ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED. — Interim / Quarterly Report 2006

Mar 15, 2006

ENVIRONMENTAL SOLUTIONS INTERNATIONAL LIMITED

ACN 009 120 405

Financial report for the half-year ended 31 December 2005

Financial report for the half-year ended 31 December 2005

Page

Directors' report	$\mathcal{Z}_{\mathbb{Z}}$
Auditors' independence declaration	5
Independent review report	6
Directors' declaration	8
Consolidated income statement	9
Consolidated balance sheet	10
Consolidated statement of recognised income and expense	11
Consolidated cash flow statement	12 °
Notes to the financial statements	13

Directors' report

The directors of Environmental Solutions International Ltd submit herewith the financial report for the half-year ended 31 December 2005. In order to comply with the provisions of the Corporations Act 2001, the directors report as follows:

The names and particulars of the Directors of the Company in office during or since the end of the half year are:

Name	Particulars
Terence Edward O'Connor OC	Chairman, Non-Executive Director, joined the board on 18 November 1985. Chancellor of the University of Notre Dame Australia, Chairman of Ausdrill Ltd, Director of Elkington Bishop Molineaux Insurance Brokers Ltd, Director of GES International Ltd and Chairman of the Western Australian Anti Corruption Commission.
Dennis Hamilton O'Neill B.Sc. (Hons) - Mech. Eng	Non-Executive Director, joined the board on 12 April 1995. Mr O'Neill is former Managing Director and Chief Executive of United Group and former Managing Director of Evans Deakins Industries Ltd. He has extensive experience in engineering and in the export of
	Australian expertise and technologies.
John Boon Heng Cheak B. Econ. (UWA)	Non-Executive Director, joined the board on 16 February 1996. Mr Cheak is the CEO/Director of CH Offshore Ltd, Managing Director of Cleanway Environmental Services, Cleanway Systems and Technologies Pte Ltd and CFX Sdn Bhd Malaysia. Non-Executive
	Director of Finbar International Ltd and Zicom Australia Limited. He has extensive experience in sales, marketing, investment and venture

The Directors noted above were in office from the beginning of the half year until 15 December 2005. However the powers of the directors were suspended upon the appointment of Voluntary Administrators to the Company on 19 November 2004. The current Directors of the Company are as follows:

management in Asia and Australia.

Name	Particulars
Sachlan Fraval	Chairman, Executive Director, joined the board on 27 October 2005. Mr Fraval is an accountant by training and a former Fellow of the Institute of Chartered Accountants, London. During 1966 to 1971 he was Articled to Turquand Young & Co, now Ernst & Young. Mr Fraval has over 30 years experience in corporate and business development of private and public companies in the UK, USA and Australia. He has been actively involved as a director of high tech companies in development and marketing of lasers, hand held computers, forensic science equipment, biometrics solutions and light guide products.
Faldi Ismail B.Bus (ECU)	Non - Executive Director, joined the board on 27 October 2005. Mr Ismail is currently a director of Kalimantan Investment Corporation Limited (the major shareholder of Canadian public listed company Kalimantan Gold Corporation Limited), former company secretary of unlisted public company Cascara Corporation Limited and recently resigned his position as company secretary of ASX listed Eldore Mining Corporation Limited (ASX code: EDM) (formerly Riley Corporation Limited).
Greg Fendis Ba.Comms (RMIT)	Non - Executive Director, joined the board on 27 October 2005. Mr Fendis has had extensive experience in the design, installation and commissioning of large complex computer-based systems. In particular he specialises in Smart Card Technology and ID based card systems. He has an understanding of smart card products, technology issues, marketing and customer needs. His technology experience spans over 20 years.

Company Secretary

Mr Sean Henbury	Mr Sean Henbury is a Chartered Accountant who is a founding
(appointed 21 December 2005)	principle of the accounting firm FJH Solutions Pty Ltd. He has been
	company secretary of a number of companies and is regularly called
	upon to advise Directors of their duties.

Review of operations

• On 18 November 2004, Environmental Solutions International Ltd (Subject to Deed of Company $(a)$ Arrangement) (Receivers and Managers Appointed) ("the Company") and other wholly owned subsidiaries were placed into Receivership.
• $(b)$ As a consequence of the above appointment, on 19 November 2004, the Company was placed into Voluntary Administration.
• $(c)$ A proposal to enter the Company into a Deed of Company Arrangement was approved at a meeting of creditors held on 16 December 2004. On 6 January 2005, the Deed of Company Arrangement was executed and Environmental Solutions International Limited, previously subject to voluntary administration, became subject to a Deed of Company Arrangement.
• $(d)$ The Receivers and Managers realised most of the Company's property, plant and equipment and contracts through private sale, public tenders and public auctions. The proceeds from the sale of the Company's assets were paid to the Company's secured creditor, the Commonwealth Bank of Australia, to partially reduce its outstanding debt.
• $(e)$ On 25 August 2005 the Company executed a Reconstruction Deed with Rofin Australia Pty Ltd detailing the terms of a recapitalisation and restructure of the Company. On 30 September 2005, the Creditors of the Company approved the restructuring of the Company and also approved a variation to the existing Deed of Company Arrangement ("DOCA") so as to facilitate the restructure. On 11 October 2005 the Varied Deed of Company Arrangement was executed.
• $(f)$ The Reconstruction Deed contemplates the consolidation of the Company's share capital, a capital raising (being a placement of shares with a sophisticated investor), payment of cash and the issue of debt capitalisation shares for the benefit of creditors under the Varied DOCA and Trust Deed, the lifting of the Company's ASX trading suspension and the termination of the DOCA and coming into effect of a Trust Deed for the benefit of creditors.
• New directors were appointed by the Administrators to the Company on 27 October 2005, although $(g)$ their powers were suspended until 15 December 2005, at which date Mr Bryan Hughes retired as Deed Administrator. The appointment of the new directors was ratified at a shareholder meeting held on 5 December 2005.
• $(h)$ On 15 December 2005, the Deed of Company Arrangement was effectuated and terminated with full control being passed onto the current Directors of the Company. On removal from Administration the remaining assets of the company, other than all rights and property pertaining to the Enersludge technology were assigned to the Trustee pursuant to Listing Rule 11.2 of the ASX and the terms of the Deed of Company Arrangement, and all debts payable by, and claims against the company (actual or contingent) arising before the date of appointment of the Administrator, were extinguished.
• $(i)$ Rofin Australia Pty Ltd has paid the \$2,420,000 to the Company and \$1,150,000 of these funds were made available to the creditors and the trustees. The \$1,150,000 represents \$630,000 which has been paid to Commonwealth Bank as the secured creditor, \$300,000 which has been paid to the unsecured creditors trust and \$220,000 which was paid to the Deed Administrators by Rofin Australia Pty Ltd.

Auditor's independence declaration

The auditor's independence declaration is included on page 6 of the half-year financial report

Directors' report

Subsequent events

• a. On 15 December 2005, the Deed of Company arrangement was wholly effectuated, therefore removing the Company from external administration;
• b. On 19 January 2006, the Company was reinstated to the official quotation on the ASX following termination of the administration and the completion of a capital raising;
• c. On 27 January 2006, the Company entered into a strategic relationship with Australian Native Landscapes (ANL), a company specialising in the handling of biosolids on a large scale for use in horticulture and agriculture.
• d. On 10 February 2006 the Company entered into an agreement to purchase 100% of Asia Pacific Coal and Steel Pty Ltd for a consideration of 16,000,000 fully paid ESI shares. The agreement is conditional upon both ESI and APCS shareholder approval and upon ESI completing due diligence on APCS. The acquisition will provide ESI access to APCS' patented dewatering technology which the Company believes will provide an economical solution to its aggressive program to roll out transportable Enersludge units which can be applied in cooperation with contract holders or waste management authorities.
• On the 2 March 2006 the Company announced that Asia Pacific Coal and Steel Pty Ltd ("APCS"), the $e_{1}$ company it is currently in the process of acquiring, has signed a Deed for a forward order with Green Power Resources PTE LTD, Singapore ("GPR") for the supply of 3 million tonnes per annum (3mtpa) of brown coal pellets formed from the patented APCS Coldry Process^®.

Other than the above, no other events have arisen between the end of the half-year ended 31 December 2005 and the date of this report, in the opinion of the directors of the company that will affect significantly the operations of the entity, the results of those operations, or the state of the affairs of the entity, in subsequent financial years.

Comparatives

On 19 November 2004 the Company was placed into Voluntary Administration. At 31 December 2004 the Company was in voluntary administration. On 15 December 2005, the Deed of Company arrangement was effectuated and terminated with full control being passed onto the current Directors.

Accordingly the administrator applied to the ASX for an exemption to the requirement to lodge and prepare half vear financial statements for the half vear ended 31 December 2004. No published financial statements exist for the company for the half year ended 31 December 2004. Although published financial statements were prepared for the years ended 30 June 2004 and 30 June 2005, the Company is unable to determine the 31 December 2004 financial information due to a lack of supporting documentation from the period that the Company was under administration and a lack of access to documentation from before that time.

Therefore the Company is unable to provide comparatives to the Income Statement, Statement of changes in equity and cash flow statement at this time.

The Company also believes that due to the reconstruction, the comparatives would lack compatibility with the current period.

Signed in accordance with a resolution of directors made pursuant to s.306(3) of the Corporations Act 2001. On behalf of the Directors

Gaddan Javal

SACHLAN FRAVAL Director Melbourne, VIC, 16 March 2006

Deloitte Touche Tohmatsu ABN 74 490 121 060

Woodside Plaza Level 14 240 St Georges Terrace Perth WA 6000 GPO Box A46 Perth WA 6837 Australia

DX 206 Tel: +61 (0) 8 9365 7000 Fax: +61 (0) 8 9365 7001 www.deloitte.com.au

The Board of Directors Environmental Solutions International Ltd C/- FJH Solutions Pty Ltd 21 Teddington Road Ground Floor BURSWOOD WA 6100

16 March 2006

Dear Board Members

Environmental Solutions International Limited

In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Environmental Solutions International Ltd.

As lead audit partner for the audit of the financial statements of Environmental Solutions International Limited for the half year ended 31 December 2005, I declare that to the best of my knowledge and belief, there have been no contraventions of:

• (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and
• (ii) any applicable code of professional conduct in relation to the audit.

Yours sincerely

Deloitte Touche Tohnatsu

DELOITTE TOUCHE TOHMATSU

Peter M Rupp Partner Chartered Accountants

Deloitte Touche Tohmatsu ABN 74 490 121 060

Woodside Plaza Level 14 240 St Georges Terrace Perth WA 6000 GPO Box A46 Perth WA 6837 Australia

DX 206 Tel: +61 (0) 8 9365 7000 Fax: +61 (0) 8 9365 7001 www.deloitte.com.au

Independent review report to the members of Environmental Solutions International Ltd

Scope

The financial report and directors' responsibility

The financial report comprises the balance sheet, income statement, cash flow statement, statement of changes in equity, selected explanatory notes and the directors' declaration for the consolidated entity for the half-year ended 31 December 2005 as set out on pages 8 to 17. The consolidated entity comprises both Environmental Solutions International Ltd (the company) and the entities it controlled at the end of the half-year or from time to time during the half-year.

The directors of the company are responsible for the preparation and true and fair presentation of the financial report in accordance with Accounting Standards in Australia and the Corporations Act 2001. This includes responsibility for the maintenance of adequate financial records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the financial report.

Review Approach

We have performed an independent review of the financial report in order to state whether, on the basis of the procedures described, anything has come to our attention that would indicate that the financial report is not presented fairly in accordance with the Corporations Act 2001 and Accounting Standards AASB 134 "Interim Financial Reporting" and AASB 1 "First-time Adoption of Australian Equivalents to International Financial Reporting Standards", so as to present a view which is consistent with our understanding of the consolidated entity's financial position, and performance as represented by the results of its operations, its changes in equity and its cash flows, and in order for the company to lodge the financial report with the Australian Securities and Investments Commission.

Our review was conducted in accordance with Australian Auditing Standards applicable to review engagements. A review is limited primarily to inquiries of the entity's personnel and analytical procedures applied to the financial data. These procedures do not provide all the evidence that would be required in an audit, thus the level of assurance provided is less than given in an audit. We have not performed an audit and, accordingly, we do not express an audit opinion.

Deloitte.

Qualification

The financial report does not include a comparative income statement, cash flow statement and statement of changes in equity in respect of the half year ended 31 December 2004. This is a departure from the requirements of Accounting Standard AASB 134, Interim Financial Reporting, which requires the disclosure of these statements for the comparable interim period, being the half year ended 31 December 2004. It is not practical for us to determine the amounts that should have been disclosed due to the reason disclosed in Note 1.

Oualified statement

Based on our review, which is not an audit, except for the effects on the financial report of the matter referred to in qualification paragraph, we have not become aware of any matter that makes us believe that the half-year financial report of Environmental Solutions International Ltd is not in accordance with the Corporations Act 2001, including:

• $(a)$ giving a true and fair view of the consolidated entity's financial position as at 31 December 2005 and of its performance for the half-year ended on that date; and
• complying with Accounting Standards AASB 134 "Interim Financial Reporting" and AASB 1 $(b)$ "First-time Adoption of Australian Equivalents to International Financial Reporting Standards" and the Corporations Regulations 2001.

Deloitte Touche Tohnatsu

DELOITTE TOUCHE TOHMATSU

Peter M Rupp Partner Chartered Accountants Perth, 16 March 2006

Directors' declaration

The directors declare that:

• in the directors' opinion, there are reasonable grounds to believe that the disclosing entity will be able to pay $(a)$ its debts as and when they become due and payable; and
• $(b)$ in the directors' opinion, the attached financial statements and notes thereto are in accordance with the Corporations Act 2001, including compliance with accounting standards and giving a true and fair view of the financial position and performance of the consolidated entity.

Signed in accordance with a resolution of the directors made pursuant to s.303(5) of the Corporations Act 2001.

On behalf of the Directors

Graham Javal

SACHLAN FRAVAL Director Melbourne, VIC, 16 March 2006

Consolidated income statement for the half-year ended 31 December 2005

		Note	Consolidated Half-year ended 31 December 2005 S
Revenue from ordinary activities			126,174
Costs from exiting administration			(220,000)
Loss before income tax expense			(93, 826)
Income tax expense
Loss from continuing operations			(93, 826)
	Net loss attributable to the members of the parent entity		(93, 826)
Loss Per Share -	Basic (cents per share)		0.04
	- Diluted (cents per share)		0.04

Notes to the financial statements are included on pages 13 to 17.

Comparative information for the half year ended 31 December 2004 is not presented for the reasons set out in note 1.

Consolidated balance sheet as at 31 December 2005

	Note Consolidated
		31 December 2005 \$	30 June 2005 \$
Current Assets
Cash and cash equivalents		1,270,376
Receivables			9,403
Total Current Assets		1,270,376	9,403
Total Assets		1,270,376	9,403
Current Liabilities
Borrowings		30,000	1,065,201
Total Current Liabilities		30,000	1,065,201
Total Liabilities		30,000	1,065,201
Net Assets /(Liabilities)		1,240,376	(1,055,798)
Equity
Issued Capital		25,645,158	23,255,158
Accumulated Losses		(24, 404, 782)	(24,310,956)
Total Equity /(Deficiency)		1,240,376	(1,055,798)
Notes to the financial statements are included on pages 13 to 17.

Consolidated statement of changes in equity for the half-year ended 31 December 2005

	Half-Year Ended 31 December 2005 S
Accumulated losses
Accumulated losses at the beginning of the period	(24,310,956)
Net loss for period	(93, 826)
Accumulated Losses At The End Of The Period	(24, 404, 782)
Share Capital
Share capital at the beginning of the period
Fully paid shares (i) - 77,097,512	23,255,158
Shares issued $-212,000,000$	2,390.000
Share Capital At The End Of The Period -
227,434,974 Fully Paid Shares	25,645,158

(i) As a result of the general meeting held on 5 December 2005, the issued capital of the company was consolidated on the basis of every five $(5)$ shares be consolidated into one $(1)$ share.

Notes to the financial statements are included on pages 13 to 17.

Comparative information for the half year ended 31 December 2004 is not presented for the reasons set out in note 1.

Consolidated cash flow statement for the half-year ended 31 December 2005

	Note	Consolidated Inflow /(Outflow) Half-year ended 31 December 2005 S
Cash Flows From (Used In) Operating Activities
Payments to suppliers and employees		(220,000)
Net Cash Flow Used In Operating Activities		(220,000)
Cash Flows from Financing Activities
Repayment of borrowings		(811, 647)
Proceeds from the issue of shares		2,390,000
Proceeds from borrowings		30,000
Net Cash from Financing Activities		1,608,353
Net Increase in Cash Held		1,388,353
Cash and cash equivalents held at the beginning of the financial period		(117,977)
Cash and cash equivalents at the end of the Financial Period		1.270.376

Notes to the financial statements are included on pages 13 to 17.

Comparative information for the half year ended 31 December 2004 is not presented for the reasons set out in note 1.

Notes to the financial statements for the half-year ended 31 December 2005

1. Summary of accounting policies

Basis of preparation

The half-year financial report is a general purpose financial report prepared in accordance with the Corporations Act 2001 and AASB 134 'Interim Financial Reporting'. Compliance with AASB 134 ensures compliance with International Financial Reporting Standard IAS 34 'Interim Financial Reporting'. The half-year financial report does not include notes of the type normally included in an annual financial report and shall be read in conjunction with the most recent annual financial report.

The consolidated entity changed its accounting policies on 1 July 2005 to comply with A-IFRS. The transition to A-IFRS is accounted for in accordance with Accounting Standard AASB 1 'First-time Adoption of Australian Equivalents to International Financial Reporting Standards', with 1 July 2004 as the date of transition. An explanation of how the transition from superseded policies to A-IFRS has affected the consolidated entity's financial position, financial performance and cash flows is discussed in note 5.

The accounting policies set out below have been applied in preparing the financial statements for the halfyear ended 31 December 2005, the comparative information presented in these financial statements, and in the preparation of the opening A-IFRS balance sheet at 1 July 2004 (as disclosed in note 5), the consolidated entity's date of transition, except for the accounting policies in respect of financial instruments. The consolidated entity has not restated comparative information for financial instruments, including derivatives, as permitted under the first-time adoption transitional provisions. The accounting policies for financial instruments applicable to the comparative information are consistent with those adopted and disclosed in the lodged 2005 annual financial report. The transition from superseded policies in relation to financial instruments to A-IFRS has not affected the Company's balance sheet as at 30 June 2005.

Comparative financial information

On 19 November 2004 the Company was placed into Voluntary Administration. At 31 December 2004 the Company was in voluntary administration. On 15 December 2005, the Deed of Company arrangement was effectuated and terminated with full control being passed onto the current Directors.

Accordingly the administrator applied to the ASX for an exemption to the requirement to lodge and prepare half year financial statements for the half year ended 31 December 2004. No published financial statements exist for the company for the half year ended 31 December 2004. Although published financial statements were prepared for the years ended 30 June 2004 and 30 June 2005, the Company is unable to determine the 31 December 2004 financial information due to a lack of supporting documentation from the period that the Company was under administration and a lack of access to documentation from before that time.

Therefore the Company is unable to provide comparatives to the Income Statement, Statement of changes in equity and Cashflow statement at this time.

The Company also believes that due to the reconstruction, the comparatives would lack compatibility with the current period.

Significant accounting policies

The following significant accounting policies have been adopted in the preparation and presentation of the half-year financial report:

$(a)$ Borrowings

Borrowings are recorded initially at fair value, net of transaction costs.

Subsequent to initial recognition, borrowings are measured at amortised cost with any difference between the initial recognised amount and the redemption value being recognised in profit and loss over the period of the borrowing using the effective interest rate method.

Environmental Solutions International Ltd

Notes to the financial statements

1. Summary of accounting policies continued

• Cash and cash equivalents $(b)$
• Cash and cash equivalents comprise cash on hand, cash in banks and investments in money market instruments, net of outstanding bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the balance sheet.

Financial assets $(c)$

Investments are recognised and derecognised on trade date where purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, net of transaction costs.

Subsequent to initial recognition, investments in associates are accounted for under the equity method in the consolidated financial statements.

Other financial assets are classified into the following specified categories: financial assets 'at fair value through profit or loss', 'held-to-maturity' investments, 'available-for-sale' financial assets, and 'loans and receivables'. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Loans and receivables

Trade receivables, loans, and other receivables are recorded at amortised cost less impairment.

$(d)$ Financial instruments issued by the company

Debt and equity instruments

Debt and equity instruments are classified as either liabilities or as equity in accordance with the substance of the contractual arrangement.

Transaction costs on the issue of equity instruments

Transaction costs arising on the issue of equity instruments are recognised directly in equity as a reduction of the proceeds of the equity instruments to which the costs relate. Transaction costs are the costs that are incurred directly in connection with the issue of those equity instruments and which would not have been incurred had those instruments not been issued.

Interest and dividends

Interest and dividends are classified as expenses or as distributions of profit consistent with the balance sheet classification of the related debt or equity instruments or component parts of compound instruments.

Goods and services tax $(e)$

Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except:

• i. where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or
• for receivables and payables which are recognised inclusive of GST. ii.

The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables.

Cash flows are included in the cash flow statement on a gross basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified as operating eash flows.

1. Summary of accounting policies continued

$(f)$ Impairment of assets

At each reporting date, the consolidated entity reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the consolidated entity estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Goodwill, intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually and whenever there is an indication that the asset may be impaired. An impairment of goodwill is not subsequently reversed.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised in profit or loss immediately, unless the relevant asset is carried at fair value, in which case the impairment loss is treated as a revaluation decrease

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised in profit or loss immediately, unless the relevant asset is carried at fair value, in which case the reversal of the impairment loss is treated as a revaluation increase.

Income tax $(q)$

Current tax

Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by reporting date. Current tax for current and prior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable).

Deferred tax

Deferred tax is accounted for using the comprehensive balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base of those items.

In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities (other than as a result of a business combination) which affects neither taxable income nor accounting profit. Furthermore, a deferred tax liability is not recognised in relation to taxable temporary differences arising from goodwill.

Notes to the financial statements

1. Summary of accounting policies continued

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, branches, associates and joint ventures except where the consolidated entity is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with these investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s) when the asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the consolidated entity expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the company/consolidated entity intends to settle its current tax assets and liabilities on a net basis.

Current and deferred tax for the period

Current and deferred tax is recognised as an expense or income in the income statement, except when it relates to items credited or debited directly to equity, in which case the deferred tax is also recognised directly in equity, or where it arises from the initial accounting for a business combination, in which case it is taken into account in the determination of goodwill or excess.

$(h)$ Pavables

Trade payables and other accounts payable are recognised when the consolidated entity becomes obliged to make future payments resulting from the purchase of goods and services.

$(i)$ Revenue recognition

Sale of goods

Revenue from the sale of goods is recognised when the consolidated entity has transferred to the buyer the significant risks and rewards of ownership of the goods.

Rendering of services

Revenue from a contract to provide services is recognised by reference to the stage of completion of the contract.

Rovalties

Royalty revenue is recognised on an accrual basis in accordance with the substance of the relevant agreement.

Dividend and interest revenue

Dividend revenue is recognised on a receivable basis. Interest revenue is recognised on a time proportionate basis that takes into account the effective yield on the financial asset.

Principles of Consolidation $(i)$

The consolidated financial statements have been prepared by combining the financial statements of all the entities that comprise the consolidated entity being the company and the entities it controlled during the year. Where entities are not controlled throughout the financial year, the consolidated results include the results of those entities for that part of the year during which control exists.

The effect of all transactions between entities in the consolidated entity and inter-entity balances are eliminated in full in preparing the consolidated financial statements.

Where necessary dissimilar accounting policies adopted by controlled entities have been amended to ensure consistent policies are adopted within the consolidated entity.

2. Subsequent events

• a) On 15 December 2005, the Deed of Company arrangement was wholly effectuated, therefore removing the Company from external administration:
• b) On 19 January 2006, the Company was reinstated to the official quotation on the ASX following termination of the administration and the completion of a capital raising:
• c) On 27 January 2006, the Company entered into a strategic relationship with Australian Native Landscapes (ANL), a company specialising in the handling of biosolids on a large scale for use in horticulture and agriculture.
• d) On 10 February 2006 the Company entered into an agreement to purchase 100% of Asia Pacific Coal and Steel Pty Ltd for a consideration of 16,000,000 fully paid ESI shares. The agreement is conditional upon both ESI and APCS shareholder approval and upon ESI completing due diligence on APCS. The acquisition will provide ESI access to APCS' patented dewatering technology which the Company believes will provide an economical solution to its aggressive program to roll out transportable Enersludge units which can be applied in cooperation with contract holders or waste management authorities.
• e) On the 2 March 2006 the Company announced that Asia Pacific Coal and Steel Pty Ltd ("APCS"). the company it is currently in the process of acquiring, has signed a Deed for a forward order with Green Power Resources PTE LTD, Singapore ("GPR") for the supply of 3 million tonnes per annum (3mtpa) of brown coal pellets formed from the patented APCS Coldry Process".

Other than the above, no other events have arisen between the end of the half-year ended 31 December 2005 and the date of this report, in the opinion of the directors of the company that will affect significantly the operations of the entity, the results of those operations, or the state of the affairs of the entity, in subsequent financial years.

3. Segment Information

The company operates solely within the research and development of dewatering technologies in Australia.

4. Issuances, repurchases and repayments of securities

During the half-year reporting period. Environmental Solutions International Ltd undertook the following transactions with shareholders:

• 1. On 6 December 2005 the company undertook a reorganisation by way of consolidating every five fully paid ordinary shares in the capital of the Company into one fully paid ordinary share;
• 1. The Company issued 22,000,000 fully paid ordinary shares for \$2,200,000; and
• 1. The Company issued 190,000,000 fully paid ordinary shares for \$190,000.

5. Impacts of the Adoption of Australian Equivalents to International Financial Reporting Standards

The consolidated entity changed its accounting policies on 1 July 2005 to comply with Australian equivalents to International Financial Reporting Standards ('A-IFRS'). The transition to A-IFRS is accounted for in accordance with Accounting Standard AASB 1 'First-time Adoption of Australian Equivalents to International Financial Reporting Standards', with 1 July 2004 as the date of transition, except for financial instruments, including derivatives, where the date of transition is 1 July 2005. For the reasons set out in Note 1, the consolidated entity has presented no comparative information for the income statement, cashflow statement and statement of changes in equity for the half year ended 31 December 2004.

The transition to A-IFRS had no financial impact on the consolidated equity at 1 July 2004 and 30 June 2005, nor on the net loss or cashflow statement for the year ended 30 June 2005 as previously reported under superseded accounting policies.