BANK OF BAKU
AUDITORS REPORT AND FINANCIAL STATEMENTS AT 31 DECEMBER 1998

• Auditors Report
• Balance Sheet
• Statement of Income
• Statement of Cash Flows
• Statement of Changes in Shareholders Equity

Notes to the Financial Statements

Note 1 Principal Activities
Note 2 Basis of Presentation
Note 3 Significant Accounting Policies
Note 4 Cash and Short-Termshort-term funds
Note 5 Loans and Advances to Banks
Note 6 Loans and Advances to Customers
Note 7 Premises and Equipment
Note 8 Deposits From Banks
Note 9 Customer Accounts
Note 10 Other Liabilities
Note 11 Share Capital
Note 12 Accumulated Deficit / Retained earnings
Note 13 Dividends
Note 14 Fees and Commission Income
Note 15 Fees and Commission Expense
Note 16 General, Administrative and Other Operating Expenses
Note 17 Taxation
Note 18 Asset and Liability Concentration
Note 19 Fair value of Financial Instruments
Note 20 Risk Management
Note 21 Commitments and Contingent Liabilities
Note 22 Reconciliation of Azeri Accounting Rules to International. Accounting Standards
Note 23 Related Party Transactions

We have audited the accompanying balance sheet of the Bank of Baku ("the Bank") at 31 December 1998, and the related statements of income and of cash flows for the year then ended. These financial statements are the responsibility of the Banks management. 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 plan and perform our audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

The balance sheet of the Bank at 31 December 1997, which is included in the accompanying financial statements, was audited by another auditor whose report dated 12 January 1998 expressed an unqualified opinion on that balance sheet.

International Accounting Standard No 5 "Information to be Disclosed in Financial Statements" requires that financial statements should show corresponding figures for the preceding period. However, the audited statements of income and of cash flows of the Bank for the year ended 31 December 1997 were not available. In addition, notes to the balance sheet at 31 December 1997 were disclosed to the extent they were available.

In our opinion, except for the non-comparative presentation of the statements of income and cash flows as noted in paragraph 43 above, the accompanying financial statements present fairly, in all material respects, the financial position of the Bank as at 31 December 1998 and the results of its operations and its cash flows for the year then ended in accordance with International Accounting Standards.

Without qualifying our opinion we draw attention to the following matter:

The Azerbaijan economy has continuously shown progress in achieving a lower rate of inflation and stable exchange rates in previous years. However, mainly the sharp fall in oil prices and partially the financial crisis in Russia had negative effects on the economic situation of the country in 1998. With respect to the direct impact of the economic conditions on all economic sectors and the increased level of credit risk in the banking environment, difficulties may be experienced in the near future in the recovery of loans granted to customers.

1 February 1999

Balance Sheet at 31 December 1998 and 1997
(Amounts are expressed in thousands of Azeri Manat)

(*) Reclassified for consistency purposes