 December 2010, the Nomination Committee met on two occasions. The
Nomination Committee has made recommendations to the Board regarding the appointment of
two new independent directors, Michael Sarris and Demetriou Panayiotis, the current composition
of the Audit and Remuneration Committees, and has also made a recommendation not to re-
appoint Avinadav Grinshpon as a director. All recommendations made by the Nomination
Committee were adopted by the Board. The recommendations were made after considering the
challenges and opportunities facing the Company, the balance of skills, knowledge and
experience required for the position of directors, and the candidates background, experience and
capabilities.

Remuneration Committee

The Remuneration Committee comprises Moshe Amit (Chairman), Christakis Klerides, John
Porter and Panayiotis Demetriou. The Remuneration Committee is responsible for:

       making recommendations and preparing an annual report to the Board on the Company‘s
        remuneration policies and reviewing and determining the remuneration of the executive
        directors; and
       reviewing the scale and structure of the remuneration packages of the executive directors
        and the terms of their service or employment contracts, including any share incentive
        plans, other employee incentive schemes adopted by the Company from time to time and
        pension contributions. No director or manager may be involved in any decisions as to
        his/her own remuneration.

The remuneration of the non-executive directors is determined by the Chairman and the other
executive directors outside the framework of the Remuneration Committee. No director is involved
in discussions or decisions relating to his own remuneration.

The Remuneration Committee intends to undertake a comprehensive review of the existing
executive remuneration structures in place. The aim of this review is to formulate a remuneration
policy in the context of both the market in which we operate and good corporate governance
practice. This Remuneration policy will be fully explained in next year‘s Annual Report.

Between Listing and 31 December 2010, the Remuneration Committee met on one occasion. It is
expected to meet on at least three occasions annually going forward.

The Remuneration Committee did not appoint external consultant(s) during 2010.

Long Term Incentive Plan
As at 31 December .2010 there was no long term incentive plan available for the Directors.
                                                                                                    34

Options held by Directors and Senior Managers

Options over 1,089,295 GDRs and 1,089,295 class B shares were granted up to 31 December
2010 to Russian and Israeli employees and directors with an exercise price of US$14 vesting one-
third on the second anniversary of the date of grant, a further one-third on the third anniversary
and the remaining one-third, on the fourth anniversary of the date of grant provided that the
participants remain in employment until the vesting date. The vesting is not subject to any
performance conditions. The contractual life is ten years.
Pensions and benefits in kind
No Pensions and contributions are currently payable to the Directors by the Company

Employee Share option plan

The AFI Development Share Option Plan (the ―Share Option Plan‖) was adopted by the Board on
12 April 2007. The Remuneration Committee has responsibility for supervising the Share Option
Plan, for granting options and administering the Share Option Plan. The Share Option Plan is
discretionary and options will only be granted when the committee so determines. All employees
and directors (except independent directors) of the Company, and those of the Company's holding
company or its subsidiaries are eligible to participate in the Share Option Plan at the discretion of
the Remuneration Committee. However, options are currently intended to be granted in the future
to the Company‘s senior management, directors (except non-executive directors) and key
personnel only, and to those of the Company‘s subsidiaries.

The price per A Ordinary share or GDR payable on the exercise of an option shall be derived from
the closing middle market price for a GDR on the dealing day immediately preceding the date of
grant, unless the Remuneration Committee determines in its discretion that a lower price is
required, for example, in order to facilitate the recruitment or retention of a key executive. The
exercise price of options already granted is US$14.00. In any 10 year period, not more than 10%
of the Company‘s issued ordinary share capital may be issued or be issuable under the Share
Option Plan and any other employee share plan the Company operates. Options that have been
released or lapsed without being exercised are ignored for the purposes of this limit.

Subject to the participant discharging any relevant tax liability, options will normally be exercisable
at the following times: (a) as to one-third of the A Ordinary Shares or GDRs in respect of which it
was granted from the second anniversary of grant, (b) as to a further one-third of the Ordinary
Shares or GDRs from the third anniversary of grant, and (c) as to the remainder of the A Ordinary
Shares or GDRs from the fourth anniversary of grant. A different vesting schedule may be
determined by the Remuneration Committee at grant. The vesting of options already granted is not
subject to any performance conditions. The Remuneration Committee may, however, determine
that options granted in the future should be subject to performance conditions.

If a participant dies, his options will be exercisable within a period of twelve months following his
death. If a participant ceases to be an employee or director by reason of injury, disability,
redundancy, the sale of the business for which he works to a third party or retirement, his options
may generally be exercised within 6 months of cessation. If a participant ceases to be an
employee or director for any other reason, his options will normally lapse unless and to the extent
the committee decides otherwise.

The Remuneration Committee may satisfy (generally with the consent of the participant) an option
on exercise by paying to the participant in cash or other assets the gain (i.e. the difference
between the market value of the relevant A Ordinary shares or GDRs on the date of exercise and
the exercise price), as an alternative to issuing or transferring A Ordinary Shares or transferring or
procuring the transfer of GDRs to the participant.

The Remuneration Committee may amend the rules of the Share Option Plan at any time. The
Share Option Plan will terminate upon the tenth anniversary of approval, if not terminated earlier
by the committee. Termination of the Share Option Plan will not affect the subsisting rights of the
participants.

Directors’ Emoluments

The aggregate emoluments of each of the Directors (including benefits in kind) for the financial
accounting period ending 31 December 2010 were as follows:
                                                                                                             35

         Name                       Salary/Fee            Benefits   Annual    Pension           Total
                                                          in kind    bonuses
Lev Leviev ......................         US$0             US$0       US$0      US$0              US$0
Alexander Khaldey..........           US$$967,858          US$0       US$0      US$0              US$0
Avraham Barzilay ...........              US$0             US$0       US$0      US$0              US$0
Izzy Cohen ......................         US$0             US$0       US$0      US$0              US$0
Avinadav Grinshpon........                US$0             US$0       US$0      US$0              US$0
Christakis Klerides .......... US$50,000 per year          US$0       US$0      US$0     Not to exceed £100,000
                                    plus US$3,500 per                                          per annum
                                   meeting of the Board
Moshe Amit .................... US$50,000 per year         US$0       US$0      US$0     Not to exceed £100,000
                                    plus US$3,500 per                                          per annum
                                   meeting of the Board
John Porter ...................... US$50,000 per year      US$0       US$0      US$0     Not to exceed £100,000
                                    plus US$3,500 per                                          per annum
                                   meeting of the Board
Michael Sarris ................. US$50,000 per year        US$0       US$0      US$0     Not to exceed £100,000
                                    plus US$3,500 per                                          per annum
                                   meeting of the Board
Panayiotis Demetriou ..... US$50,000 per year              US$0       US$0      US$0     Not to exceed £100,000
                                    plus US$3,500 per                                          per annum
                                   meeting of the Board


The level of remuneration of each non-executive director is capped at US$100,000 per annum.


Audit Committee

The Audit Committee comprises four independent directors and meets at least four times each
year at appropriate times in the reporting and audit cycle of the Company and more frequently if
required. The Audit Committee comprises Christakis Klerides (Chairman), Moshe Amit, John
Porter and Michael Sarris.

The purpose of the Audit Committee is to assist the Board in fulfilling its responsibilities of
oversight and supervision of, among other things:

           the integrity of the Company‘s financial statements, including its annual and interim
           accounts;

           the adequacy and effectiveness of the Company‘s internal controls, accountancy
           standards and risk management systems, assessing consistency and clarity of disclosure
           as well as the operating and financial review and corporate governance statement;

           and the terms of appointment and remuneration of the Company‘s external auditor,
           assessing independence and objectivity and ultimately reviewing the findings and
           assessing the standard and effectiveness of the external audit.

The Audit Committee supervises and monitors, and advises the Board of Directors on, risk
management and control systems and the implementation of codes of conduct. In addition, the
Audit Committee supervises the submission by the Company of financial information and a
number of other audit-related issues and also makes recommendations to the Board accordingly.

The Committee held three meetings between Listing and 31 December 2010 . The Board is
satisfied that at all stages during 2010 at least one member of the Committee had recent and
relevant financial experience.

During the period from Listing through to December 31, 2010, the matters reviewed and
considered by the Audit Committee included:

                The replacement of the internal auditor of the Company;
          The Audit Report on Non-Core Asset Management and Collections;
          The Audit Report on Remedial action implementation of recommendations regarding
           Marketing of rental space and engagement of tenants; and
          The Working Plan of the Audit Committee for the year of 2011.
                                                                                                36

Risk Management Processes

Internal auditor
Until 20 December 2010 the Company‘s internal audit function was outsourced to a certified
accountant in Israel, Grand Thornton (Fahn, Kanne & Co.) nominated from time to time by the
Audit Committee, subject to the approval of the Board of Directors. On 20 December 2010 Mr.
Shaul Dabby was appointed as the internal auditor of the Company in place of Grand Thornton
(Fahn, Kanne & Co.).


The internal auditor is responsible for the recommendation of an auditing plan to the Audit
Committee. The internal auditor carries out auditing assignments in accordance with such plan
and oversees and reports on the Company‘s compliance with the plan‘s recommendations. The
internal auditor files an annual report with the Audit Committee and the Board of Directors and is
available for any meetings of the Audit Committee or of the Board of Directors.


Internal controls

Principal aspects of the Company’s Internal Control

The Board has overall responsibility for maintaining the Company's system of internal control to
safeguard shareholders‘ investment and the Company‘s assets and for monitoring the
effectiveness of these systems. The Audit Committee supervises, monitors and advises the Board
of Directors on risk management and control systems and the implementation of codes of conduct
and the auditing plan recommended by Mr Shaul Dabby, the internal auditor.

The Company implements its procedures according to the best practice on internal control
provided in the Turnbull Guidance «Internal Control: Revised Guidance for Directors on the
Combined Code». The Company‘s system of internal control supports identification, evaluation
and managing the risks affecting the Group and the business environment in which it operates.

Internal Control Framework

Structure and authority

Authority is delegated from the Board through the senior management to the operating divisions
and clear reporting lines and assigned responsibilities exist amongst different management levels
within each division. Segregation of duties is applied through the Company.

The Company has a clearly set out organisation structure with well-defined reporting lines
between the Board and the heads of each operating division.

The senior management has the ultimate power of decision over significant matters relating to the
financial management of the Company such as: material changes in banking arrangements
(including change of bankers facilities and signatory category limits), approval of project budgets
and the Annual Business Plan, changes to the Company‘s capital structure and acquisitions and
disposals of subsidiaries/projects;

Budgeting and reporting

The Company has comprehensive project-based budgeting and reporting processes as well as the
Company's finance reporting process, monthly operational results and forecast.

Financial control procedures

Senior management of the Company has implemented the appropriate controls for the Company‘s
financial reporting processes.
                                                                                                37

Investment appraisal process

In the course of investment appraisal process the following guidelines are followed by the
Company‘s management:

    1. When valuing current portfolio of assets an independent appraiser is used on an annual /
       semi--annual basis to confirm market value improvement or impairment in value of each of
       the Company‘s properties. The calculations are then examined by the Company team.

    2. When making decisions on re-gearing pipeline / land bank projects internal investment
       models are prepared to evaluate economic effectiveness and reasonableness of the
       potential investments. An investment model template approved by the Company's
       financial department and is used to evaluate economics of potential and current
       developments.

    3. Before disposals of material projects a market-value calculation is performed by an
       independent appraiser to justify the reasonableness of the contracted price or to analyze
       any discrepancies revealed.

    4. When approving any significant change in the development budget of any of the
       Company‘s existing projects, internal investment modeling is performed to test potential
       influence on the project returns.

    5. When acquiring new assets an independent appraiser is used to conduct a market survey
       and determine market value of the target property.

Operation policies and procedures

The Company has a clearly stated mission and has a well-defined strategy which is determined by
the senior management and approved by the Board.

The policies and procedures relating to the core business processes are formally documented and
communicated to the relevant employees;

Compliance with laws and regulations

The Company retains legal counsel in all relevant jurisdictions in order to ensure on-going
   compliance with all applicable laws and regulations.

Monitoring and review of activities

Assurances on compliance with the internal control systems are obtained through certain
monitoring processes, including a formal annual confirmation of compliance provided by Mr.
Khaldey.

-Reports from the external auditors

Deloitte has performed a review of the effectiveness of the controls operating over the preparation
the Company‘s financial statements as part of a wider AFI Investments Group exercise to prepare
it for new legislation in Israel

Review of effectiveness

In 2011, the Company intends that the Board and the Audit Committee will review the
effectiveness of the internal control system, including financial, operational and compliance
controls and risk management. The results of such review are intended to be published in the
annual report for 2011.




Financial reporting and the ‘going concern’ basis for accounting
                                                                                               38

The Board seeks to present a balanced and understandable assessment of the Company‘s
position and prospects, and details are given in the Report of the Directors.

The Directors are responsible for the preparation of the Annual Report and financial statements of
the Company.

After making enquiries, the Directors have a reasonable expectation that the Company has
adequate resources to continue in operational existence for the foreseeable future. For this
reason, they continue to adopt the going concern basis in preparing the accounts.

Dividends

During 2010, the Company did not pay dividends. In the future, the Company may consider
making dividend payments on its ordinary shares, when and if commercially prudent, after taking
into account profits, cash flow and capital investment requirements. No dividends will be paid
otherwise than out of profits.


Safety

The Company takes its commitment to health and safety very seriously. It reviews its policies,
procedures and standards on a regular basis to ensure that its properties and developments offer
a safe environment for its employees, customers and suppliers, as well as for other visitors.

The Company works with its suppliers and contractors to ensure that they meet the Company's
high health and safety standards.

Communication with shareholders

The directors place considerable importance on maintaining open and clear communication with
investors. The Company‘s investor relations department is dedicated to facilitating communication
with shareholders.

The Company maintains an ongoing dialogue with its shareholders, discussing a wide range of
relevant issues including strategy, performance, the market, management and governance within
the constraints of the information already known to the market. The principal methods of
communication with shareholders are our news announcements, interim report, annual review and
financial statements, the annual general meeting and corporate website. In addition, the Company
undertakes regular roadshows to the US, Europe and Israel and participates in sector
conferences.

During the course of a year, shareholders are kept informed of the progress of the Company
through results statements and other announcements that are released through the London Stock
Exchange and other news services. Company announcements are made available simultaneously
on the Company‘s website, affording all shareholders full access to material information.
Shareholders can also raise questions directly with the Company at any time through a facility on
the Company‘s website.

The Company's annual general meeting affords individual shareholders the opportunity to question
the Chairman and members of the Board. Notice of the annual general meeting is sent to
shareholders at least 21 days before the meeting. At the meeting, after each resolution has been
passed, details are given of the number of proxies lodged, together with details of votes cast for
and against each resolution.

.

Principal Activity and status of Company

The Company was incorporated in Cyprus on 13 February 2001 as a limited liability company
under the name Donkamill Holdings Limited. In April 2007 the Company became a public
company and changed its name to AFI Development PLC. The address of the Company‘s
registered office is 25 Olympion Street, Omiros & Araouzos Tower, 3035 Limassol, Cyprus.
                                                                                                39

As at the date of this Report, 5% (31/12/2009: 71.20%) of the Company‘s shares are held by
Africa Israel Investments Ltd (―Africa-Israel‖), which is listed in the Tel Aviv Stock Exchange
(―TASE‖).

The decrease was a result of the debt restructuring of Africa-Israel‘s debt to the holders of its
previously issued bonds (the ―Settlement‖), pursuant to which Africa-Israel converted part of its
debt into AFI Development‘s equity amounting to 92,720,923 shares, representing approximately
17.7% of the Company's equity capital. In order to facilitate this part of the Settlement,
Africa-Israel converted a corresponding amount of its shares in the Company into GDRs.
Following the completion of the Settlement, Africa-Israel remained AFI Development‘s majority
shareholder with approximately 57% of the Company‘s shares. In addition, Africa-Israel has
pledged 126,605,557 of its GDRs in the Company to the bond holders. 6.75% of the Company‘s
share capital is held by Nirro Group S.A. and the remaining shareholding of ―A‖ shares is held by a
custodian bank in exchange for the GDRs issued and listed in the London Stock Exchange
(―LSE‖). On 5 July 2010, the Company issued by way of a bonus issue, 523,847,027 ―B‖ shares,
which were admitted to a premium listing on the Official List of the UK Listing Authority and to
trading on the main market of the LSE. On the same date, the ordinary shares of the Company
were designated as ―A‖ shares. Further details are contained in note 24 to the annual financial
statements.

The principal activity of the Company is the holding of investments in subsidiaries and joint
ventures.
                                                                                                40


Section Seven: Financial statements

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Overview

As at 31 December 2010, AFI Development had a portfolio of 4 yielding properties, 9 active
investment projects under development, 2 completed residential projects, 2 residential projects
under development, 8 land bank projects and 5 hotel projects at various stages of development in
Russia and Ukraine. These comprise commercial projects focused on offices, shopping centres,
hotels and mixed-use properties, residential projects in prime locations in Moscow focused on
upscale apartment buildings and residential districts in the Moscow Region aimed at the upper
middle class segment of the market. As at 31 December 2010, JLL valued our beneficial interest in
the projects in our current portfolio in their existing state of development, at approximately
US$2.31 billion.

In 2010, we had a profit of US$25.88 million, in comparison to a loss of US$2.66 million in 2009.
Our profit derived primarily from the revaluation of our investment portfolio by JLL. In 2010, we
recognised a US$93.92 million gain from revaluation of our investment property as opposed to a
loss of US$38.92 million in 2009. Net revaluation gain from properties was US$75.77 as opposed
to US$22.88 million in 2009. At the same time, our revenue from rental activity increased from
US$36.15 million in 2009 to US$43.95 million in 2010. We also realised profits from sales of
residential premises at Four Winds and Ozerkovskaya Embankment Phase II projects for a total
amount of US$30.17 million as well as income from construction consulting and management
services income of US$0.88 million.


Key Factors Affecting our Financial Results

Our results have been affected, and are expected to be affected in the future, by a variety of
factors, including, but not limited to, the following:

Macroeconomic Factors

Our properties and projects are mainly located in Russia. As a result, Russian macroeconomic
trends and country-specific risks significantly influence our performance.

The following table sets out certain macroeconomic information for Russia as of and for the dates
indicated:

                                                      Year ended 31          Year ended 31
                                                      December 2010          December 2009
 Real Gross Domestic Product growth                        4%                    -7.8%
 Consumer prices                                          8.8%                    8.8%

Source: International Monetary Fund

Company Specific Factors

The following factors affected our performance in 2010:
       The Company completed AFIMALL City with approximately 75% of the retail shops in the
        Mall let to a wide mix of tenants.
       The Company obtained a Premium Listing on the London Stock Exchange with its ‗B‘
        shares commencing trading on 5 July 2010 under the ticker AFRB.
       Aquamarine Hotel on Ozerkovskaya Embankment, which was opened at the end of 2009,
        started its operation at the beginning of 2010 and achieved high levels of occupancy by
        year end.
       Paveletskaya I Office Complex was completed with significant progress on pre-leasing.
       Significant progress on development at the fully-financed Ozerkovskaya Embankment
        Phase III project was achieved which remains on track for completion in 2011.
                                                                                                                         41

         Commencement of development of the Kalinina Hotel in Zheleznovodsk.


Key Portfolio Updates

The Company had the following updates in relation to its portfolio:

Current projects

AFIMALL City
The Company completed construction of AFIMALL City with approximately 75% of the retail shops
in the mall currently let to a wide mix of tenants.

Ozerkovskaya Embankment
The Aquamarine Hotel officially opened on Ozerkovskaya Embankment in 2010. As a four star
hotel in a central location, it has seen occupancy levels of up to 70% for its 159 rooms and is
positioned in the upper mid-scale segment, the fastest growing sector of the Moscow hotel market.

The Ozerkovskaya Embankment Phase III project22 is expected to be completed on schedule
during 2011. During 2010, the Company secured financing for the final stages of the project in the
form of a loan from Sberbank of US$74 million. Consequently, negotiations with potential tenants
are now intensively underway.23

Tverskaya Zastava Shopping Centre24

During 2010, construction of the Tverskaya Zastava Shopping Centre continued with focus on
external walls and relocation of utility lines.25

Paveletskaya Business Park
Construction at the Paveletskaya Business Park continued to progress during 2010.

On 22 March 2011, AFI Development announced the lease of the Paveletskaya office complex to
a single tenant ZAO GREENATOM, a subsidiary of the State Atomic Energy Corporation,
ROSATOM. An 11-month lease agreement was signed with ZAO GREENATOM, which will roll


22
     The land lease with respect to Ozerkovskaya Embankment Phase III project initially provided that construction on the
     plot was to have been completed as of 31 December 2006. However, in April 2009, the City of Moscow adopted a
     resolution according to which Krown Investments, a 50% subsidiary of the Company had until 28 February 2011 to
     complete construction and until 30 September 2011 to put the facilities into operation. The supplement to the land
     lease envisages the same deadlines. As at the date of this preliminary statement, this project is under construction,
     and as the construction is almost completed, the Company does not expect that the City will take any negative actions
     in relation to the project or to the land lease under the project at this advanced stage.

     It is noted that the design documentation for Ozerkovskaya III has been amended to change the designation of the
     project to office use only. The Company aims to approve the amended design documentation with Mosgosekspertiza
     and other Moscow state and local authorities (if necessary) shortly.
23
     In addition, the Company is negotiating a potential sale of its rights (or part thereof) in the Ozerkovskaya Embankment
     project (excluding the Aquamarine hotel and certain residential units) to a non-related third party.
24
     It is noted that according to the resolutions of the City of Moscow, the Tverskaya Zastave Shopping Center is
     designed to be located on a land site of 33,500 sqm. The Company's group leased about 21,000 sqm of land for
     construction under three short-term land lease agreements, one lease agreement for the term of more than one year
     and two lease agreements for terms of less than one year. These lease agreements have expired. This does not
     impact the value of the project. It is noted that the Company's group continues to pay the lease fees in respect of the
     expired lease agreements in connection with this project and the City of Moscow (as landlord) has not objected.
     Therefore, the leases are automatically extended for an indefinite period of time.

     The Group‘s development rights with respect to the Tverskaya Zastava Shopping Center stem from several
     resolutions of the City of Moscow, which refer to construction of the shopping center and the traffic arrangements in
     the project and which grant the Company's group the right to develop the area between the years 2004 and 2010. As
     a result of the delay to the original construction schedule for the Tverskaya Zastava Shopping Center, AFI
     Development will need to obtain a new resolution for this project and it has approached the Moscow authorities with a
     request to extend the project deadline.
25
     On 5 June 2008, the holding company involved in this project, obtained a construction permit, which allows for the
     construction of the Tverskaya Zastava Shopping Centre and the traffic interchange and which is valid until December
     2011. Subject to the understanding reached with the City of Moscow, the holding company is planning to extend the
     construction permit for the term of completion of the project.
                                                                                                                            42

over a 3-year period once the ownership certificate has been obtained, which is expected before
the end of 2011. The lease will yield annualised revenue of US$4.7 million, excluding VAT.

Kalinina Hotel
In 2010, the Company started the development of the Kalinina Hotel project in the Russia‘s
southern region in the city of Zheleznovodsk.

In 2010, AFI Development completed a tender for and appointed the project‘s general contractor
and approved the full development budget of US$20 million. Full financing for the project was
secured through a Russian rouble loan from Sberbank.

Kossinskaya
In August 2009, this completed project was sold to a third party for US$195 million, with the
Company receiving approximately US$70 million by 31 December 2009. During 2010, the buyer
served AFI Development with a warrant for indictment, submitted in the District Court of Nicosia,
Cyprus, whereby the buyer has demanded, inter alia, repayment of approximately US$25 million
and approximately US$47 million out of the purchase price, reimbursement in the amount of
approximately US$17 million for damages and additional reimbursement of US$2.5 million per
each month of delay in the aforementioned payments. As of the date of this statement, the buyer
has not yet submitted any supporting allegations or documentation in relation to these claims. AFI
Development intends to serve its response within the time frames set forth under the applicable
law. According to the legal advisors of the Company the chances of defending the claim are more
than 50%. Nonetheless, AFI Development is currently negotiating with the buyer regarding
possible settlement options.

Land bank
Due to risks of not being able to obtain and renew a full set of project documentation for the
Kuntsevo project and therefore eliminate uncertainty over the project start date, the Company
made a decision to write down the values of Kuntsevo to zero26. Due to uncertainty in demand
levels and therefore absence of economic rationale to start the developments, the Company
decided to also write-off the values of Volgograd, Zaporozhie and Old Lake projects.


Key Events Subsequent to 31 December 2010

Following the yea-end, the following key events occurred:
         On 26 January 2011, AFI Development‘s major shareholder, Africa Israel Investments,
          agreed to purchase approximately 9.7% of the aggregate equity and voting rights in AFI
          Development from a company wholly-owned by Mr. Alexander Khaldey, the Executive
          Director of AFI Development. The total consideration is approximately US$129 million or
          approximately US$1.27 per each share or GDR of AFI Development. Alexander Khaldey
          will continue to serve as the Executive Director on the Board of AFI Development and
          Chairman of OOO AFI Rus and of ZAO Stroyinkom-K.
         Following receipt of the requisite regulatory approvals for the operation of AFIMALL City
          on 4 March 2011, the Company issued a notice to operators of the rented retail units in
          the mall requiring them to conclude all fit-out works and prepare for the opening of their
          shops by 10 March, 2011, when AFIMALL City opened to the public.
         On 4 March 2011, the Board of AFI Rus accepted the resignation of Evgeny Luneev as
          Chief Financial Officer, who decided to leave the Company in order to pursue other
          business opportunities. Mr. Luneev will act as the CFO until 29 March 2011. His successor
          will be announced in due course.
         On 23 March 2011, AFI Development leased the Paveletskaya Office Complex to a single
          tenant ZAO GREENATOM, a subsidiary of the State Atomic Energy Corporation,
          ROSATOM. An 11-month lease agreement was signed with ZAO GREENATOM, which
          will roll over a 3-year period once the ownership certificate has been obtained, expected
          before year end The lease will yield annualized revenue of US$4.7 million, excluding VAT.


26
     During 2010, AFI Development made progress in promoting its Kuntsevo project vis-à-vis the Moscow city authorities,
     including certain progress in obtaining necessary permits for the planning of this project. However, in light of the recent
     change in the Moscow city government, AFI Development estimates that there might be additional delays in promoting
     the project and obtaining the aforementioned permits. There is no certainty whether and when the necessary permits
     will be obtained, and therefore, the Company decided, for accounting purposes, to write-off this project from its
     balance sheet until more certainty is reached in relation to the development of the project.
                                                                                                     43

       On 25 March 2011, the Company announced that it had reached a non-binding
        understanding with the Moscow City administration regarding the purchase from the City
        of Moscow of its 25% share in AFIMALL City and 2,700 parking lots adjacent to AFIMALL
        City, for a total consideration of approximately US$ 310 million.
       On 25 March 2011, the Company announced that it had reached a non-binding
        understanding with the Moscow City administration to transfer its development rights in the
        Tverskaya Zastava Shopping Centre to the City of Moscow in exchange for being fully
        compensated for its development costs incurred in the project to date. Such compensation
        may take the form of the City of Moscow granting additional building rights for the
        Company's other projects. As part of the non-binding understanding reached with the City
        of Moscow, it is intended that AFI Development will remain the owner of the projects
        surrounding Tverskaya, equating to nearly 350,000 sqm of commercial and residential
        space. It is also intended that such projects will retain their key development criteria and it
        is the Company's understanding that the current planning documentation will remain in
        place.

Disposals and Acquisitions

There were no disposals or acquisitions made by the Company in 2010.


Presentation of Financial Information

Our consolidated financial statements were prepared in accordance with International Financial
Reporting Standards (―IFRS‖), as adopted by the European Union (―EU‖), which were in effect at
the time of preparing our consolidated financial statements. IFRS differs in various material
respects from US GAAP and UK GAAP.


Financial policies and practices

Revenue Recognition
The key elements of our revenue recognition policies are as follows:

       Rental income. We recognise rental income from investment properties leased out under
        operating leases in our income statement on a straight line basis over the term of the
        lease.

       Construction consulting and construction management fees. We recognise revenues
        from construction consulting and construction management services in our income
        statement, in proportion to the stage of the project as at the relevant reporting date. We
        assess the stage of completion by reference to the amount of work performed.

       Sales of trading properties. We recognise revenue from the sale of trading properties in
        our income statement when the risks and rewards of ownership of the property are
        transferred to the buyer. When we receive down payments in connection with the sale of
        trading property that is under construction, we record this figure in the current liabilities on
        our balance sheet at the time of sale.


Operating expenses

Operating expenses consist mainly of employee wages, social benefits and property operating
expenses, which are directly attributable to revenues. As substantially all of our activities to date
have involved real estate development projects that are still in the pre-construction or construction
phase, we have historically capitalized the great majority of our overall costs. We recognise as
expenses in our income statement the costs of those employees who have provided construction
consulting and construction management services to third parties or, with respect to a portion of
such costs, to our 50-50 joint ventures. We also recognise property operating costs (including
outsourced building maintenance), utilities, security and other tenant services related to our
properties that generate rental income, as expenses on our income statement.

Administrative expenses
                                                                                                   44

Our administrative expenses comprise primarily of general and administrative expenses such as
office rental costs, audit, marketing costs, travelling and entertainment, office equipment as well as
depreciation expenses related to our office use motor vehicles.

Profit on disposal of investment in subsidiaries
We recognise profit or loss from the sale of interests in our subsidiaries when the risks and
rewards of ownership are transferred to the buyer in the transaction.

Revaluation of investment property
An external, independent valuation company, having appropriate recognised professional
qualifications and recent experience in the location and categories of properties being valued,
values the Company‘s investment property portfolio every six months. The fair values are based
on market values, being the estimated amount for which a property could be exchanged on the
date of the valuation in a transaction between a willing buyer and a willing seller after proper
marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion.
The difference between revalued fair value of investment property and its book value is recognised
as revenue in the income statement.

Operating profit before net finance costs
Operating profit before net finance costs is calculated by adding revenue, other income, profit on
disposal of investment in subsidiaries and valuation gains on investment property, and subtracting
operating expenses, administrative expenses and other expenses.

Finance income
Our finance income comprises net foreign exchange gain, if any, and interest income. We
recognise foreign exchange gains and losses, principally in connection with US Dollar
denominated payables and receivables of our Russian subsidiaries, whose functional currency is
the Rouble. Our interest income is derived primarily from interest on our bank deposits which
primarily include proceeds from our May 2007 IPO and interest on loans to our joint ventures,
including Westec and Krown Investments.

Finance expenses
Our finance expense comprises net foreign exchange loss, if any, and interest expense on
outstanding loans less interest capitalised. We recognise foreign exchange gains and losses
principally in connection with US Dollar denominated payables and receivables of our Russian
subsidiaries, whose functional currency is the Rouble. We capitalise our interest expense with
respect to our development projects that are under construction, for which amounts are not
reflected as expenses in our income statement. When funds are borrowed specifically for a
particular project, we capitalise all actual borrowing costs related to the project less income earned
on the temporary investment of such borrowings and when funding for a project is obtained from
our general funds, we capitalise only funding costs related to the particular project based on the
weighted average of the borrowing costs applicable to our general funds.

Income tax expense
Income taxes are calculated based on tax legislation applicable to the country of residence of each
of our subsidiaries and, as a company based and organised in Cyprus, we are subject to income
tax in Cyprus. We and our Cypriot subsidiaries are currently subject to a statutory corporate
income tax rate of 10% in Cyprus. Our Russian subsidiaries were subject to corporate income tax
at a rate of 20%. Profits on revaluation gains of investment property in companies based in
Russia, from which we have derived the vast majority of our profits to date, are subject to deferred
income tax at a rate of 20%.

Capitalisation of Costs for Properties under Development
We capitalise all costs directly related to the purchase and construction of properties being
developed as both investment properties and trading properties, including costs to acquire land
rights and premises, design costs, permit costs, costs of general contractors, costs relating to the
lease of the underlying land and the majority of our employee costs related to such projects.

In addition, we capitalise financing costs related to development projects only during the period of
construction of the projects. We do not, however, commence the capitalising of financing costs
related to expenditures on a project until construction on each project begins. As the majority of
our development projects are still in the pre-construction or construction phases, to date we have
capitalised the great majority of the overall costs related to our business activities. In our
consolidated financial statements, we capitalised expenses related to the development of our
investment and trading properties in aggregate amounts of US$200.16 million and US$160.01
                                                                                                   45

million in the years ended 2009 and 2010, respectively. Since the Company‘s adoption of IAS 40
from 1 January 2009, upon completion of construction works, property classified as investment
property under development (which are those properties that are being constructed or developed
for future use to earn rental income or for capital appreciation) is appraised to market value and
reclassified as an investment property and any gain or loss on appraisal is recognised in our
income statement. Trading properties, which include those projects where we intend to sell the
entire project as a whole or in part (this principally includes our residential development projects),
are represented on our balance sheet at the lower of cost and net realizable value, which is the
estimated selling price in the ordinary course of business, less the estimated costs of completion
and sale.

Exchange Rates
Our consolidated financial statements are presented in US Dollars, which is our functional
currency. The functional currency of our Russian subsidiaries and joint ventures is the Rouble.
The balance sheets of our Russian subsidiaries are translated into US Dollars in accordance with
IAS 21, whereby assets and liabilities are translated into US Dollars at the rate of exchange
prevailing at the balance sheet date and income and expense items are translated into US Dollars
at the average exchange rate for the period. All resulting foreign currency exchange rate
differences are recognised directly in our shareholders' equity under the line item ―translation
reserve.‖ When a foreign operation is sold, the cumulative amount of the exchange differences
deferred in the separate component of equity relating to that foreign operation is recognised in our
income statement when the gain or loss on disposal of the foreign operation is recognised. The
monetary assets and liabilities of our Russian subsidiaries that are denominated in currencies
other than Roubles are initially recorded by our subsidiaries at the exchange rate between the
Rouble and such foreign currency prevailing at such date. Such monetary assets and liabilities are
then retranslated into Roubles at the exchange rate prevailing at each subsequent balance sheet
date. We recognise the resulting exchange rate differences between the dates at which such
assets or liabilities were originally recorded and at subsequent balance sheet dates as foreign
exchange losses and gains in our income statement. In particular, during the period under review,
we have recognised foreign exchange rate gains and losses in connection with US Dollar
denominated payables and receivables of our Russian subsidiaries. As most of our projects are
still in the preyield stage, our Russian subsidiaries have historically had higher levels of US Dollar
denominated payables, including interest on loans and general contractor fees, than US Dollar
denominated receivables, such as rental payments, with the result that we have historically
recorded foreign exchange gains when the Rouble appreciates against the US Dollar, thus
reducing the US Dollar denominated liabilities of our Russian subsidiaries when translated into
Roubles and foreign exchange losses when the US Dollar appreciates against the Rouble.

Recovery of VAT
We pay VAT to the Russian authorities with respect to construction costs and expenses incurred
in connection with our projects, which, according to Russian tax law, can be recovered upon
completion of construction. We have accordingly included recoverable VAT as an asset on our
balance sheet, the size of which we expect will increase as the development of our projects
advances.

Deferred Taxation
As we continue to advance the development of our projects, we also expect to record higher
deferred tax liabilities and assets. Under Russian tax law, we are not allowed to capitalise certain
of the costs in relation to the design, construction and financing of projects that we capitalise for
the purposes of our consolidated financial statements under IFRS. As a result, our tax bases in the
related assets may be lower than our accounting bases for IFRS purposes, which would result in
deferred tax liabilities. However, the recognition of such costs as expenses may result in
accumulated tax losses for Russian tax purposes that we may be able to carry forward against
estimated future profits, resulting in deferred tax assets. We expect these deferred tax liabilities
and assets to grow as our major projects reach more advanced stages. However, such tax losses
may only be carried forward to offset gains for a ten--year period under Russian tax law and they
may only be utilised in the Russian subsidiary in which such tax losses were generated.

Fair Value Calculation
Our future results of operations may be affected by our measurement of the fair value of our
investment properties and changes in the fair value of such properties. Upon completion of
construction, the projects that we have classified as investment property under development are
reassessed at fair value and reclassified as investment property, and any gain or loss as a result
of reassessment is recognised in our income statement.
                                                                                              46

Any change in fair value of the investment property under development is thereafter recognised as
a gain or loss in the income statement. Accordingly, fair value measurements of investment
properties under development may significantly affect results of operations even if the Company
does not dispose of such assets. Specifically, in May 2008 the International Accounting Standards
Board issued its latest standard, titled ‗Improvements to International Financial Reporting
Standards, 2008.‘ Amendments to IAS 40 ‗Investment property‘ under this standard had a
significant impact on the Company‘s financial statements in 2009 and will continue to do so in
2010.
                                                                                                47

Results of Operations

Description of Income Statement Line Items

                          Summary of income statement for 2010 and 2009


  USD 'thousands                           For   the     For   the    Change 2010/2009
                                           year          year
  Narrative                                ended 31      ended 31     USD            %%
                                           December      December     'thousands
                                           2010          2009
  Revenue
  Construction consulting/management              876          906            (30)        -3%
  services
  Rental income                                43 946       36 153          7 793      22%
  Sale of residential                          30 170       25 900          4 271      16%
                                               74 992       62 958         12 034      19%

  Other income                                     231        3 361        (3 130)    -93%
  Operating expenses                          (18 660)      (9 430)        (9 230)     98%
  Administrative expenses                     (13 178)     (10 944)        (2 234)     20%
  Cost of sales of residential                (20 173)     (19 085)        (1 089)      6%
  Other expenses                               (7 879)        (693)        (7 185)   1036%
                                              (59 659)     (36 791)       (22 868)     62%

  Gross profit                                 15 333       26 168        (10 835)    -41%
  Loss on disposal of investment in                            (97)             97   -100%
  subsidiaries
  Impairment     of    prepayment    for      (17 676)            -       (17 676)        N/A
  investments
  Valuation gains on investment property        93 917       38 923        54 991     1.41%
  Impairment loss for trading property        (18 144)     (16 048)        (2 096)      13%
  and PPE
  Net valuation gain on properties             75 773       22 875         52 898     231%

  Results from operating activities            73 430        48 945        24 485      50%
  Finance income                               13 657        10 722         2 935      27%
  Finance expense                              (8 816)      (3 723)        (5093)     137%
  FX Gain/(Loss)                               (7 977)        6 978        (1999)      14%
  Impairment of financial asset                      -     (18 411)        18 411    -100%
  Net finance income/(costs)                   (3 136)      (4 434)         1 298     -29%

  Profit before income tax                      70 294       44 511        25 783      58%
  Income tax expense                          (44 416)     (47 166)         2 749      -6%

  Profit from continuing operations            25 878       (2 655)        28 532    -1075%

  Profit for the period                        25 878       (2 655)        28 532    -1075%

Revenue – General Overview

To date, we have derived revenues from three sources: construction consulting and construction
management fees, rental income and sale of residential properties. During the period under
review, we derived considerable amounts of revenue from such rental income and sale of
residential properties, unlike in the previous reporting period. We expect that our revenue from
rental income will increase further in the future once we have completed the construction of the
commercial properties we are currently developing for lease. As we no longer provide construction
consulting and construction management services to third parties, other than our joint ventures,
                                                                                                 48

we do not expect construction consulting and construction management fees to contribute a
significant amount to our revenue in the future.

Construction consulting and construction management fees

We derive construction consulting and construction management fees from project management
services we provide to our joint ventures. We typically charge a fixed percentage of the total costs
related to the projects for which we provide such services. We provide such services to (i) our 50%
owned joint venture Westec Four Winds Ltd., (―Westec‖), which owns the Four Winds project; and
(ii) our 50% owned joint venture Krown Investments, which is developing the Ozerkovskaya Phase
II and Phase III projects.

Rental income

We derive rental income from our core assets that we acquired or developed in the past and from
non--core assets, i.e. existing real estate on land sites where we plan to develop new projects.


                                                  For the       For the
                                                   year          year        Change 2010/2009
                                                 ended 31      ended 31
  USD 'thousands
                                                 December      December
                                                   2010          2009          USD

                                         Core assets
  4 Winds office building                        15 904            13 648        2 257      17%
  4 Winds street retail                              543            1 936      (1 392)     -72%
  H2O office building                              2 454            2 375           79       3%
  Berezhkovskya office building                    4 650            4 342          308       7%
  Aquamarine Hotel                                 6 054               52        6 002   11486%
  Plaza Spa Hotel                                  4 316            3 721          595      16%
                                       Non-core assets
  Ozerkovskaya IV                                    520              503           17         3%
  Premises at Bolshaya Pochtovaya                  5 019            6 206      (1 187)       -19%
  Premises at Plaza II (Gruzinsky Val)               159              144           15        10%
  Premises at Tverskaya Zastava Square             1 162            1 052          110        10%
  Other land bank assets                           3 165            2 175          990        46%
  Total                                          43 946            36 153        7 792        22%

Sale of residential properties

Revenue. Our revenue increased by US$12.03 million or 19%, from US$62.96 million in 2009 to
US$74.99 million in 2010. This increase resulted mainly from an increase in rental income due to
improving rent levels and occupancies, putting in operation of the Aquamarine hotel in February
2010 and higher sale prices for our remaining apartments in 4 Winds and Ozerkovskaya II
residential complexes.

Operating expenses. Our operating expenses increased by US$9.23 million, or 98%, from
US$9.43 million in 2009 to US$18.66 million in 2010. This increase was primarily due to the
following:
       Higher expenses resulting from an increase in the number of revenue producing
        properties we operated. In 2010, Aquamarine hotel operating costs were US$4.40 million.
       At Four Winds, new premises were opened (fitness and retail) resulting in additional
        US$1.51 million utility costs.
       Following a more conservative approach to financial reporting, expenses incurred in
        projects where development is not actively on-going were expensed rather than
        capitalized. This includes costs of land leases and costs of obtaining project
        documentation.
                                                                                                49

Administrative expenses. Our administrative expenses increased by US$2.23 million, or 20%,
from US$10.94 million in 2009 to US$13.18 million in 2010. This is due to an increase in audit
costs and legal costs to support the Company‘s day-to-day activities.

Other expenses. Other expenses increased by US$7.19 million, or 1036%, from US$0.69
million in 2009 to US$7.88 million in 2010. This increase primarily relates to costs incurred in
obtaining Premium listing on LSE of US$2.19 million, writing off non--recoverable VAT (older than
3 years) of US$3.34 million.

Net valuation gain/(losses) on investment property. Net result of investment property
valuation increased by US$47.37 million, or 122%, from a gain of US$38.92 million in 2009 to a
gain of US$93.92 million in 2010 and net valuation gain on properties increased by US$52.90
million, or 231% from US$22.88 million in 2009 to US$75.77 million in 2010, all mainly due to
improved market conditions and capital expenditures spent on development projects during the
year. In accordance with the revised IAS 40, which became effective on 1 January 2009, we
disclosed investment property under development on a fair value basis.

Net finance costs. Net finance costs are finance income less finance expense. Our net finance
costs decreased by US$1.30 million, or 29%, from a US$4.44 million cost in 2009 to cost of
US$3.14 million in 2010.

Finance income
Our finance income increased by US$2.94 million, or 27%, from US$10.72 million in 2009 to
US$13.66 million in 2010. This increase was primarily due to higher interest income received from
funds held on bank deposits.

Net foreign exchange loss
We recorded a net foreign exchange loss of US$7.98 million in 2010 compared to a net foreign
exchange gain of US$6.98 million in 2009. Our foreign exchange loss in 2010 was primarily due to
the weakening of the Rouble against the US Dollar in 2009 which resulted in US Dollar
denominated bank loans payable by our Russian subsidiaries being increased when translated
into Rouble and transferring from depreciating against US Dollar Eurobonds to USD based
instruments.

Finance expenses
Finance expenses increased from US$3.73 million in 2009 to US$8.83 million in 2010. The
increase in finance expenses from 2009 to 2010 primarily resulted from higher interest expenses
accrued (rather than capitalised) on the loan granted by MDM Bank to Westec (Four Winds office),
which increased from US$2.05 million to US$6.67 million.

Current tax expense. Our current tax expense decreased in 2010 by US$2.74 million or by 6%,
from US$47.2 million in 2009 to US$44.4 million in 2010. The reason for this increase is the higher
levels of income generated from rental activity of income producing assets. The Cypriot rate of
corporate income tax remained unchanged during 2009 and 2010 and profit on the disposal of
investments in subsidiaries is not subject to income tax in Cyprus.

Profit/Loss for the year. Due to the factors described above, we recorded a US$25.88 million
profit for 2010 compared to a loss of US$2.66 million for 2009.
                                                                                                50

Liquidity and Capital Resources

Cash flows
                            Summary of cash flows for 2010 and 2009

                                                        For the year     For the year
                                                        ended     31     ended      31
  USD 'thousands
                                                        December         December
                                                        2010             2009
  Net cash from / (used in) operating activities              22 969          (15 119)
  Net cash used in investing activities                      (148 083)        (81 541)
  Net cash flows from financing activities                       2 854          76 513
  Effect of exchange rate fluctuations                           2 024           1 438
  Net decrease in cash and cash equivalents                  (120 236)        (18 709)
  Cash and cash equivalents at 1 January                       210 830        272 498
  Cash and cash equivalents at 31 December                     129 839        210 830


Net cash used in operating activities
Net cash from operating activities increased from a negative US$15.12 million in 2009 to a positive
US$22.97 million in 2010. This increase was primarily attributable to an increase in profit after
adding back all non--cash items in the amount of US$7.55 million, an increase in working capital
changes of US$33.48 million from a negative US$14.92 million in 2009 to a positive US$18.56
million in 2010 less additional taxes paid in the amount of US$2.94 million. The increase in
working capital changes was mainly due to an increase in cash receipts from the residential sales
of Ozerkovskaya II residential complex. In addition, in 2009, a $23.48 million decrease in payables
to the JV partner in Krown Investments was recorded as compared to a decrease of only US$5.64
million in 2010.

Net cash used in investing activities
Net cash used in investing activities increased from a negative US$81.54 million in 2009 to a
negative US$148.08 million 2010. This increase was primarily attributable to advances received
for the sale of the Kossinskaya project of US$70 million in 2009 whereas only US$3 million in
2010.

Net cash used in financing activities
Net cash used in financing activities decreased from US$76.52 million in 2009 to US$2.85 million
in 2010. The Company borrowed US$130.82 million in 2010 as opposed to US$187.99 million in
2009. Of US$130.82 million, US$117.15 was used to finance AFIMALL City, US$10.40 million for
Ozerkovskaya III project (through Krown Investments, the Company‘s 50% subsidiary) and
US$2.50 million for the Kalinina hotel project.

Capital Resources

Capital Requirements.

We require capital to finance capital expenditures, consisting of cash outlays for capital
investments in active real estate development projects; repayment of debt; changes in working
capital; and general corporate activities.

Real estate development is a capital -intensive business, and we expect to have significant
ongoing liquidity and capital requirements in order to finance our active development projects.

For the foreseeable future, we expect that we will continue to rely on our financing activities to
support our investing and operating activities. We also expect that our capital expenditures in
connection with the development of real estate properties will comprise the majority of our cash
outflows for the foreseeable future.

We completed 2010 with a strong liquidity position comprising US$129.84 million cash and cash
equivalents on our balance sheet as at 31 December 2010. This is due to the Company‘s ability to
balance liquidity from a number of sources, including cash proceeds from the IPO and sales of
residential projects, as well as use project fenced debt financing to fund our projects.
                                                                                                               51

Our financing strategy is to maximise the amount of debt financing for projects under construction
while maintaining healthy loan-to-value levels. After delivery and commissioning, we refinance the
properties at more favourable terms including longer amortization periods, lower interest rates and
higher principal balloon payments.

In general, collateral for this debt are property rights and shares of property holding companies.

As of December 31, 2010 our debt portfolio was as follows:

      Project        Lending        Max debt      Current     Available    Nominal     Currency         Maturity
                      bank         limit (USD     balance    (USD mln)     Interest
                                      mln)         (USD                      rate
    /Corporate                                                                                         (dd.mm.yy)
                                                   mln)




  AFIMALL CITY         VTB            279.0        279.0          0         13.25%       RUR           28.08.2013

  Tverskaya Mall     Sberbank         280.0         77.8          0         6 month      USD           16.08.2014
                                                                             LIBOR
                                                                              +8%




 Ozerkovskaya III    Sberbank         74.0         10.4*        53.2         13%         RUR           17.06.2015



   Kalinina hotel    Sberbank         20.0          2.5         17.5        6.75%        RUR           20.12.2014

     4 Winds        MDM Bank          75.0          73.8          0         10.5%        USD           25.12.2007



    Corporate        Deutsche         60.0          10.2          0         6 month      USD           12.02.2011
                      Bank                                                   LIBOR
                                                                             +2.4%

*recoded value on the balance sheet, Borrower is Krown Investments, in which the Company owns 50%.



Accrued Interest expenses of the total amount of loans outstanding are US$2.3 million. In addition,
there are loans received by subsidiaries before being acquired by the Company in the amount of
US$14.5 million.
For more detail, see notes 5 and 25 to our consolidated financial statements.

As at 31 December 2010, our loans and borrowings were payable as follows:


                                                                                                   As at 31
                                                                             As at 31
  USD 'million                                                                                    December
                                                                          December 2010             2009

  Less than one year                                                          33,883                 94,005
  Between one and five years                                                 380,352                 263,046
  More than five years                                                        54,000                 59,050
  Total                                                                      468,235                 416,101

Portfolio Valuation

As at 31 December 2010, JLL, our independent appraisers, valued our portfolio of yielding
properties at US$161.65 million, our portfolio of commercial and residential projects under
development at US$1,605.20 million, our portfolio of residential properties at US$58.10 million, our
hotel portfolio at US$97.90 million and our land bank portfolio at US$385.85.
                                                                                                  52

Consequently, the total value of our investment portfolio, as valued by JLL, is US$2.31 billion. This
figure represents a 20% increase since last valuations carried on 31 December 2009 and 31 May
2010 of US$1.92 billion.

Major drivers of the portfolio revaluation were the following:
       Progressed construction works in the Company's projects which are currently under
        development. The progress had a positive effect on the valuations through a decrease in
        development risks.
       Due to improving macroeconomic conditions in Russia in general and in real estate market
        in particular, yield compression and rent increases are observed due to which JLL
        concluded higher values for many of the Company‘s projects.
       In December 2010, we managed to complete AFIMALL City and achieve a rate of
        occupancy of 75%. Due to this progress in construction, capitalization of expenses,
        improvements in yields and letting, JLL appraised the property at 49% more than at 31
        December 2009, at approximately US$490 million to US$732 million (in respect of the
        75% of the project belonging to the Company). It should be noted that, out of the total
        value increase, the Company has recorded a revaluation gain of $US96.12 million.
       Four Winds residential complex includes commercial premises. Accordingly, despite
        selling 7 apartments in 2010, resulting in a decrease of balance sheet value of 24%, JLL
        concluded a 25% increase in the overall value of the property.
       Plaza IIa was revalued up by 86% to US$12,200,000 due to a decreased development
        budget and improved market conditions, resulting from removal of demolishing costs on
        the site, an expense now to be incurred by the municipal authorities.
       Ozerkovskaya Phase III value has increased by 81% due to significant progress achieved
        in construction and improving yields for quality offices in Moscow‘s central business
        district.
       Ukraine was treated as a single project in the last valuation and as two separate projects
        being Borysol and Zaporozhie in the December 31, 2010 valuation.
       Despite positive values for Kuntsevo, Volgograd, Zaporozhie and Old Lake, the Company
        made a decision to write down their values to zero. For Kuntsevo, this is due to risks of not
        being able to obtain and renew a full set of project documentation and therefore eliminate
        uncertainty over the project start date.
       For the other projects – this is due to uncertainty in demand levels given which there was
        no economic rationale for starting the developments.
       Other changes in JLL valuation and balance sheet values of properties are due to different
        valuation dates. The last valuation was carried out for some properties as at May 31, 2010
        and June 20, 2010 while the comparable balance sheet values are as at December 31,
        2009.
                                                                                                                            53


#   Property             Date      of   Last valuation     Valuation       Change     Balance sheet   Balance sheet   Change
                         last                              31/12/2010      in value   value           value           in
                         valuation                                                    31/12/2009      31/12/2010      Balance
                                                                                                                      sheet
                                                                                                                      value
                                                     Income yielding properties
1   H2O                  31/12/2009     14,850,000       15,200,000        2%         11,150,000      15,200,000      36%
2   Ozerkovskaya         31/12/2009     2,380,000          2,550,000       7%         1,980,000       2,550,000       29%
    IV
3   Four     Winds       31/12/2009     104,025,000        119,300,000     15%        100,150,000     119,300,000     19%
    Office
4   Berezhkovskaya       31/12/2009     23,675,000       24,600,000      4%           27,195,946      33,243,243      22%
    Total                               144,930,000      161,650,000     12%          140,475,946     170,293,243     21%
                                               Active Projects Under Development
5   AFI Mall City        31/12/2009     490,305,334      732,400,000     49%          490,305,334     732,400,000     49%
6   Tverskaya            31/12/2009     76,595,000       74,800,000      --2%         76,595,000      74,800,000      --2%
    Zastava
7   Plaza I              31/12/2009     131,725,000        133,700,000     1%         131,725,000     133,700,000     1%
8   Plaza II             31/12/2009     57,600,000         72,800,000      26%        57,600,000      72,800,000      26%
9   Plaza IIa            31/12/2009     5,825,000          12,200,000      109%       5,825,000       12,200,000      109%
1   Plaza IV             31/12/2009     95,260,000         105,000,000     10%        100,273,684     110,526,316     10%
0
1   Paveletskaya         31/12/2009     12,750,000         21,600,000      69%        12,750,000      21,600,000      69%
1
1   Ozerkovskaya         31/12/2009     66,700,000         140,450,000     111%       66,700,000      140,450,000     111%
2   Phase III
1   Kosinskaya           31/05/2010     144,350,000        144,250,000     0%         190,043,580     144,250,000     --24%
3
    Total                               1,081,110,334 1,437,200,000 33%             1,131,817,598     1,442,726,316   27%
                                             Residential Projects Under Development
1   Otradnoye            31/05/2010     98,500,000       104,000,000      6%        104,695,572       105,962,436     1%
4
1   Botanic Garden       31/05/2010     60,400,000         64,000,000      6%         66,533,637      68,841,949      3%
5
    Total                               158,900,000    168,000,000      6%            171,229,209     174,804,385     2%
                                                Completed Residential Properties
1   Four       Winds     31/05/2010     22,460,000     28,100,000       25%           35,375,609      26,723,248      --24%
6   Residential (incl.
    fitness & retail)
1   Ozerkovskaya II      31/05/2010     41,500,000         30,000,000      --28%      30,589,630      17,342,984      --43%
7
    Total                               63,960,000         58,100,000       --9%      65,965,239      44,066,232      --33%
                                                         Land Bank Properties
1   Kuntsevo             31/05/2010     76,800,000         77,200,000       1%        74,282,884      0               --100%
8
1   Ruza                 31/05/2010     63,500,000         63,700,000      0%         4,171,864       4,108,753       --2%
9
2   St. Petersburg       31/05/2010     1,810,000          1,850,000       2%         3,862,524       1,850,000       --52%
0
2   Volgograd            31/05/2010     2,925,000          2,950,000       1%         1,266,923       0               --100%
1
2   Bolshaya             31/05/2010     205,660,000        212,400,000     3%         203,290,490     212,400,000     4%
2   Pochtovaya
2   Boryspol             31/05/2010     11,730,000         13,500,000      15%        0               13,500,000      n/a
3   (Ukraine)
2   Zaporozhie           31/05/2010     5,170,000          5,050,000       --2%       34,618,633      0               --100%
4   (Ukraine)
2   Old        Lake      31/05/2010     9,060,000          9,200,000       2%         3,009,187       0               --100%
5   (Kislovodsk)
    Total                               376,655,000        385,850,000     2%         324,502,505     231,858,753     --29%
                                                             Hotels
2   Aquamarine           31/05/2010     40,800,000         42,800,000      5%         34,729,389      35,584,021      2%
6   Hotel
2   Plaza Spa Hotel      31/05/2010     30,200,000         30,600,000      1%         27,049,326      26,786,827      --1%
7   in Kislovodsk
2   Kalinina Hotel in    31/05/2010     7,385,000          7,600,000       3%         12,582,000      8,200,000       --35%
8   Zheleznovodsk
2   Park Plaza hotel     31/05/2010     9,730,000          10,000,000      3%         8,045,000       8,386,050       4%
9   developments in
    Kislovodsk
3   Versalles            31/05/2010     6,670,000          6,900,000       3%         19,146,000      7,980,000       --58%
0   project        in
    Kislovodsk
    Total                               94,785,000         97,900,000      3%         101,551,715     86,936,898      --14%
    Grand Total                         1,920,340,334      2,308,700,000   20%        1,935,542,211   2,150,685,826   11%
                                                                                                 54

Critical Accounting Policies

Critical accounting policies are those policies that require the application of our management's
most challenging, subjective or complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain and may change in subsequent
periods. Critical accounting policies involve judgments and uncertainties that are sufficiently
sensitive to result in materially different results under different assumptions and conditions. We
believe that our most critical accounting policies are those described below.

A detailed description of certain of the main accounting policies we use in preparing our
consolidated financial statements is set forth in note 3 to our consolidated financial statements.

Estimates regarding fair value

We make estimates and assumptions regarding the fair value of our investment properties that
have a significant risk of causing a material adjustment to the amounts of assets and liabilities on
our balance sheet. In particular, our investment properties under development (which currently
comprise the majority of our projects) are re-measured at fair value upon completion of
construction and the gain or loss on re-measurement is recognised in our income statement, as
appropriate. In forming an opinion on fair value, we consider information from a variety of sources
including, among others, the current prices in an active market, third party valuations and internal
management estimates.

The principal assumptions underlying our estimates of fair value are those related to the receipt of
contractual rentals, expected future market rentals, void/vacancy periods, maintenance
requirements and discount rates that we deem appropriate. We regularly compare these
valuations to our actual market yield data and actual transactions and those reported by the
market. We determine expected future market rents on the basis of current market rents for similar
properties in the same location and condition.

Impairment of financial assets

We recognise impairment losses with respect to financial assets, including loans receivable and
trade and other receivables, in our income statement if objective evidence indicates that one or
more events have had a negative effect on the estimated future cash flows of that asset. We test
significant financial assets for impairment on an individual basis and assess our remaining
financial assets collectively in groups that share similar credit characteristics. Impairment losses
with respect to financial assets are calculated as the difference between the asset's carrying
amount and the present value of the estimated future cash flows of the asset discounted at the
original effective interest rate of that asset.

Estimating the discounted present value of the estimated future cash flows of a financial asset is
inherently uncertain and requires us both to make an estimate of the expected future cash flows
from the asset and also to choose a suitable discount rate in order to calculate the present value
of those cash flows. Changes in one or more of these estimates can lead us to either recognizing
or avoiding impairment charges.

Impairment of non-financial assets

We recognise impairment loss with respect to non--financial assets, including investment property
under development and trading properties under construction, if the carrying amount of the asset
exceeds its recoverable amount. The recoverable amount of an asset is the greater of its value in
use and its fair value less costs to sell. In assessing value in use, we discount estimated future
cash flows of the asset 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. The carrying
amounts of impaired non-financial assets are reduced to their estimated recoverable amount
either directly or through the use of an allowance account and we include the amount of such loss
in our income statement for the period.

We assess at each reporting date whether there is any indication that a non-financial asset may
be impaired. If any such indication exists, we then estimate the recoverable amount of the asset.
Estimating the value in use requires us to make an estimate of the expected future cash flows
from the asset and also to choose a suitable discount rate in order to calculate the present value
of those cash flows. The development of the value in use amount requires us to estimate the life of
the asset, its expected cash flows over that life and the appropriate discount rate, which is
                                                                                                      55

primarily based on our weighted average cost of capital, itself subject to additional estimates and
assumptions. Changes in one or all of these assumptions can lead to us either recognizing or
avoiding impairment charges.

Deferred income taxes

We are required to estimate our income taxes in each of the jurisdictions in which we operate. This
process involves a jurisdiction-by-jurisdiction estimation of actual current tax exposure and the
assessment of the temporary differences resulting from differing treatment of items, such as
capitalization of expenses, among others, for tax and financial reporting purposes. These
differences result in deferred tax assets and liabilities, which are included within our consolidated
balance sheet. We must assess, in the course of our tax planning process, our ability and the
ability of our subsidiaries to obtain the benefit of deferred tax assets based on expected future
taxable profit and available tax planning strategies. If, in our management‘s judgment, the deferred
tax assets recorded will not be recovered, a valuation allowance is recorded to reduce the
deferred tax asset.

Significant management judgment is required in determining our provision for income taxes,
deferred tax assets, deferred tax liabilities and valuation allowances to reflect the potential inability
to fully recover deferred tax assets. In our consolidated financial statements the analysis is based
on the estimates of taxable income in the jurisdictions in which we operate and the period over
which the deferred tax assets and liabilities will be recoverable.

If actual results differ from these estimates, or we adjust these estimates in future periods, we may
need to establish an additional valuation allowance which could adversely affect our financial
position and results of operations.

Share--based payment transactions

The fair value of employee stock options is measured using a binomial lattice model. The fair
value of share appreciation rights is measured using the Black-Scholes formula. Measurement
inputs include share price on the measurement date, exercise price of the instrument, expected
volatility (based on weighted average historic volatility adjusted for changes expected due to
publicly available information), weighted average expected life of the instruments (based on
historic experience and general option holder behaviour), expected dividends and the risk-free
interest rate (based on government bonds). Service and nonmarket performance conditions
attached to the transactions are not taken into account in determining fair value.


Related Party transactions

Other than he general contractor agreement between the Company and with Danya Cebus PM
there were no related party transactions during the financial year 2010.
                   AFI DEVELOPMENT PLC

CONSOLIDATED AND PARENT COMPANY SEPARATE FINANCIAL STATEMENTS

                For the year ended 31 December 2010
                               AFI DEVELOPMENT PLC

                       CONSOLIDATED FINANCIAL STATEMENTS

                             For the year ended 31 December 2010


                                      CONT ENTS


                                                                    Page

Board of Directors and Professional Advisers                         58

Board of Directors‟ Report                                          59-61

Directors‟ Responsibility Statement                                  62

Independent Auditors‟ Report                                        63-64

Consolidated Financial Statements                                  65-116

Parent Company Separate Financial Statements                       117-138
                                                                                         58
                           AFI DEVELOPMENT PLC

               BOARD OF DIRECTORS AND PROFESSIONAL ADVISERS



Board of Directors       Lev Leviev - Chairman

                         Izzy Cohen

                         Alexander Khaldey

                         Avraham Barzilay (resigned on 31 December 2010)

                         Avinadav Grinshpon (resigned on 30 June 2010)

                         Moshe Amit

                         Christakis Klerides

                         John Robert Camber Porter

                         Panayiotis Demetriou (appointed on 20 May 2010)

                         Michalakis Sarris (appointed on 20 May 2010)


Secretary                Emerald Secretarial Limited


Independent Auditors     KPMG Limited


Bankers                  Joint Stock Commercial Savings Bank of the Russian Federation

                         Joint Stock Company VTB Bank

                         Bank Leumi (UK) plc

                         Deutsche Bank AG London

                         Morgan Stanley Smith Barney LLC

                         Citibank N.A.



Registered Office        Olympion, 25
                         Omiros & Araouzos Tower,
                         3035 Limassol,
                         Cyprus
                                                                                                 59
                                  AFI DEVELOPMENT PLC

                             BOARD OF DIRECTORS‟ REPORT


The Board of Directors of AFI Development Plc (the “Company”) presents to the members its
annual report together with the audited consolidated financial statements of the Company for the
year ended 31 December 2010.

PRINCIPAL ACTIVITIES

The principal activities of the Group, which remained unchanged from last year, are real estate
investment and development. The principal activity of the Company is the holding of investments
in subsidiaries.

EXAMINATION OF THE DEVELOPMENT, POSITION AND PERFORMANCE OF THE
ACTIVITIES OF THE GROUP

AFI Development is one of the leading real estate development companies operating in Russia and
other CIS countries. The Company focuses on developing and redeveloping high quality
commercial and residential real estate assets in Moscow, the Moscow Region and other major
Russian cities such as Kislovodsk, St. Petersburg and Volgograd, as well as Ukraine. The
Company‟s strategy is to sell the residential properties it develops and to either lease the
commercial properties it develops or sell them if it is able to achieve a favourable return.

As at 31 December 2010 the Group has a portfolio of 4 yielding properties, 11 investment projects
under development, 2 trading properties, 8 land bank projects and 5 hotel projects at various stages
of development in 17 locations in Russia and Ukraine. These comprise commercial projects
focused on offices, shopping centres, hotels, mixed-use properties and residential projects in prime
locations in Moscow focused on upscale apartment buildings and residential districts in the
Moscow Region aimed at the upper middle class segment of the market.

FINANCIAL RESULTS

The Group‟s results are set out in the consolidated income statement on page 66. The profit of the
Group for the year before taxation amounted to US$70,294 thousand (2009: US$44,511 thousand).
The profit after taxation attributable to the Group‟s shareholders amounted to US$25,516 thousand
(2009: loss US$3,691 thousand), which the Board of Directors recommends to be transferred to
the retained earnings.
                                                                                               60
                                  AFI DEVELOPMENT PLC

                             BOARD OF DIRECTORS‟ REPORT


DIVIDENDS

The Board of Directors does not recommend the payment of a dividend and the net profit for the
year is transferred to retained earnings.
MAIN RISKS AND UNCERTAINTIES

The most significant risks faced by the Group and the steps taken to manage these risks are
described in note 5 of the consolidated financial statements.

FUTURE DEVELOPMENTS

The Group is one of the leading real estate development companies operating in Russia. It focuses
on developing and redeveloping high quality commercial and residential real estate assets in
Moscow and the Moscow Region. The strategy during the reporting period and for the future
periods is to sell the residential properties that the Group develops and to either lease the
commercial properties that the Group develops or sell them if the Group is able to achieve a
favourable return.

SHARE CAPITAL

    Pursuant to the resolutions of the Company‟s AGM on 21 May 2010 the Company:
     increased its authorized share capital from 1,000,000,000 shares of US$0.001 each to
       2,000,000,000 shares of US$0.001 each by creation of 1,000,000,000 new shares of
       nominal value of US$0.001 each to rank pari passu with the existing shares in the capital
       of the Company,
     designated the 523,847,027 held by the existing shareholders as “A” ordinary shares,
       together with 100,000,000 unissued shares forming the part of the authorised share
       capital of the Company to be designated as “A” ordinary shares and the remaining
       1,376,152,973 unissued shares were designated as “B” ordinary shares.
     capitalised out of the share premium account an amount of US$523,847 against the
       issuance of 523,847,027 “B” ordinary shares of US$0.001 each, fully paid up, which
       were allotted and distributed as bonus shares to and amongst the shareholders of
       Company of 2 July 2010, on the basis of one “B” share for every one existing ordinary
       share.

    On 5 July 2010 the Company‟s 523,847,027 “B” shares, issued as a bonus issue to the
    existing shareholders, were admitted to a premium listing on the Official List of the UK
    Listing Authority and to trading on the main market of London Stock Exchange (“LSE”).

    The Company retained its GDR listing as well. Since then each GDR represents one “A”
    ordinary share on deposit with BNY (Nominees) Limited, as custodian.

BRANCHES

The Group operates seven branches and/or representative offices of Cypriot and BVI entities in the
Russian Federation. These are Bellgate Construction Ltd branch, which operates AFIMALL City
(ex Mall of Russia) project. The Dulverton Ltd branch and the Westec Four Winds Ltd branch,
which operate Four Winds I and II projects respectively. Amerone Ltd branch and Bugis Finance
branch operating investment properties and Bastet Estates Ltd branch and Falgaro Investments Ltd
branch acting as sale agents for residential properties.
                                                                                                  61
                                   AFI DEVELOPMENT PLC

                              BOARD OF DIRECTORS‟ REPORT


BOARD OF DIRECTORS
The members of the Board of Directors as at 31 December 2010 and at the date of this report are
shown on page 58. The directors‟ date of appointment and resignation, if applicable, is indicated
on page 58. The term of those that have not resigned will expire on the date of the next annual
general meeting of the shareholders but all of them are eligible for re-election. There were no
significant changes in the assignment of responsibilities of the Board of Directors.

POST BALANCE SHEET EVENTS

Events which took place after the reporting date and which have a bearing on the understanding of
the financial statements are described in note 37 of the consolidated financial statements.

INDEPENDENT AUDITORS
The independent auditors, KPMG Limited, have expressed their willingness to continue offering
their services. A resolution reappointing the auditors and giving authority to the Board of Directors
to fix their remuneration will be proposed at the Annual General Meeting.

                                                              By order of the Board

                                                           Emerald Secretarial Services
                                                                   Secretary
Nicosia, 28 March 2011
                                                                                                    62
                                  AFI DEVELOPMENT PLC


                          DIRECTORS‟ RESPONSIBILITY STATEMENT

Each of the directors, whose names are listed below confirm that, to the best of their knowledge:

       the consolidated and the parent company separate financial statements, prepared in
        accordance with IFRS as adopted by the EU, give a true and fair view of the assets,
        liabilities, financial position and profit or loss of the Company and the undertakings
        included in the consolidation as a whole; and

       the adoption of a going concern basis for the preparation of the financial statements
        continues to be appropriate based on the foregoing and having reviewed the forecast
        financial position of the Group; and

       the Board of Directors‟ reports include a fair review of the development and performance
        of the business and the position of the Company and the undertakings included in the
        consolidation as a whole, together with a description of the principal risks and
        uncertainties that they face.

The Directors of the Company as at the date of this announcement are as set out below:

The Board of Directors

Executive directors

Lev Leviev – Chairman             .............................................................

Alexander Khaldey                 .............................................................

Izzy Cohen                        .............................................................

Non-executive directors

Moshe Amit                        .............................................................

Christakis Klerides               .............................................................

John Robert Camber Porter         .............................................................

Panayiotis Demetriou              .............................................................

Michalakis Sarris                 .............................................................
                                                                                                    63
                             Independent Auditors’ Report

To the Members of AFI Development Plc

Report on the Consolidated Financial Statements

We have audited the accompanying consolidated financial statements and the parent company
separate financial statements of AFI Development Plc and its subsidiaries, which comprise the
consolidated statement of financial position and the parent company separate statement of
financial position as at 31 December 2010, and the consolidated statements of income statement,
comprehensive income, changes in equity and cash flows and the parent company separate
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.

Board of Directors’ Responsibility for the consolidated Financial Statements
The Company‟s Board of Directors is responsible for the preparation of financial statements that
give a true and fair view in accordance with International Financial Reporting Standards as
adopted by the European Union (EU) and the requirements of the Cyprus Companies Law, Cap.
113. 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 misstatement, 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 financial statements based on our audit. We
conducted our audit in accordance with International Standards on Auditing. Those Standards
require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditor‟s judgment,
including the assessment of the risks of material misstatement of the financial statements, whether
due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity's preparation of financial statements that give a true and fair view 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 policies used and the reasonableness of accounting
estimates made by the Board of Directors, as well as evaluating the overall presentation of the
financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
                                                                                                64
Opinion
In our opinion, the consolidated and parent company separate financial statements give a true and
fair view of the financial position of AFI Development Plc and its subsidiaries as at 31 December
2010, and of their financial performance and their cash flows for the year then ended in
accordance with International Financial Reporting Standards as adopted by the EU and the
requirements of the Cyprus Companies Law, Cap. 113.

Report on Other Legal and Regulatory Requirements

Pursuant to the requirements of the Companies Law, Cap. 113, we report the following:
     We have obtained all the information and explanations we considered necessary for the
      purposes of our audit.
     In our opinion, proper books of account have been kept by the Company.
     The Company‟s consolidated and parent company separate financial statements are in
      agreement with the books of account.
     In our opinion and to the best of the information available to us and according to the
      explanations given to us, the consolidated and the parent company separate financial
      statements give the information required by the Companies Law, Cap. 113, in the manner
      so required.
     In our opinion, the information given in the report of the Board of Directors is consistent
      with the consolidated and parent company separate financial statements.

We have nothing to report in respect of the Listing Rules, where we are required to review the part
of Corporate Governance statement relating to the company‟s compliance with the nine provisions
of the June 2008 Combine Code specified for our review.

Other Matter

This report, including the opinion, has been prepared for and only for the Company‟s members as
a body in accordance with Section 156 of the Companies Law, Cap.113 and for no other purpose.
We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any
other person to whose knowledge this report may come to.




KPMG Limited

Chartered Accountants


Nicosia, 28 March 2011
                                  AFI DEVELOPMENT PLC

                      CONSOLIDATED FINANCIAL STATEMENTS

                            For the year ended 31 December 2010


                                       CONT ENTS


                                                                   Page

Consolidated Income Statement                                       66

Consolidated Statement of Comprehensive Income                      67

Consolidated Statement of Changes in Equity                         68

Consolidated Statement of Financial Position                        69

Consolidated Statement of Cash Flows                                70

Notes to the Consolidated Financial Statements                    71 – 116
                                                                                                66
                                     AFI DEVELOPMENT PLC

                            CONSOLIDATED INCOME STATEMENT

                                 For the year ended 31 December 2010


                                                                         2010             2009
                                                            Note        US$ ‟000         US$ ‟000

Revenue
Rental income                                                             43,946           36,153
Construction consulting/management fees                                      876              906
                                                                          44,822           37,059

Other income                                                  8              231            3,361
Operating expenses                                                       (18,660)          (9,430)
Administrative expenses                                                  (13,178)         (10,944)
Other expenses                                                9           (7,879)            (693)
                                                                           5,336           19,353

Loss on disposal of investment in subsidiaries               29                -                (97)
Impairment of prepayment for investments                     21          (17,676)                 -
                                                                         (17,676)               (97)

Valuation gain on investment property                       13,14         93,917           38,923
Impairment loss on trading properties                       19,20         (1,251)         (16,048)
Impairment loss on property, plant and equipment             15          (16,893)               -
Net valuation gain on properties                                          75,773           22,875

Proceeds from sale of trading properties                                  30,170           25,900
Carrying value of trading properties sold                  19, 20        (20,173)         (19,085)
Profit on disposal of trading properties                                   9,997            6,815

Results from operating activities                                         73,430           48,946

Finance income                                                            13,657           17,699
Finance costs                                                            (16,793)         (22,134)
Net finance costs                                            10           (3,136)          (4,435)

Profit before income tax                                                  70,294           44,511
Income tax expense                                           11          (44,416)         (47,166)

Profit/(loss) for the period                                              25,878           (2,655)

Profit/(loss) attributable to:
Owners of the Company                                                     25,516           (3,691)
Non-controlling interest                                                     362            1,036
Profit/(loss) for the period                                              25,878           (2,655)

Profit/(loss) per share
Basic and diluted profit/(loss) per share (cent)             12              2.44           (0.35)



The notes on pages 71 to 116 are an integral part of these consolidated financial statements.
                                                                                                67
                                   AFI DEVELOPMENT PLC


              CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

                               For the year ended 31 December 2010


                                                                         2010             2009
                                                                        US$ ‟000         US$ ‟000

Profit/(loss) for the period                                              25,878           (2,655)

Other comprehensive income:
Foreign currency translation differences for foreign operations               109         (20,623)

Total comprehensive income for the period                                 25,987          (23,278)


Total comprehensive income attributable to:
Owners of the parent                                                      25,629          (24,279)
Non-controlling interest                                                     358            1,001
                                                                          25,987          (23,278)




The notes on pages 71 to 116 are an integral part of these consolidated financial statements.
                                                                                                           68
                                               AFI DEVELOPMENT PLC


                              CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

                                          For the year ended 31 December 2010

                                                                                                      Non-
                                           Attributable to the owners of the Company               controlling     Total
                                                                                                     interest
                                  Share     Share          Translation Retained
                                  Capital Premium           Reserve    Earnings        Total
                                 US$ ‘000 US$ ‘000         US$ ‘000    US$ ‘000       US$ ‘000     US$ ‘000      US$ ‘000


Balance at 1 January 2009             524 1,763,933 (122,157)              85,215     1,727,515       1,866      1,729,381
Total comprehensive income for the year
Profit or loss                          -         -         -               (3,691)      (3,691)      1,036         (2,655)
Other comprehensive income
Foreign currency translation
differences                             -         -   (20,588)                    -     (20,588)        (35)       (20,623)
Total comprehensive income
for the year                            -         -   (20,588)              (3,691)     (24,279)      1,001        (23,278)
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Share option expense                    -         -         -                (575)     (575)              -           (575)
Balance at 31 December 2009           524 1,763,933 (142,745)              80,949 1,702,661           2,867      1,705,528


Balance at 1 January 2010             524 1,763,933 (142,745)              80,949     1,702,661       2,867      1,705,528
Total comprehensive income for the year
Profit or loss                          -         -        -               25,516        25,516         362        25,878
Other comprehensive income
Foreign currency translation
differences                             -          -     113                      -         113          (4)          109
Total comprehensive income
for the year                            -          -     113               25,516        25,629         358        25,987
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Issue of bonus shares                 524      (524)       -                     -            -            -            -
Share option expense                    -         -        -                   106          106            -          106
Total transactions with
owners, recorded directly in
equity                                524      (524)       -                  106           106           -            106
Balance at 31 December 2010         1,048 1,763,409 (142,632)             106,571     1,728,396       3,225      1,731,621




The notes on pages 71 to 116 are an integral part of these consolidated financial statements.
                                                                                                69
                                   AFI DEVELOPMENT PLC


 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2010

                                                                        2010               2009
                                                          Note         US$ ‘000           US$ ‘000
Assets
Investment property                                         13          192,973            140,476
Investment property under development                       14        1,674,585          1,290,191
Property, plant and equipment                               15           88,402            102,749
Other investments                                           16                -             42,959
Long-term loans receivable                                  17               38                 38
VAT recoverable                                             18            8,893             29,780
Goodwill                                                                    153                150
Total non-current assets                                              1,965,044          1,606,343
Trading properties                                          19           21,386            42,050
Trading properties under construction                       20          174,804           171,229
Inventory                                                                   576               324
Short-term loans receivable                                 17               79                73
Trade and other receivables                                 21          136,706           126,748
Income tax receivable                                       11              689                 -
Cash and cash equivalents                                   22          129,839           210,830
Assets classified as held for sale                          23                -           190,044
Total current assets                                                    464,079           741,298

Total assets                                                          2,429,123          2,347,641

Equity
Share capital                                                             1,048                524
Share premium                                                         1,763,409          1,763,933
Translation reserve                                                    (142,632)          (142,745)
Retained earnings                                                       106,571             80,949
Total equity attributable to owners of the
Company                                                     24        1,728,396          1,702,661
Non-controlling interest                                                  3,225              2,867
Total equity                                                          1,731,621          1,705,528

Liabilities
Long-term loans and borrowings                              25          434,352           322,096
Deferred tax liabilities                                    26           81,194            44,592
Total non-current liabilities                                           515,546           366,688
Short-term loans and borrowings                             25           33,883            94,005
Trade and other payables                                    27          119,834           151,702
Income tax payable                                          11                -             1,892
Deferred income                                             28           28,239            27,826
Total current liabilities                                               181,956           275,425

Total liabilities                                                       697,502            642,113

Total equity and liabilities                                          2,429,123          2,347,641
The consolidated financial statements were approved by the Board of Directors on 28 March 2011.

Lev Leviev                                                            Alexander Khaldey
Chairman                                                              Director
The notes on pages 71 to 116 are an integral part of these consolidated financial statements.
                                                                                                              70
                                          AFI DEVELOPMENT PLC


                           CONSOLIDATED STATEMENT OF CASH FLOWS

                                    For the year ended 31 December 2010

                                                                                             2010           2009
                                                                                 Note       US$‟000        US$‟000
Cash flows from operating activities
Profit/(loss) for the period                                                                    25,878       (2,655)
Adjustments for:
Depreciation                                                                       15             1,274         898
Interest income                                                                    10            (7,084)    (10,449)
Interest expense                                                                   10             7,029       3,038
Share option expense                                                               23               106        (575)
Fair value adjustments                                                                          (75,773)    (22,875)
Impairment of prepayments for investments                                          21            17,676           -
Loss on disposal of investment in subsidiaries                                     29                 -          97
Profit from sale of property, plant and equipment                                                   (36)        (66)
Change in fair value of other investments                                          10            (6,315)          -
Unrealised loss/(gain) on foreign exchange                                         10             7,977      (6,978)
Income tax expense                                                                 11            44,416      47,166
                                                                                                 15,148       7,601
Change in trade and other receivables                                                             5,618      12,454
Change in amounts receivable from related companies                                21            (3,749)       (966)
Change in inventories                                                                              (252)        233
Change in trading properties under construction                                    20            17,027      (8,382)
Change in trade and other payables                                                 27             1,234     (21,885)
Change in down payments received for construction                                  27            (1,484)     (1,448)
Change in amounts payable to related companies                                     27              (249)      1,529
Change in deferred income                                                          28               413       3,544
                                                                                                 33,706      (7,320)
Income taxes paid                                                                               (10,737)     (7,799)
Net cash from/(used in) operating activities                                                     22,969     (15,119)

Cash flows from investing activities
Receipts in advance for the sale of an investment                                             2,506          70,311
Payment of expenses associated to the disposal of investments                                (1,950)              -
Proceeds from sale of property, plant and equipment                                              98             423
Net cash outflow for the acquisition of investments                                7              -         (31,894)
Interest received                                                                             2,429          10,100
Cash received from investment portfolio                                                      10,237               -
Acquisition of other investments                                                               (208)              -
Change in advances to builders                                                    21            224          66,898
Payments for investment property under development                              13, 14     (154,322)       (185,342)
Change in VAT recoverable                                                                    (2,360)         (7,540)
Payments for acquisition of property, plant and equipment                          15        (4,734)         (4,497)
Acquisition of intangible assets                                                                 (3)              -
Net cash used in investing activities                                                      (148,083)        (81,541)

Cash flows from financing activities
Payments for loan receivable                                                                      -            (64)
Proceeds from loans and borrowings                                                          130,820        187,985
Repayment of loans and borrowings                                                           (78,163)       (71,668)
Interest paid                                                                               (49,803)       (39,740)
Net cash from financing activities                                                            2,854         76,513

Effect of exchange rate fluctuations                                                              2,024       1,438
Net decrease in cash and cash equivalents                                                  (120,236)       (18,709)
Reclassification to cash and cash equivalents/other investments                              39,245        (42,959)
Cash and cash equivalents at 1 January                                                      210,830        272,498
Cash and cash equivalents at 31 December                                           22       129,839        210,830

The notes on pages 71 to 116 are an integral part of these consolidated financial statements.
                                                                                                  71
                                  AFI DEVELOPMENT PLC

              NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                             For the year ended 31 December 2010


1. INCORPORATION AND PRINCIPAL ACTIVITY

  AFI Development PLC (the “Company”) was incorporated in Cyprus on 13 February 2001 as a
  limited liability company under the name Donkamill Holdings Limited. In April 2007 the
  Company was transformed into public company and changed its name to AFI Development PLC.
  The address of the Company‟s registered office is 25 Olympion Street, Omiros & Araouzos
  Tower, 3035 Limassol, Cyprus. The Company is a 54% (31/12/2009: 71.20%) subsidiary of
  Africa Israel Investments Ltd (“Africa-Israel”), which is listed in the Tel Aviv Stock Exchange
  (“TASE”). The decrease was a result of the debt restructuring of Africa-Israel‟s debt to the
  holders of its previously issued bonds (the “Settlement”), pursuant to which Africa-Israel
  converted part of its debt into AFI Development‟s equity amounting to 92,720,923 shares,
  representing approximately 17.7% of the Company's equity capital. In order to facilitate this part
  of the Settlement, Africa-Israel converted a corresponding amount of its shares in the Company
  into GDRs. Following the completion of the Settlement, Africa-Israel remained AFI
  Development‟s majority shareholder with 54% of the Company‟s shares. In addition, Africa-
  Israel has pledged 126,605,557 of its GDRs in the Company to the bond holders. A 9.7% of the
  Company‟s share capital is held by Nirro Group S.A. and the remaining shareholding of “A”
  shares is held by a custodian bank in exchange for the GDRs issued and listed in the London
  Stock Exchange (“LSE”). On 5 July 2010 the Company issued by way of a bonus issue,
  523,847,027 “B” shares, which were admitted to a premium listing on the Official List of the UK
  Listing Authority and to trading on the main market of LSE. On the same date, the ordinary
  shares of the Company were designated as “A” shares. Further details in note 24.

  The consolidated financial statements of the Company as at and for the year ended 31 December
  2010 comprise of the Company and its subsidiaries (together referred to as the “Group”) and the
  Group‟s interest in jointly controlled entities. The principal activity of the Group is real estate
  investment and development.

  The principal activity of the Company is the holding of investments in subsidiaries and joint
  ventures as presented in note 36 “Group Entities”.

2. BASIS OF PREPARATION

  Statement of compliance
  The consolidated financial statements have been prepared in accordance with International
  Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) and the
  requirements of the Companies Law of Cyprus, Cap. 113.

  The consolidated financial statements were authorised for issue by the Board of Directors on 28
  March 2011.

  Basis of measurement
  The consolidated financial statements have been prepared on the historical cost basis as
  modified, up to 31 December 2003, by the provisions of IAS 29 “Reporting in Hyperinflationary
  Economies” which provides for the restatement of non-monetary assets and liabilities to account
  for the inflation. The historical cost basis is also modified in regard to investment properties,
  investment property under development and other investments which are presented at fair value
  and trading properties, trading properties under construction which are presented net of any
  impairment to their value.
                                                                                                72
                                  AFI DEVELOPMENT PLC

               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                              For the year ended 31 December 2010


2. BASIS OF PREPARATION (continued)

   Functional and presentation currency
   These consolidated financial statements are presented in United States Dollars which is the
   Company‟s functional currency. All financial information presented in United States Dollars has
   been rounded to the nearest thousand except when otherwise indicated.

   Use of estimates and judgements
   The preparation of the consolidated financial statements in conformity with IFRSs requires
   management to make judgements, 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 these 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 and critical judgements in applying
   accounting policies that have the most significant effect on the amounts recognised in the
   consolidated financial statements is included in the following notes:

       Note 7 – business combinations
       Note 11 – provision for tax liabilities
       Note 13 – valuation of investment property
       Note 14 – valuation of investment property under development
       Note 15 – valuation of land and buildings and buildings under construction
       Note 16 – valuation of other investments
       Note 19 – valuation of trading properties
       Note 20 – valuation of trading properties under construction
       Note 21 – recoverability of receivables
       Note 26 – utilisation of tax losses
       Note 29 – estimated cost of disposed assets and liabilities
       Note 34 – contingencies
                                                                                                   73
                                  AFI DEVELOPMENT PLC


              NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                              For the year ended 31 December 2010

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 the note above which addresses changes in accounting policies.

  Certain comparative amounts have been reclassified to conform to the current year‟s
  presentation.

  Basis of consolidation
  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. Losses applicable to the non-controlling interests in a subsidiary
  are allocated to the non-controlling interests even if doing so causes the non-controlling interests
  to have a deficit balance.

  Acquisitions from entities under common control
  Business combinations arising from transfers of interests in entities that are under the control of
  the shareholder that controls the Group are accounted for as if the acquisition had occurred at the
  beginning of the earliest comparative period presented or, if later, at the date that common
  control was established; for this purpose comparatives are restated. The assets and liabilities
  acquired are recognised at the carrying amounts recognised previously in the Group controlling
  shareholder‟s consolidated financial statements. The components of equity of the acquired
  entities are added to the same components within Group equity and any gain/loss arising is
  recognised directly in equity.

  Jointly controlled entities
  A jointly controlled operation is a joint venture carried on by each venturer using its own assets
  in pursuit of the joint operations. The consolidated financial statements include the assets that
  the Group controls and the liabilities that it incurs in the course of pursuing the joint operation
  and the expenses that the Group incurs and its share of the income that it earns from the joint
  operation.

  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.

  Foreign currency
  Foreign currency transactions
  Transactions in foreign currencies are translated to the respective functional currencies of the
  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 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 year,
  adjusted for effective interest and payments during the year, and the amortised cost in foreign
  currency translated at the exchange rate at the end of the year.
                                                                                                      74
                                    AFI DEVELOPMENT PLC


                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                               For the year ended 31 December 2010

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

   Foreign currency (continued)
   Foreign currency transactions (continued)
   Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair
   value are retranslated to the functional currency at the exchange rate at the date that the fair value
   was determined. Non-monetary items in a foreign currency that are measured in terms of
   historical cost are translated using the exchange rate at the date of the transaction. Foreign
   currency differences arising on retranslation are recognised in profit or loss.

   Translation of foreign entity’s financial statements
   Each entity of the Group determines its own functional currency and items included in the
   financial statements of each entity are measured using its functional currency. Where the
   functional currency of an entity of the Group is other than US Dollars, which is the presentation
   currency of the Group, then the financial statements of the entity are translated in accordance
   with IAS 21 „The effects of changes in foreign exchange rates‟. Assets and liabilities of foreign
   operations, both monetary and non-monetary are translated to US Dollars at exchange rates at the
   reporting date. Income and expense items are translated to US Dollars using the transaction dates
   or average rate for the year for practical reasons. All resulting exchange differences are
   recognised in other comprehensive income and presented in the translation reserve in equity,
   until the foreign entity is disposed of (in part or in full) in which case the relevant amount is
   transferred to the profit or loss as part of the profit or loss on disposal. When the settlement of a
   monetary item receivable from or payable to a foreign operation is neither planned nor likely in
   the foreseeable future, foreign exchange gains and losses arising from such a monetary item are
   considered to form part of a net investment in a foreign operation and are recognised in other
   comprehensive income, and are presented within equity in the translation reserve.

   The table below shows the exchange rates of Russian Roubles which is the functional currency
   of the Russian subsidiaries of the Group:

                                             Exchange rate
                                            Russian Roubles
   As of:                                      for US$1                            % Change
   31 December 2010                             30.4769                               0.8
   31 December 2009                             30.2442                               2.9

   Average rate during:
   Year ended 31 December 2010                   30.3785                             (4.9)
   Year ended 31 December 2009                   31.9333                             27.8

   Financial Instruments

   Non derivative financial instruments
   Non-derivative financial instruments comprise of financial assets at fair value through profit or
   loss, loans receivable, trade and other receivables, cash and cash equivalents, loans and
   borrowings and trade and other payables.

   The Group recognises loans and receivables and deposits on the date that they are originated. All
   other non-derivative financial instruments are recognised initially at the trade date at which the
   Group become party to the contractual provisions of the instrument.
                                                                                                      75
                                    AFI DEVELOPMENT PLC


                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                               For the year ended 31 December 2010


3. SIGNIFICANT ACCOUNTING POLICIES (continued)

   Financial Instruments (continued)

   Non derivative financial instruments (continued)
   They are initially recognised at fair value plus any directly attributable transaction costs.
   Subsequent to initial recognition non-derivative financial instruments are measured as described
   below. 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 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. Financial liabilities are derecognised if the Group‟s obligations
   specified in the contact expire or are discharged or cancelled.

   Financial assets at fair value through profit or loss
   A financial asset is classified at fair value through profit or loss if it is classified as held for
   trading or is designated as such upon initial recognition. Financial assets are designated at fair
   value through profit or loss if the Group manages such investments and makes purchase and sale
   decisions based on their fair value in accordance with the Group‟s documented risk management
   or investment strategy. Attributable transaction costs are recognised in profit or loss as incurred.
   Financial assets at fair value through profit or loss are measured at fair value and changes therein
   are recognised in profit or loss.

   Loans and receivables
   Loan 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 rate method, less any impairment losses.

   Cash and cash equivalents
   Cash and cash equivalents comprise of cash in hand, cash at banks and short-term highly liquid
   investments with original maturities of three months or less.

   Share capital

   Ordinary shares
   Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of
   ordinary shares and share options are recognised as a deduction from equity, net of any tax
   effects.

   Investment Property
   Investment property is property held either to earn rental income or for capital appreciation or for
   both, but not for sale in the ordinary course of business, use in the production or supply of goods
   or services or for administration purposes. Investment property is measured at fair value. The
   fair values are based on market values, being the estimated amount for which a property could be
   exchanged on the date of the 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,
   prudently and without compulsion. Any gain or loss arising from a change in fair value is
   recognised in profit or loss.
                                                                                                     76
                                   AFI DEVELOPMENT PLC


                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                               For the year ended 31 December 2010


3. SIGNIFICANT ACCOUNTING POLICIES (continued)
   Investment Property (continued)
   When the use of a property changes from owner-occupied to investment property, the property is
   remeasured to fair value and reclassified as investment property. Any gain arising on
   remeasurement is recognised in profit or loss to the extent that it reverses a previous impairment
   loss on the specific property, with any remaining gain recognised in other comprehensive income
   and presented in the revaluation reserve in equity. Any loss is recognised immediately in profit or
   loss.

   When the use of a property changes such that it is reclassified as property, plant and equipment,
   its fair value at the date of reclassification becomes its cost for subsequent accounting.

   When the Group begins to redevelop an existing property for continued use as investment
   property, the property remains an investment property, which is measured based on fair value
   model, and is not reclassified as property plant and equipment during the redevelopment.

   Investment property under development
   Property that is being constructed or developed for future use as investment property is classified
   as investment property under development and accounted for at fair value until construction or
   development is complete, at which time it is reclassified as investment property.

   Certain development assets within the Group‟s portfolio that are in very early stages of
   development process were categorised as “land bank” without ascribing current market value to
   them. Any value ascribed to such land bank projects other that their cost, would result in a gain
   or loss to be recognised in profit or loss. This approach was adopted due to abnormal market
   volatility and will be reviewed in the future once market conditions are more stable.

   All costs directly related with the purchase and construction of a property, land lease payments,
   and all subsequent capital expenditure for the development qualifying as acquisition costs are
   capitalised.
   Capitalisation of financing costs
   Financing costs are capitalised if they are directly attributable to the acquisition or production of
   a qualifying asset. Capitalisation of financing costs commences when the activities to prepare
   the asset are in process and expenditures and financing costs are being incurred. Capitalisation
   of financing costs may continue until the assets are substantially ready for their intended use. If
   the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is
   recognised. The capitalisation rate is arrived at by reference to the actual rate payable on
   borrowings for development purposes or, with regard to that part of the development cost
   financed out of general funds, to the average rate. The capitalised financing cost is limited to the
   amount of borrowing cost actually incurred.
                                                                                                         77
                                     AFI DEVELOPMENT PLC


                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                For the year ended 31 December 2010

3. SIGNIFICANT ACCOUNTING POLICIES (continued)

   Property, plant and equipment
   Recognition and measurement
   Items of property, plant and equipment are measured at cost less accumulated depreciation and
   impairment losses.

   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 assets 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
   capitalise borrowing costs. Purchased software that is integral to the functionality of the related
   equipment is capitalised as part of that equipment.
   All hotels are treated as property, plant and equipment due to our significant influence on their
   management.
   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.
   The gain or loss on disposal of an item of property, plant and equipment is determined by
   comparing the proceeds from disposal with the carrying amount of property, plant and equipment
   and is recognised net within other income/other expenses in profit or loss.
   Subsequent costs
   The cost of replacing a component 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 component will flow to the Group and its cost can be measured reliably. The carrying
   amount of the replaced component is derecognised. The costs of the day-to-day servicing of
   property, plant and equipment are recognised in profit or loss as incurred.

   Depreciation
   Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives
   of each component of an item of property, plant and equipment. The annual depreciation rates
   for the current and comparative years are as follows:
                       Buildings                                1-2%
                       Office equipment                       10-33⅓%
                       Motor vehicles                          33⅓%
   Depreciation methods, useful lives and residual values are reviewed at each reporting date and
   adjusted if appropriate.

   Intangible assets
   Goodwill
   Goodwill (negative goodwill) arises upon the acquisition of subsidiaries, associates and joint
   ventures. Goodwill arising on acquisition represents the excess of the cost of acquisition over the
   Group‟s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities
   of the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in
   profit or loss.
                                                                                                   78
                                  AFI DEVELOPMENT PLC


              NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                              For the year ended 31 December 2010


3. SIGNIFICANT ACCOUNTING POLICIES (continued)

  Intangible assets (continued)
  Acquisitions of non-controlling interests
  Acquisitions of non-controlling interests are accounted for as transactions with equity holders in
  their capacity as equity holders and therefore no goodwill is recognised as a result of such
  transactions.

  Subsequent measurement
  Goodwill is measured at cost less accumulated impairment losses. In respect of equity-accounted
  investees, the carrying amount of goodwill is included in the carrying amount of the investment,
  and an impairment loss on such an investment is not allocated to any asset, including goodwill,
  that forms part of the carrying amount of the equity-accounted investee.
  Trading Properties
  Trading Properties are measured at the lower of cost and net realisable value. Cost includes
  expenditure incurred in acquiring the properties and bringing them to their existing condition. In
  the case of constructed trading properties, cost includes an appropriate share of direct and
  financing costs. Net realisable value is the estimated selling price in the ordinary course of
  business, less estimated costs of completion and selling expenses.
  Trading properties under construction
  Trading properties are defined as projects in which the Group participates as a contractor or as a
  promoter, and which include construction work with the intention to sell the entire building as a
  whole or parts thereof. Each project represents one building or a group of buildings.
  A group of buildings is considered one project when the buildings at the same building site are
  being constructed according to one building plan and under one building license, and are offered
  for sale at the same time. Trading properties include cost of land or of rights to the land that
  constitutes the relative portion of the area, on which the construction work on projects is
  performed, plus the cost of the work executed on the projects as well as other costs allocated
  thereto, less the cumulative amounts recognised in profit or loss as cost of trading properties sold
  up to the end of the reported period.

  Direct costs and expenses are charged to projects on a specific basis, whereas borrowing costs
  are allocated among the projects based on the relative proportion of the costs. Non–specific
  borrowing costs are capitalised to such qualifying asset, or portion thereof which was not
  financed with specific credit, by weighted–average rate of the borrowing cost up to the amount of
  borrowing cost actually incurred. Where the estimated expenses for a building project indicate
  that a loss is expected, an appropriate provision is set up. Buildings that are under construction
  are classified as trading properties under construction on the face of the balance sheet.

  Deferred income
  Income received in advance is classified under current liabilities as deferred income and
  comprise rental income received for future periods and amounts received in advance for the sale
  of trading properties, for which recognition of revenue has not yet commenced.
                                                                                                      79
                                    AFI DEVELOPMENT PLC


                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                               For the year ended 31 December 2010


3. SIGNIFICANT ACCOUNTING POLICIES (continued)

   Impairment
   Non-derivative 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 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.

   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.

   Individually significant financial assets are tested for impairment on an individual basis. The
   remaining financial assets are assessed collectively in groups that share similar credit
   characteristics.

   All impairment losses are recognised in profit or loss.

   Non-financial assets
   The carrying amounts of the Group‟s non-financial assets, other than investment property,
   investment property under development, VAT recoverable, inventory 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. For goodwill and
   intangible assets that have indefinite useful lives or that are not yet available for use, the
   recoverable amount is estimated each year at the same time.

   The recoverable amount of an asset 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.

   An impairment loss is recognised if the carrying amount of an asset exceeds its estimated
   recoverable amount. Impairment losses are recognised in profit or loss.

   An impairment loss in respect of goodwill is not reversed. In respect of other assets, 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.
                                                                                                    80
                                   AFI DEVELOPMENT PLC


               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                               For the year ended 31 December 2010


3. SIGNIFICANT ACCOUNTING POLICIES (continued)

   Non-current assets held for sale
   Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be
   recovered primarily through sale rather than through continuing use, are classified as held for
   sale. Immediately before classification as held for sale, the assets, or components of a disposal
   group, are remeasured in accordance with the Group‟s accounting policies. Thereafter generally
   the assets, or disposal group, are measured at the lower of their carrying amount and fair value
   less cost to sell.

   Any impairment loss on a disposal group first is allocated to goodwill, and then to remaining
   assets and liabilities on pro rata basis, except that no loss is allocated to inventories, financial
   assets, deferred tax assets, employee benefit assets, investment property and biological assets,
   which continue to be measured in accordance with the Group‟s accounting policies. Impairment
   losses on initial classification as held for sale and subsequent gains or losses on remeasurement
   are recognised in profit or loss. Gains are not recognised in excess of any cumulative impairment
   loss.

   Employee benefits
   Short-term 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 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.

   Share-based payment transactions
   The grant-date fair value of share-based payment options granted to employees is recognised as
   an employee expense, with a corresponding increase in equity, over the period that the
   employees unconditionally become entitled to the options. The amount recognised as an expense
   is adjusted to reflect the actual number of share options that vest.

   The fair value of the amount payable to employees in respect of share appreciation rights, which
   are settled in cash, is recognised as an expense, with a corresponding increase in liabilities, over
   the period that the employees unconditionally become entitled to payment. The liability is
   remeasured at each reporting date and at settlement date. Any changes in the fair value of the
   liability are recognised as personnel expenses in profit or loss.

   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.
                                                                                                    81
                                   AFI DEVELOPMENT PLC


               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                               For the year ended 31 December 2010


3. SIGNIFICANT ACCOUNTING POLICIES (continued)

   Revenue
   Sale of trading properties
   Revenue from sale of trading properties is recognised in profit or loss when the significant risks
   and rewards of ownership are transferred to the buyer.

   Construction Management fee
   Revenue from construction management is recognised in profit or loss in proportion to the stage
   of completion of the transaction at the reporting date. The stage of completion is assessed by
   reference to surveys of work performed.

   Rental income
   Rental income from investment property leased out under operating leases is recognised in profit
   or loss on a straight line basis over the term of the lease.

   Finance income and finance costs
   Finance income comprises interest income on funds invested, fair value gains on financial assets
   at fair value through profit or loss 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, fair value losses on financial assets at
   fair value through profit or loss and impairment losses recognised on financial assets.

   Borrowing costs are recognised in profit or loss using the effective interest method, net of
   interest capitalised.

   Foreign currency gains and losses are reported on a net basis as either finance income or finance
   cost depending on whether foreign currency movements are in a net gain or net loss position.

   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 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 substantially 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 temporary differences on the initial recognition of assets or
   liabilities that affects neither accounting nor taxable profit or loss.

   Deferred tax is measured at the tax rates that are expected to be applied to temporary differences
   when they reverse, based on the laws that have been enacted or substantively enacted by the
   reporting date.
                                                                                                        82
                                    AFI DEVELOPMENT PLC


                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                For the year ended 31 December 2010


3. SIGNIFICANT ACCOUNTING POLICIES (continued)

   Income tax (continued)
   Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current
   tax liabilities and assets, 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.
   The provision for taxation either current or deferred is based on the tax rates applicable to the
   country of residence of each subsidiary.

   Discontinued operations
   A discontinued operation is a component of the Group‟s business that represents a separate major
   line of business or geographical area of operations that has been disposed of or is held for sale, or
   is a subsidiary acquired exclusively with a view to resale. Classification as a discontinued
   operation occurs upon disposal or when the operation meets the criteria to be classified as held
   for sale, if earlier. When an operation is classified as a discontinued operation, the comparative
   statement of comprehensive income is re-presented as if the operation had been discontinued
   from the start of the comparative year.

   Earnings per share
   The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic
   EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the
   Company by the weighted average number of ordinary shares outstanding during the year.
   Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders
   and the weighted average number of ordinary shares outstanding for the effects of all dilutive
   potential ordinary shares, which comprise share options granted to employees.

   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 to make decisions about resources to be
   allocated to the segment and assess its performance, and for which discrete financial information
   is available.
                                                                                                    83
                                   AFI DEVELOPMENT PLC


               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                               For the year ended 31 December 2010


3. SIGNIFICANT ACCOUNTING POLICIES (continued)

   Adoption of new and revised International Financial Reporting Standards and Interpretations
   As from 1 January 2010, the Company adopted all of the IFRSs and International Accounting
   Standards (IAS), which are relevant to its operations. The adoption of these Standards did not
   have a significant effect on the financial statements of the Company except for the adoption of
   IFRS 3 “Business Combinations”. Under the provisions of the revised IFRS 3 entities have a
   choice to measure non-controlling interest in the acquiree either at its fair value or at its
   proportionate interest in the acquiree‟s net assets. In addition contingent consideration is
   measured at fair value at the date of acquisition with subsequent changes in the fair value being
   recognised in profit or loss. Also, acquisition-related costs are expensed through profit or loss at
   the time the services are received. The Group has applied the revised IFRS 3 in its financial
   statements prospectively.

   The following Standards, Amendments to Standards and Interpretations had been issued but are
   not yet effective for the year ended 31 December 2010:

   Standards and Interpretations adopted by the EU
    Improvements to IFRSs issued in May 2010 (effective for annual periods beginning on or
      after 1 July 2010 and 1 January 2010 as applicable).
    IFRS 1 (amendment): Limited exemption from comparative IFRS 7 disclosures for first time
      adopters (effective for annual periods beginning on or after 1 July 2010)
    IAS 24 ''Related Party Disclosures'' (revised) (effective for annual periods beginning on or
      after 1 January 2011).
    IAS 32 ''Classification of rights issues'' (amendments) (effective for annual periods beginning
      on or after 1 February 2010).
    IFRIC 14: Prepayments of a Minimum Funding Requirement (amendments) (effective for
      annual periods beginning on or after 1 January 2011).
    IFRIC 19: ''Extinguishing Financial Liabilities with Equity Instruments'' (effective for annual
      periods beginning on or after 1 July 2010).

   Standards and Interpretations not adopted by the EU
    IFRS 1 – Severe Hyperinflation and Removal of Fixed Dates for First-Time Adopters
      (amendments) (effective for annual periods beginning on or after 1 July 2011).
    IFRS 7 “Financial Instruments- Disclosures” (amendments): Transfers of Financial Assets
      (effective for annual periods beginning on or after 1 July 2011).
    IFRS 9 ''Financial Instruments'' (effective for annual periods beginning on or after 1 January
      2013).
    IAS 12 - ''Deferred tax'': Recovery of Underlying Assets (amendments) (effective for annual
      periods beginning on or after 1 January 2012).

   The Board of Directors expects that the adoption of the above financial reporting standards in
   future periods will not have a significant effect on the financial statements of the Company
   except for:

      The adoption of IFRS 9 could change the classification and measurement of financial assets.
       The extent of the impact has not been determined.
                                                                                                  84
                                  AFI DEVELOPMENT PLC


              NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                              For the year ended 31 December 2010

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/or 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.

  Property, plant and equipment
  The fair value of property, plant and equipment recognised as a result of a business combination
  is based on market values. The market value of items of property, plant and equipment is the
  estimated amount for which they 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. The market value of land and building and buildings
  under development is based on the quoted market prices for similar items when available and
  replacement cost when appropriate.

  Investment property
  An external, independent valuation company, having appropriate recognised professional
  qualifications and recent experience in the location and category of property being valued, values
  the Group‟s investment property portfolio. As fair values have to be reported quarterly,
  commencing 2009, instead of performing a full revaluation of the property portfolio twice a year,
  a two-step approach to the valuation of the investment property portfolio and of the investment
  property under development portfolio has been adopted: first, at the end of every quarter, the
  independent valuation company reviews the investment property portfolio to determine whether
  there has been a significant movement in the properties‟ values compared with their current book
  value. Should the independent valuation company determine that there has indeed been a
  material change in the values of certain properties, these properties are revalued and their book
  values are adjusted accordingly. Where there has been no such change in the values, no
  revaluation is ordered and the corresponding book values remain intact.

  The aggregate portfolio will be, however, revalued once a year with the resulting valuation to be
  published with the annual results. The fair values are based on market values, being the
  estimated amount, for which a property could be exchanged on the date of the 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.

  In the absence of current prices in an active market, the valuations are prepared by considering
  the aggregate of the estimated cash flows expected to be received from renting out the property.
  A yield that reflects the specific risks inherent in the net cash flows is then applied to the net
  annual cash flows to arrive at the property valuation.

  Valuations reflect, where appropriate, the type of tenants actually in occupation or responsible
  for meeting lease commitments or likely to be in occupation after letting vacant accommodation,
  and the market‟s general perception of their creditworthiness; the allocation of maintenance and
  insurance responsibilities between the Group and the lessee; and the remaining economic life of
  the property. When rent reviews or lease renewals are pending with anticipated reversionary
  increases, it is assumed that all notices and when appropriate counter-notices have been served
  validly              and            within           the             appropriate           time.
                                                                                                      85
                                     AFI DEVELOPMENT PLC


                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                 For the year ended 31 December 2010


4. DETERMINATION OF FAIR VALUES (continued)

     Share-based payment transactions
     The fair value of the employee share options is measured using a binomial lattice model. The fair
     value of share appreciation rights is measured using the Black-Scholes formula. Measurement
     inputs include the share price on measurement date, the exercise price of the instrument,
     expected volatility (based on an evaluation of the company‟s historic volatility, particularly over
     the historic period commensurate with the expected term), expected term of the instruments
     (based on historical experience and general option holder behaviour), expected dividends, and
     the risk-free interest rate (based on government bonds). Service and non-market performance
     conditions attached to the transactions are not taken into account in determining fair value.

5.    FINANCIAL RISK MANAGEMENT

      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 Board of Directors has overall responsibility for the establishment and oversight of the
      Group‟s risk management framework and is responsible for developing and monitoring the
      Group‟s risk management policies.

      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.

      The Company‟s Audit Committee overseas how management monitors compliance with the
      Group‟s risk management policies and procedures, and reviews the adequacy of the risk
      management framework in relation to the risks faced by the Group. The Company‟s Audit
      Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both
      regular and ad hoc reviews of risk management controls and procedures, the results of which are
      reported to the Audit Committee.

      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 and investment securities.
                                                                                                      86
                                    AFI DEVELOPMENT PLC


                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                For the year ended 31 December 2010

5.   FINANCIAL RISK MANAGEMENT (continued)

     Credit risk (continued)
     Trade and other receivables
     Financial assets which are potentially subject to credit risk consist principally of trade and other
     receivables. The carrying amount of trade and other receivable represents the maximum amount
     exposed to credit risk. Credit risk arises from cash and cash equivalents as well as credit
     exposures with respect to rental customers and buyers of residential including outstanding
     receivables. Approximately 15 percent of the Group‟s rental revenue is attributable to revenue
     from a single customer. However, geographically there is no concentration of credit risk.

     The Group has policies in place to ensure that, where possible rental contracts are made with
     customers with an appropriate credit history. Cash transactions are limited to high-credit-quality
     financial institutions. The utilisation of credit limits is regularly monitored.

     The Group has no other significant concentrations of credit risk. Although collection of
     receivables could be influenced by economic factors, management believes that there is no
     significant risk of loss to the Group.

     Investments
     The Group limits its exposure to credit risk by investing only in liquid securities and only with
     counterparties that have a high credit rating. Management actively monitors credit ratings and
     given that the Group only has invested in securities with high credit ratings, management does
     not expect any counterparty to fail to meet its obligations, except as disclosed in note 33.

     Guarantees
     The Group‟s policy is to provide financial guarantees only to wholly-owned subsidiaries. At 31
     December 2010 there was one guarantee outstanding under the non-revolving credit line from
     VTB Bank for RUR 8,488 million and one under the Joint Stock Commercial Savings Bank of
     the Russian Federation (“Sberbank”) loan for US$20 million. At 31 December 2009 there was
     only one guarantee outstanding under the non-revolving credit line from VTB Bank for RUR
     8,488 million

     Liquidity risk
     Liquidity risk is the risk that the Group will encounter difficulty in meeting its financial
     obligations as they fall due. 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.

     Prudent liquidity risk management implies maintaining sufficient cash, the availability of
     funding through an adequate amount of committed credit facilities and the ability to close out
     market positions. Due to the dynamic nature of the underlying businesses, the Group aims to
     maintain flexibility in its funding requirements by keeping cash and committed credit lines
     available.

     The Group‟s liquidity position is monitored on a daily basis by the management which take
     necessary actions if required. The Group structures its assets and liabilities in such a way that
     liquidity risk is minimised.
                                                                                                     87
                                    AFI DEVELOPMENT PLC


                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                For the year ended 31 December 2010


5.   FINANCIAL RISK MANAGEMENT (continued)

     Liquidity risk (continued)
     The Group maintains the following lines of credit as at 31 December 2010:
      A US$60,000 thousand term loan facility agreement with Quasar Capital Ltd as original
        lender and Deutsche Bank AG, London Branch, as facility agent. This loan is intended for
        the financing of the Ozerkovskaya Embankment project.
      A non-revolving credit line from the Joint Stock Commercial Savings Bank of the Russian
        Federation (“Sberbank”) for US$280,000 thousand. The funds drawn under the credit line
        are required to be used to finance the construction of the Tverskaya Zastava Shopping
        Centre project.
      A non-revolving credit line from VTB Bank for RUR 8,448 million. The funds drawn under
        this credit line are being used to finance the construction of the Moscow-City Mall project.
      A US$150 million term loan facility, (the Group‟s 50% share is US$75,000), from Joint-
        Stock Commercial Bank “Moscow Business World” (MDM Bank).
      A five year US$74 million loan from Sberbank, obtained during the period by the 50%
        owned subsidiary Krown Investments LLC. The loan will be used to complete construction
        works at the Ozerkovskaya Embankment project, Phase III.
      An additional four year US$20 million loan from Sberbank was obtained during the period.
        The loan is denominated in Russian Rouble and will be used for the reconstruction of
        Kalinina project.

     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.

     Since the beginning of 2010, the Russian economy showed signs of improvements form the
     global recession in 2008 and 2009. The improving labour market, positive income growth, and
     the increased volumes of consumer financing were observed in 2010. In the commercial real
     estate sector, 2010 represented a turning point in the market, across all segments, including
     hotels and warehouses. Investor interest in real estate is returning with major focus to Moscow,
     currently the third largest real estate market in Europe, after London and Paris.

     Currency risk
     The Group is exposed to currency risk on future commercial transactions, recognised monetary
     assets and liabilities and net investments in foreign operations that are denominated in a
     currency other than the respective functional currencies of Group entities, primarily the United
     States Dollars and Russian Roubles. The currencies in which these transactions primarily are
     denominated are Russian Roubles, United States Dollars, Euro and Ukrainian Hryvnia.

     Operational risk
     Operational risk is the risk of direct or indirect loss arising from a wide variety of causes
     associated with the Group‟s processes, personnel, technology and infrastructure, and from
     external factors other than credit, market and liquidity risks such as those arising from legal and
     regulatory requirements and generally accepted standards of corporate behaviour. Operational
     risks arise from all of the Group‟s operations.
                                                                                                  88
                                   AFI DEVELOPMENT PLC

                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                               For the year ended 31 December 2010

5.   FINANCIAL RISK MANAGEMENT (continued)

     Operational risk (continued)
     The Group‟s objective is to manage operational risk so as to balance the avoidance of financial
     losses and damage to the Group‟s reputation with overall cost effectiveness and to avoid control
     procedures that restrict initiative and creativity.

     The primary responsibility for the development and implementation of controls to address
     operational risk is assigned to senior management within each business unit. This responsibility
     is supported by the development of overall Group standards for the management of operational
     risk in the following areas:

        requirements for appropriate segregation of duties, including the independent authorisation
         of transactions
        requirements for the reconciliation and monitoring of transactions
        compliance with regulatory and other legal requirements
        documentation of controls and procedures
        requirements for the periodic assessment of operational risks faced, and the adequacy of
         controls and procedures to address the risks identified
        requirements for the reporting of operational losses and proposed remedial action
        development of contingency plans
        training and professional development
        ethical and business standards
        risk mitigation, including insurance where this is effective

     Compliance with Group standards is supported by a programme of periodic reviews undertaken
     by Internal Audit. The results of Internal Audit reviews are discussed with the management of
     the business unit to which they relate, with summaries submitted to the Audit Committee and
     senior management of the Group.

     Capital management
     The Board‟s policy is to maintain a strong capital base so as to maintain investor, creditor and
     market confidence and to sustain future development of the business.

     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.

     The Company is committed to delivering the highest standards in boardroom practice and
     financial transparency through:
      clear and open communication with investors;
      maintaining accurate quarterly financial records which transparently and honestly reflect the
        financial position of its business; and
      endeavouring to maximise shareholder returns.

     A full programme of investor relations activity ensures appropriate contact with institutional
     and private shareholders, with regular meetings, presentations and disclosure of important
     information. Great care is taken to provide suitably detailed information on the Group‟s
     activities and results to enable various stakeholders to understand the performance and
     prospects of the Group.
                                                                                                                                      89
                                                  AFI DEVELOPMENT PLC

                         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                            For the year ended 31 December 2010

6.   OPERATING SEGMENT

     The Group has 4 reportable segments, as described below, which are the Group‟s strategic business units.
     The strategic business units offer different types of real estate products and services and are managed
     separately because they require different marketing strategies as they address different types of clients. For
     each strategic business unit the Group‟s management reviews internal management reports on at least a
     monthly basis. The following summary describes the operation in each of the Group‟s reportable
     segments.

        Development Projects – Commercial projects: Include construction of property for future lease.
        Development Projects – Residential projects: Include construction and selling of residential properties.
        Asset Management: Includes the operation of investment property for lease.
        Other – Land bank: Includes the investment and holding of property for future development.

     Information regarding the results of each reportable segment is included below. Performance is measured
     based on segment profit before income tax, as included in the internal management reports that are
     reviewed by the Group‟s management team. 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. Inter-segment pricing is determined
     on an arm‟s length basis.
                                       Development projects                     Asset management        Other - land bank
                         Commercial projects     Residential projects                                                                 Total

                            2010    2009            2010     2009    2010    2009    2010    2009    2010                                     2009
                         US$‟000 US$‟000          US$‟000 US$‟000 US$‟000 US$‟000 US$‟000 US$‟000 US$‟000                                  US$‟000
External revenues             898          380      30,183     25,923          43,041    35,767        870         889       74,992            62,959
Inter-segment revenue           6            7           5          7             370       281        290         524          671               819

Interest revenue            4,641        6,073           24             8        246        391      2,173      4,250         7,084            10,722

Interest expense           (6,750)      (2,662)         (30)            (7)    (1,635)     (604)      (412)       (450)      (8,827)           (3,723)

Depreciation                 (146)        (119)         (18)             -      (896)      (318)      (214)       (461)      (1,274)            (898)
Reportable segment
profit before income
tax                        (6,179)       4,609       8,974       6,266        23,610     26,341     (14,765)        23       11,640            37,239
Other material
non-cash items:
Net valuation
gains/(losses) on
properties                15,012      133,900       66,651 (16,048)           10,725     (50,531) (34,291) (44,446)          58,097            22,875
Reportable segment
assets                  1,476,158 1,150,065 226,086 301,763                   472,995 423,569       47,632 221,742 2,222,871               2,097,139
Reportable segment
liabilities              662,614     636,308        11,917     12,021         12,991      (2,356)    3,459       1,312      690,981           647,285


Note:
Development projects: investment projects under construction, including construction of residential properties.
Asset management: yielding property management (all commercial properties).
                                                                                                 90
                                       AFI DEVELOPMENT PLC

                   NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                   For the year ended 31 December 2010


6.   OPERATING SEGMENT (continued)

     Reconciliations of reportable segment revenues, profit or loss, assets and liabilities and other
     material items.

                                                                      2010            2009
                                                                     US$‟000         US$‟000
     Revenues
     Total revenue for reportable segments                                74,787       62,872
     Other revenue                                                           876          906
     Elimination of inter-segment revenue                                   (671)        (819)
     Consolidated revenue                                                 74,992       62,959

     Consolidated revenue comprises of the following items in
     income statement:
     Rental income                                                        43,946       36,153
     Construction consulting/management fees                                 876          906
     Proceeds from sale of trading properties                             30,170       25,900
                                                                          74,992       62,959

     Profit or loss
     Total profit or loss for reportable segments                         11,640       37,239
     Other profit or loss                                                    557        2,808
     Valuation gain on investment property                                93,917       38,923
     Impairment loss on property, plant and equipment                    (16,893)           -
     Impairment of prepayment for investments                            (17,676)           -
     Impairment loss on trading properties                                (1,251)     (16,048)
     Impairment loss on financial assets                                       -      (18,411)
     Consolidated profit before income tax                                70,294       44,511

     Assets
     Total assets for reportable segments                           2,221,871       2,097,139
     Other assets                                                           -          42,959
     Other unallocated amounts                                        207,252         207,543
     Consolidated total assets                                      2,429,123       2,347,641

     Liabilities
     Total liabilities for reportable segments                           690,981      647,285
     Other unallocated amounts                                             6,521       (5,172)
     Consolidated total liabilities                                      697,502      642,113

                                                   Reportable                       Consolidated
                                                 segment totals   Adjustments          totals
                                                    US$‟000          US$‟000          US$‟000

     Other material items 2010
     Interest revenue                                    7,084                 -        7,084
     Interest expense                                    8,827            (1,798)       7,029
     Net valuation losses on properties                 58,097                 -       58,097
                                                                                                 91
                                      AFI DEVELOPMENT PLC


                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                 For the year ended 31 December 2010

6.   OPERATING SEGMENT (continued)

                                                     Reportable                    Consolidated
                                                   segment totals   Adjustments       totals
                                                      US$‟000        US$‟000        US$‟000

     Other material items 2009

     Interest revenue                                   10,722              -          10,722
     Interest expense                                    3,723         (1,239)          2,484
     Net valuation losses on properties                 22,875              -          22,875

     Geographical segments
     Geographically the segments operate in Russia and Ukraine. In presenting information on the basis
     of geographical segments, segment revenue and segment assets are based on the geographical
     location of the properties.

                                                   Non-current                     Non-current
                                     Revenues        Assets          Revenues        Assets
                                       2010           2010             2009           2009
                                     US$‟000        US$‟000          US$‟000        US$‟000

     Russia                               74,985    1,951,525         62,952         1,571,699
     Ukraine                                   7       13,519              7            34,644
                                          74,992    1,965,044         62,959         1,606,343


     Major customer
     Revenues from one customer of the asset management segment, represents approximately 15% of
     the Group‟s total rental revenue.

7.   ACQUISITION OF SUBSIDIARIES

     During 2010 the Group did not acquire any subsidiaries.

     During 2009 the Group acquired the following subsidiaries:

     100% of Ropler Engineering Inc, a British Virgin Islands company, which owns 100% shareholding
     of OOO Centr Dosuga Molodegi, registered in Russia. OOO Centr Dosuga Molodegi LLC holds
     land rights in Kunstevo project.

     100% of Amakri Management Limited and 100% of Jaquetta Investments Limited, Cypriot
     companies, owning cumulatively 100% shareholding of ABG Sozidatel, which holds land rights in
     Zaporozhie project in Ukraine.

     60% of OOO Stroycapital, registered in the Russian Federation. OOO Stroycapital holds the land
     rights in Volgograd project.
                                                                                                       92
                                      AFI DEVELOPMENT PLC


                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                  For the year ended 31 December 2010

7.   ACQUISITION OF SUBSIDIARIES (continued)

     The above acquisitions had the following effect on the Group‟s assets and liabilities.
                                                                             2010             2009
                                                                          US$ ‘000          US$ ‘000


     Investment property under development                                        -        45,156
     VAT recoverable                                                              -            50
     Trade and other receivables                                                  -           425
     Cash and cash equivalents                                                    -            20
     Long-term loans and borrowings                                               -       (26,142)
     Short-term loans and borrowings                                              -          (224)
     Trade and other payables                                                     -          (119)
     Income tax payable                                                           -            (2)
     Net identifiable assets                                                      -        19,164

     Net identifiable assets acquired by the Group based on % of
     acquisition of each subsidiary                                               -        19,164
     Amount paid in previous periods                                              -        12,750
     Less cash acquired                                                           -           (20)
     Net cash outflow from the acquisition of subsidiaries                        -        31,894

8.   OTHER INCOME
                                                                             2010           2009
     Other income consist of:                                              US$ ‘000       US$ ‘000

     Profit on prior years‟ sales of investment                                  -           3,239
     Profit on sale of property, plant and equipment                            36              66
     Sundries                                                                  195              56
                                                                               231           3,361

9.   OTHER EXPENSES
                                                                             2010           2009
                                                                           US$ ‘000       US$ ‘000

     Prior years‟ VAT non recoverable (note18)                                3,344            693
     Land lease expense                                                       2,197              -
     Listing expenses                                                         2,079              -
     Sundries                                                                   259              -
                                                                              7,879            693
                                                                                               93
                                     AFI DEVELOPMENT PLC


                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                For the year ended 31 December 2010

10. FINANCE INCOME AND FINANCE COSTS
                                                                        2010         2009
                                                                      US$ ‘000     US$ ‘000

   Interest income on loans receivable                                  4,655        6,283
   Interest/investment income on bank deposits and cash equivalents     2,429        4,439
   Change in fair value of other investments                            6,573            -
   Net foreign exchange gain                                                -        6,977
   Finance income                                                      13,657       17,699

   Interest expense on loans and borrowings                              (684)      (1,630)
   Interest expense on bank loans                                     (49,807)     (29,013)
   Interest capitalised                                                43,462       28,159
   Net change in fair value of financial assets                        (1,463)     (18,935)
   Other finance costs                                                   (324)        (715)
   Net foreign exchange loss                                           (7,977)           -
   Finance costs                                                      (16,793)     (22,134)

   Net finance costs                                                   (3,136)       (4,435)

   Subject to the provisions of IAS23 “Borrowing costs” the Group capitalised US$43,462 thousand
   (2009: US$28,159 thousand) financing costs to the project that are in construction phase. These
   were added to the cost of the Investment property under development, US$42,809 thousand (2009:
   25,997 thousand) see note 14, and to the cost of Trading properties under construction US$653
   thousand (2009: US$2,162 thousand).

11. INCOME TAX EXPENSE
                                                                        2010         2009
                                                                      US$ ‘000     US$ ‘000
   Current tax expense
   Current year                                                         7,226        7,090
   Adjustment for prior years                                             930         (102)
                                                                        8,156        6,988
   Deferred tax expense
   Origination and reversal of temporary differences                   36,260       40,172
   Utilisation of previously unrecognised tax losses                        -            6
                                                                       36,260       40,178

   Total income tax expense                                            44,416       47,166
                                                                                                           94
                                        AFI DEVELOPMENT PLC


                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                     For the year ended 31 December 2010

11. INCOME TAX EXPENSE (continued)

   The provision for taxation either current or deferred is based on the tax rates applicable to the
   country of residence of each Group entity. Cypriot entities are subject to 10% corporate rate
   whereas Russian subsidiaries are subject to 20% corporate rates.

                                                                        2010                    2009
                                                               %      US$ ‟000           %    US$ ‟000

   Profit/(loss) for the period after tax                               25,878                  (2,655)
   Total income tax expense                                             44,416                  47,166
   Profit before income tax                                             70,294                  44,511

   Income tax using the Company‟s domestic tax rate          10.00       7,029   10.00           4,451
   Effect of tax rates in foreign jurisdictions              (3.70)     (2,602) (9.28)          (4,131)
   Tax exempt income                                        (20.09)    (14,122) (15.24)         (6,782)
   Non deductible expenses                                   76.52      53,786 119.61           53,239
   Over provided in prior years                               0.46         325    0.64             287
   Utilisation of previously unrecognised tax losses            -            -    0.01               6
   Tax losses carried forward                                   -            -    0.22              96
                                                             63.19      44,416 105.96           47,166

   The current tax receivable of US$689 thousand for the year ended 31 December 2010 (2009:
   current tax liability of US$1,892 thousand) represents the amount of income tax receivable/payable
   in respect of current and prior periods net of payments made up to the year end.

12. EARNINGS PER SHARE
                                                                             2010              2009
    Basic earnings per share                                               US$ ‟000          US$ ‟000

    Profit/(loss) attributable to ordinary shareholders                          25,516          (3,691)
                                                                             Shares in         Shares in
    Weighted average number of shares                                       thousands         thousands
    Issued ordinary shares at 1 January                                      523,847           523,847
    Effect of bonus issued on 2 July 2010                                    523,847           523,847
    Weighted average number of shares                                      1,047,694         1,047,694
    Profit/(loss) per share (cent)                                                 2.44           (0.35)
   Diluted earnings per share are not presented as their assumed conversion would have an anti-
   dilutive effect i.e. increase in earnings per share.
                                                                                                  95
                                    AFI DEVELOPMENT PLC


                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                For the year ended 31 December 2010

13. INVESTMENT PROPERTY
                                                                            2010            2009
                                                                          US$ ‘000         US$ ‘000

   Balance 1 January                                                       140,476         186,275
   Transfer from investment property under development                      23,592               -
   Renovations/additional cost                                               1,371           6,434
   Fair value adjustment                                                    29,506         (50,531)
   Effect of movement in foreign exchange rates                             (1,972)         (1,702)
   Balance 31 December                                                     192,973         140,476
   The carrying amount of investment property is the fair value of the property as determined by a
   registered independent appraiser having an appropriate recognised professional qualification and
   recent experience in the location and category of the property being valued. Fair values were
   determined having regard to recent market transactions for similar properties in the same location as
   the Group‟s investment property. The same applies for investment property under development in
   note 14 below. The last valuation took place on 31 December 2010.

   During the year the commercial area and fitness centre of the second building of Four Winds
   project was completed and was reclassified as Investment property.

14. INVESTMENT PROPERTY UNDER DEVELOPMENT
                                                                            2010            2009
                                                                          US$ ‘000         US$ ‘000

   Balance 1 January                                                     1,290,191       1,112,003
   Additions due to acquisitions of subsidiaries                                 -          45,156
   Construction costs                                                      152,951         185,342
   Capitalised interest                                                     42,809          25,997
   Transfer from trading properties under construction (note 20)                 -          25,773
   Transfer to investment property                                         (23,592)              -
   Transfer to trading properties                                             (301)              -
   Transfer from/(to) assets classified as held for sale (note 23)         144,035        (190,044)
   Transfer to VAT recoverable                                             (13,724)              -
   Fair value adjustment                                                    85,100          89,454
   Disposal                                                                      -             (75)
   Effect of movements in foreign exchange rates                            (2,884)         (3,415)
   Balance 31 December                                                   1,674,585       1,290,191

   The fair value adjustment is presented net of a write-off of the cost of Kuntsevo project. During
   2010 the Company made a progress in promoting its Kuntsevo project vis-à-vis the Moscow city
   authorities, including certain progress in obtaining necessary permits for the planning of this
   project. However, in light of the recent change in the Moscow city government, AFI Development
   Plc estimates that there might be additional delays in promoting the project and obtaining the
   aforementioned permits. There is no certainty whether and when the necessary permits will be
   obtained, and therefore, the Company decided, for accounting purposes, to write-off this project
   until more certainty is reached in relation to the development of the project.
                                                                                                          96
                                            AFI DEVELOPMENT PLC


                         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                        For the year ended 31 December 2010

15. PROPERTY, PLANT AND EQUIPMENT
                                                     Buildings
                                                       under         Land &        Office       Motor
                                                    construction    Buildings    Equipment     Vehicles      Total
                                                     US$ ‟000       US$ ‟000      US$ ‟000     US$ ‟000    US$ ‟000
  Cost
  Balance at 1 January 2010                              39,536       61,735         2,509       2,007     105,787
  Additions                                               2,090        1,695           763         186       4,734
  Impairment                                            (16,893)           -             -           -     (16,893)
  Disposals                                                 (28)         (59)         (209)        (27)       (323)
  Effect of movement in foreign exchange rates             (211)        (635)          (19)        (14)       (879)
  Balance at 31 December 2010                            24,494       62,736         3,044       2,152      92,426
  Accumulated depreciation
  Balance at 1 January 2010                                    -        248          1,669       1,121          3,038
  Charge for the year                                          -        502            435         337          1,274
  Disposals                                                    -        (53)          (201)         (7)          (261)
  Effect of movement in foreign exchange rates                 -          (4)          (14)         (9)           (27)
  Balance at 31 December 2010                                  -         693         1,889       1,442          4,024
  Carrying amount
  At 31 December 2010                                    24,494       62,043         1,155         710         88,402

  Cost
  Balance at 1 January 2009                              39,038       58,963          5,254      1,968     105,223
  Additions                                                 995        2,901            320        281       4,497
  Disposals                                                    -           -           (156)      (499)       (655)
  Effect of movement in foreign exchange rates             (497)        (129)        (2,909)       257      (3,278)
  Balance at 31 December 2009                            39,536       61,735          2,509      2,007     105,787
  Accumulated depreciation
  Balance at 1 January 2009                                    -          -          1,450         940          2,390
  Charge for the year                                          -        147            365         386            898
  Disposals                                                    -          -            (68)       (230)          (298)
  Effect of movement in foreign exchange rates                 -        101            (78)         25             48
  Balance at 31 December 2009                                  -        248          1,669       1,121          3,038
  Carrying amount
  At 31 December 2009                                    39,536       61,487           840         886     102,749


   The impairment charge during the year represents the decrease in fair value of the Kislovodsk area hotels
   “Kalinina” and “Versailles”.
                                                                                                 97
                                    AFI DEVELOPMENT PLC


                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                               For the year ended 31 December 2010

16. OTHER INVESTMENTS

   The amount as of 31 December 2009 represented interest bearing bonds classified at fair value
   through profit or loss. Initially, these bonds were treated as cash and cash equivalents and
   reclassified on 30 June 2009 as other investments. On 31 December 2009 the fair value decreased
   and an amount of $18,411 thousand was recognised in the Income statement as an impairment loss
   in finance expenses. On 31 December 2010 the investment was reclassified back to cash and cash
   equivalent after the disposal of the bonds and which is now available cash in brokerage account
   with the portfolio manager. The money were withdrawn early 2011 to be used in the operations of
   the Group. At reclassification the fair value of the portfolio was reassessed and a gain of US$6,573
   thousand was recognised in the Income Statement as fair value gain in finance income.

17. LOANS RECEIVABLE
                                                                               2010          2009
                                                                              US$ ‘000      US$ ‘000
   Long-term loans
   Loans to non-related companies                                                  38             38

   Short-term loans
   Loans to non-related companies                                                  79             73


   Terms and loan repayment schedule

   Terms and conditions of outstanding loans were as follows:
                                        Currency     Nominal       Year of     2010          2009
                                                   interest rate   maturity   US$ ‘000      US$ ‘000

   Loans to non-related companies         RUR      11%-CBR           2014          38            38
                                                    rate*1.1
                                                                     On
   Loans to non-related companies         RUR          11%         demand          79            73
                                                                                  117           111

   The above loans are unsecured.

18. VAT RECOVERABLE

   Represents VAT paid on construction costs and expenses which according to the Russian VAT law
   can be recovered upon completion of the construction. This VAT is expected to be recovered after
   more than 12 months from the balance sheet date. Due to the uncertainties in the Russian tax and
   VAT law, the management has assessed the recoverability of this VAT and has provided for any
   amounts that their recoverability was deemed doubtful or questionable (see note 9).

   Under a revised Russian VAT legislation, VAT can also be claimed during the period of
   construction provided that all required documentation is presented to the VAT authorities. The
   Group was successful in recovering VAT during the year, and it is estimated that the major part of
   the VAT recoverable as at the year-end will be recovered within the next 12 months, which is
   included in trade and other receivables, note 21.
                                                                                                98
                                   AFI DEVELOPMENT PLC


                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                               For the year ended 31 December 2010

19. TRADING PROPERTIES
                                                                            2010           2009
                                                                           US$ ‘000       US$ ‘000

   Balance 1 January                                                          42,050             -
   Transfer from investment property under development                           301             -
   Transfer from trading properties under construction                             -        58,236
   Fair value adjustment                                                      (1,251)       (3,407)
   Disposals                                                                 (19,785)      (13,622)
   Effect of movements in exchange rates                                          71           843
   Balance 31 December                                                        21,386        42,050

   Trading properties comprise of Four Winds II complex and Ozerkovskaya emb. 26 residential
   building complex. The Group has sold during the period a number of the remaining residential flats.

20. TRADING PROPERTIES UNDER CONSTRUCTION
                                                                            2010           2009
                                                                           US$ ‘000       US$ ‘000

   Balance 1 January                                                        171,229        271,035
   Construction costs                                                         3,758          8,382
   Fair value adjustment                                                          -        (12,641)
   Transfer to trading properties                                                 -        (58,236)
   Transfer to investment properties under development (note 14)                  -        (25,773)
   Capitalised interest                                                         653          2,162
   Disposals                                                                      -         (5,463)
   Effect of movements in exchange rates                                       (836)        (8,237)
   Balance 31 December                                                      174,804        171,229

   Trading properties under construction comprise of Botanic Garden and Otradnoye projects. Both
   projects involve primarily the construction of residential properties.

21. TRADE AND OTHER RECEIVABLES
                                                                            2010           2009
                                                                           US$ ‘000       US$ ‘000

   Advances to builders                                                     36,206         38,763
   Amounts receivable from related companies                                 9,007          5,258
   Prepayments for acquisition of investments                                    -         10,000
   Trade receivables                                                        19,411          8,915
   Other receivables                                                        15,176         39,909
   VAT recoverable                                                          55,796         22,850
   Tax receivables                                                           1,110          1,053
                                                                           136,706        126,748
                                                                                                99
                                    AFI DEVELOPMENT PLC


                   NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                For the year ended 31 December 2010

21. TRADE AND OTHER RECEIVABLES (continued)

   Advances to builders
   Include an amount of US$5,803 thousand (31/12/2009: US$NIL) prepaid to Danya Cebus Rus
   LLC, related party of the Group, for the construction of the Moscow City mall.

   Other receivables
   On 31 December 2009 other receivables included an amount of US$21,473 thousand, reclassified
   from prepayment for acquisition of investments. This amount represented a prepayment to
   Straitline B.V. for the acquisition of 100% shareholding in Pinkerton Limited owning 100% of the
   share capital of JSC WTIC Mercury, registered in the Russian Federation with regard to the
   Moscow City Hotel project. On 5 May 2010 the Company received an amount of EUR 14,010
   thousand, equivalent to US$18,353 thousand in full settlement of the above. The remaining balance
   of US$3,120 thousand together with additional payments for expenses and construction costs in
   relation to the same project of US$4,391 thousand, were recognised as impairment of prepayment
   for investment on 31 March 2010.

   Prepayments for acquisition of investments
   On 31 December 2009 the amount of US$10,000 thousand represented a prepayment for the
   acquisition of 100% shareholding of OOO Avtograd. In 2010 the Company decided not to proceed
   with the acquisition, and the amount of prepayment was impaired as its recoverability was
   considered doubtful.

22. CASH AND CASH EQUIVALENTS
                                                                            2010           2009
   Cash and cash equivalents consist of:                                   US$ ‘000       US$ ‘000

   Cash at banks                                                           129,829       210,822
   Cash in hand                                                                 10             8
                                                                           129,839       210,830

23. NON-CURRENT ASSETS HELD FOR SALE

   On 6th of August 2009, the Company entered into a sale and purchase agreement for the project
   Kosinskaya, through the sale of subsidiary Rognerstar Finance Limited which holds 100% of
   OOO Titon. All assets included in both companies where presented as held for sale following the
   agreement to sell. A fair value gain of US$13,921 thousand was recognised on the measurement
   of the investment property under development to adjust its current amount to its fair value less
   cost to sell, i.e. net present value of the selling price. On 30 June 2010 the Company decided to
   reclassify Kosinskaya project from “assets held for sale” back to investment property under
   development due to the uncertainty of fulfilment of the agreement and future date of closing.
   Pursuant to the reclassification and according to valuation made by professional appraisers the
   Company recorded an impairment of US$20,689 thousand on 30 June 2010. See note 27 for
   further details.

                                                                            2010           2009
                                                                           US$ ‘000       US$ ‘000
   Assets classified as held for sale
   Investment property under development                                          -       190,044
                                                                                               100
                                   AFI DEVELOPMENT PLC


                   NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                               For the year ended 31 December 2010


24. SHARE CAPITAL AND RESERVES
                                                                           2010           2009
   Share capital                                                          US$ ‘000       US$ ‘000

   Authorised
   2,000,000,000 shares of US$0.001 each                                     2,000
   1,000,000,000 shares of US$0.001 each                                                   1,000
   Issued and fully paid
   523,847,027 A ordinary shares of US$0.001 each                              524           524
   523,847,027 B ordinary shares of US$0.001 each                              524             -
                                                                             1,048           524

   Pursuant to the resolutions of the Company‟s AGM on 21 May 2010 the Company:
    increased its authorized share capital from 1,000,000,000 shares of US$0.001 each to
      2,000,000,000 shares of US$0.001 each by creation of 1,000,000,000 new shares of nominal
      value of US$0.001 each to rank pari passu with the existing shares in the capital of the
      Company,
    designated the 523,847,027 held by the existing shareholders as “A” ordinary shares, together
      with 100,000,000 unissued shares forming the part of the authorised share capital of the
      Company to be designated as “A” ordinary shares and the remaining 1,376,152,973 unissued
      shares were designated as “B” ordinary shares.
    capitalised out of the share premium account an amount of US$523,847 against the issuance of
      523,847,027 “B” ordinary shares of US$0.001 each, fully paid up, which were allotted and
      distributed as bonus shares to and amongst the shareholders of Company of 2 July 2010, on the
      basis of one “B” share for every one existing ordinary share.

   On 5 July 2010 the Company‟s 523,847,027 “B” shares, issued as a bonus issue to the existing
   shareholders, were admitted to a premium listing on the Official List of the UK Listing Authority
   and to trading on the main market of London Stock Exchange (“LSE”).

   The Company retained its GDR listing as well. Since then each GDR represents one “A” ordinary
   share on deposit with BNY (Nominees) Limited, as custodian.

   Share premium
   It represents the share premium on the issued shares on 31 December 2006 for the conversion of the
   shareholders‟ loans to capital US$421,325 thousand. It also includes the share premium on the
   issued shares which were represented by GDRs listed in the LSE in 2007. It was the result of the
   difference between the offering price, US$14, and the nominal value of the shares, US$0.001, after
   deduction of all listing expenses. An amount of US$1,399,900 thousand less US$57,292 thousand
   transaction costs was recognised during the year 2007. On 5 July 2010 an amount of US$524
   thousand was capitalised as a result of bonus issued as described in share capital note above.
                                                                                                   101
                                    AFI DEVELOPMENT PLC


                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                For the year ended 31 December 2010

24. SHARE CAPITAL AND RESERVES (continued)

   Employee Share option plan
   The company has established an employee share option plan operated by the Board of Directors,
   which is responsible for granting options and administrating the employee share option plan.
   Eligible are employees and directors, excluding independent directors, of the Company and
   employees and directors of the ultimate holding company, Africa Israel Investments Ltd and its
   subsidiaries. The employees share option plan is discretionary and options will be granted only
   when the Board so determines at an exercise price derived from the closing middle market price
   preceding the date of grant. No payment will be required for the grant of the options. In any 10 year
   period not more that 10 per cent of the issued ordinary share capital may be issued or be issuable
   under the employee share option plan.

   Options over 1,089,295 GDRs and 1,089,295 class B shares were granted up to 31 December 2010
   to Russian and Israeli employees and directors with an exercise price of US$14 vesting one-third on
   the second anniversary of the date of grant, a further one-third on the third anniversary and the
   remaining one-third, on the fourth anniversary of the date of grant provided that the participants
   remain in employment until the vesting date. The vesting is not subject to any performance
   conditions. The contractual life is ten years.

   If a participant ceases to be employed his options will normally lapse subject to certain exceptions.
   In the event of a takeover, reorganisation or winding up vested options may be exercised or
   exchanged for new equivalent options where appropriate. Shares/GDRs issued under the plan will
   rank equally with all other shares at the time of issue. The Board of Directors may satisfy (with the
   consent of the participant) an option by paying the participant in cash or other assets the gain as an
   alternative of issuing and transferring the shares/GDRs. The Board of Directors may amend the
   rules of the plan at any time.

   Translation reserve
   The translation reserve comprises all foreign currency differences arising from the translation of the
   financial statements of foreign operations to the Group presentation currency and the foreign
   exchange differences on loans designated as loans to an investee company which are accounted for
   as part of the investor‟s investment (IAS21.15) as their repayment is not planned or likely to occur
   in the foreseeable future. These foreign exchange differences are recognised directly to Translation
   Reserve.

   Retained earnings
   The amount at each reporting date is available for distribution. No dividends were proposed,
   declared or paid during the year ended 31 December 2010.
                                                                                                    102
                                     AFI DEVELOPMENT PLC


                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                For the year ended 31 December 2010

25. LOANS AND BORROWINGS
                                                                               2010           2009
                                                                              US$ ‘000       US$ ‘000
   Non-current liabilities
   Secured bank loans                                                         434,352          312,096
   Secured loan from non-related company                                            -           10,000
                                                                              434,352          322,096

   Current liabilities
   Secured bank loans                                                            9,112          10,087
   Unsecured bank loans                                                              -          49,566
   Secured loan from non-related company                                        10,161          20,345
   Unsecured loans from other non-related companies                             14,610          14,007
                                                                                33,883          94,005

   The loans comprise of the following:
  (i)   A non-revolving credit line which was obtained from VTB Bank for RUR 8,448 million on 28
        August 2008. Up to 31 December 2010 RUR 8,448 million (2009: RUR 4,888 million) where
        drawn. This credit line initially carried interest of 14.25% (ruble terms) which increased to 16%
        (rouble terms) on April 2009. The funds drawn under the credit line are being used to finance
        the construction of the Moscow-City Mall project. The credit line is secured by a pledge over
        100% of the shares of Bellgate Constructions Limited, a lien over 75% of the development
        rights regarding the project, and a mortgage of commercial spaces when completed. AFI
        Development‟s guarantee is one of the elements of collateral for this credit line. On 26 July
        2010 the Company reached an agreement with VTB Bank extending the repayment period by
        two years to August 2013 and lowering the interest rate to 13.25% (rouble terms).

  (ii) A non-revolving credit line which was obtained from Sberbank for US$280 million during the
       year ended 31 December 2007. Up to 31 December 2010 US$77,565 thousand (2009:
       US$77,531 thousand) were drawn. The funds drawn under the credit line are being used to
       finance the construction of the Tverskaya Zastava Shopping Centre project. This credit line
       carries interest of 8% above 6-month libor. The credit line is secured by a pledge over 51% of
       the shares in the asset company, a lien over the development rights regarding the Tverskaya
       Zastava shopping mall project, and a mortgage over the shopping mall and its parking when
       completed.

  (iii) The secured loan from non-related party is from Quasar Capital Limited with Deutsche Bank
        London Branch acting as facility agent. According to the loan agreement dated 13 February
        2006 the total amount of the loan granted was US$60 million, it carries interest at an annual rate
        of 2.4% above 6 months US$ LIBOR and will be paid in fixed instalments with the last being
        on 13 February 2011. The current balance as at 31 December 2010 is US$10,161 thousand
        payable within one year. The full amount of the loan is guaranteed by Africa Israel Investments
        Ltd, registered in Israel, which is the shareholder of the Company.
                                                                                                   103
                                     AFI DEVELOPMENT PLC


                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                 For the year ended 31 December 2010

25. LOANS AND BORROWINGS (continued)

   (iv) A credit line from MDM Bank which was obtained by the 50% owned subsidiary Dulverton
        Limited on 9 October 2009 for US$150 million. The loan bears an annual interest of 10.5% and
        is to be repaid in 31 accelerating quarterly instalments commencing with a first instalment of
        US$0.6 million, paid in the second quarter of 2010, and increasing to the thirtieth instalment to
        US$3.5 million payable in the third quarter of 2017 with a subsequent bullet repayment of
        US$86 million in the fourth quarter of 2017. The credit line was used to pay the two previous
        existing loans of Westec Four Winds Limited and for financing operating activities.

   (v) A five year US$74 million loan from Sberbank which was obtained during the year by the 50%
       owned subsidiary Krown Investments LLC. The loan is denominated in Russian Rouble and is
       being used to complete construction works at the Ozerkovskaya Embankment project, Phase III.
       It carries an initial interest rate of 13% which will be reduced to 11.75% at date when mortgage
       agreement will be presented to Sberbank. Up to 31 December 2010 the subsidiary withdrew
       RUR 629 million.

   (vi) A four year US$20 million loan from Sberbank which was obtained during the period by the
        100% owned subsidiary Eitan K LLC. The loan is denominated in Russian Rouble and will be
        used for the reconstruction of Kalinina project. The loan carries an annual interest rate of
        16.25%. Since 6th of October 2010 interest rate was decreased to 13.5%. Up to 31 December
        2010 the subsidiary withdrew RUR 76 million.

    The following loans were repaid in full during the year:

    (i) A non-revolving credit line which was obtained from VTB Bank for RUR 1,488 million on 1
        August 2008 and carried interest of 16% (rouble terms) was redeemed on 1 March 2010.

    (ii) An express credit line which was obtained from Smith Barney Bank for US$20,095 thousand on
         June 2008 and carried an interest of 3.072% p.a. was redeemed during the year.

                                                                                 2010         2009
    The loans and borrowings are payable as follows:                            US$ ‘000     US$ ‘000

    Less than one year                                                            33,883       94,005
    Between one and five years                                                   380,352      263,046
    More than five years                                                          54,000       59,050
                                                                                 468,235      416,101
                                                                                                     104
                                      AFI DEVELOPMENT PLC


                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                 For the year ended 31 December 2010

25. LOANS AND BORROWINGS (continued)

   Terms and debt repayment schedule
   Terms and conditions of outstanding loans were as follows:
                                                  Currency     Nominal     Year of      2010       2009
                                                             interest rate maturity    US$ ‘000   US$ ‘000

   Secured loan from Quasar Capital Limited          USD       6m USD         2011     10,161      30,345
                                                               LIBOR +
                                                                  2.4%
   Secured loan from Sberbank                        USD       6m USD         2014     72,492      76,946
                                                             LIBOR + 8%
                                                     USD          9.5%        2011      5,290         707
                                                     USD        16.25%        2014      2,302           -
                                                     USD        16.25%        2011        206           -
                                                     USD          13%         2015      9,325           -
                                                     USD          13%         2011      1,031           -
   Secured loan from MDM Bank                        USD         10.5%        2017     71,250      73,750
                                                     USD          13%         2011      2,585       1,651
   Secured loan from Smith Barney                    USD         3.07%                      -       7,730
   Secured loan from VTB Bank                        RUR        13.25%        2013    278,983     161,400
   Unsecured loan from VTB Bank                      RUR          16%                       -      49,566
   Unsecured loans from non-related companies        USD          12%         2011      1,466       1,452
                                                     RUR         18.5%        2011      5,499       4,899
                                                     RUR           0%         2011      6,852       6,904
                                                     RUR          12%         2011         78          51
                                                     RUR      0.1% - 5%       2011        715         700
                                                                                      468,235     416,101

26. DEFERRED TAX ASSETS AND LIABILITIES

   Deferred tax (assets) and liabilities are attributable to the following:
                                                                                       2010        2009
                                                                                      US$ ‘000    US$ ‘000

   Investment property                                                                 17,468       3,102
   Investment property under development                                               46,458      57,304
   Property, plant and equipment                                                       38,763      (1,525)
   Trading properties under construction                                               (4,150)         72
   Trade and other receivables                                                         (1,026)         70
   Cash and cash equivalents                                                                -           5
   Long term loans and borrowings                                                        (319)       (538)
   Short term loans and borrowing                                                        (197)          -
   Trade and other payables                                                             2,776         202
   Other items                                                                          1,583         (34)
   Tax losses carried forward                                                         (20,162)    (14,066)
   Deferred tax liability                                                              81,194      44,592
                                                                                                 105
                                    AFI DEVELOPMENT PLC


                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                For the year ended 31 December 2010

27. TRADE AND OTHER PAYABLES
                                                                                2010         2009
                                                                               US$ ‘000     US$ ‘000

   Trade payables                                                                1,845           234
   Payables to related parties                                                   1,751         2,000
   Amount payable to builders                                                   10,650        12,983
   VAT and other taxes payable                                                   2,299         1,416
   Down payments received for construction projects                                  -         1,484
   Provisions for construction costs                                                 -           625
   Receipts in advance from sale of investment                                  45,867        70,311
   Other payables                                                               57,422        62,649
                                                                               119,834       151,702

   The above are payable within one year and bear no interest.

   Receipts in advance from sale of investment
   On 6th August 2009, the Company has entered into a sale and purchase agreement for the
   Kosinskaya project, through the sale of subsidiary Rognerstar Finance Limited at which date it was
   reclassified as asset held for sale. Under the original terms, sale proceeds of US$195 million were
   expected to be received within one year, by August 2010. Up to 31 December 2010 the Company
   received US$73 million (2009: US$70 million) less expenses incurred in relation to the sale. As of
   the expected dated of receipt the buyer has not paid the full amount and the title of the assets was
   still under the ownership of the Company. Due to the uncertainty of fulfilment the agreement and
   future date of closing, the company had decided to reclassify Kosinskaya project from assets
   classified as held for sale to investment property under development on 30 June 2010. Pursuant to
   the reclassification and according to valuation made by independent appraisers the Company
   recorded an impairment of US$20,689 thousand. In addition, the Company also decided to
   derecognise US$25 million from “receipts in advance from sale of investment” as this amount
   represents the minimum amount that is not refundable according to the contract.
   Other payables
   Include an amount of US$51,869 thousand (2009: US$57,508 thousand) payable to the 50% partner
   of the joint venture Krown Investments LLC.

28. DEFERRED INCOME

   Represents rental income received in advance, which corresponds to periods after the reporting
   date.

29. DISPOSAL OF SUBSIDIARIES
                                                                                2010         2009
                                                                               US$ ‘000     US$ ‘000
   The profit on disposal of subsidiaries consists of:

   Loss on disposal of investment in subsidiaries                                      -         (97)
                                                                                                                       106
                                              AFI DEVELOPMENT PLC


                        NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                         For the year ended 31 December 2010

   29. DISPOSAL OF SUBSIDIARIES (continued)

       The above disposals had the following effect on the Group‟s assets and liabilities:

                                                                                                 2010            2009
                                                                                                US$ ‘000        US$ ‘000
                                                                                                                  Sundry
                                                                                                                Subsidiaries*

       Investment property under development                                                             -            (75)
       Trade and other receivables                                                                       -            (14)
       Cash and cash equivalents                                                                         -             (8)
       Long term loans and borrowings                                                                    -             68
       Short term loans and borrowings                                                                   -              3
       Trade and other payables                                                                          -             98
       Net identifiable assets                                                                           -             72

       Consideration received in cash                                                                    -              8
       Cash disposed of                                                                                  -             (8)
       Net cash inflow from the disposal of subsidiaries                                                 -              -
       * Comprises of a number of subsidiaries which are individually insignificant, namely Temalis Limited, Sewaka
       Limited, Guzela Limited, OOO Ko Development, OOO Rostranconsult and OOO StroyInkom Realt.

   30. JOINTLY CONTROLLED ENTITIES

        Included in the consolidated financial statements are the following items that represent the Group‟s
        interests in the assets and liabilities, income and expenses of the joint ventures:

                                         Current Non-current Current Non-current                     Profit /
                          Ownership      assets    assets    liabilities liabilities Income Expenses (loss)
                                        US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000
2010:
Nouana Limited                   50%          163        4,016              50        9,932             -       (3,776)      (3,776)
OOO Tirel                        50%        2,098       13,072             597       10,758         4,352       (2,913)       1,439
ZAO Kama Gate                    50%            -            -               -            -             -            -            -
OOO Krown Investments            50%       31,508      141,283          11,844       93,702        79,329      (22,919)      56,410
Westec Four Winds Limited        50%        8,025      144,046          12,062       52,359         8,414      (17,919)      (9,505)
Dulverton Limited                50%       10,488      212,351           7,606       90,490        45,318      (18,922)      26,396
                                           52,282      514,768          32,159      257,241       137,413      (66,449)      70,964

2009:
Nouana Limited                   50%          146        4,640              96        6,745           370     (873)   (503)
OOO Tirel                        50%        1,476       13,210             980       11,307         3,739   (3,045)    694
ZAO Kama Gate                    50%            -            -               -            -            46     (524)   (478)
OOO Krown Investments            50%       31,255       61,902          15,192       67,111        23,737 (16,203) 7,534
Westec Four Winds Limited        50%       12,251      150,774          17,293       44,927        35,405 (26,375) 9,030
Dulverton Limited                50%      130,071      223,689          18,495      135,114        55,921 (59,269) (3,348)
                                          175,199      454,215          52,056      265,204       119,218 (106,289) 12,929
                                                                                                        107
                                     AFI DEVELOPMENT PLC


                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                 For the year ended 31 December 2010

31. FINANCIAL INSTRUMENTS

   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

                                                                                    2010             2009
                                                                       Note      US$‟000          US$‟000

   Other investments                                                    16              -          42,959
   Long term loans receivable                                           17             38              38
   Short term loans receivable                                          17             79              73
   Cash and cash equivalents                                            22        129,839         210,830
   Trade and other receivables                                          21        100,500          77,985
                                                                                  230,456         331,885


   Liquidity risk

   The following are the contractual maturities of financial liabilities, including estimated interest
   payments and excluding the impact of netting agreements:

                              Carrying     Contractual   6 months    6-12                                 More than
                              Amount        Cash flow     or less   months     1-2 years    2-5 years     5 years
                              US$‟000        US$‟000      US$‟000   US$‟000     US$‟000      US$‟000      US$‟000

   Secured bank loans            443,464    (615,943)    (29,310)   (32,554)    (63,994)    (425,555)     (64,530)
   Secured loans                  10,161     (10,188)    (10,188)          -           -            -            -
   Unsecured loans                14,610     (14,610)    (14,468)      (142)           -            -            -
   Trade and other payables       73,967     (73,967)    (73,967)          -           -            -            -

   Currency risk

   Sensitivity analysis
   The following shows the magnitude of changes in respect of a number of major factors influencing
   the Group‟s profit before taxes. The assessment has been made on the year-end figures.

   A 10% strengthening of the United States Dollar against the following currencies at 31 December
   2010 would have increased/ (decreased) equity and profit for the year by the amounts shown below.
   This analysis assumes that all other variables, in particular interest rates, remain constant. The
   analysis is performed on the same basis for 2009.
                                                                                                     108
                                      AFI DEVELOPMENT PLC


                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                For the year ended 31 December 2010

31. FINANCIAL INSTRUMENTS (continued)

   Currency risk (continued)

   Sensitivity analysis (continued)
                                                                                        Profit for
                                                                         Equity         the year
                                                                        US$ ‘000        US$ ‘000
    31 December 2010
    Russian Roubles                                                       (24,265)            181
    Ukrainian Hryvnia                                                       3,057             125

    31 December 2009
    Russian Roubles                                                       (21,123)            320
    Ukrainian Hryvnia                                                       2,924             657

   A 10% weakening of the United States Dollar against the above currencies at 31 December 2010
   would have the equal but opposite effect on the above currencies to the amounts shown above, on
   the basis that all other variables remain constant.

   Interest rate risk

   Profile
   At the reporting date the interest rate profile of the Group‟s interest-bearing financial instruments
   was:
                                                                              Carrying amount
                                                                             2010          2009
                                                                           US$ ‘000      US$ ‘000
   Fixed rate instruments
   Financial assets                                                        111,932          43,952
   Financial liabilities                                                  (380,292)       (300,373)
                                                                          (268,360)       (256,421)
   Variable rate instruments
   Financial assets                                                         18,023         123,705
   Financial liabilities                                                   (87,943)       (115,728)
                                                                           (69,920)           7,977
                                                                                                     109
                                    AFI DEVELOPMENT PLC


                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                For the year ended 31 December 2010

31. FINANCIAL INSTRUMENTS (continued)

   Interest rate risk (continued)

   Cash flow sensitivity analysis for variable rate instruments
   An increase of 100 basis points in interest rates at the reporting date would have increased/
   (decreased) equity and profit for the year by the amounts shown below. This analysis assumes that
   all other variables, in particular foreign currency rates, remain constant. The analysis is performed
   on the same basis for 2009.

                                                                                        Profit for
                                                                          Equity        the year
                                                                         US$ ‘000       US$ ‘000
    31 December 2010
    Variable rate instruments                                                     -           (699)

    31 December 2009
    Variable rate instruments                                                     -             80

   A decrease of 100 basis points in interest rates at the reporting date would have the equal but
   opposite effect on the above instruments to the amounts shown above, on the basis that all other
   variables remain constant.

   Fair values
   Fair value is the amount at which a financial instrument could be exchanged in a current transaction
   between willing parties, other than in a forced sale or liquidation and is best evidenced by an active
   quoted market price.

   The estimated fair values of financial instruments have been determined by the Group using
   available market information, where it exists, and appropriate valuation methodologies. However
   judgement is required to interpret market data to determine the estimated fair value.

   The fair values of financial assets and liabilities are not materially different than their carrying
   amount shown in the balance sheet.

   Russian Business Environment
   The Russian Federation continues to display some characteristics of an emerging market and
   economic conditions continue to limit the volume of activity in the financial markets. Market
   quotations may be outdated or reflect distress sale transactions and therefore not represent fair
   values of financial instruments.
                                                                                                     110
                                    AFI DEVELOPMENT PLC


                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                For the year ended 31 December 2010

32. OPERATING LEASES

   Leases as lessee
   Non-cancellable operating lease rentals are payable as follows:
                                                                              2010         2009
                                                                             US$ ‘000     US$ ‘000

   Less than a year                                                            4,629        5,632
   Between one and five years                                                 11,129       14,749
   More than five years                                                       23,625       22,223
                                                                              39,383       42,604

   Amount recognised as an expense during the year                              3,261       2,054

   The ownership of land in the Russian Federation is rare and especially within Moscow region, in
   which all of the property with only a few exceptions, is owned by the City of Moscow. The
   majority of land is occupied by private entities pursuant to lease agreements between occupants, of
   the building located on the land, and the City of Moscow. The Group has several long-term
   operating leases for land. These leases are entered into with the intention and right to develop the
   land and carry out construction. Typically they run for an initial period of one to five years which is
   the period of development and upon completion of development the developer has the right to
   renew for a long term period of usually up to 49 years. Under both leases the lessee is required to
   make periodic lease payments, generally on a quarterly basis to the City of Moscow.

   There is also the option of long term land lease prior to commencement of construction which the
   developer can acquire with a lump sum payment that is determined from time to time by the City of
   Moscow and is based on the size of the land, its location and the proximity to amenities. The Group
   has two such land rights and they run for period of 49 years.

   Leases as lessor
   The Group leases out investment property under operating leases. The future minimum lease
   payments under non-cancellable leases are as follows:
                                                                    2010           2009
                                                                  US$ ‘000       US$ ‘000

   Less than a year                                                       99,186            39,483
   Between one and five years                                            391,835           289,683
   More than five years                                                   71,422            81,139
                                                                         562,443           410,305

   Amount recognised as income during the year                            43,946            36,153
                                                                                                 111
                                   AFI DEVELOPMENT PLC


                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                               For the year ended 31 December 2010

33. CAPITAL COMMITMENTS

   Up to 31 December 2010 the Group has entered into a number of contracts for the construction of
   investment or trading properties:

   Project name                                                            Commitment
                                                                        2010          2009
                                                                       US$ ‟000    US$ ‟000

   AFIMALL City (ex Mall of Russia)                                       22,224           15,985
   Otradnoye                                                                   -          143,260
   Ozerkovskaya Embankment - Phase II                                     29,256            3,164
   Four Winds II                                                             753            7,396
                                                                          52,233          169,805

   The following is a summary of the most significant contracts giving rise to future capital
   commitments:

   AFIMALL City project includes a contract with Enka Insaat Ve Sanayi Anonim Sirketi (“Enka‟)
   and Danya Cebus Rus LLC who are acting as the general constructors of the project. The amount of
   future capital commitment according to the contract is US$22,224 thousand.

   Ozerkovskaya Embankment – Phase II project includes a contract with Danya Cebus Rus LLC who
   is acting as the general constructor of the project. The amount of future capital commitment
   according to the contract is US$29,256 thousand.

   Four Winds II project includes a contract with Rasen Construction Ltd who is acting as the general
   constructor of the project. The amount of future capital commitments according to the contract is
   US$753 thousand.

   Otradnoye project development is postponed until the revised concept is finalised.

34. CONTINGENCIES

   On 6th of August 2009, the Group has entered into a sale and purchase agreement for the sale of
   Kosinskaya project, through the sale of OOO Titon, the subsidiary of Rognerstar Finance Limited,
   which is the subsidiary of AFI Development Plc. Under the original terms, sale proceeds of US$195
   million were expected to be received within one year, by August 2010. By the expected date of
   receipt the Group had received US$72.5 million and was negotiating with the buyer an amended
   payment schedule, in order to extend the receipt of the total proceeds to the end of 2010. The buyer
   has served AFI Development Plc a warrant for indictment, submitted in the District Court of
   Nicosia, Cyprus, whereby the buyer demands, inter alia repayment of the amount of approximately
   US$47 million out of the purchase price, reimbursement in the amount of approximately US$17
   million for damages and additional reimbursement of US$2.5 million per each month of delay in
   the aforementioned payments. As of the date of these financial statements, the buyer has not yet
   submitted any supporting documentation in relation to these claims. AFI Development Plc intends
   to serve its answer in the time frames set forth under the applicable law.
                                                                                                    112
                                    AFI DEVELOPMENT PLC


                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                For the year ended 31 December 2010

35. RELATED PARTIES

   Outstanding balances with related parties                              2010            2009
                                                                         US$ ‘000        US$ ‘000
   Assets
   Amounts receivable from ultimate holding company                             -            503
   Amounts receivable from joint ventures                                   4,388          4,384
   Advances issued to other related companies                               5,803            302
   Amounts receivable from other related companies                          4,619            372

   Liabilities
   Amounts payable to ultimate holding company                                157            266
   Amounts payable to other related companies                               1,594          1,735

   All outstanding balances with these parties are priced at an arm‟s length basis and are to be settled
   in cash. For repayment dates, securities and interest rates of the loans see notes 17 and 25. None of
   the other balances is secured.

   Transactions with the key management personnel                         2010            2009
                                                                         US$ ‘000        US$ ‘000
   Key management personnel compensation comprised:
   Short-term employee benefits                                             2,370          2,137
   Key management personnel are those persons having authority and responsibility for planning,
   directing and controlling the activities of the entity, directly or indirectly, including any director
   (whether executive or otherwise) of that entity. The person is a member of the key management
   personnel of the entity or its parent (includes the immediate, intermediate or ultimate parent). Key
   management is not limited to directors; other members of the management team also may be key
   management.

   Other related party transactions                                     2010               2009
                                                                       US$ ‘000           US$ ‘000
   Revenue
   Ultimate holding company – other income                                     -              503
   Joint venture – consulting services                                       863              775
   Joint venture – interest income                                         4,592            5,924
   Other related companies – consulting services                               -                8
   Other related companies – other income                                      -              523
   Key management personnel – interest income                                  -               31
   Expenses
   Ultimate holding company – administrative expenses                        303             266
                                                                                                113
                                    AFI DEVELOPMENT PLC


                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                 For the year ended 31 December 2010

36. GROUP ENTITIES

   Ultimate controlling party:     Lev Leviev                                  Israel

   Ultimate holding company:       Africa Israel Investments Limited           Israel

   Holding company:                Africa Israel Investments Limited           Israel

   Significant Subsidiaries                 Ownership interest         Country of incorporation
                                              2010       2009
   1. OOO Avtostoyanka Tverskaya Zastava 100              100          Russian Federation
   2. OOO MayStroy                         100            100          Russian Federation
   3. OOO InzhStroy AG                     100            100          Russian Federation
   4. OOO IncomStroy                       100            100          Russian Federation
   5. OOO Tain Investments                 100            100          Russian Federation
   6. OOO AFI Development                  100            100          Russian Federation
   7. OOO Ozerkovka                        100            100          Russian Federation
   8. OOO Corin Development                100            100          Russian Federation
   9. OOO LessyProf                        100            100          Russian Federation
   10. OAO Moskovskiy Kartonazhno-poligraphiche
       skiy Kombinat (MKPK)               99.1           99.1          Russian Federation
   11. Bellgate Construction Limited       100           100           Cyprus
   12. Moscow City Centre PLC              100           100           United Kingdom
   13. Slytherin Development Limited       100           100           Cyprus
   14. OOO Ultrastroy                      100           100           Russian Federation
   15. OOO Ultrainvest                     100           100           Russian Federation
   16. OOO Regionalnoe AgroProizvodstvennoe
       Objedinenie (RAPO)                   100           100          Russian Federation
   17. Severus Trading Limited              100           100          Cyprus
   18. OOO Aristeya                         100           100          Russian Federation
   19. Talena Development Limited           100           100          Cyprus
   20. Buildola Properties Limited          100           100          Cyprus
   21. Bugis Finance Limited                100           100          British Virgin Islands
   22. Borenco Enterprises Limited          100           100          Cyprus
   23. OOO StroyInkom-K                     100           100          Russian Federation
   24. OOO PSO Dorokhovo                    100           100          Russian Federation
   25. Scotson Limited                      100           100          Cyprus
   26. ZAO Armand                           100           100          Russian Federation
   27. OOO Project+                         100           100          Russian Federation
   28. OOO Volga StroyInkom Development     100           100          Russian Federation
   29. OOO Volga Land Development           100           100          Russian Federation
   30. Krusto Enterprises Limited           100           100          Cyprus
   31. Keyri Trading & Investments Ltd      100           100          Cyprus
   32. OOO Favorit                          100           100          Russian Federation
   33. OOO KO Proekt                        100           100          Russian Federation
                                                                                             114
                                 AFI DEVELOPMENT PLC


                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                              For the year ended 31 December 2010

36. GROUP ENTITIES (continued)

   Significant Subsidiaries              Ownership interest         Country of incorporation
                                           2010 2009

   34. ZAO Nedra Publishing                 90.17   90.17           Russian Federation
   35. OOO Titon                             100     100            Russian Federation
   36. ZAO UMM Stroyenergomekhani
       zatsiya                               100     100            Russian Federation
   37. Rognerstar Finance Limited            100     100            Cyprus
   38. Hermielson Investments Ltd            100     100            Cyprus
   39. ZAO Firm Gloria                       100     100            Russian Federation
   40. Bundle Trading Limited                100     100            Cyprus
   41. ZAO MTOK                             99.38   99.38           Russian Federation
   42. Bioka Investments Limited               90      90           Cyprus
   43. OOO Nordservis                          90      90           Russian Federation
   44. AFI Development Hotels Limited        100     100            Cyprus
   45. Eitan (Cyprus) Limited                100     100            Cyprus
   46. OOO Eitan                             100     100            Russian Federation
   47. OOO Eitan K                           100     100            Russian Federation
   48. Sherzinger Limited                    100     100            Cyprus
   49. Rubiosa Management Limited            100     100            Cyprus
   50. OOO Stroycapital                        60      60           Russian Federation
   51. Bastet Estates Limited                100     100            Cyprus
   52. OOO Semprex                           100     100            Russian Federation
   53. Beslaville Management Limited           95      95           Cyprus
   54. OOO Zheldoruslugi                       95      95           Russian Federation
   55. OOO RealProject                         95      95           Russian Federation
   56. Amerone Development Limited           100     100            Cyprus
   57. Hegemony Limited                      100     100            Cyprus
   58. OOO Extra Plus                        100     100            Russian Federation
   59. Inscribe Limited                      100     100            Cyprus
   60. OOO AFI RUS Parking Management        100     100            Russian Federation
   61. OOO Cristall Development              100     100            Russian Federation
   62. OOO North Investments                 100     100            Russian Federation
   63. OOO Region-K                          100     100            Russian Federation
   64. Grifasi Investments Limited           100     100            Cyprus
   65. Occuper Holdings Limited              100     100            Cyprus
   66. OOO Adnera                            100     100            Russian Federation
   67. OOO AFI RUS                           100     100            Russian Federation
   68. LL Avia Management SA                 100     100            British Virgin Islands
   69. OOO AFI Region                        100     100            Russian Federation
   70. OOO AFI RUS Management                100     100            Russian Federation
   71. OOO Bizar                               74      74           Russian Federation
   72. OOO Sever Region K                    100     100            Russian Federation
   73. AFI Ukraine Limited                   100     100            Cyprus
   74. OOO AFI-DS 1                          100     100            Ukraine
                                                                                                 115
                                   AFI DEVELOPMENT PLC


                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                               For the year ended 31 December 2010

36. GROUP ENTITIES (continued)

   Significant Subsidiaries                Ownership interest          Country of incorporation
                                             2010 2009

   75. OOO AFI-DS 2                              100     100            Ukraine
   76. OOO AFI-DS 3                              100     100            Ukraine
   77. OOO Budinkom-Ukraine                      100     100            Ukraine
   78. Jaquetta Investments Limited              100     100            Cyprus
   79. Amakri Management Limited                 100     100            Cyprus
   80. OOO OR-Avner                              100     100            Ukraine
   81. OOO ABG-Sozidatel                         100     100            Ukraine
   82. AFI D Finance SA                          100     100            British Virgin Islands
   83. Falgaro Investments Limited               100     100            Cyprus
   84. Ropler Engineering Limited                100     100            British Virgin Islands
   85. OOO CDM                                   100     100            Russian Federation
   Jointly controlled entities
   1. OOO Krown Investments                       50      50            Russian Federation
   2. Westec Four Winds Limited                   50      50            Cyprus
   3. Dulverton Limited                           50      50            Cyprus
   4. Nouana Limited                              50      50            Cyprus
   5. OOO Tirel                                   50      50            Russian Federation
   6. ZAO Kama Gate                               50      50            Russian Federation

   During the year ended 31 December 2010 the Group did not acquire any subsidiaries.

37. SUBSEQUENT EVENTS

   Subsequent to 31 December 2010 there were no events that took place which have a bearing on the
   understanding of these financial statements except of the following:

   AFIMALL City shopping centre

   On 24 January 2011, AFI Development received a certificate of completion from the City of
   Moscow authorities for the operation of the AFIMALL City shopping centre. In accordance with the
   planned development schedule, the final works requested by the municipal authorities regarding
   safety and fire hazards were carried out in order to receive authorisation to proceed with a “soft
   opening” of the Mall to the general public. During this process, fit-out works for the retail units
   continued.

   Following receipt of the requisite regulatory approvals for the operation of the Mall on 4 March
   2011, the Company issued operators of the rented retail units in the Mall a notice requiring them to
   conclude all fit-out works and prepare for the opening of their shops by 10 March, 2011, when
   AFIMALL City opened to the public.
                                                                                                  116
                                    AFI DEVELOPMENT PLC


                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                               For the year ended 31 December 2010

37. SUBSEQUENT EVENTS (continued)
   On March 25 2011 the Company announced and confirmed that it had reached a non binding
   understanding with the Moscow City administration regarding the purchase from the City of
   Moscow of its 25% share in AFI MALL City and 2,700 parking lots adjacent to AFI MALL City,
   for a total consideration of approximately US$ 310 million. So as to ensure sufficient parking space
   is available for customers of the Mall while the main parking area is being completed, the Company
   rented the required amount of parking space from the owners of adjacent buildings .

   Paveletskaya office complex
   On 23 March 2011, AFI Development leased the Paveletskaya office complex to a single tenant
   ZAO GREENATOM, a subsidiary of the State Atomic Energy Corporation ROSATOM. An 11-
   month lease agreement was signed with ZAO GREENATOM, which will roll over a 3-year period
   once the ownership certificate is obtained, expected before year end. The average annual lease rate
   is RUB 11,331, equivalent to US$400 per square meter, including VAT and OPEX but excluding
   electricity. The 126 parking spaces have been let at an average monthly rate of RUR 4,000, equating
   to US$141 including VAT, per parking space. The aforementioned lease is expected to yield an
   annualised income of approximately US$5.4 million in the first year. The lease payments are linked
   to a fixed index rate of 8.5% per annum, commencing from the second year of the lease.
   Tverskaya Zastava Shopping Center
   On March 25, 2011, the Company announced and confirmed that it has reached a non-binding
   understanding with the Moscow City administration to transfer its development rights in the
   Tverskaya Zastava shopping centre to the City of Moscow in exchange for being fully compensated
   for its development costs incurred in the project to date. Such compensation may take the form of
   the City of Moscow granting additional building rights for the Company's other projects. As part of
   the non-binding understanding reached with the City of Moscow it is intended that AFI
   Development will remain the owner of the projects surrounding Tverskaya, equating to nearly
   350,000 of commercial and residential space. It is also intended that such projects will retain their
   key development criteria and it is the Company's understanding that the current planning
   documentation will remain in place.
   Changes in ownership
   On 26 January 2011, AFI Development‟s major shareholder, Africa Israel Investments, agreed to
   purchase approximately 9.7% of the aggregate equity and voting rights in AFI Development Plc
   from a company wholly-owned by Mr. Alexander Khaldey, the Executive Director of AFI
   Development. The transaction is being carried out in two stages, with 2.96% of the equity and
   voting rights in AFI Development Plc transferred upon execution of the agreement on 28 January
   2011 and the remainder of the holdings being transferred in May 2011. The completion of the
   transactions is subject to the fulfilment of a number of conditions. Once these have been met, Africa
   Israel Investments will hold approximately 64% of the equity and voting rights in AFI
   Development. Alexander Khaldey will continue to serve as General Director of AFI Development.
   Following completion of both stages of the transaction, Africa Israel Investments will have
   purchased the holdings for a total consideration of approximately USD 129 million or
   approximately USD 1.27 per each share or GDR of AFI Development.
   Changes in senior management
   On 4 March 2011, the Board of AFI Development accepted the resignation of Evgeny Luneev as
   Chief Financial Officer, who decided to leave the Company in order to pursue other business
   opportunities. Mr. Luneev will act as the CFO until 29 March 2011. His successor will be
   announced in due course.
                                 AFI DEVELOPMENT PLC

                 PARENT COMPANY SEPARATE FINANCIAL STATEMENTS

                                      CONT ENTS



                                                             Page

Parent Company Separate Statement of Comprehensive Income    118

Parent Company Separate Statement of Changes in Equity       119

Parent Company Separate Statement of Financial Position      120

Parent Company Separate Statement of Cash Flows              121

Notes to the Parent Company Separate Financial Statements   122-138
                                                                                                 118
                                  AFI DEVELOPMENT PLC


     PARENT COMPANY SEPARATE STATEMENT OF COMPREHENSIVE INCOME

                              For the year ended 31 December 2010




                                                                                2010             2009
                                                                      Note     US$ '000         US$ '000

Loss on disposal of investment in subsidiaries                          7               -             (43)
Impairment of prepayment for investments                                10         (4,560)         (6,254)
Administrative expenses                                                            (8,626)         (7,864)
Other expenses                                                          4          (2,079)               -
Operating loss
                                                                                  (15,265)        (14,161)

Finance income                                                                      44,619         40,137
Finance costs                                                                     (13,053)        (33,951)
Net finance income
                                                                        5           31,566             6,186
Profit/(loss) before tax
                                                                                   16,301          (7,975)
Tax                                                                     6          (1,259)         (2,092)
Profit/(loss) for the year
                                                                                    15,042        (10,067)

Other comprehensive income                                                                -                -

Total comprehensive income / (expense) for the year                                 15,042        (10,067)




The notes on pages 122 to 138 are an integral part of these parent company separate financial
statements.
                                                                                                  119
                                  AFI DEVELOPMENT PLC


         PARENT COMPANY SEPARATE STATEMENT OF CHANGES IN EQUITY

                              For the year ended 31 December 2010



                                                               Share           Retained
                                             Share capital    premium          earnings           Total
                                              US$ '000        US$ '000         US$ '000          US$ '000


Balance at 1 January 2009                              524      1,763,933         128,620        1,893,077

Total comprehensive expense for the year                  -              -        (10,067)         (10,067)
Transactions with owners, recognized
directly in equity
Share option expense                                      -              -           (575)              (575)

Balance at 31 December 2009                            524      1,763,933         117,978        1,882,435

Balance at 1 January 2010                              524      1,763,933         117,978        1,882,435

Total comprehensive income for the year                   -              -         15,042           15,042
Transactions with owners, recognized
directly in equity
Issue of bonus shares                                  524           (524) -                 -
Share option expense                                     -              -             106               106

Balance at 31 December 2010                          1,048      1,763,409         133,126        1,897,583




The notes on pages 122 to 138 are an integral part of these parent company separate financial
statements.
                                                                                                 120
                                   AFI DEVELOPMENT PLC


         PARENT COMPANY SEPARATE STATEMENT OF FINANCIAL POSITION

                                      As at 31 December 2010


                                                                                2010             2009
                                                                      Note     US$ '000         US$ '000

Assets
Property, plant and equipment                                                            -              87
Investment in subsidiaries                                              7          896,163         904,927
Investment in jointly controlled entities                               8           15,529          15,150
Loans receivable                                                        9        1,040,839         974,577
Total non-current assets                                                         1,952,531       1,894,741

Trade and other receivables                                             10          16,218         38,696
Loans receivable                                                         9             600          3,410
Other investments                                                       11               -         42,959
Refundable tax                                                          15           2,215          2,215
Cash and cash equivalents                                                          106,737        178,235
Total current assets                                                               125,770        265,515

Total assets                                                                     2,078,301       2,160,256

Equity
Share capital                                                                        1,048             524
Share premium                                                                    1,763,409       1,763,933
Retained earnings                                                                  133,126         117,978
Total equity                                                            11       1,897,583       1,882,435

Liabilities
Loans and borrowings                                                    13          40,177          50,170
Total non-current liabilities                                                       40,177          50,170

Short term portion of long-term loans                                   13          10,161         69,911
Trade and other payables                                                14         130,380        157,740
Total current liabilities                                                          140,541        227,651

Total liabilities                                                                  180,718        277,821

Total equity and liabilities                                                     2,078,301       2,160,256



The financial statements were approved by the Board of Directors οn 28 March 2011.




Lev Leviev - Chairman                                                 Alexander Khaldey - Director


The notes on pages 122 to 138 are an integral part of these parent company separate financial
statements.
                                                                                                          121
                                      AFI DEVELOPMENT PLC


               PARENT COMPANY SEPARATE STATEMENT OF CASH FLOWS

                                  For the year ended 31 December 2010

                                                                                             2010            2009
                                                                                     Note   US$ '000        US$ '000

Cash flows from operating activities
Profit/(loss) for the year                                                                      15,042          (10,067)
Adjustments for:
Depreciation of property, plant and equipment                                                         -              68
Unrealised exchange loss                                                                         5,325            5,484
Loss from the sale of property, plant and equipment                                                 81               37
Loss from the sale of investment in subsidiaries                                      7               -              43
Impairment of prepayment for investment                                                          4,560            6,254
Change in fair value of other investments                                             5         (6,315)                -
Dividend income                                                                       5         (8,013)          (2,900)
Interest income                                                                       5        (30,290)         (37,236)
Interest expense                                                                      5          6,183            9,776
Income tax expense                                                                    6          1,259            2,092
Share option expense                                                                               106             (575)
Change in trade and other receivables                                                           17,859           12,068
Change in trade and other payables                                                              (2,916)         (12,349)
Cash flows from operations                                                                       2,881          (27,305)
Tax paid                                                                                        (1,259)          (4,307)
Net cash flows from/(used in) operating activities                                               1,622          (31,612)

Cash flows from investing activities
Receipts in advance for the sale of an investment                                                2,506           70,311
Payment of expenses associated to the disposal of an investment                                 (1,950) -
Payment for acquisition of property, plant and equipment                                              -             (87)
Additional contribution of capital to existing subsidiaries and jointly controlled
entities                                                                                       (14,800)           1,275
Acquisition of other investments                                                                  (208)               -
Cash received from investment portfolio                                                         10,237                -
Proceeds from disposal of property, plant and equipment                                              6              182
Interest received                                                                                2,174            4,142
Net cash flows (used in)/from investing activities                                              (2,035)          75,823

Cash flows from financing activities
Payments for loans receivable                                                                  (51,631)         (95,372)
Proceeds from repayment of loans receivable                                                     18,237           33,489
Repayment of loans and borrowings                                                              (77,485)         (45,000)
Proceeds from loans and borrowings                                                               3,748           44,005
Interest paid                                                                                   (2,678)          (9,318)
Net cash flows used in financing activities                                                   (109,809)         (72,196)

Effect of exchange rate fluctuations on cash held                                                 (521)           (796)

Net decrease in cash and cash equivalents
                                                                                              (110,743)         (28,781)
Cash and cash equivalents at the beginning of the year                                         178,235          249,975
Reclassification to cash and cash equivalents/(other investments)                               39,245          (42,959)
Cash and cash equivalents at the end of the year
                                                                                               106,737          178,235

The notes on pages 122 to 138 are an integral part of these parent company separate financial
statements.
                                                                                                       122
                                       AFI DEVELOPMENT PLC

   NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS

                                  For the year ended 31 December 2010

1. INCORPORATION AND PRINCIPAL ACTIVITIES

   AFI Development Plc (the ''Company'') was incorporated in Cyprus on 13 February 2001 as a
   limited liability company under the name Donkamill Holdings Limited. In April 2007 the
   Company was transformed into public company and changed its name to AFI Development PLC.
   The address of the Company's registered office is 25 Olympion street, Omiros & Araouzos Tower,
   3035 Limassol, Cyprus. The Company is a 54% (31/12/2009: 71.20%) subsidiary of Africa Israel
   Investments Ltd ("Africa-Israel"), which is listed in the Tel Aviv Stock Exchange ("TASE"). The
   decrease was a result of the debt restructuring of Africa-Israel's debt to the holders of its previously
   issued bonds (the "Settlement"), pursuant to which Africa-Israel converted part of its debt into AFI
   Development's equity amounting to 92,720,923 shares, representing approximately 17,7% of the
   Company's equity capital. In order to facilitate this part of the Settlement, Africa-Israel converted a
   corresponding amount of its shares in the Company into GDRs. Following the completion of the
   Settlement, Africa-Israel remained AFI Development's majority shareholder with 54% of the
   Company's shares. In addition, Africa-Israel has pledged 126,605,557 of its GDRs in the Company
   to the bond holders. A 9.7% of the Company's share capital is held by Nirro Group S.A. and the
   remaining shareholding of "A" shares is held by a custodian bank in exchange for the GDRs issued
   and listed in the London Stock Exchange ("LSE"). On 5 July 2010 the Company issued by way of
   a bonus issue, 523,847,027 "B" shares, which were admitted to a premium listing on the Official
   List of the UK Listing Authority and to trading on the main market of LSE. On the same date, the
   ordinary shares of the Company were designated as "A" shares. Further details in note 12.

   The principal activity of the Company is the holding of investments in subsidiaries. In addition the
   Company provides financing to its subsidiaries and jointly controlled entities.

2. BASIS OF PREPARATION

(a) Statement of compliance
    The financial statements have been prepared in accordance with International Financial Reporting
    Standards (IFRSs) as adopted by the European Union (EU) and the requirements of the Cyprus
    Companies Law, Cap.113.

   Users of these parent's separate financial statements should read them together with the Group's
   consolidated financial statements as at and for the year ended 31 December 2010 in order to obtain
   a proper understanding of the financial position, the financial performance and the cash flows of
   the Company and the Group.

(b) Basis of measurement
    The financial statements have been prepared under the historical cost convention, except in the
    case of investments, which are stated at cost less provision for impairment in value.

(c) Adoption of new and revised International Financial Reporting Standards and
    Interpretations
    As from 1 January 2010, the Company adopted all of the IFRSs and International Accounting
    Standards (IAS), which are relevant to its operations. The adoption of these Standards did not have
    a material effect on the financial statements of the Company.
                                                                                                      123
                                      AFI DEVELOPMENT PLC


          NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS

                                  For the year ended 31 December 2010

2. BASIS OF PREPARATION (continued)

   (c) Adoption of new and revised International Financial Reporting Standards and
   Interpretations (continued)
   The following Standards, Amendments to Standards and Interpretations had been issued but are
   not yet effective for the year ended 31 December 2010:

   (i) Standards and Interpretations adopted by the EU
     Improvements to IFRSs issued in May 2010 (Effective for annual periods beginning on or after 1
         July 2010 and 1 January 2010 as applicable).
     IFRS1 (amendment): Limited exemption from comparative IFRS7 disclosures for first time
         adopters (effective for annual periods beginning on or after 1 July 2010).
     IAS 24 (revised): ''Related Party Disclosures'' (effective for annual periods beginning on or after 1
         January 2011).
     Amendments to IAS 32 ''Classification of rights issues'' (effective for annual periods beginning on
         or after 1 February 2010).
     Amendment to IFRIC 14 Prepayments of a Minimum Funding Requirement (effective for annual
         periods beginning on or after 1 January 2011).
     IFRIC 19: ''Extinguishing Financial Liabilities with Equity Instruments'' (effective from 1 July
         2010).

   (ii) Standards and Interpretations not adopted by the EU
     IFRS 1 – Severe Hyperinflation and Removal of Fixed Dates for First-Time Adopters
         (amendments) (effective for annual periods beginning on or after 1 July 2011).
     IFRS 7 Financial Instruments (amendments): Disclosures - Transfers of Financial Assets (effective
         for annual periods beginning on or after 1 July 2011).
     IFRS 9 ''Financial Instruments'' (effective for annual periods beginning on or after 1 January 2013).
     IAS 12 - ''Deferred tax'': Recovery of Underlying Assets (amendments)(effective for annual periods
         beginning on or after 1 January 2012).

(d) Use of estimates and judgements
    The preparation of financial statements in accordance with IFRSs requires from management the
    exercise of judgment, to make estimates and assumptions that influence the application of
    accounting principles and the related amounts of assets and liabilities, income and expenses. The
    estimates and underlying assumptions are based on historical experience and various other factors
    that are deemed to be reasonable based on knowledge available at that time. Actual results may
    deviate from such estimates.

   The estimates and underlying assumptions are revised on a continuous basis. Revisions in
   accounting estimates are recognised in the period during which the estimate is revised, if the
   estimate affects only that period, or in the period of the revision and future periods, if the revision
   affects the present as well as future periods.
                                                                                                    124
                                      AFI DEVELOPMENT PLC


          NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS

                                  For the year ended 31 December 2010

2. BASIS OF PREPARATION (continued)

   In particular, information about significant areas of estimation, uncertainty and critical judgements
   in applying accounting policies that have the most significant effect on the amount recognised in
   the financial statements are described below:

       Income taxes
        Significant judgement is required in determining the provision for income taxes. There are
        transactions and calculations for which the ultimate tax determination is uncertain during the
        ordinary course of business. The Company recognises liabilities for anticipated tax audit
        issues based on estimates of whether additional taxes will be due. Where the final tax
        outcome of these matters is different from the amounts that were initially recorded, such
        differences will impact the income tax and deferred tax provisions in the period in which such
        determination is made.

       Impairment of investments in subsidiaries/associates
        The Company periodically evaluates the recoverability of investments in
        subsidiaries/associates whenever indicators of impairment are present. Indicators of
        impairment include such items as declines in revenues, earnings or cash flows or material
        adverse changes in the economic or political stability of a particular country, which may
        indicate that the carrying amount of an asset is not recoverable. If facts and circumstances
        indicate that investment in subsidiaries/associates may be impaired, the estimated future
        undiscounted cash flows associated with these subsidiaries/associates would be compared to
        their carrying amounts to determine if a write-down to fair value is necessary.

       Valuation of non-listed investments
        The Company uses various valuation methods to value non-listed investments. These methods
        are based on assumptions made by the Board of Directors which are based on market
        information at the reporting date.

(e) Functional and presentation currency
    The financial statements are presented in United States Dollars, rounded to the nearest thousand
    which is the functional currency of the Company.

3. SIGNIFICANT ACCOUNTING POLICIES

   The following accounting policies have been applied consistently for all the years presented in
   these financial statements and in stating the financial position of the Company.

   Subsidiary companies
   Investments in subsidiary companies are stated at cost less provision for impairment in value,
   which is recognised as an expense in the period in which the impairment is identified.

   Interests in jointly controlled entities
   The Company's share in a jointly controlled entity is recorded at cost less provision for impairment
   in value, which is recognised as an expense in the period in which the impairment is identified.
                                                                                                         125
                                         AFI DEVELOPMENT PLC


            NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS

                                    For the year ended 31 December 2010

3.   SIGNIFICANT ACCOUNTING POLICIES (continued)

     Finance income and finance cost
     Finance income comprises interest income on funds invested and loans offered to related parties,
     fair value gains on financial assets at fair value through profit or loss 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, fair value losses on financial assets at fair
     value through profit or loss and impairment losses recognised on financial assets. Borrowing costs
     are recognised in profit or loss using the effective interest method.

     Foreign currency gains and losses are reported on a net basis as either finance income or finance
     cost depending on whether foreign currency movements are in a net gain or net loss position.

     Foreign currency translation
     (i) Functional and presentation currency
          Items included in the Company's financial statements are measured using the currency of the
          primary economic environment in which the entity operates ('the functional currency'). The
          financial statements are presented in United States Dollars, rounded to the nearest thousand, which
          is the Company's functional and presentation currency.

     (ii) Transactions and balances
          Foreign currency transactions are translated into the functional currency using the exchange rates
          prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the
          settlement of such transactions and from the translation at year-end exchange rates of monetary
          assets and liabilities denominated in foreign currencies are recognised in profit or loss.

     Tax
     Tax liabilities and assets for the current and prior periods are measured at the amount expected to
     be paid to or recovered from the taxation authorities, using the tax rates and laws that have been
     enacted, or substantively enacted, by the reporting date. Current tax includes any adjustments to
     tax payable in respect of previous periods.

     Dividends
     Dividend distribution to the Company's shareholders is recognised in the Company's financial
     statements in the year in which they are approved by the Company's shareholders.

     Financial instruments
     Financial assets and financial liabilities are recognised when the Company becomes a party to the
     contractual provisions of the instrument.
                                                                                                          126
                                         AFI DEVELOPMENT PLC


             NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS

                                     For the year ended 31 December 2010

3.   SIGNIFICANT ACCOUNTING POLICIES (continued)

     (i)   Loans granted
           Loans originated by the Company by providing money directly to the borrower are
           categorised as loans and are carried at amortised cost. This is defined as the fair value of cash
           consideration given to originate those loans as is determined by reference to market prices at
           origination date. All loans are recognised when cash is advanced to the borrower.

           An allowance for loan impairment is established if there is objective evidence that the
           Company will not be able to collect all amounts due according to the original contractual
           terms of loans. The amount of the provision is the difference between the carrying amount
           and the recoverable amount, being the present value of expected cash flows including
           amounts recoverable from guarantees and collateral, discounted at the original effective
           interest rate of loans.

     (ii) Financial assets at fair value through profit or loss
          A financial asset is classified at fair value through profit or loss if it is classified as held for
          trading loss or is designated as such upon initial recognition. Financial assets are designated at
          fair value through profit or loss if the company manages such investments and makes
          purchase and sale decisions because on their fair value in accordance with the company‟s
          documented risk management or investment strategy. Attributable transaction costs are
          recognized in profit or loss as incurred. Financial assets at fair value through profit or loss are
          measured at fair value and changes therein are recognized in profit or loss.

     (iii) Cash and cash equivalents
           For the purpose of the statement of cash flows, cash and cash equivalents comprise cash at
           bank and short term highly liquid investments with original maturity of three months or less.

     (iv) Borrowings
          Borrowings are recorded initially at the proceeds received, net of transaction costs incurred.
          Borrowings are subsequently stated at amortised cost. Any differences between the proceeds
          (net of transaction costs) and the redemption value is recognised in profit or loss over the
          period of the borrowings using the effective interest method.
                                                                                                          127
                                         AFI DEVELOPMENT PLC


            NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS

                                     For the year ended 31 December 2010

3.   SIGNIFICANT ACCOUNTING POLICIES (continued)

     Derecognition of financial assets and liabilities
          Financial assets
          A financial asset (or, where applicable a part of a financial asset or part of a group of similar
          financial assets) is derecognised when:
           the rights to receive cash flows from the asset have expired;
           the Company retains the right to receive cash flows from the asset, but has assumed an
               obligation to pay them in full without material delay to a third party under a 'pass
               through' arrangement; or
           the Company has transferred its rights to receive cash flows from the asset and either (a)
               has transferred substantially all the risks and rewards of the asset, or (b) has neither
               transferred nor retained substantially all the risks and rewards of the asset, but has
               transferred control of the asset.
          Financial liabilities
          A financial liability is derecognised when the obligation under the liability is discharged or
          cancelled or expires.
          When an existing financial liability is replaced by another from the same lender on
          substantially different terms, or the terms of an existing liability are substantially modified,
          such an exchange or modification is treated as a derecognition of the original liability and the
          recognition of a new liability, and the difference in the respective carrying amounts is
          recognised in profit or loss.

     Impairment of assets
     Assets that have an indefinite useful life are not subject to amortisation and are tested annually for
     impairment. Assets that are subject to depreciation or amortisation are reviewed for impairment
     whenever events or changes in circumstances indicate that the carrying amount may not be
     recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount
     exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less
     costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the
     lowest levels for which there are separately identifiable cash flows (cash-generating units).

     Offsetting financial instruments
     Financial assets and financial liabilities are offset and the net amount reported in the statement of
     financial position if, and only if, there is a currently enforceable legal right to offset the recognised
     amounts and there is an intention to settle on a net basis, or to realise the asset and settle the
     liability simultaneously. This is not generally the case with master netting agreements, and the
     related assets and liabilities are presented gross in the statement of financial position.
     Share capital
     Ordinary shares are classified as equity. The difference between the fair value of the consideration
     received by the Company and the nominal value of the share capital being issued is taken to the
     share premium account.
     Non-current liabilities
     Non-current liabilities represent amounts that are due more than twelve months from the reporting
     date.
     Comparatives
     Where necessary, comparative figures have been adjusted to conform to changes in presentation in
     the current year.
                                                                                          128
                                        AFI DEVELOPMENT PLC

           NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS

                                    For the year ended 31 December 2010

4.   OTHER EXPENSES

                                                                           2010           2009
                                                                          US$ '000       US$ '000

     Listing expenses                                                          2,079                -


5.   FINANCE INCOME AND COSTS

                                                                           2010           2009
                                                                          US$ '000       US$ '000

     Interest income on loans receivable                                      28,117        33,095
     Interest / investment income on bank deposits and cash equivalents        2,174         4,142
     Change in fair value of other investments                                 6,315 -
     Dividend income                                                           8,013            2,900
     Finance income
                                                                              44,619        40,137

     Net foreign exchange loss                                                (6,822)       (5,219)
     Interest expense on loans and borrowings                                 (4,876)       (3,198)
     Interest expense on bank loan                                            (1,307)       (6,578)
     Net change in fair value of financial assets                                   -      (18,935)
     Other finance costs                                                         (48)          (21)
     Finance costs
                                                                             (13,053)      (33,951)
     Net finance income
                                                                              31,566            6,186

6.   TAXATION

                                                                           2010           2009
                                                                          US$ '000       US$ '000

     Current tax- charge for the year
                                                                               1,259            2,092

     The corporation tax rate is 10%.
                                                                                                   129
                                         AFI DEVELOPMENT PLC


            NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS

                                    For the year ended 31 December 2010

7.   INVESTMENT IN SUBSIDIARIES
                                                                                      2010         2009
                                                                                     US$ '000     US$ '000


     Balance at 1 January                                                              904,927      653,892
     Additional contribution of capital in existing subsidiaries                        16,236      251,078
     Acquisition of new subsidiaries                                                          -      20,289
     Disposals                                                                                -        (43)
     Impairment                                                                        (25,000)           -
     Balance at 31 December
                                                                                       896,163      904,927

     During 2010 the Company has decided to derecognise US$25 million from its investment in
     subsidiary Rognerstar Finance Limited as this amount represents the minimum amount that is not
     refundable according to its sale contract. For further details see note 14.

     During 2009 the Company has decided to excuse all loans to its subsidiary Rognerstar Finance
     Limited and contributed those as additional paid in capital.

     In addition, during 2009 the Company disposed its investments in Temalis Limited, Sewaka
     Limited and Guzela Limited and acquired 100% shareholding of Ropler Engineering Limited
     registered in British Virgin Islands.


     The details of the subsidiaries are as follows:

     Name                          Country of                 Principal activities    2010         2009
                                   incorporation                                     US$ '000     US$ '000


     Investment in Cypriot                                  Holding of
     companies                     Cyprus                   investments/Financing     700,250      684,283
     Investment in Russian
     companies                     Russian Federation       Real estate               175,624      170,355
     Investment in BVI                                      Holding of
     companies                     BVI                      investments                 20,289       20,289

                                                                                      896,163      874,927
                                                                                                  130
                                         AFI DEVELOPMENT PLC


            NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS

                                     For the year ended 31 December 2010

8.   INVESTMENT IN JOINTLY CONTROLLED ENTITIES

                                                                                     2010         2009
                                                                                    US$ '000     US$ '000

     Balance at 1 January                                                             15,150       14,765
     Additional contribution of capital to existing jointly controlled entities          379          385
     Balance at 31 December
                                                                                       15,529      15,150

     The details of the jointly controlled entities are as follows:

     Name                                     Country of               Principal     2010         2009
                                              incorporation            activities   US$ '000     US$ '000


     Investment in Cypriot companies          Cyprus                  Real estate       6,108        6,108
     Investment in Russian companies          Russian Federation      Real estate       9,421        9,042

                                                                                      15,529       15,150

9.   LOANS RECEIVABLE

                                                                                     2010         2009
                                                                                    US$ '000     US$ '000

     Loans to subsidiaries (Note 16)                                                1,040,839     974,577
     Loans to jointly controlled entities (Note 16)                                       600       3,410

                                                                                    1,041,439     977,987
     Less current portion                                                                (600)     (3,410)
     Non-current portion
                                                                                    1,040,839     974,577

     The loans are repayable as follows:
     Within one year                                                                       600       3,410
     Between one and five years                                                      1,040,839     974,577

                                                                                     1,041,439     977,987

     The fair values of non-current receivables approximate to their carrying amounts as presented
     above.
                                                                                               131
                                   AFI DEVELOPMENT PLC


        NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS

                               For the year ended 31 December 2010

10. TRADE AND OTHER RECEIVABLES

                                                                                 2010          2009
                                                                                US$ '000      US$ '000


  Receivables from related parties (Note 16)                                       14,809        12,593
  Other receivables                                                                 1,409        26,103

                                                                                   16,218        38,696

  Other receivables
  On 31 December 2009 other receivables included an amount of US$21,473 thousand representing
  a prepayment to Straitline B.V for the acquisition of 100% shareholding in Pinkerton Limited
  owning 100% of the share capital of JSC WTIC Mercury, registered in the Russian Federation
  with regard to the Moscow City Hotel project. On 5 May 2010 the Company received an amount
  of EUR 14,010 thousand, equivalent to US$18,353 thousand in full settlement of the above. The
  remaining balance of US$3,120 thousand together with additional payments for expenses of
  US$1,440 thousand, were recognised as impairment of prepayment for investment on 31 March
  2010.

  The fair values of trade and other receivables due within one year approximate to their carrying
  amounts as presented above.

  The exposure of the Company to credit risk and impairment losses in relation to trade and other
  receivables is reported in note 17 of the financial statements.

11. OTHER INVESTMENTS

  The amount as of 31 December 2009 represented interest bearing bonds classified at fair value
  through profit or loss. Initially, these bonds were treated as cash and cash equivalents and
  reclassified on 30 June 2009 as other investments. On 31 December 2009 the fair value decreased
  and an amount of $18,411 thousand was recognised in the Income statement as an impairment loss
  in finance expenses. On 31 December 2010 the investment was reclassified back to cash and cash
  equivalents after the disposal of the bonds and which are now available cash in brokerage account
  with the portfolio manager. The money were withdrawn early 2011 to be used in the operations of
  the Company. At reclassification the fair value of the portfolio was reassessed and a gain of
  US$6,573 thousand was recognised in the Income Statement as fair value gain in finance income.
                                                                                                 132
                                    AFI DEVELOPMENT PLC


         NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS

                                For the year ended 31 December 2010

12. SHARE CAPITAL AND RESERVES

                                                                                  2010           2009
  Share capital                                                                  US$ '000       US$ '000

  Authorised
  2,000,000,000 shares of US$0.001 each                                               2,000
  1,000,000,000 shares of US$0.001 each                                                               1,000

  Issued and fully paid
  523,847,027 A ordinary shares of US$0.001 each                                        524            524
  523,847,027 B ordinary shares of US$0.001 each                                        524              -
                                                                                      1,048            524

  Pursuant to the resolutions of the Company's AGM on 21 May 2010 the Company:
  • increased its authorized share capital from 1,000,000,000 shares of US$0.001 each to
  2,000,000,000 shares of US$0.001 each by creation of 1,000,000,000 new shares of nominal value
  of US$0.001 each to rank ''pari passu'' with the existing shares in the capital of the Company.
  • designated the 523,847,027 held by the existing shareholders as "A" ordinary shares, together
  with 100,000,000 unissued shares forming the part of the authorised share capital of the Company
  to be designated as "A" ordinary shares and the remaining 1,376,152,973 unissued shares were
  designated as "B" ordinary shares.
  • capitalised out of the share premium account an amount of US$523,847 against the issuance of
  523,847,027 "B" ordinary shares of US$0.00l each, fully paid up, which were allotted and
  distributed as bonus shares to and amongst the shareholders of Company of 2 July 2010, on the
  basis of one "B" share for every one existing ordinary share.

  On 5 July 2010 the Company's 523,847,027 "B" shares, issued as a bonus issue to the existing
  shareholders, were admitted to a premium listing on the Official List of the UK Listing Authority
  and to trading on the main market of London Stock Exchange ("LSE").

  The Company retained its GDR listing as well. Since then each GDR represents one "A" ordinary
  share on deposit with BNY (Nominees) Limited, as custodian.

  Share premium
  It represents the share premium on the issued shares on 31 December 2006 for the conversion of
  the shareholders' loans to capital US$421,325 thousand. It also includes the share premium on the
  issued shares which were represented by GDRs listed in the LSE in 2007. It was the result of the
  difference between the offering price, US$14, and the nominal value of the shares, US$0.001, after
  deduction of all listing expenses. An amount of US$1,399,900 thousand less US$57,292 thousand
  transaction costs was recognised during the year 2007. On 5 July 2010 an amount of US$524
  thousand was capitalised as a result of bonus issued as described in share capital note above.

  Retained earnings
  The amount at each reporting date is available for distribution. No dividends were proposed,
  declared or paid during the year ended 31 December 2010.
                                                                                                     133
                                     AFI DEVELOPMENT PLC

         NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS

                                 For the year ended 31 December 2010

12. SHARE CAPITAL AND RESERVES (continued)

  Employee share option expense
  The company has established an employee share option plan operated by the Board of Directors,
  which is responsible for granting options and administrating the employee share option plan.
  Eligible are employees and directors, excluding independent directors, of the Company and
  employees and directors of the ultimate holding company, Africa Israel Investments Ltd and its
  subsidiaries. The employees share option plan is discretionary and options will be granted only
  when the Board so determines at an exercise price derived from the closing middle market price
  preceding the date of grant. No payment will be required for the grant of the options. In any 10
  year period not more that 10 per cent of the issued ordinary share capital may be issued or be
  issuable under the employee share option plan.

  Options over 1,089,295 GDRs and 1,089,295 class B shares were granted up to 31 December 2010
  to Russian and Israeli employees and directors with an exercise price of US$14 vesting one-third
  on the second anniversary of the date of grant, a further one-third on the third anniversary and the
  remaining one-third, on the fourth anniversary of the date of grant provided that the participants
  remain in employment until the vesting date. The vesting is not subject to any performance
  conditions. The contractual life is ten years.

  If a participant ceases to be employed his options will normally lapse subject to certain exceptions.
  In the event of a takeover, reorganisation or winding up vested options may be exercised or
  exchanged for new equivalent options where appropriate. Shares/GDRs issued under the plan will
  rank equally with all other shares at the time of issue. The Board of Directors may satisfy (with
  the consent of the participant) an option by paying the participant in cash or other assets the gain as
  an alternative of issuing and transferring the shares/GDRs. The Board of Directors may amend the
  rules of the plan at any time.

13. LOANS AND BORROWINGS
                                                                                     2010           2009
                                                                                    US$ '000       US$ '000
   Long term liabilities
   Loans from related parties (Note 16)                                                 40,177         40,170
   Secured loan from non related company                                                     -         10,000

                                                                                        40,177         50,170
   Short term liabilities
   Secured bank loan                                                                         -         49,566
   Secured loan from non related company                                                10,161         20,345

                                                                                        10,161         69,911
  Maturity of non-current borrowings:
  Within one year                                                                       10,161         69,911
  Between one and five years                                                                 -         14,096
  After five years                                                                      40,177         36,074

                                                                                        50,338        120,081

  The exposure of the Company to interest rate risk in relation to financial instruments is reported in
  note 17 of the financial statements.
                                                                                                   134
                                     AFI DEVELOPMENT PLC

         NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS

                                 For the year ended 31 December 2010


14. TRADE AND OTHER PAYABLES

                                                                                    2010           2009
                                                                                   US$ '000       US$ '000

  Receipts in advance from sale of investment                                         45,867         70,311
  Other payables                                                                      82,578         85,681
  Payables to related parties (Note 16)                                                1,935          1,748

                                                                                     130,380        157,740

  Receipts in advance from sale of investment
  On 6th August 2009, the Company has entered into a sale and purchase agreement for the
  Kosinskaya project, through the sale of subsidiary Rognerstar Finance Limited. Under the original
  terms, sale proceeds of US$195 million were expected to be received within one year, by August
  2010. Up to 31 December 2010 the Company received US$73 million (2009: US$70 million) less
  expenses incurred in relation to the sale. As of the expected dated of receipt the buyer has not paid
  the full amount and the title of the assets was still under the ownership of the Company. The
  Company decided to derecognise US$25 million from "receipts in advance for sale of investment"
  as this amount represents the minimum amount that is not refundable according to the contract.

  Other payables
  Include an amount of US$82,247 thousand (2009: US$85,373 thousand) payable to the jointly
  controlled entity, Krown Investments LLC.


15. REFUNDABLE TAX

                                                                                    2010           2009
                                                                                   US$ '000       US$ '000

  Corporation tax                                                                      (2,215)       (2,215)
                                                                                                  135
                                     AFI DEVELOPMENT PLC


         NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS

                                 For the year ended 31 December 2010

16. RELATED PARTY TRANSACTIONS

  The transactions with related parties are as follows:


                                                                                  2010           2009
                                                                                 US$ '000       US$ '000

  Interest income charged to subsidiaries                                            28,027        33,065
  Interest income charged to jointly controlled entities                                 90            30
  Interest expense charged from subsidiaries                                            189           517
  Interest expense charged from jointly controlled entities                           4,103         1,075
  Management fees charged from subsidiaries                                             424           160

  The balances with related parties are as follows:

  (i) Receivables from related parties (Note 10)
                                                                                  2010           2009
                                                                                 US$ '000       US$ '000

  Receivables from subsidiaries                                                       2,489           273
  Receivables from jointly controlled entities                                       12,320        12,320

                                                                                     14,809        12,593
  (ii) Loans to related parties (Note 9)
                                                                                  2010           2009
                                                                                 US$ '000       US$ '000


  Loans to subsidiaries                                                           1,040,839       974,577
  Loans to jointly controlled entities                                                  600         3,410

                                                                                  1,041,439       977,987

  The loans to related parties were provided on interest ranging from 6% p.a. to 8.5% p.a., and their
  repayment date is on 31 December 2014. All loans to group companies are unsecured.

  (iii) Payables to related parties (Note 14)
                                                                                  2010           2009
                                                                                 US$ '000       US$ '000
  Name

  Payables to subsidiaries                                                            1,786         1,482
  Payable to related company                                                            149           266

                                                                                      1,935         1,748
                                                                                                    136
                                      AFI DEVELOPMENT PLC

          NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS

                                  For the year ended 31 December 2010

16. RELATED PARTY TRANSACTIONS (continued)

  (iv) Loans from related parties (Note 13)
                                                                                     2010           2009
                                                                                    US$ '000       US$ '000

   Loan from jointly controlled entity                                                40,177          36,074
   Loan from subsidiary                                                                    -           4,096

                                                                                      40,177          40,170

  The loan from jointly controlled entity, Dulverton Limited, was provided at 10.55% p.a. interest,
  and repayment date is on 31 December 2017.

  The loan from subsidiary, AFID Finance SA was repaid in full during the year.

17. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

  Financial risk factors
  The Company is exposed to the following risks from its use of financial instruments:
   Credit risk
   Liquidity risk
   Market risk

  The Board of Directors has overall responsibility for the establishment and oversight of the
  Company's risk management framework.

  The Company's risk management policies are established to identify and analyse the risks faced by
  the Company, to set appropriate risk limits and controls, and monitor risks and adherence to limits.
  Risk management policies and systems are reviewed regularly to reflect changes in market
  conditions and the Company's activities.

  (i)  Credit risk
       Credit risk arises when a failure by counter parties to discharge their obligations could reduce
       the amount of future cash inflows from financial assets on hand at the reporting date. The
       Company has no significant concentration of credit risk. Cash balances are held with high
       credit quality financial institutions and the Company has policies to limit the amount of credit
       exposure to any financial institution.
   (i) Credit risk (continued)

        Trade and other receivables
        The Company establishes an allowance for impairment that represents its estimate of incurred
        losses in respect of trade and other receivables. The main components of this allowance are a
        specific loss component that relates to individually significant exposures and a collective loss
        component established for groups of similar assets in respect of losses that have been incurred
        but not yet identified.
                                                                                                       137
                                      AFI DEVELOPMENT PLC


         NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS

                                  For the year ended 31 December 2010

17. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)

  (ii) Liquidity risk
       Liquidity risk is the risk that arises when the maturity of assets and liabilities does not match.
       An unmatched position potentially enhances profitability, but can also increase the risk of
       losses. The Company has procedures with the object of minimising such losses such as
       maintaining sufficient cash and other highly liquid current assets and by having available an
       adequate amount of committed credit facilities.

  (iii) 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 Company's income or the value of its holdings of
        financial instruments.

       Interest rate risk
       Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes
       in market interest rates. Borrowings issued at variable rates expose the Company to cash flow
       interest rate risk. Borrowings issued at fixed rates expose the Company to fair value interest
       rate risk. The Company's management monitors the interest rate fluctuations on a continuous
       basis and acts accordingly.

       Currency risk
       Currency risk is the risk that the value of financial instruments will fluctuate due to changes in
       foreign exchange rates. Currency risk arises when future commercial transactions and
       recognised assets and liabilities are denominated in a currency that is not the Company's
       measurement currency. The Company is exposed to foreign exchange risk arising from
       various currency exposures primarily with respect to the Euro and the Russian Rouble. The
       Company's management monitors the exchange rate fluctuations on a continuous basis and
       acts accordingly.

  Capital management
  The Company manages its capital to ensure that it will be able to continue as a going concern
  while increasing the return to shareholders through the strive to improve the debt equity ratio. The
  Company's overall strategy remains unchanged from last year.
                                                                                                138
                                    AFI DEVELOPMENT PLC


        NOTES TO THE PARENT COMPANY SEPARATE FINANCIAL STATEMENTS

                                For the year ended 31 December 2010

18. FAIR VALUES

  The fair values of the Company's financial assets and liabilities approximate their carrying
  amounts at the reporting date.

19. CONTINGENT LIABILITIES

  On 6th of August 2009, the Company has entered into a sale and purchase agreement for the sale
  of Kosinskaya project, through the sale of OOO Titon, the subsidiary of Rognerstar Finance
  Limited, which is the subsidiary of the Company. Under the original terms, sale proceeds of
  US$195 million were expected to be received within one year, by August 2010. By the expected
  date of receipt the Company received US$72.5 million and was negotiating with the buyer an
  amended payment schedule, in order to extend the receipt of the total proceeds to the end of 2010.
  The buyer has served AFI Development Plc a warrant for indictment, submitted in the District
  Court of Nicosia, Cyprus, whereby the buyer demands, inter alia repayment of the amount of
  approximately US$47 million out of the purchase price, reimbursement in the amount of
  approximately US$17 million for damages and additional reimbursement ofUS$2.5 million per
  each month of delay in the aforementioned payments. As of the date of these financial statements,
  the buyer has not yet submitted any supporting documentation in relation to these claims. AFI
  Development Plc intends to serve its answer in the time frames set forth under the applicable law.

20. EVENTS AFTER THE REPORTING PERIOD

  Subsequent to 31 December 2010 there were no events that took place which have a bearing on the
  understanding of these financial statements except of the following:

  Changes in ownership
  On 26 January 2011, AFI Development's major shareholder, Africa Israel Investments, agreed to
  purchase approximately 9.7% of the aggregate equity and voting rights in AFI Development Plc
  from a company wholly-owned by Mr. Alexander Khaldey, the Executive Director of AFI
  Development Plc. The transaction is being carried out in two stages, with 2.96% of the equity and
  voting rights in AFI Development Plc transferred upon execution of the agreement on 28 January
  2011 and the remainder of the holdings being transferred in May 2011. The completion of the
  transactions is subject to the fulfillment of a number of conditions. Once these have been met,
  Africa Israel Investments will hold approximately 64% of the equity and voting rights in AFI
  Development Plc. Alexander Khaldey will continue to serve as General Director of AFI
  Development Plc. Following completion of both stages of the transaction, Africa Israel
  Investments will have purchased the holdings for a total consideration of approximately USD 129
  million or approximately USD 1.27 per each share or GDR of AFI Development Plc.

				
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