ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED. — Interim / Quarterly Report 2009

Feb 26, 2009

ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED ACN 009 120 405

HALF-YEAR FINANCIAL REPORT 31 December 2008

CONTENTS

	Page No.
Company Details	1
Directors’ Report	2
Independent Review Report to the Members	5
Auditor’s Independence Declaration	6
Directors’ Declaration	7
Condensed Income Statement	8
Condensed Balance Sheet	9
Condensed Statement of Changes in Equity	10
Condensed Cash Flow Statement	11
Notes to and Forming Part of the Financial Statements	13-17

ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED (ACN 009 120 405)

Directors

Dave Woodall Non-Executive Chairman

Dennis Brockenshire Non-Executive Director

John Hutchinson Non Executive Director

Secretary

Jan Macpherson

Principal Registered Office in Australia

Level 10, 530 Little Collins St Melbourne Vic 3000 (03) 9684 0888

Share Register

Security Transfer Registrars Pty Ltd 770 Canning Highway Applecross Perth 6153

Auditors

PKF Chartered Accountants Level 14, 140 William Street Melbourne Victoria 3000

Bankers

National Australia Bank Limited 3/330 Collins Street Melbourne Victoria 3000

Stock Exchange

Australian Stock Exchange Limited 530 Collins Street Melbourne Victoria 3000

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ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED (ACN 009 120 405)

DIRECTORS’ REPORT - 31 December 2008

Your directors present their report on the accounts of the Company for the half-year ended 31 December 2008.

Directors

The following persons were directors of Environmental Clean Technologies Limited during the whole of the half-year and up to the date of this report:

D Woodall J Hutchinson D Brockenshire

Review of Operations

The net result of operations after applicable income tax expense was a loss of $1,046,824 (2007 loss: $1,978,803 ).

The first half of 2008-09 has been met with a number of challenges stemming from a downturn in the global economic climate which has heavily impacted ECT’s share prices and our ability to seal deals and meet sales objectives.

Despite the share price fall to below 0.02c per share, our loyal shareholders are holding tight as we determine the best options to secure our financial future.

We have successfully reduced our operational expenditure from $3M in 2007-08 to a half yearly result of $1.1M and forward forecast for 2008-09 is around $2M. In these uncertain and unstable economic times, this is a pleasing result for a company of our size with little resources and a prime objective to take the Coldry technology to its next phase of commercialisation and commence pre-feasibility studies on Matmor.

We have continued negotiations and discussions with potential global purchasers of Coldry, and intend to begin initial marketing to over 1524 power stations capable of converting to Coldry immediately. These are primarily located in Eastern Europe, India, China and Indonesia.

Our milestones:

• 1) The Coldry technology was completed and commercially tested by an independent operator at our Bacchus Marsh Pilot Plant.

• 2) The Commercialisation plan has been completed and approved by the Board.

• 3) The company is now scaling up the plant designs through a world wide engineering company (Arup).

• 4) Discussions are in progress with a number of Australian and overseas companies regarding their interest in the use of the Coldry technology.

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ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED (ACN 009 120 405)

• 5) Identification that the Coldry technology can also be used for the dewatering of some sub-bituminous coals.

• 6) Advanced planning and preparation for the establishment of the first commercial plant for the processing of Coldry.

• 7) Testing on Indonesian coals has commenced.

• 8) Progression has been made on securing a deal from Vietnamese company Victoria Capital for the purchase of 20M tonnes of Coldry over 20 years.

In the administration area we have:

• 1) Transferred the company’s head office to central Melbourne to be closer to our advisors

• 2) More effectively managed our use of space.

The Board has:

• Made a conscious decision to contain costs while still working towards identifying appropriate future board members that will assist in growing the business.

Shareholder liaison:

• All telephone and email shareholder contacts are dealt with as expeditiously as possible 7 days a week even though we are operating the company with minimum staff.

• The ASX is advised on a continuous disclosure basis.

This company is not yet a revenue producer and, until such time as revenue is produced it will continue to rely on capital raisings and borrowings. The Board have achieved considerable reduction in the cost of operations, however scaling up of the Coldry plant and the work that is necessary to complete the commissioning of the Matmor technology, will continue to require financial input.

Dividends

No dividends were declared by the directors of ECT in relation to the half year period ended 31 December 2008.

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ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED (ACN 009 120 405)

Matters Subsequent to the End of the Financial Half Year

There are no matters or circumstances that have arisen since 31 December 2008 that have significantly affected or may significantly affect:

• (a) the company’s operations in future financial years,

• (b) the results of those operations in future financial years, or

• (c) the company’s state of affairs in future financial years.

Significant Changes in the State of Affairs

There was no significant change in the state of affairs of the company, during the year.

Future Developments

At the date of this report, there are no likely developments in the operations of this company required to be reported in accordance with sub-section 299(1)(e) of the Corporations Act 2001.

Auditor’s Independence Declaration

A copy of the auditor’s independence declaration as required under Section 307C of the Corporations Act 2001, is set out on page 5.

This report is made in accordance with a resolution of the directors.

Mr J Hutchinson Director

Melbourne, 27 February 2009

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ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED (ACN 009 120 405)

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ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED (ACN 009 120 405)

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ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED (ACN 009 120 405)

DIRECTORS’ DECLARATION

The directors declare that the financial statements and notes set out on pages 9 to 18:

• (a) comply with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and

• (b) give a true and fair view of the Company’s financial position as at 31 December 2008 and of its performance, as represented by the results of its operations, changes in equity and its cash flows, for the half-year ended on that date.

In the directors’ opinion:

• (a) the financial statements and notes are in accordance with the Corporations Act 2001; and

• (b) there are reasonable grounds to believe that Environmental Clean Technologies Limited will be able to pay its debts as and when they become due and payable.

This statement is made in accordance with a resolution of the directors.

Mr J Hutchinson Director

Melbourne, 27 February 2009.

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ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED (ACN 009 120 405)

INCOME STATEMENT FOR THE HALF-YEAR ENDED 31 December 2008

Revenue Other Revenue Raw materials and subcontractor expenses Employee benefits expense Depreciation and amortisation expenses Travel Rent Corporate costs Consultants Insurance Interest Patent fees Other expenses from ordinary activities Loss before Income Tax Expense Income Tax Expense Net Profit attributable to members of Environmental Clean Technologies Limited Basic earnings per share Diluted earnings per share	3(a) 2 3(b)

The above income statement should be read in conjunction with the accompanying notes.

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ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED (ACN 009 120 405)

BALANCE SHEET AS AT 31 December 2008

Current Assets Cash and Cash Equivalents 4 Receivables 6 Total Current Assets Non-Current Assets Property, plant and equipment Intangible Assets Total Non-Current Assets Total Assets Current Liabilities Trade and other payables Total Current Liabilities Non-Current Liabilities Borrowings 7 Total Non-Current Liabilities Total Liabilities Net Assets Equity Issued capital 5 Reserves Retained profits Total Equity	31 Dec 2008 $ 47,444 828,649 876,093 368,231 - 368,231 1,244,324 739,425 739,425 1,781,101 1,781,101 2,520,526 (1,276,202) 29,133,445 1,461,070 (31,870,717) (1,276,202)	30 June 2008 $ 324,433 68,042
		392,475
		437,316 -
		437,316
		829,791
		330,199
		330,199
		1,427,456
		1,427,456
		1,757,655
		(927,864)
		28,700,683 1,195,346 (30,823,893)
		(927,864)

The above balance sheet should be read

in conjunction with the accompanying notes.

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ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED (ACN 009 120 405)

STATEMENT OF CHANGES IN EQUITY FOR THE HALF-YEAR ENDED 31 December 2008

Accumulated losses Accumulated losses at the beginning of the period Net loss for the period Accumulated Losses at the end of the period Share Capital Share Capital at the beginning of the period Shares issued Share Capital at the end of the period Share Option Reserve Balance at the beginning of the period Valuation of Options issued for capital raising Share based payment valuation for the period Reserve balance at the end of the period Convertible Note Reserve Balance at the beginning of the period Equity component of convertible notes issue Reserve balance at the end of the period Total Reserves	( (	2008 $ 30,823,893) (1,046,824) 31,870,717) 28,700,683 432,762 29,133,445 427,497 - - 427,497 767,849 265,724 1,033,573 1,461,070	2007 $ (27,350,713) (1,978,803) (29,329,516) 24,411,300 2,946,738 27,358,038 12,000 175,000 389,000 576,000 767,849 - 767,849 1,343,849

The above statement of changes in equity should be read in conjunction with the accompanying notes.

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ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED (ACN 009 120 405)

CASH FLOW STATEMENT FOR THE HALF-YEAR ENDED 31 December 2008

Cash Flows from Operating Activities Receipts from customers Payments to suppliers and employees Miscellaneous income and cash received Interest received Interest and other costs of finance paid Net Cash Outflow from Operating Activities Cash Flows from Investing Activities Payments for property, plant & equipment Net Cash Outflow from Investing Activities Cash Flows From Financing Activities (Repayment)/Proceeds of borrowings Receipts from issue of equity Net Cash Inflow from Financing Activities Net Increase (Decrease) in Cash Held Cash at the beginning of the reporting period Cash at the End of the Reporting Period	2008 $ - (660,970) - 2,990 - (657,980) (1,960) (1,960) - 382,951 382,951 (276,989) 324,433 47,444	2007 $ - (2,176,242) 20,000 7,050 (75,112)
		(2,224,304)
		(3,431)
		(3,431)
		(426,472) 3,001,739
		2,575,267
		347,532 44,769
		392,301

The above cash flow statement should be read in conjunction with the accompanying notes.

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ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED (ACN 009 120 405)

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE HALF-YEAR ENDED 31 December 2008

1. BASIS OF PREPARATION OF HALF-YEAR REPORT

This general purpose financial report for the interim half year reporting period ended 31 December 2008 has been prepared in accordance with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Act 2001 .

This interim financial report does not include all the notes of the type normally included in an annual financial report. Accordingly, this report is to be read in conjunction with the annual report for the year ended 30 June 2008 and any public announcements made by Environmental Clean Technologies Limited during the interim reporting period in accordance with the continuous disclosure requirements of the Corporations Act 2001 .

The accounting policies adopted are consistent with those of the previous financial year and corresponding interim reporting period.

1(a) GOING CONCERN

For the half year ended 31 December 2008 the consolidated entity had a negative net asset position of $1,276,202, a loss of $1,046,824, and a negative cash flow from operating activities of $657,980. Furthermore, the consolidated entity does not have a source of income and is reliant on equity capital or loans from third parties to meet its operating costs. These conditions indicate a material uncertainty that may cast significant doubt about the consolidated entity’s ability to continue as a going concern.

The financial statements have been prepared on the basis that the consolidated entity is a going concern, which contemplates the continuity of normal business activity, realisation of assets and the settlement of liabilities in the normal course of business.

The ability of the Consolidated Entity to continue as a going concern is dependent upon a number of factors, one being the continuation and availability of funds. To this end, the Consolidated Entity is expecting the funding from the following sources:

• $2.5m funding from Share Placement Scheme (SPS) at a General Meeting scheduled on 4 March 2009. This SPS will give shareholders the opportunity to subscribe for up to $5,000 in shares, which will be offered at 2 cents per share with two free attaching options that will be exercisable at the same price. ECT has received significant interest from shareholders and is confident of raising $2.5m from the SPS. At present ECT has received an underwriting agreement for $500,000 of the SPS. The underwriting was received from the same sophisticated investors who contributed capital in January 2009.

• Successful share placement made on 20 January 2009 for $220,000 to sophisticated investors.

• In January 2009 $262k was received from the 2006 Research & Development offset claim. ECT has lodged further Research & Development claims with the Australian Taxation office for additional refunds.

• Access to $15 million equity line of credit facility for three years (executed in 2007) with Fortrend Securities Pty Ltd in which ECT has successfully raised funds in the past.

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ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED (ACN 009 120 405)

On 16 February 2009, Environmental Clean Technologies (ESI) served Pacific Capital Value Limited (PCVL) with a notice of breach for failure to perform its obligations under the Subscription Agreement dated 18 November 2008. Given these events, ESI considers it unlikely that any more convertible notes will be issued to PCVL (Refer Note 7).

Cash flow forecasts prepared by management demonstrate that the Company has sufficient cash flows to meet its commitments over the next twelve months based on the above factors.

Should the consolidated entity be unable to continue as a going concern, it may be required to realise its assets and extinguish its liabilities other than in the ordinary course of business, and at amounts that differ from those stated in the financial statements. The financial report does not include any adjustments relating to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities that might be necessarily incurred should the consolidated entity not continue as a going concern.

Based on the above capital raising activities and cash flow forecasts prepared, the directors are of the opinion that the basis upon which the financial statements are prepared is appropriate in the circumstances.

2. OTHER REVENUE

Other revenue amounting to $232,625.40 represents the 2006 Research and Development Offset. This claim was reported and lodged with the Australian Taxation Office in November 2008 and was subsequently received in January 2009.

3. INTEREST REVENUE AND EXPENSE

Operating profit before income tax is arrived at after: a. crediting interest as revenue b. charging interest as an expense - finance charges - unwinding present value	31 Dec 2008 $ 31 Dec 2007 $ 32,917 7,050 75,000 119,369 194,369 75,112 91,068 166,180

4. CASH AND CASH EQUIVALENTS

4. CASH AND CASH EQUIVALENTS
Cash at bank and in hand (a) The above figures are reconciled to cash at the end of the statement of cash flow as follows: Balances as above Balances per statements of cash flow	31 Dec 2008 $ 31 Dec 2007 $ 47,444 392,301 47,444 392,301 financial year as shown in the 47,444 392,301 47,444 392,301	31 Dec 2007 $ 392,301
		392,301
		392,301

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ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED (ACN 009 120 405)

5. ISSUANCES, REPURCHASES AND REPAYMENTS OF SECURITIES

During the half-year reporting period, Environmental Clean Technologies Ltd undertook the following transactions with shareholders:

1. The company issued 6,400,000 ordinary shares for $14,000 cash consideration by way of exercising options

2. The company issued 11,304,871 ordinary shares for $368,951.

6. RECEIVABLES

First Tranche of Convertible Note held in Escrow 2006 Research & Development Offset Accrued interest from 2006 Research & Development Offset Deposits Paid Prepayments Goods & Services Tax (GST) Receivable	31 Dec 2008 $ 465,000 232,625 29,927 9,178 61,480 30,439 828,649	30 June 2008 $ - - - - 27,545 40,497
		68,042

7. TRADE AND OTHER PAYABLES

Accrued Interest Professional fees Employee costs Consultants Corporate costs Pilot plant expenses other creditors	31 Dec 2008 $ 158,334 199,681 38,929 159,869 67,273 70,655 44,684 739,425	30 June 2008 $ 112,158 151,899 5,532 88,871 26,025 27,377 9,588
		421,450

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ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED (ACN 009 120 405)

8. NON-CURRENT LIABILITIES

Convertible Notes	31 Dec 2008 $ 1,781,101 1,781,101	30 June 2008 $ 1,427,456
		1,427,456

The debt portion of the convertible note has been calculated at its fair value in accordance with AASB 139 – Financial Instruments: Recognition and Measurement.

A convertible note was issued on 27 June 2007 for $2,000,000 which is redeemable after 3 years, with contracted interest payable every six months at 7.5% per annum. An additional convertible note was issued on 18 December 2008 for $500,000 which is redeemable after 3 years with zero interest coupon payable.

In calculating the fair value of the debt portion of the financial instruments, the directors have discounted the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments which the directors have assessed to be 28.75%

9. FINANCIAL REPORTING BY SEGMENTS

The company operates predominantly in the environmental and energy industry, and a single geographic segment being Australia.

10. EVENTS OCCURRING AFTER REPORTING DATE

On Friday 13 February 2009, Environmental Clean Technologies (ESI) advised that Pacific Capital Value Limited (PCVL) purported to issue it with a “notice of default” in relation to the note certificates issued to PCVL on 17 December 2008 under the subscription agreement dated 18 November 2008.

ESI considers that the purported notice of default is invalid because:

• a) it has not been served on ESI in accordance with the delivery procedure for notices under the Subscription Agreement;

• b) it relies upon ESI’s refusal to issue conversion shares to PCVL before payment for those shares has been made as constituting a default by ESI, whereas ESI disputes that it is required to issue the shares in those circumstances;

• c) it asserts that ESI has breached the Subscription Agreement, but does not describe any such breach; and

• d) alleged breaches by the party to the Note certificates must be the subject of a remediation notice before any event of default can exist, and no such notice has been given.

On 16 February 2009, ESI served PCVF with a notice of breach due to PCVL’s failure to perform its obligations under the Subscription Agreement, and has given PCVL 10 Business Days in which to remedy those breaches. The breaches relate to PCVL’s failure to pay for conversion shares and its dealings with shares in ESI lent to it in accordance with the Subscription Agreement.

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ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED (ACN 009 120 405)

The likely financial ramifications of this dispute are unknown at this time but are not expected to exceed $100,000. Given these events, ESI considers it unlikely that any more convertible notes will be issued to PCVL. ECT still has access to a $15 million equity line of credit facility for three years (executed in 2007) with Fortrend Securities Pty Ltd.

On 27 February ECT signed a heads of agreement for the staged investment in a special purpose vehicle by a Vietnamese based company, Thang Long Investment to establish a plant for the production of 20M tonnes per annum of Coldry, black substitute coal over the next 30 years.

10. COMMITMENTS AND CONTINGENT LIABILITIES

Participants agreement with Maddingley Associates

Capital Commitment

On 29[th] July 2005 Asia Pacific Coal and Steel Limited (“APCS”) signed a participants agreement with Maddingley Associates with the objective for APCS to licence and commercialise the Coldry and Matmor technology owned by Maddingley Associates.

This agreement was then subject to a deed of variation following the acquisition of 100% of the equity of APCS by Environment Clean Technologies Limited (“ECT”) on 25 May 2006.

As part of the participant’s agreement and deed of variation, APCS and ECT have committed to complete agreed milestones along an agreed critical path. These milestones were amended on 25 March 2008 by mutual agreement. The commitments which remain outstanding after the year end are as follows:

• Within 30 days of notice being given by Maddingley either once the Matmor Process has been proved, or at 31 December 2010 (whichever is the earlier) – Commissioning of 6000 tonne per annum Matmor Steel demonstration plant at JBD Park, Bacchus Marsh;

• 30 January 2009 – Conclude negotiation for sites for the construction of additional Coldry plants in the Latrobe Valley, to meet additional opportunities for emissions reduction and commence construction of additional Coldry plants to service export market opportunities (goal 10 million tonnes per annum of production capacity by December 2010); and

• 30 July 2009 – Complete commissioning of one Export Plant.

In the opinion of the directors, the capital expenditure commitments arising from the above agreement cannot be accurately estimated, and therefore, no value has not been included in the accounts.

Contingent liability

The Maddingley agreement and subsequent deed of variation states that should the agreement be terminated by any reason other than breach or default on the part of Maddingley Associates, then APCS will grant to Maddingley Coal an option to buy the following for $1:

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ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED (ACN 009 120 405)

• The benefits of all contracts, licences and sublicences entered into in relation to the Licenced Technology;

• All right, title and interest of APCS relating to the Licensed Technology;

• All right, title and interest of APCS in any improvements at JBD Industrial Park including any modifications or upgrades to the Coldry Pilot Plant;

• All the leasehold or other interest of APCS to JBD Industrial Park or any part thereof.

As part of the fulfilment of the agreement is dependent on the completion of future events as above there is potentially a loss to the consolidated entity of $437,300 should it fail to meet the obligations and Maddingley exercise the option to purchase the Coldry Pilot Plant upgrades which at 31 December 2008 have a net book value of $368,231 for $1.

On 25 February 2009, a notice was received by Maddingley Coal advising that no action will be taken in relation to the failure of ECT to meet any of the milestones as stated in the Participant’s Agreement for 12 months as from the 28[th] February 2009.

ECT has entered into a Letter of Intent with the Calleja Group, owners of the Coldry and Matmor technologies, for the acquisition of the intellectual property of the Coldry process. ECT has an exclusive right under a Participation Agreement with the technology owners to licence the Coldry and Matmor processes and under the terms of the Letter of Intent will purchase the intellectual property in the Coldry process. The Option will have an initial expiry date of 27 February 2009 however ECT may extend the option period until 1 July 2009 by giving written notice and paying an extension fee. The consideration to be paid by ECT for the Units upon exercise of the Option will comprise both cash and Options. If ECT does not exercise the Option before it expires, the Participant’s Agreement will remain in force and the Maddingley Parties will not take action to terminate the Agreement.

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