FIRST LITHIUM LIMITED — Annual Report 2007

Oct 18, 2007

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FRANCE
PAKISTAN
IRAN
CHINA
MYANMAR
BANGLADESH
INDIA
THAILAND
MALAYSIA
AUSTRALIA
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contents

Corporate Information .................................................................................................................... 2 Directors’ Report ................................................................................................................................ 3 Corporate Governance Statement ....................................................................................... 16 Auditor’s Independence Declaration .................................................................................. 20 Consolidated Income Statements .......................................................................................... 21 Consolidated Balance Sheets .................................................................................................... 22 Statements of Changes in Equity ............................................................................................ 23 Cash Flow Statements ................................................................................................................... 25 Notes to the Financial Statements ........................................................................................ 26 Directors’ Declaration .................................................................................................................. 61 Independent Audit Report.......................................................................................................... 62 Additional Stock Exchange Information ............................................................................ 64

1

corporate information

This annual report covers both Advanced Engine Components Limited (“the Company” or “AEC”) as an individual entity and the consolidated entity comprising Advanced Engine Components Limited and its subsidiaries (“the Group”). The Group’s functional and presentation currency is AUD ($).

A description of the Group’s operations and principal activities is included in the review of operations and activities in the Directors’ report on pages 3 to 15.

ASX Code

ACE

Directors

Mr. G Keys (Chairman) Mr. A. Middleton (Managing Director) Mr. T Liu (Non-Executive Director) Mr. A Pun (Non-Executive Director

Company Secretary

Share Registrar

Computershare Investor Services Pty Limited Level 2, 45 St Georges Terrace Perth WA 6000 Tel: 1300 85 05 05

Bankers

St Georges Bank 152-158 St Georges Terrace Perth WA 6000

Ms. S Hunter

Auditors

Registered Office

14 Energy Street Malaga WA 6090 Tel: (08) 9209 6900

BDO Kendalls Audit & Assurance (WA) Pty Ltd 128 Hay Street Subiaco WA 6008

2

Directors’ report

The Directors submit their report on the consolidated entity consisting of Advanced Engine Components Limited and the entities it controlled at the end of, or during, the year ended 30 June 2007.

DIRECTORS

The names and details of the Company’s Directors in office during the financial year and until the date of this report are as follows. Directors were in office for this entire period unless otherwise stated.

Mr. Graham Keys BEc (Monash) ACA FFin MAICD (Dip)

(Non-Executive Chairman)

Mr. Keys is a former corporate finance partner of Ernst & Young. He has experience as Executive Director, and subsequently Managing Director, of a publicly listed company, as non-executive Chairman of a publicly listed company and as the executive officer of two large private companies. He formed Norvest Corporate Pty Ltd, a specialist corporate advisory firm, in April 2000 and is the current Managing Director of that company. He was appointed a Non-executive Director of AEC on 9 May 2003 and Chairman on 19 October 2004. During the past three years Mr. Keys has also served as a director of Global Wine Ventures Ltd.

Mr. Antony Middleton BE MBA FIE (Aust) FCILT

(Managing Director)

Mr. Middleton holds a Bachelor of Engineering and Master of Business Administration from the University of Western Australia, and a Company Directors’ Diploma from the University of New England. Mr. Middleton has held senior management positions with government agencies including Chairman and Chief Executive Officer of Transperth and also on various international engineering projects. He is past National Chairman and a Fellow of the Chartered Institute of Logistics and Transport in Australia, and a Fellow of the Institution of Engineers (Australia). Mr. Middleton was appointed a Director of AEC in March 1997 and Chairman in December 2002. He retired as Chairman and was appointed Managing Director in August 2003. During the past three years Mr. Middleton has not served as a director for any other Australian listed companies.

Mr. Thomas Liu BS MBA

(Non-Executive Director)

Mr. Liu is the Executive Director and Head of the real estate investment group CDIB Capital Limited, a subsidiary of China Development Industrial Bank in Taiwan, responsible for identifying and making investment in real estate projects and assets in the greater China region. Prior to joining CDIB, Mr. Liu was the Managing Director of 698 Capital Holdings Limited and also the Chief Operating Officer of a real estate development company, He Qiao, in Beijing, China. Previously, Mr. Liu was Vice President of Corporate Finance at KGI Asia Limited, a regional investment bank, where he advised clients on over US$400 million in international investments. He also worked previously at PKF Consulting Limited, then a global leader in hospitality consultancy services. He has a Master of Business Administration from the Kellogg School of Management from Northwestern University in Chicago and the Hong Kong University of Science and Technology and also dual Bachelor of Science degrees from Boston University. Mr. Liu was appointed a Non-executive Director on 7 August 2003. During the past three years Mr. Liu has not served as a director for any other Australian listed companies.

3

Directors’ report

Mr. Albert Pun CPA FCCA MSc BSocSc

(Non-Executive Director) appointed 28 November 2006

Mr Pun has significant international investment experience. Mr Pun is the Managing Director of Cherry Capital Management Limited, a Hong Kong based financial advisory company, providing strategic and financial advice to its clients. He is currently appointed as the Chief Advisor of KGI Group, a Hong Kong based regional investment bank. Mr Pun was formerly the Chief Financial Officer and a member of the board of Directors of KG Investments Holdings Limited, a regional financial services group in Hong Kong. Both KGI Asia Limited and KG Investments Holdings Limited are part of the Koos Group which is one of the largest business groups in Taiwan. Mr Pun previously worked at Morgan Stanley Asia Limited as Vice President. Mr Pun has a Master of Sciences and Bachelor of Social Sciences degree from the University of Hong Kong. During the past three years Mr. Pun has not served as a director of any other Australian listed companies.

Mr. Wei Chang Fang BcompSc MBA

(Non-Executive Director) resigned 28 November 2006

Mr. Fang is the Chief Operating Officer of KGI Securities (Thailand) PLC, a listed financial institution on the Stock Exchange of Thailand. Mr. Fang was previously the Chief Operating Officer of KGI Group, a Hong Kong based regional investment bank, and Managing Director of KGI Capital Asia Pacific Ltd, both part of the Koos Group which is one of the largest business groups in Taiwan. Mr. Fang was appointed a Non-Executive Director on 19 October 2004. Mr. Fang resigned as a Non-Executive Director on 28 November 2006. During the past three years Mr. Fang has not served as a director for any other Australian listed companies.

Mr. William Lee CFA FCCA

(Non-Executive Director) resigned 10 September 2007

Mr. Lee is Vice President of Structured Finance Group at CTIC Capital, a leading China focused investment management and advisory firm in Hong Kong. Mr. Lee was Vice President with CDIB Capital Limited, a subsidiary of China Development Industrial Bank in Taiwan. Prior to joining CDIB Capital, Mr. Lee was a Director and Chief Financial Officer of 698 Capital Holdings Limited. He is a Chartered Financial Analyst and Chartered Certified Accountant. Previously, Mr. Lee was Assistant Vice President at KGI Asia and Corporate Finance Officer at China Development Finance (now BOCI Asia). He has also worked as Senior Accountant with KPMG Peat Marwick, performing financial audits and special assignments for various public companies in Hong Kong and China. Mr. Lee received a Master of Business Administration from the Hong Kong University of Science and Technology and a Master of International and Public Affairs from the University of Hong Kong. Mr. Lee was appointed as an Executive Director and Chief Financial Officer of the Company on 7 August 2003. He subsequently resigned from those positions on 19 October 2004 and was a Non-Executive Director until his resignation on 10 September 2007. During the past three years Mr. Lee has not served as a director for any other Australian listed companies.

Company Secretary

Ms. Susan Hunter BCom, ACA, FFSIA(Dip), MAICD(Dip), ACIS(Dip)

Ms. Susan Hunter has over 13 years experience in the corporate finance industry. Ms. Hunter holds a Bachelor of Commerce degree from the University of Western Australia majoring in accounting and finance, is a Member of the Australian Institute of Chartered Accountants, a Fellow of the Financial Services Institute of Australasia, a Member of the Australian Institute of Company Directors and a Member of the Institute of Chartered Secretaries in Australia. She is currently the Company Secretary of three Australian Stock Exchange listed companies, an AIM listed company and several unlisted companies.

4

Directors’ report

Principal Activities

The Group’s principal activities in the course of the financial year were the commercialisation and sale of AEC patented Natural Gas Vehicle Systems (“NGVS”), associated services components and spare parts.

Operating Results

The consolidated loss after tax for the year attributable to the members of Advanced Engine Components Limited was $3,131,445 (2006: $1,386,454).

Dividends

No dividends have been declared or paid to shareholders at the date of this report.

REVIEW OF OPERATIONS

The past year has been one of significant progress offset by a degree of frustration. Essentially your company’s operations exceeded expectations in all respects except timing. Although a high volume of development work has been completed on behalf of our main Chinese Original Equipment Manufacturer (“OEM”) customers, and further strategic links have been formed throughout our main target market, namely the Asia Pacific Region, this work has only just begun to bear fruit in terms of commercial orders for our NGVS.

China

At the start of the year we had working arrangements with three of China’s top five manufacturers of heavy duty engines for buses and trucks - First Auto Works (“FAW”), Weichai and Dongfeng.

A working agreement has now also been reached with another Chinese engine builder. While not an OEM, this company is a distributor of engines assembled from components from a variety of sources, including engine components from FAW. Significantly, the engine builder will focus on natural gas (“NG”) engines, so the potential for the sale of AEC components through this company is significant.

On behalf of these companies we have adapted engines of various capacities - from 3.2 litres to 11.6 litres - and have produced variations on most of the designs to accommodate specific market performance requirements. The four manufacturers have specified a total of 18 different engine versions, and have over 70 trucks and buses undergoing various trials, giving them tremendous flexibility to market their products to a wide range of end users.

Most of the 18 variations have been completed, commissioned and certified to the Euro 3 standard, which exceeds the emission performance of virtually all engines currently in use in Asia. Only a small amount of development work remains to be completed.

In short, the anticipated flow of business from China is actually more substantial than originally anticipated, albeit taking longer than we had planned to come to fruition.

Each of the four companies with which we are dealing in China and the industry is coming under growing domestic and international pressure to produce more emission-efficient engines. As an indicator to future demand, our agreement with FAW required us to demonstrate our capacity to supply them with up to 3,000 NGVS kits a year. Realistically, each of our four Chinese customers has the potential to buy 3,000 units a year on an ongoing basis, considering the overall size of the market and the pressure on manufacturers and fleet operators to reduce exhaust emissions. To put this figure in perspective, we need to sell only 2,500 NGVS a year to trade at a profit.

5

Directors’ report

Other Markets

Although China remains the main focus for AEC, your company has continued to make sound progress in other markets. Late in the 2007 financial year AEC commenced sales of complete natural gas engines. This was principally a market driven decision. AEC had been approached by the bus builders and operators, particularly in Thailand, Bangladesh and Pakistan, to facilitate their purchase of NG engines from China. These requests have been driven by AEC’s technical capabilities, assistance in the installation and commissioning stage and after sales support. The direct sale of completed engines has not required your company to add any new skills or find any additional working capital. In the last quarter of the 2007 financial year AEC sold over 60 NG engines to Thailand.

The addition of NG engines to AEC’s portfolio of products means AEC benefit through the entire product cycle with:

• the sale of the AEC NGVS and other patented components to the OEM;

• a margin on the sale of the NG or base engine to the vehicle manufacturer; and

• the ongoing sale of patented spare parts and consumables to the end user.

In Australia, your company has commenced a development and promotion strategy for Isuzu trucks, fuelled by liquefied natural gas (“LNG”), for the Australian market.

This initiative will benefit significantly from the new LNG capacity and infrastructure becoming available in Western Australia. The first LNG refuelling station, for the heavy duty vehicle market, is planned to be operational in Perth, Western Australia by the last quarter of calendar 2007 with further facilities planned throughout WA and into the Eastern States.

AEC has developed, commissioned and tested 190hp, 220hp and 255hp compressed natural gas (“CNG”) versions of the 7.8 L Isuzu engine. The first of the AEC/Isuzu CNG production vehicles has travelled more than 80,000 kilometres in active service. As a result, development of LNG versions of these engines will be completed relatively quickly and the first truck will be on the road in the last quarter of calendar 2007.

Spare Parts

The sale of spare parts to France and within Australia also continued throughout the 2007 financial year. This underlines the importance of this key secondary market. While it is natural to focus on the sale of new units, it is doubly reassuring to note that every unit sold creates an ongoing market for the sale of spares and consumables for the life of the engine which is up to 20 years. In the year ended, the sale of spares contributed 29% of your company’s revenue. Our experience with this expanding income stream to date shows that each kit sold will attract a further double its face value when spares are factored in.

Staff Numbers and Deployment

Over the year, staff numbers have increased from 37 to 46. Of these, 11 appointments were in China, reflecting our determination to expand our marketing capability and to provide users of our technology with a high standard of technical support and after sales service.

FINANCIAL REVIEW

AEC’s financial result for the 2007 financial year reflects the early stages of commercialisation of the AEC NGVS throughout China and Asia Pacific region.

The loss for the financial year was $3.1m compared to a loss of $1.4m in the 2006 financial year. Sales for the year were $3.1m (2006: $2.6m) with a gross profit of $0.7m (2006: $1.5m). The lower margin reflects the changing geographical nature and maturity of AEC’s markets. In 2007 sales to China were $2.2m (2006: $0.2 m), France $0.8m (2006: $2.0m) and Australia $0.1m (2006: $0.4m).

6

Directors’ report

The 2007 sales to China were principally NGVS kits and in the last quarter included NG engines to Thailand. The 2006 sales to France and Australia principally relate to the sale of spare parts and service. The expanding sale of NGVS kits and NG engines create future expanding sales of spare parts and services to these new markets. Sales of spares and service to France and Australia are mature markets that will continue for the next 20 years.

The margins for China will improve as the markets expand. The margins for the 2007 financial year are on limited sales relative to the marketing, development, freight, staff, travel and purchasing costs incurred in this early stage of the market.

Results for the 2007 year were also affected by:

• the first full year of administrative costs for AEC in China ($0.23m);

• eighteen development programmes resulting in additional development costs expensed ($0.2m);

• first full year of amortization of successfully completed development programmes ($0.13m);

• foreign exchange currency losses ($0.18m); and

• write off of costs incurred on the investment in Motive Energy Pty Ltd ($0.3m).

AEC’s major shareholder continues to provide financial support, as required, to assist the Company through these early marketing stages.

Summary

The past year has seen the virtual completion of our development work for FAW, Weichai and Dongfeng. Those three companies, together with a further engine builder are aggressively marketing a total range of 18 engines incorporating AEC technology to a wide range of truck and bus clients. We have successfully extended our client base, particularly in Asia, and have seen increasing commercial orders.

We operate in a climate in which our technology is very much “an idea whose time has come”. High oil prices and political uncertainty about supply, the ready availability of low-cost natural gas and growing world resolve to reduce harmful vehicle emissions are all factors supporting the use of NG engines.

The past year’s financial performance has been distorted by the high development costs needed to bring us to the point we have reached today, where we are poised to take a substantial share of a market which, according to all indicators, is on the brink of explosive growth. We have amply demonstrated that our technology is world-beating, and we have an unrivalled customer network and on-site support base built up over four years of painstaking negotiations and development work.

We are poised to reap the benefits of the past years, and thank our shareholders and staff for their patience and loyalty for bringing AEC to this exciting point.

SIGNIFICANT CHANGES IN STATE OF AFFAIRS

During the year AEC raised $1.95 million through a placement of 16.25 million shares at 12 cents per share. In addition, the Company raised a further $565,680 through the issue of 4.7 million shares pursuant to a share purchase plan offer to existing shareholders.

During the year, 800,000 options exercisable at 19 cents per share on or before 31 December 2008 and 1,263,471 options exercisable at 20 cents per share on or before 30 June 2008 were exercised, raising $404,694 for the Company.

In June 2007, CIM Special Situations Fund Limited (“CIM”) exercised their option to acquire 5,555,555 shares in AEC for a consideration of $750,000. CIM also extended the repayment term of their existing $750,000 loan to AEC from 31 October 2007 to 31 October 2008.

7

Directors’ report

AFTER BALANCE SHEET DATE EVENTS

Subsequent to the end of the financial year AEC entered into a joint venture arrangement to build new natural gas powered vehicles and re-power existing diesel vehicles with natural gas engines in Thailand. AEC’s partners in the joint venture are Monika Motors Limited (51%), a Thai based strategic investment company (19%) and a Thai based individual with experience in Thailand’s public transport and government (9%). AEC has a 21% interest in the joint venture.

In August 2007, AEC’s solicitors in France filed a Summary of Proceedings against Centre de Recherché en Machines Thermiques (“CRMT”) for recovery of the debt owing of approximately $300,000 and NGVS kits held. The matter will be heard by the Commercial Court of Lyon in October 2007.

In September 2007, 698 Capital Asia Pacific Ltd agreed to increase its existing $750,000 loan to AEC to not more than $1.75 million. Pursuant to the loan agreement AEC must reduce the total borrowing to $750,000, including all accrued interest, either through a cash payment or, at the lenders option, a combination of cash and shares. Reduction of the borrowing must occur upon the earlier of the Company raising a minimum of $1.5 million through the issue of shares and 15 July 2008.

On 21 September 2007 Engineers Australia announced that AEC was a winner of the 2007 WA Engineering Excellence Awards in the category “Products and Manufacturing” for its project “Natural Gas Engine Technology for China”. As well as being significant in winning a prestigious award the win in the “Products and Manufacturing” category is confirmation that AEC has made the transformation from R&D to production.

EARNINGS PER SHARE

Basic earnings per share was a loss of 2.8 cents (2006: loss of 1.5 cents)

EMPLOYEES

The group employed 46 persons as at 30 June 2007 (2006: 37 persons) with 27 employees in Australia (2006: 29) and 19 in China (2006: 8).

FUTURE DEVELOPMENTS, PROSPECTS AND BUSINESS STRATEGIES

Refer to the Review of Operations included in this report of the Directors

ENVIRONMENTAL ISSUES

The consolidated entity’s operations are not subject to any significant environmental regulations under either Commonwealth or State legislation. However, the Board believes that the consolidated entity has adequate systems in place for the management of its environmental requirements and is not aware of any breach of these environmental requirements as they apply to the consolidated entity.

DIRECTORS’ INTERESTS

DIRECTORS’ INTERESTS
As at the date of this report, the interests of the directors in the shares	and options of Advanced	Engine Components
Limited were:
Director	Number of	Number of
	Ordinary Shares	Options over
		Ordinary Shares
Mr. G Keys	2,597,334	1,450,000
Mr. A Middleton	3,181,651	-
Mr. A Pun through his directorshipof 698 Capital International Ltd	55,332,713	-
Mr. T Liu	-	-

See remuneration section below for full details of shares and options.

8

Directors’ report

REMUNERATION REPORT (AUDITED)

This report details the nature and amount of remuneration for each Director of AEC, and for the key management personnel receiving the highest remuneration. These disclosures included in (a) to (d) are required under Accounting Standard 124 Related Party Disclosures and have been transferred from the financial report and have been audited.

(a) remuneration policy

The objective of the Company’s key management personnel reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The Board reviewed the Executive Director’s remuneration at a meeting held on 30 May 2006 and has agreed the approach to be taken over the following two years taking into account the Company’s financial state of affairs.

AEC’s remuneration policy has been designed to align Director and key management personnel objectives with shareholder and business objectives by providing a fixed remuneration component and offering specific long-term incentives based on key performance areas affecting the economic entity’s financial results and future prospects. The board of AEC believes the remuneration policy to be appropriate and effective in its ability to attract and retain the best key management personnel and directors to run and manage the Company to create goal congruence between directors, key management personnel and shareholders, and to remunerate these key management personnel and directors on normal commercial terms, having regard to the Company’s current financial position, commensurate with their experience and responsibilities.

During the year ended 30 June 2007 AEC did not have a separately established remuneration committee. The duties and responsibilities typically delegated to such committee is included in the responsibilities of the full board.

The board’s policy for determining the nature and amount of remuneration for board members and senior executives is as follows:

The remuneration policy, setting the terms and conditions for the Executive Directors and key management personnel, was approved by the board. All key management personnel receive a base salary (which is based on factors such as length of service and experience), superannuation, fringe benefits, options and performance incentives. The board reviews key management personnel packages annually by reference to the economic entity’s performance, key management personnel performance and comparable information from industry sectors and other listed companies in similar industries.

(b) options issued as part of remuneration for the Year ended 30 June 2007

The Company did not grant options over ordinary shares to Directors and key management personnel during the year as part of their remuneration. Key management personnel are entitled to participate in the employee share option plan.

The Executive Directors and key management personnel receive a superannuation guarantee contribution required by the government, which is currently 9%, and do not receive any other retirement benefits. Some individuals, however, have chosen to sacrifice part of their salary to increase payments towards superannuation.

All remuneration paid to Directors and key management personnel is valued at the cost to the Company and expensed. Options are valued using the Black-Scholes methodology.

The board policy is to remunerate non-executive Directors at market rates for comparable companies for time, commitment and responsibilities but which also takes into consideration the financial state of the Company. The board determines payments to the non-executive Directors and reviews their remuneration annually. The maximum aggregate amount of fees that can be paid to non-executive Directors is subject to approval by shareholders at the Annual General Meeting.

9

Directors’ report

REMUNERATION REPORT (audited) continued

(c) Directors’ and other Key management personnel remuneration (audited)

Names and positions held of parent entity Directors and other key management personnel in office at any time during the financial year are:

parent entity Directors

Mr. G Keys Chairman – Non-Executive Mr. A Middleton Managing Director – Executive Mr. W Fang (i) Director - Non-Executive Mr. T Liu Director - Non-Executive Mr. W Lee (iv) Director - Non-Executive Mr. A Pun (ii) Director - Non-Executive

other Key management personnel

Mr. E Parry (iii) Chief Financial Officer and Company Secretary Mr. B Neumann Engine Development Manager Mr. N McLaren Electronics Division Manager Mr. M McKay Senior Mechanical Engineer Mr. D Wang General Manager - AEC China

• (i) Resigned 28th November, 2006

• (ii) Appointed 28th November, 2006

• (iii) Resigned 21st February, 2007

• (iv) Resigned 10th September 2007

Compensation of key management personnel (Consolidated) for the year ended 30 June 2007

30 June 2007 Short-Term				Relative Proportion of
Non	Post	Share-based		Remuneration
Salary & Monetary	Employment	Payment		Linked to
Fees Benefits	Superannuation	Options	Total	Performance
Directors
Mr. G Keys 25,000 -	-	-	25,000	-
Mr. A Middleton 52,648 103,459	13,895	-	170,002	-
Other Key Management Personnel
Mr. E Parry (i) 102,546 -	9,229	-	111,775	-
Mr. B Neumann 66,545 13,263	28,773	-	108,581	-
Mr. N McLaren 78,242 21,565	8,965	-	108,772	-
Mr. M McKay 100,454 -	8,654	-	109,108	-
Mr. D Wang 115,706 -	-	-	115,706	-
541,141 138,287	69,516	-	748,944	-

(i) Resigned 21st February, 2007

10

Directors’ report

REMUNERATION REPORT (audited) continued

Compensation of key management personnel (consolidated) for the year ended 30 June 2006

30 June 2006	Short-Term				Relative Proportion of
	Post Non		Share-based		Remuneration
	Employment Salary & Monetary		Payment		Linked to
	Superannuation Fees Benefits		Options	Total	Performance
Directors
Mr. G Keys	25,000 -	-	-	25,000	-
Mr. A Middleton	109,368 31,200 12,651		27,600	180,819	15.3%
Other Key Management
Personnel
Mr. Harwick (i)	43,160 10,457 4,673		-	58,290	-
Mr. E Parry (ii)	84,634 7,617		690	92,941	0.7%
Mr. B Neumann	67,932 12,068 23,550		6,900	110,450	6.2%
Mr. N McLaren	66,169 28,817 8,550		6,900	110,436	6.2%
Mr. D Wang	108,911 -	-	6,900	115,811	6.0%
	505,174 82,542 57,041		48,990	693,747

(i) Resigned 2nd November, 2005

(ii) Appointed 2nd November, 2005

(d) options and rights Holdings

							total	total
				net			Vested	exercisable
parent entity	opening	Granted as	options	change		closing	as at	as at year
Directors	Balance	remuneration	exercised	other		Balance	year end	end
Mr. G Keys
2007	1,450,000	-	-		-	1,450,000	1,450,000	1,450,000
2006	1,450,000	-	-		-	1,450,000	1,450,000	1,450,000
Mr. A Middleton
2007	900,000	-	900,000		-	0	0	0
2006	500,000	400,000	-		-	900,000	900,000	900,000
Total
2007	2,350,000	-	900,000		-	1,450,000	1,450,000	1,450,000
2006	1,950,000	400,000	-		-	2,350,000	2,350,000	2,350,000

11

Directors’ report

REMUNERATION REPORT (audited) continued

MUNERATIO	N REPO	RT (audited)	continued
								total	total
other Key				net				Vested	exercisable
management	opening	Granted as	options	change		closing		as at	as at year
personnel	Balance	remuneration	exercised	other		Balance		year end	end
Mr. E Parry (i)
2007	10,000	-	-	10,000			-	-	-
2006	-	10,000	-		-	10,000		10,000	10,000
Mr. B Neumann
2007	280,000	-	125,000		-	155,000		155,000	155,000
2006	180,000	100,000	-		-	280,000		280,000	280,000
Mr. McLaren
2007	120,000	-	120,000		-		-	-	-
2006	20,000	100,000	-		-	120,000		120,000	120,000
Mr. D Wang
2007	100,000	-	-		-	100,000		100,000	100,000
2006	-	100,000	-		-	100,000		100,000	100,000
Mr. M McKay (ii)
2007	100,000	-	100,000		-		-	-	-
2006	-	-	-		-		-	-	-
Total
2007	610,000	-	345,000	10,000		255,000		255,000	255,000
2006	200,000	310,000	-		-	510,000		510,000	510,000

(i) Resigned 21st February, 2007

(ii) Transferred from contract to employment 3rd July, 2006

The Net Change Other column above includes those options that have been forfeited by holders as well as options issued during the year under review.

The terms and conditions of each grant of options affecting remuneration in the previous, this or future reporting periods are as follows:-

		Date Vested and			Value per Option
	Grant Date	Exercisable	Expiry Date	Exercise Price	at Grant Date
23	November 2005	23 November 2005	31 December 2008	$0.19	$0.069

Options granted under the plan carry no dividend or voting rights.

The exercise price of options is based on the weighted average price at which the Company’s shares are traded on the Australian Stock Exchange during the five business days up to the day prior to the date of grant.

There were no options granted to employees during the year.

As at balance sheet date, the following were unissued ordinary shares under options issued as compensation:

• 450,000 Options - exercisable at 19 cents per share on or before 31 December 2008.

12

Directors’ report

REMUNERATION REPORT (audited) continued

(e) shareholdings

shareholdings
			Options
	Opening	Received as	Exercised/		Net Change	Closing
	Balance	remuneration	(Lapsed)		Other	Balance
Parent Entity Directors and related parties
Mr. G Keys
2007	1,730,000	-		-	867,334	2,597,334
2006	1,496,191	-		-	233,809	1,730,000
Mr. A Middleton
2007	1,857,750	-	900,000		423,901	3,181,651
2006	1,607,750	-		-	250,000	1,857,750
Mr. T Liu (i)
2007	-	-		-	-	-
2006	-	-		-	-	-
Mr. W Lee (i)(ii)
2007	-	-		-	-	-
2006	-	-		-	-	-
Mr. A Pun (i)
2007	-	-		-	-	-
Other Key Management Personnel
Mr. B Neumann
2007	510,500	-	125,000		(176,000)	459,500
2006	410,500	-		-	100,000	510,500
Mr. N McLaren
2007	60,970	-	120,000		(120,978)	60,000
2006	29,278	-			31,700	60,978
Mr. M McKay
2007	-	-	100,000		(100,000)	-
2006	-	-		-	-	-

(i) 698 Capital International Ltd - owns 55,332,713 shares in the Company (2006: 55,332,713).

Mr Liu and Mr Lee were directors of 698 Capital International Ltd until their resignation from that company on 20 August 2007.

Mr Pun was appointed as a director of 698 Capital International Ltd on 20 August 2007

(ii) Resigned 10 September 2007

The Net Change Other column above refers to shares purchased or sold during the financial year.

Shares Under Option

As at balance sheet date, the following were unissued ordinary shares under options:

• 20,000,000 Options - exercisable at 20 cents per shares on or before 15 April 2008 subject to the Company’s 30 day volume weighted average share price exceeding 50 cents.

• 4,361,529 Options - exercisable at 20 cents per share on or before 30 June 2008.

• 450,000 Options - exercisable at 19 cents per share on or before 31 December 2008.

• Options for shares to a maximum value of $750,000 - exercisable at the lower of $0.20 or a 20% discount to the share issue price should a share issue take place on or before 31 October 2008.

13

Directors’ report

Meetings of Directors

The number of Directors’ meetings and number of meetings attended by each of the Directors of the Company during the financial year are detailed below:

the financial year are detailed below:
Directors	Board of Directors
	Held Attended
Mr. G Keys (Chairman)	6 6
Mr. A Middleton	6 6
Mr. W Fang (resigned 28/11/06)	3 -
Mr. T Liu	6 6
Mr. W Lee (resigned 10/09/07)	6 2
Mr. A Pun (appointed 28/11/06)	4 4

Meetings of Audit Committee

The Company’s Audit Committee comprised of 3 non-executive Directors, Mr. G Keys, Mr. W Lee and Mr. A Pun. During the financial year, 2 Audit Committee meetings were held, both of which were attended by BDO Kendalls Audit & Assurance (WA) Pty Ltd, the Company’s auditors.

& Assurance (WA) Pty Ltd, the Company’s auditors.
Members	Audit Committee
	Held Attended
Mr. G Keys (Chairman)	2 2
Mr. T Liu (resigned 28/11/06)	1 -
Mr. W Lee (resigned 10/09/07)	2 2
Mr. A Pun (appointed 28/11/06)	1 1

Indemnifying Officers

Every officer of the consolidated entity is indemnified by the consolidated entity against any liability incurred by him in his capacity as officer in defending any proceedings, whether civil or criminal, in which judgment is given in his favour or in which he is acquitted or in connection with any application in relation to any such proceedings in which relief is under the Law granted to him by the Court.

The Directors have not included details of the nature of the liabilities covered or the amount of the premium paid in respect of the Company’s insurance contracts, as such disclosure is prohibited under the terms of the contract.

Non-audit Services

The Board of Directors, in accordance with advice from the audit committee, is satisfied that the provision of nonaudit services during the year is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the services disclosed below did not compromise the external auditor’s independence for the following reasons:

• All non-audit services are reviewed and approved by the audit committee prior to commencement to ensure they do not adversely affect the integrity and objectivity of the auditor; and

14

Directors’ report

• The nature of the services provided do not compromise the general principles relating to auditor independence as set out in the Institute of Chartered Accountants in Australia and CPA Australia’s APES 110 Code of Ethics for Professional Accountants.

Details of the amounts paid or payable to the auditor for audit and non-audit services provided during the year are set out below:

out below:
	Consolidated
	2007	2006
	$	$
Audit services (BDO Kendalls Audit & Assurance (WA) Pty Ltd)
Audit and review of financial reports and other work under the
Corporations Act 2001	67,693	39,048
Other assurance services
IFRS	3,723	11,925
Other accounting services	7,181		-
Taxation Services Related parties of BDO Kendalls
Tax compliance including review of Company income tax returns	26,576	19,727
Grant Applications	8,305	17,061

AUDITOR’S INDEPENDENCE DECLARATION

The auditor’s independence declaration for the year ended 30 June 2007 has been received and can be found on page 20.

Signed in accordance with a resolution of the Board of Directors.

==> picture [151 x 37] intentionally omitted <==

a miDDleton managing Director

PERTH, WESTERN AUSTRALIA

Dated 28th September 2007

15

corporate GoVernance statement

The Board of Directors of AEC is responsible for the corporate governance of the consolidated entity. The Board guides and monitors the business and affairs of the Company on behalf of the shareholders by whom they are elected and to whom they are accountable.

The format of the Corporate Governance Statement is in accordance with the Australian Stock Exchange Corporate Governance Council’s (the Council’s) “Principles of Good Corporate Governance and Best Practice Recommendations” (the Recommendations). In accordance with the Council’s recommendations, the Corporate Governance Statement contains certain specific information and must disclose the extent to which the Company has followed the guidelines during the period. Where a recommendation has not been followed, that fact must be disclosed, together with reasons for the departure. AEC’s Corporate Governance Statement is now structured with reference to the Corporate Governance Council’s principles and recommendations, which are as follows:

Principle	1.	Lay solid foundations for management and oversight
Principle	2.	Structure the Board to add value
Principle	3.	Promote ethical and responsible decision making
Principle	4.	Safeguard integrity in financial reporting
Principle	5.	Make timely and balanced disclosure
Principle	6.	Respect the rights of shareholders
Principle	7.	Recognise and manage risk
Principle	8.	Encourage enhanced performance
Principle	9.	Remunerate fairly and responsibly
Principle	10.	Recognise the legitimate interests of stakeholders

Independence

Corporate Governance Council Recommendation 2.1 requires a majority of the Board to be independent Directors. In addition, Recommendation 2.2 requires the Chairperson of the Company to be independent. The Corporate Governance Council defines independence as being free from any business or other relationship that could materially interfere with – or could reasonably be perceived to materially interfere with – the exercise of unfettered and independent judgement. In accordance with this definition, the following Directors are not considered to be independent:

name position

name	position
Mr. Antony Middleton	Managing Director
Mr. Thomas Liu	Non-Executive Director
Mr. William Lee	Non-Executive Director (resigned 10 September 2007)
Mr. Albert Pun	Non-Executive Director (appointed 28 November 2006)
Mr. William Fang	Non-Executive Director (resigned 28 November 2006)

To the date of this report, only one director is independent when applying the council’s definition of independence. Therefore the majority of the Board is not independent. There are however four out of five non-executive Directors. The Board believes that given the financial position and the size of the Company, it is not practical to have a majority of independent Directors. The Company intends to reassess the issue when the size and scale of the Company is larger.

The Chairman, Mr. Graham Keys, is considered to be independent using the Council’s definition of independence.

Corporate Governance Council Recommendation 4.3 requires a majority of the audit committee to be independent Directors. In addition, it requires the Chairperson of the audit committee to be independent and not the same person as the Chairman of the full Board. With due consideration to the size of the Company, the Board is satisfied that it is more practical to have the Chairman of the full Board also Chairing the audit committee with effect from the 2006/2007 financial year.

16

corporate GoVernance statement

Members of the Audit Committee are Mr. Graham Keys (Chairman), Mr. Albert Pun and Mr. William Lee. Of the Directors in office Mr. Albert Pun and Mr. W Lee are not independent when applying the Council’s definition of independence. Therefore the majority of the Audit Committee is not independent.

Nomination and Remuneration Committees

Recommendation 2.4 requires listed entities to establish a nomination committee. Recommendation 9.1 requires listed entities to establish a remuneration committee. During the year ended 30 June 2007, AEC did not have a separately established nomination or remuneration committee however the duties and responsibilities typically delegated to such committees are included in the responsibilities of the full Board.

Performance Evaluation Process and Remuneration Policies

Recommendation 8.1 requires listed entities to disclose the process for performance evaluation of the Board, its committees and individual Directors, and key executives. Due to its size and composition the Board has undertaken only an informal review of its performance in meeting its key responsibilities.

Recommendation 9.1 requires disclosure in relation to the Company’s remuneration policies to enable investors to understand (i) the costs and benefits of those policies and (ii) the link between remuneration paid to Directors and key executives and corporate performance.

The Company advises that Directors’ fees have been paid for only one current Director in the year ended 30 June 2007. Emoluments paid to the Managing Director and other executives are disclosed in the Directors’ Report. This policy reflects the current financial position of the Company. It is intended that this be reviewed at Board level once the financial position of the Company has improved as indicated above.

Director & Executive Code of Conduct, Share Trading Policy, Continuous Disclosure Policy, Shareholder Communication Policy, and Company Code of Conduct

Corporate Governance Council Recommendation 3.1 requires the Company to establish a Code of Conduct to guide Directors and executives as to policies to maintain the integrity of the Company and to report and investigate unethical practices. Corporate Governance Council Recommendation 3.2 requires the Company to disclose the policy of the Company regarding trading in securities of the Company by Directors, officers and employees. Corporate Governance Council Recommendation 5.1 requires the Company to establish written policies and procedures designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior management level for that compliance. Corporate Governance Council Recommendation 6.1 requires the Company to design and disclose a communications strategy to promote effective communication with shareholders and encourage effective participation at general meetings. Corporate Governance Council Recommendation 10.1 requires the Company to establish and disclose a Company Code of Conduct to guide compliance with legal and other obligations to legitimate stakeholders.

While Directors, the company secretary and all relevant employees are aware of their responsibilities in regard to the above matters no such codes or policies have been written or disclosed.

With regard to Recommendation 6.1 the Company wishes to advise that it has been making regular announcements to the ASX to provide information on the latest issues of the Company.

AEC’s corporate governance practices were in place throughout the year ended 30 June 2007. With the exception of the departures from Corporate Governance Council recommendations in relation to independence, committees, Board performance evaluation and the written codes and policies as detailed above, the corporate governance practices of AEC were compliant with the Council’s best practice recommendations.

17

corporate GoVernance statement

Structure of the Board

To ensure the Board is well equipped to discharge its responsibilities it has established guidelines for the nomination, selection and remuneration of Directors and key executives and for the operation of the Board.

The Board carries out its responsibilities according to the following mandate:

• The Board should comprise at least three Directors;

• The Board should be made up of at least one-third of Non-executive Directors;

• The Chairman of the Board should be a Director;

• The Directors should possess a broad range of skills, qualifications, and experience;

• The Board should meet on a bi-monthly basis; and

• All available information in connection with the items to be discussed at a meeting of the Board shall be provided to each Director prior to that meeting.

The Directors in office and the term of their appointment at the date of this statement are:

name	position	term in office
Mr. Graham Keys	Chairman, Non-Executive Director	Appointed 09/05/2003
Mr. Antony Middleton	Managing Director	Appointed 25/03/1997
Mr. Thomas Liu	Non-Executive Director	Appointed 07/08/2003
Mr. Albert Pun	Non-Executive Director	Appointed 28/11/2006

The skills, experience and expertise relevant to the position of Director held by each Director at the date of the annual report are included in the Directors’ Report on pages 3 to 4.

Refer above under the sub-heading “Independence” for disclosure regarding independent Directors.

There are procedures in place, agreed by the Board, to enable Directors, in furtherance of their duties, to seek independent professional advice at the Company’s expense.

Audit Committee

The Board has established an audit committee, which operates under a charter approved by the Board. It is the Board’s responsibility to ensure that an effective internal control framework exists within the entity. This includes internal controls to deal with both the effectiveness and efficiency of significant business processes. This includes the safeguarding of assets, the maintenance of proper accounting records, the reliability of financial information as well as non-financial considerations such as the benchmarking of operational key performance indicators. The Board has delegated the responsibility for the establishment and maintenance of a framework of internal control and ethical standards for the management of the consolidated entity to the audit committee. The committee provides the Board with additional assurance regarding the reliability of financial information for inclusion in the financial reports. The committee is also responsible for the nomination of the external auditor and reviewing the adequacy of the scope and quality of the annual statutory audit and half year statutory audit or review.

The audit committee comprised of Mr. Graham Keys (Chairman), Mr. Albert Pun and Mr. William Lee.

For details of Directors’ attendance at meetings of the audit committee, refer to page 14 of the Directors’ Report.

18

corporate GoVernance statement

Board Responsibilities

The Board acts on behalf of the shareholders and is therefore accountable to the shareholders. It also has other obligations of a regulatory or ethical nature. In addition, the Board is responsible for identifying areas of significant business risk and ensuring arrangements are in place to appropriately manage those risks. The Board seeks to discharge these responsibilities in a number of ways.

The primary responsibilities of the Board include:

• Approval of the annual and half-yearly financial report;

• The establishment of the long term goals of the consolidated entity and strategic plans to achieve those goals;

• The review and adoption of annual budgets for the financial performance of the consolidated entity and monitoring the results on a quarterly basis; and

• Ensuring that the consolidated entity has implemented adequate systems of internal controls together with appropriate monitoring of compliance activities.

The responsibility for the operation and administration of the consolidated entity is delegated by the Board to the Managing Director and the executive team. The Board ensures that this team is appropriately qualified and experienced to carry out their responsibilities.

The Board is responsible for ensuring that management’s objectives and activities are aligned with the expectations and risks identified by the Board.

Communication to Shareholders

The Board aims to ensure that the shareholders, on whose behalf they act, are kept sufficiently well informed to enable them to assess the performance of the Directors. Information is communicated to the shareholders through:

• the annual report which is distributed to all shareholders;

• the announcements made through the ASX companies announcements platform;

• the Company’s website (http://www.advancedengine.com); and

• the Annual General Meeting and any other meetings called to obtain approval for Board action as appropriate

Risk Management Policies

The Board is responsible for the consolidated entity’s system of internal controls. The Board constantly monitors the operational and financial aspects of the consolidated entity’s activities, and considers the recommendations and advice of its external auditors, legal counsel and other skill specific consultants on the operational and financial risks that face the consolidated entity.

The Board ensures that recommendations made by its auditors and other advisors are investigated and, where considered necessary, appropriate action is taken to ensure that the consolidated entity has an appropriate internal control environment in place to manage the key risks identified.

AEC is committed to the management of risks throughout its operations to protect all of its stakeholders. Risk management is carried out through the various committees, processes and procedures mentioned above.

19

==> picture [153 x 32] intentionally omitted <==

auDitor’s inDepenDence

Declaration

28 September 2007

==> picture [172 x 151] intentionally omitted <==

The Board of Directors Advanced Engine Components Limited 14 Energy Street MALAGA WA 6090

Dear Sirs,

DECLARATION OF INDEPENDENCE BY BDO KENDALLS TO THE DIRECTORS OF ADVANCED ENGINE COMPONENTS LIMITED

As lead auditor of Advanced Engine Components Limited for the year ended 30 June 2007, I declare that, to the best of my knowledge and belief, there have been no contraventions of:

• the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and

• any applicable code of professional conduct in relation to the audit.

This declaration is in respect of Advanced Engine Components Limited and the entities it controlled during the period.

Yours faithfully

BDO Kendalls Audit & Assurance (WA) Pty Ltd

==> picture [123 x 63] intentionally omitted <==

peter toll

Director

20

consoliDateD income statements

FOr thE Financial YEar EnDED 30 JunE 2007

note	AEC GROUP AEC ENTITY 2007 2006 2007 2006 $ $ $ $
Sales revenue 6 Cost ofgoods sold	3,076,717 2,570,712 2,265,873 2,730,056 (2,328,268) (1,107,971) (1,637,439) (1,081,640)
Gross profit	748,449 1,462,741 628,434 1,648,416
Other revenue from continuing operations 6 Distribution expenses Marketing expenses Occupancy expenses Corporate costs Administration expenses Development expenses Finance Costs 6 Other expenses 6	238,655 87,791 238,421 79,596 (83,900) (36,141) (76,430) (36,141) (52,914) (24,217) (36,481) (22,919) (271,211) (233,666) (200,067) (199,152) (320,449) (296,672) (232,103) (242,175) (1,515,319) (1,247,719) (1,576,324) (1,516,622) (1,139,653) (756,073) (1,095,865) (756,073) (435,103) (347,029) (435,103) (347,029) (300,000) - (300,013) -
loss before income tax expense Income tax refund/(expense) 7	(3,131,445) (1,390,985) (3,085,531) (1,392,099) - 4,531 - 4,531
net loss attributable to members of the parent entity 23	(3,131,445) (1,386,454) (3,085,531) (1,387,568)
Basic loss per share 9 Diluted loss per share 9	($0.028) ($0.015) ($0.027) ($0.015) ($0.028) ($0.015) ($0.027) ($0.015)

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

21

consoliDateD Balance statements

FOr thE Financial YEar EnDED 30 JunE 2007

c C T In	u r	a a v	r s e	r h d	e e n	n a t	t o	n a r	d n i	a d e	s c s	s	e a o	t s t	s h h		e e	r	q	u r	i e	v c		a e	le iv		n a	t b	s l	e	s																														o 1 1 1	1 2 3	t	e													A	E							R						P 2		0 $	0		6																					E				E				T	I	T		Y 2		0	0 $		6
																																																																								2		0	0		7																																	2		0	0		7
																																																																										$																																						$
																																																																																								1 1	, ,	0 5 5		8 0 9	8 5 9	, , ,	0 1 1		1 7 6	3 5 4																												1 1	, ,	0 7 3		3 6 5	6 9 2	, , ,	9 5 1		9 6 9	4 8 8
																																																																							6		1	1	,	1		3	9																														4		4	1	,	8		8	4
																																																																							9		2	3	,	3		1	8																												1	,	5		4	4	,	9		3	8
																																																																					1	,	4		6	5	,	2		3	0																												1	,	0		4	2	,	7		7	2
t	o	t		a	l		c	u	r	r		e	n	t		a		s	s	e	t	s																																															2	,	9		9	9	,	6		8	7									3	,	1		9	2	,	3		5	2									3	,	0		2	9	,	5		9	4									3	,	1		5	8	,	7		6	0
n O P In	l	o t a t	n h n a	- t n	e g	c r a i	u b	r fi n	r n d le		e a e	n n a	t c q s	i u s	a a i e	l t	s p s	s a	e s	t s e	s e	t n	s t																																						1 1 1	4 5 6																										1	,	9 8		3 9	7 2	, ,	5 3		4 8	- 6 9																												1	,	3 9 5		0 1 9	0 7 2	, , ,	0 7 3		1 7 8	3 8 9
																																																																															-																																							-
																																																																							7		8	2	,	6		8	3																														7		6	1	,	5		6	1
																																																																					2	,	8		3	3	,	8		4	4																												2	,	8		3	3	,	8		4	4
t	o	t		a	l				o	n	-	c		u	r	r	e		n	t		a	s	s		e	t	s																																									3	,	6		1	6	,	5		2	7									2	,	8		2	9	,	9		3	5									3	,	5		9	5	,	4		0	5									2	,	8		1	0	,	1		8	0
t	o	t		a	l		a	s	s	e	t	s																																																																												6	,	0		2	2	,	2		8	7																												5	,	9		6	8	,	9		4	0
																																																																					6	,	6		1	6	,	2		1	4																												6	,	6		2	4	,	9		9	9
c T B P	u r o r	a o	r r	r d r v	e e o i	n si	t a o	i	l n n n	i d s	a g	s	b o	il t	i h	t	i e	e r	s	p	a		y	a	b	l	e		s																																1 1 1	7 8 9																										1	,	8 1 1		8 5 6	9 3 6	, , ,	6 9 5		3 2 6	9 6 9																												1	,	8 1 1		2 5 6	7 3 6	, , ,	9 9 5		6 2 6	9 6 9
																																																																					1	,	1		3	0	,	9		6	4																												1	,	1		4	3	,	0		4	6
																																																																					1	,	1		2	6	,	6		3	4																												1	,	1		2	6	,	6		3	4
																																																																							1		8	3	,	2		1	7																														1		8	3	,	2		1	7
t	o	t		a	l		c	u	r	r		e	n	t		l	i	a		b	il	i	ti	e		s																																											2	,	4		4	0	,	8		1	5									2	,	2		1	0	,	1		3	4									2	,	4		5	2	,	8		9	7									2	,	1		4	8	,	4		6	4
n B P	o r	o o	n r	- r v	o i	c si	u o	r i	r n n	e s	g	n s	t		l	i	a	b		il	it	i	e	s																																					2 1	0 9																										3	,	7		4 1	6 7	, ,	5 6		0 8	7 5																												3	,	7		4 1	6 7	, ,	5 6		0 8	7 5
																																																																					3	,	7		3	1	,	2		2	4																												3	,	7		3	1	,	2		2	4
																																																																									1	1	,	1		3	4																																1	1	,	1		3	4
t	o	t		a	l				o	n	-	c		u	r	r	e		n	t		l	i	a	b	i	l	it	i	e	s																																						3	,	7		4	2	,	3	5		8									3	,	7		6	4	,	1		9	2									3	,	7		4	2	,	3		5	8									3	,	7		6	4	,	1		9	2
t	o	t		a	l	l	i	a		b	i	li	t	i	e	s																																																																								5	,	9		7	4	,	3		2	6																												5	,	9		1	2	,	6		5	6
																																																																					6	,	1		8	3	,	1	7		3																												6	,	1		9	5	,	2		5	5
n		e	t		a	s	s		e	t	s																																																																																	4	7	,	9		6	1																																5	6	,	2		8	4
																																																																							4		3	3	,	0	4		1																														4		2	9	,	7		4	4
E C R A	q e	o c	u n s c	i e u	t t r	y ri v	b	e u	u s l	t a	e t	e	d	d	e	q l	o	u s	i s	t e	y s																																								2 2 2	1 2 3																							(		1 1	1 1 2	, , ,	7 0 7		4 3 3	3 7 3	, , ,	7 2 0		4 5 4	8 5 2	)																								(		1 1	1 1 2	, , ,	7 0 7		4 4 3	3 6 4	, , ,	7 6 1		4 9 5	8 2 6	)
																																																																				1	5	,	2		5	7	,	9	3		9																											1	5	,	2		5	7	,	9		3	9
																																																																					1	,	0		3	9	,	5	8		9																														9		9	1	,	4		9	2
																																																																		(	1		5	,	8		6	4	,	4	8		7	)																								(		1	5	,	8		1	9	,	6		8	7	)
t	o	t		a	l		E	q	u		it	y																																																																																4	7	,	9		6	1																																5	6	,	2		8	4
																																																																							4		3	3	,	0	4		1																														4		2	9	,	7		4	4
t	h	e			a	b	o	v	e		s	t	a	t	e		m		e	n	t	s		o	f		c	h	a		n	g	e	s		i	n		e	q	u	i	t	y		s	h	o	u	l	d		b		e	r		e	a	d		i	n	c	o	n	j	u	n	c	t	i	o	n			w	it		h	t	h		e		a	c	c	o				p	a	n		yi	n	g		n		o	t	e	s	.

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

22

statements of cHanGes in equitY FOr thE YEar EnDED 30 JunE 2007

AEC Group

2		0	0		6	-		0	7																								I C	s	s a	u p $	i	e t	d a	l						C		o		n	v	e o $	t	r e	t s	i	b	l	e				R	e	R	A v e	a	s l s	s u e $	e a r	t v	t i	o e		n				S	h P	R	a a	r y e	e s	$	B e	e r	a n v	s t e	e s		d				T	E r	F x a R	o e	c n	r h s s	e a l e $	i a r	g n t v	n g i	e o e		n				A	c	c	L	u	o	s $	u s	l e	a s	t		e	d						E	T	q	o u $	t i	a t	l y
O a L T y Is T o S F o	s o o e s r f h o n	p t a a r	a s a r u o a t	e t s l e n r e r	n f r s p e i a	i 1 e o f t g	n o c e i i n n	J r o f r o s s	g u v o s n s e l	l t g h o s u a	b y h e n e x t	a e i a r c i	l 2 s r c h o	a y e e e e n	n 0 x o a	0 e n d c s n	c a t i e t g	e 6 r s n a r s	f p c e	o e i i	r t s	q a e	t u l	h i	t	e y	:			1		1 3 (	, ,	5 6 2	8 7 5 1		5 0 5 1	, , , ,	7 3 2 3	4 7 0 8		8 4 0 3	- ) -						1		5	8	,	0		0	0	- - - - -								7	5		0	,	0	0		0	- - - - -							2 (		9 5	6 5	, ,	6 2		9 0	2 0	- - ) - -									( 5	9 7	, ,	4 5		3 3	7 4		) - - - -		(		1 (	2 3	, ,	7 1		3 3	3 1	, ,	0 4	4	4	2 5	) ) - - - -				(	3 3	(	,1 ,6 2		4 3 7 1 5	7 1 0 1 7	, , , , ,	9 4 3 3 5		6 4 7 8 3	1 5 4 3 4		) - )
c a	s	l	o	a	s t	i	n 3		g 0		b J	u	a	l n	a	e	n	c 2		e 0	0		7							1		5	,	0	9		9,		9	3		9							1		5	8	,	0		0	0									7	5		0	,	0	0		0								2		4	1	,	4		9	2										4	8	,	0		9	7				(		1	5	,	8		6	4	,	4		8	7	)							4		3	3	,	0		4	1
2		0	0		5	-		0	6																								I C	s	s a	u p $	i	e t	d a	l						C		o		n	v	e o $	t	r e	t s	i	b	l	e				R	e	R	A v e	a	s l s	s u e $	e a r	t v	t i	o e		n				S	h P	R	a a	r y e	e s	$	B e	e r	a n v	s t e	e s		d				T	E r	F x a R	o e	c n	r h s s	e a l e $	i a r	g n t v	n g i	e o e		n				A	c	c	L	u	o	s $	u s	l e	a s	t		e	d						E	T	q	o u $	t i	a t	l y
O a L T y R c a a Is S F tr C p	s o e e o d n s h o a	p o a r a o y	a s t r v n o d u a n s	e t s a a v p e r e s t	n f l r l e t A e i l	i 1 u i o g a o e	n o e e a r o i n t f	J r x c ti f s i n	g u o ti b n S s s e o s t	l t p o l B h u n h s	b y h e g e o e x	a e n n f a c a	l 2 n i 1 r c h r	a y s s o n 3 e e	n 0 e e f o o a	0 e s t 9 c s n b	c a d A t g	e 5 r f e S a s a	o i p e s	r n o B i e	n 1 t o	t e a d	h q 3 l n	2	e u	i	ty	:			9 2	, , (	2 4 1		6 4 2	6 3 3	, , ,	5 0 8		5 5 5	1 0 3	- - ) - -				(	1 1	, ,	3 1	2 6		3 5	, ,	0 0	0 0		0 0	- ) - - - -							7		5	0	,	0		0	0	- - - - - -								2	1	8	0 6	, ,	4 2	4 5		2 0	- - - - -									(	9	,	4		3	7	- - - - - ) -			(		1 (	1 1	, ,	3 3		4 8	6 6	, ,	5 4	5	8	8 4	) ) - - - - -				(	( 1 2	1 , , (	2 , 1 4 1	3	0 8 6 4 2 ( 8	3 6 5 3 3 9 6	, , , , , , ,	4 4 0 0 8 4 2		0 5 0 5 5 3 5	5 4 0 0 3 7 0	) ) ) )
c a	s	l	o	a	s t	i	n 3		g 0		b J	u	a	l n	a	e	n	c 2		e 0	0		6							1		1	,	5	8		5,	7		4	8								1		5	8	,	0	0		0									7	5		0	,0		0	0									2		9	6	,	6	9		2										(	9	,	4		3	7	)				(	1	2	,	7		3	3	,	0	4		2	)									4	7	,	9		6	1
t	h	e			a	b	o	v	e		s	t	a	t	e		m		e	n	t	s		o	f		c	h	a	n		g	e	s		in			e	q	u	i	t	y		s	h	o	u	l	d		b	e		r	e		a	d		i	n		c	o	n	j	u	n	c	t	i	o	n			w	it	h		t	h		e		a	c	c	o				p	a	n	y	i	n	g		n		o	t	e	s	.

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

23

statements of cHanGes in equitY FOr thE YEar EnDED 30 JunE 2007

AEC Entity

==> picture [469 x 195] intentionally omitted <==

----- Start of picture text -----

||||||||
|---|---|---|---|---|---|---|
|Asset|Share Based|
|Issued|Convertible|Revaluation|Payments|Accumulated|Total|
|Capital|Notes|Reserve|Reserve|Losses|Equity|
|2006-07|$|$|$|$|$|$|
|Opening balance|
|As at 1 July 2006|11,585,748|158,000|750,000|296,692|(12,734,156)|56,284|
|Loss for the year|(3,085,531)|(3,085,531)|
|Total movements for the|
|year recognised in equity:|
|-|-|-|-|
|Issue of share capital|3,670,374|3,670,374|
|-|-|-|-|
|Transfer or exercise of options|55,200|(55,200)|
|Share issue costs|(211,383)|-|-|-|-|(211,383)|
|closing balance|
|as at 30 June 2007|15,099,939|158,000|750,000|241,492|(15,819,687)|(429,744)|

----- End of picture text -----

==> picture [469 x 234] intentionally omitted <==

----- Start of picture text -----

||||||||
|---|---|---|---|---|---|---|
|Asset|Share Based|
|Issued|Convertible|Revaluation|Payments|Accumulated|Total|
|Capital|Notes|Reserve|Reserve|Losses|Equity|
|2005-06|$|$|$|$|$|$|
|Opening balance|
|As at 1 July 2005|9,266,551|1,323,000|750,000|210,442|(11,346,588)|203,405|
|-|-|-|-|
|Loss for the year|(1,387,568)|(1,387,568)|
|Total expenses for the year|
|recognised in equity:|
|Revaluation of convertible note|
|on adoption of AASB132 and|
|AASB 139|-|(1,165,000)|-|-|-|(1,165,000)|
|-|-|-|-|
|Issue of share capital|2,443,050|2,443,050|
|Share issue costs|(123,853)|-|-|-|-|(123,853)|
|-|-|-|-|
|Cost of share based payments|86,250|86,250|
|closing balance|
|as at 30 June 2006|11,585,748|158,000|750,000|296,692|(12,734,156)|56,284|

----- End of picture text -----

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

24

casH flow statements

FOr thE YEar EnDED 30 JunE 2007

c R P In In	e a	a y t t i	c e e t	s e r r h	h i e e	p e s s h	t t t o	f s n l	l t r a d	o f s e i	r n n	o t c d	o e g	s i	s v o t	u e t a	f c h x	r u p d e	s p e	o t l r s	i	o e c p	r o a	s s i	e t d	a s	r n	p s o	d	e f	r e f	i	a n	t a	i p	n l n	o c	g y e		e	e p	s a	c i	t d	i	v		i	t	i	e	s									o		t	e													A	E							R						P 2		0 $	0		6																					E	C			E				T	I	T		Y 2		0	0 $		6
																																																																								2	0		0		7																																	2		0	0		7
																																																																										$																																						$
																																																																																							(	2 3	, ,	0 4 (		2 0 3 5	8 8 1 8 4	, , , , ,	1 9 8 5 5	7 3	1 7 3	3 5 6 9 1	) )																										(	1 2	, ,	4 9 (		7 3 3 5	5 0 1 8 4	, , , , ,	3 8 7 5 5		2 5 8 3 3	8 4 6 9 1	) )
																																																																					4	,	1		8	0	,	0		2	5																												2	,	6		0	0	,	6		7	6
																																																																				(	7	,	0		9	8	,	4	2		2	)																										(	5	,	6		3	6	,	3		5	0	)
																																																																									2	1	,	9		8	0																																2	1	,	7		4	6
																																																																							(	9		9	,	7	3		2	)																													(		9	9	,	7		3	2	)
																																																																															-																																						-
N		e	t		c	a		s	h		(	u	s		e	d		i	n	)		o		p	e		r	a	ti	n		g		a	c	t	i	v	i	ti	e		s																		1	1						(	2	,	9	9		6	,	1	4		9	)							(	1	,	4		0	2	,	9	9		4	)							(	3	,	1		1	3	,	6		6	0	)							(	1	,	4		7	7	,	7		4	8	)
c P P P	a a a	a y y y		s	h	e e e		f n n n	l t t t	o s f f	f o o		o r r	s r I	c	p a n	f l p v	r a i e	n t s	o a t	t l	a i	s	n e e	i d d n	n	e ts	v d	e q e	u v	s i	t p e	i l	o	n p	g e		n	t e		c n	t t		i c	v o	i s	t t	i s	e		s																																						( ( (	2 9 1		4 1 5	5 9 0	, , ,	2 9 0	7 6 0		8 2 0	) ) )																												( ( (	2 9 1		2 1 5	5 9 0	, , ,	5 9 0	0	1	0 2 0	) ) )
																																																																							(	6		2	,	1	8		9	)																													(		4	4	,	9		4	5	)
																																																																						(	8	5		2	,	9	2		1	)																												(	8		5	2	,	9		2	1	)
																																																																															-																																						-
N		e	t		c	a		s	h		(	u	s		e	d		i	n	)		i	n	v		e	s	ti	n		g		a	c	t	i	v	it	i	e	s																													(	9	1		5	,	1	1		0	)							(	1	,	3		1	5	,	2	4		0	)									(	8		9	7	,	8		6	6	)							(	1	,	2		9	5	,	4	7		2	)
c P T P P R P	r r r r e a	a o a o o y	p	s c n c c a	h e s e e y	e a e e e	c n	f d t d d	l s i s s e t	o o s	f f f n	r n r r t o	o o o s f	s c f	o o i	f n	f i s	r s t b t t a	s s o e e n	o r r c	u a r	e s r e	s o l	o o l l e	f f w o o	c i a a	i s ia n a s	n h g n n e	t s s	a a e s li	n r d a	e	c s b	i il	n i i	t ti	g h e		i s	s	s	c u	t	i e		v o	i f	t	i s	e h	s a		r	e	s																																	1 1	, ( , ( (	5 1 5 1 4 1		4 2 0 0 0 2	3 3 0 9 0 6	, , , , , ,	0 8 0 9 1 8	5 5 0 5 8 5		1 4 0 0 1 5	) ) )																											1 1	, ( , ( (	5 1 5 1 4 1		4 2 0 0 0 2	3 3 0 9 0 6	, , , , , ,	0 8 0 9 1 8	5 5 8 5	5	1 4 0 0 1 5	) ) )
																																																																					3	,	6	7		0	,	3	7		4																												3	,	6		7	0	,	3		7	4
																																																																						(	2	1		1	,	3	8		3	)																												(	2		1	1	,	3		8	3	)
																																																																															-																																						-
																																																																							4	7		7	,	2	9		3																														4		7	7	,	2		9	3
																																																																						(	4	4		2	,	6	3		5	)																												(	4		4	2	,	6		3	5	)
																																																																							(	7		7	,	2	3		3	)																													(		7	7	,	2		3	3	)
N		e	t		c	a	s		h		f	r	o				f	i	n	a	n		c	i	n	g		a	c	t	i	v	i	t	i	e	s																																3	,	4	1		6	,	4	1		6									2	,	5		0	2	,	1	1		1									3	,	4		1	6	,	4		1	6									2	,	5		0	2	,	1	1		1
n a C E c	n ff a	e a s	d s e h	t h c	t e	( c a s	d a q	n o	e s d f ui	h v	c c e	r a	e a x l	e s c e	a q h h n	u t	s e a s	e i n	v q g	) a u	i i e	l v	n e a r	l a	c n e t	t e	a s n	s t c	s	h h	a a	t n		b g	e e	s	g	i o	n	n n	i	n c	a	g	s	o h	f	a	y n	e	d	a	r																	(	4	9		4	,	8	4		3	)								1	( ,	2 3		1 0 (	6 8 3	, , ,	1 1 9	2 1 8		3 6 0	) )									(	5		9	5	,	1		1	0	)								1	( ,	2 3		7 0	1 8	, ,	1 1	0 0		9 3	)
																																																																					1	,	0	8		8	,	0	1		3																												1	,	0		3	6	,	9		9	4
																																																																								1		7	,	9	6		9
c		a	s		h			a	n		d		c		a		s	h			e	q		u	i		v	a	l	e		n		t	s		a		t		e		n		d		o		f		y	e		a	r						1	1									6	1		1	,	1	3		9									1	,	0		8	8	,	0	1		3											4		4	1	,	8		8	4									1	,	0		3	6	,	9	9		4
t	h	e			a	b	o	v	e		s	t	a	t	e		m		e	n	t	s		o	f		c	h	a	n		g	e	s		in			e	q	u	i	t	y		s	h	o	u	l	d		b	e		r	e		a	d		i	n	c	o	n	j	u	n	c	t	i	o	n			w	it	h		t	h		e		a	c	c	o				p	a	n	y	i	n	g		n		o	t	e	s	.

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

25

notes to tHe financial statements FOr thE YEar EnDED 30 JunE 2007

1. Reporting Entity

Advanced Engine Components Limited (the “Company”) is a company limited by shares incorporated in Australia whose shares are publicly traded on the Australian Stock Exchange. The Company’s registered office is 14 Energy St Malaga WA 6090.

The consolidated financial statements of the Company as at and for the year ended 30 June 2007 comprise the Company and its subsidiaries (together referred to as the “Group”). The nature of the operations and principal activities of the Group are described in the Directors Report.

2. Basis of Preparation

a. statement of compliance

The financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards (AASBs) (including Australian Interpretations) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The consolidated financial report of the Group also complies with International Financial Reporting Standards (IFRSs) and interpretations adopted by the International Accounting Standards Board. The parent entity financial statements and notes also comply with IFRS except that it has elected to apply the relief provided to parent entities in respect of certain disclosure requirements contained in AASB 132 Financial Instruments: Disclosure and Presentation. The financial statements were approved by the Board of Directors on 28 September 2007.

b. Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis except where stated, does not take into account changing money values or fair valuations of non-current assets.

• c. functional and presentation currency

These consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency and the functional currency of the majority of the Group.

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.

The entity has elected to adopt the following accounting standards and amendments:

• AASB 101 Presentation of Financial Statements (October 2006)

• ED 151 Australian Additions to, and Deletions from, IFRSs

• AASB 2007-7 Editorial Amendments to AASB 1, AASB 2, AASB 4, AASB 5, AASB 107 and AASB 128

In the prior financial year the Group adopted AASB 132: Financial Instruments: Disclosures and Presentation and ASSB 139: Financial Instruments: Recognition and Measurement in accordance with the transitional rules of AASB 1: First-time Adoption of Australian Equivalents to International Financial Reporting Standards. This change has been accounted for by adjusting the opening balance of accumulated losses and reserves at 1 July 2005 as disclosed in the reconciliation of movements in equity (note 21).

26

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

a. Basis of consolidation

Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account. 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 financial statements of subsidiaries are prepared for the same reporting period as the parent Company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist.

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

There is no minority interest in any subsidiary of the Group.

Investments in subsidiaries are accounted for at cost in the financial statements.

b. segment reporting

A business segment is identified for a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different to those of other business segments. A geographical segment is identified when products or services are provided within a particular economic environmental subject to risks and returns that are different form those of segments operating in other economic environments.

c. foreign currency translation

Transactions in foreign currencies are initially recorded in the functional currency at the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date.

All exchange differences in the consolidated financial report are taken to the income statement.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction.

The functional currency of the overseas subsidiaries AEC China Holdings Limited is Hong Kong Dollar and AEC China Limited is the Chinese Yuan.

As at the reporting date the assets and liabilities of these overseas subsidiaries are translated into the presentation currency of Advanced Engine Components Limited at the rate of exchange ruling at the balance sheet date and the income statements are transferred at the weighted average rates for the year.

The exchange differences arising on the retranslation are taken directly to a separate component of equity.

d. revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised.

Sale of goods

Revenue is recognised when the significant risks and rewards of the goods have passed to the buyer and can be measured reliably. Risks and rewards are considered passed to the buyer at the time of delivery of the goods to the customer.

interest

Revenue is recognised as the interest accrues (using the effective interest method, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument) to the net carrying amount of the financial asset.

27

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

e. income tax

Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognised for all taxable temporary differences:

• except where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit; and

• in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised.

Deferred tax assets and deferred tax liabilities shall be offset only if:

• (a) there is a legally enforceable right to set-off current tax assets against current tax liabilities; and

• (b) the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority on either:

• (i) the same taxable entity; or

• (ii) different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantially enacted at the balance sheet date.

Income taxes relating to items recognised directly in equity are recognised in equity and not in the income statement.

The Group has not implemented the tax consolidation legislation.

• f. other taxes

Revenues, expenses and assets are recognised net of the amount of GST except:

• (a) Where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and

• (b) Receivables and payables are stated with amounts of GST included.

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

Cash flows are included in the Cash Flow Statement on a gross basis and the GST component of cash flows arising from investing and financial activities, which are recoverable from, or payable to, the taxation authority, are classified as operating cash flows.

Commitments or contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority.

In case of AEC China Limited, revenue is recognised net of value added tax of the People’s Republic of China and expenses and assets are recognised inclusive of value added tax where the right to claim the credit of tax paid is yet to be established.

28

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

g. leases

Leases are classified at their inception as either operating or finance leases based on the economic substance of the agreement so as to reflect the risks and benefits incidental to ownership.

Operating leases

The minimum lease payments made under operating leases are charged against profits in equal instalments over the accounting periods covered by the lease term where the lessor effectively retains substantially all of the risks and benefits of ownership of the leased item.

The cost of improvements to or on leasehold property is capitalised, disclosed as leasehold improvements and amortised.

Finance leases

Leases which effectively transfer substantially all of the risks and rewards incidental to ownership of the leased item to the Group are capitalised at the present value of the minimum lease payments and disclosed as property, plant and equipment under lease. A lease liability of equal value is also recognised.

Capitalised lease assets are depreciated over the shorter of the estimated useful life of the assets and the lease term. Minimum lease payments are allocated between interest expense and reduction of the lease liability with the interest expense calculated using the interest rate implicit in the lease and recognised directly in net profit.

h. impairment of assets with indefinite useful life

At each reporting date, management assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, management makes a formal estimate of recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount.

Recoverable amount is the greater of fair value less cost to sell and value in use. It is determined for an individual asset, unless the asset’s value in use cannot be estimated to be close to its fair value less costs to sell and it does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

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.

i. cash and cash equivalents

Cash and short-term deposits in the Balance Sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purposes of the Cash Flow Statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.

j. Goodwill

Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities.

Following initial recognition, goodwill is measured at cost less any accumulated impairment losses.

Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate the carrying value may be impaired.

29

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated:

• represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and

• is not larger than a segment based on either the Group’s primary or the Group’s secondary reporting format determined in accordance with AASB 114 Segment Reporting.

Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill related. When the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised.

k. trade and other receivables

Trade receivables, which generally have 30-90 day terms are recognised and carried at original invoice amount less an allowance for any uncollectible amounts. An allowance for doubtful debts is made when there is objective evidence that the Group will not be able to collect the debts. Bad debts are written off when identified.

l. inventories

Inventories are valued at the lower of cost or net realisable value.

Costs incurred in bringing each product to its present location and conditions are accounted for as follows.

Raw Materials – purchase cost on a first in, first out basis.

Finished goods and work in progress – cost of direct materials and labour and a proportion of manufacturing overheads based on normal operating capacity but excluding borrowing costs.

Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and estimated costs necessary to make the sale.

m. investments and other financial assets

All investments are initially recognised at cost, being the fair value of the consideration given including acquisition charges associated with the investment.

Loans and non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-tomaturity when the Group has a positive intention and ability to hold to maturity. Investments intended to be held for an undefined period are not included in this classification.

Amortised cost is calculated by taking into account any discount or premium on acquisition, over the period to maturity.

n. Derivative financial instruments and hedging

The Group has adopted the policy of keeping the exposure open and accordingly no foreign exchange risk exposure of the Group has been hedged.

30

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

o. plant and equipment

Plant and equipment and leasehold improvements are carried at cost, less accumulated depreciation and any impairment in value.

(i) Depreciation & amortisation

Depreciation is calculated on a straight –line basis over the estimated useful life of the asset as follows:

• Plant and equipment – over 3 to 13 years

• Leasehold improvements – 10 years

• Capitalised development costs – 5 Years (note (p))

The assets’ residual values, useful lives and amortisation method are reviewed, and adjusted if appropriate, at each financial year end.

(ii) impairment

The carrying values of plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.

For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

If any such indication exists and where the carrying value exceeds the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount. The impairment losses are recognised in the Income statement.

The recoverable amount of plant and equipment is the greater 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.

An item of plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset.

Any gain or loss on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the income statement in the year the item is derecognised.

(iii) revaluations

Following initial recognition at cost, plant and equipment are carried at a revalued amount, which is the fair value at the date of the revaluation less any subsequent accumulated depreciation and any subsequent impairment losses. An independent expert valuer determined the fair value by reference to the market-based evidence, which is the amount, which the asset could be exchanged between knowledgeable parties at an arm’s length transactions.

p. intangible assets

research and development costs

Current expenditure on research activities, undertaken with the prospect of obtaining new scientific or technical understanding is recognised in the income statement as an expense when it is incurred.

Expenditure on development activities, being the application of research findings or other knowledge to a plan or design for the production of new or substantially improved products before the start of commercial production or use is capitalised if the products are technically and commercially feasible and adequate resources are available to complete development.

Capitalised development costs are recorded as intangible assets and amortised, from the point at which the asset is ready for sale, on a straight line basis over its useful life of five years.

Expenditure on equipment used in research and development activities is capitalised in plant and equipment and depreciated over its estimated useful life.

31

notes to tHe financial statements FOr thE YEar EnDED 30 JunE 2007

q. trade and other payables

These amounts represent liabilities for goods and services provided to the Group prior to the end of financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition.

r. Borrowings

Convertible notes are brought to account on issue at the value of the net proceeds received. The Convertible Notes are compound financial instruments where interest is paid annually in arrears. The present value of the interest and principle payable on conversion are discounted at the market rate of interest at issue date and are brought to account as borrowings. The difference between the net proceeds received and the borrowing component is brought to account as equity.

After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method.

Gains and losses are recognised in profit or loss when the liabilities are derecognised.

s. Borrowing costs

Borrowing costs are recognised as an expense when incurred, except where they are directly attributable to the acquisition or construction of qualifying assets, in which case they are capitalised as part of the cost of that asset.

t. provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement.

If the effect of the time value of money is material, 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, where appropriate, the risks specific to the liability.

u. employee leave benefits

Provision is made for employee benefits accumulated as a result of the employee rendering services up to the reporting date. These benefits including on costs expected to be settled within one year, together with benefits arising from wages and salaries and annual leave which will be settled after one year, are measured at their nominal amounts based on remuneration rates which are expected to be paid when the liability is settled. Long service leave including on costs, payable later than one year have been measured at the present value of estimated future cash outflows to be made for those benefits using the projected unit credit method.

v. pension and employment benefits

The Group contributes to various superannuation plans in accordance with and at rates set down by law. Some employees contribute to these plans at differing percentages of their salaries.

The Group contribution plan and costs are charged as an expense as incurred.

w. service warranties

Provision is made for the estimated liability on all products still under warranty at balance date. The amount of the provision is the present value of the estimated cash flows expected to be required to settle the warranty obligations, having regard to the service warranty experience over the last two years and the risks of the warranty obligations. The provision is not discounted to its present value, as the effect of discounting is not material.

32

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

x. share-base payment transactions

The Group operates an Employee Share Option Plan (ESOP), which provides benefits to employees (including Directors) of the Group in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares (“equity-settled transactions”).

The cost of these equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. An external valuer using an option-pricing model determines the fair value.

From 1 July 2004, options granted as part of employee remuneration have been valued using an option pricing model which takes into account the factors including the option exercise price, the current level and volatility of the underlying share price, the risk-free interest rate, expected dividends on the underlying share, current market price of the underlying share, the expected life of the option, and any barriers associated with vesting.

The fair value of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the option (‘vesting date’).

The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects:

• (i) The extent to which the vesting period has expired, and

• (ii) The number of options that, in the opinion of the Directors of the Group, will ultimately vest. This opinion is formed based on the best available information at balance date. No adjustment is made for the likelihood of market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date.

No expense is recognised for options that do not ultimately vest, except for options where vesting is conditional upon a market condition.

Where the terms of an equity-settled option are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any increase in the value of the transaction as a result of the modification, as measured at the date of modification.

Where an equity-settled option is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the option is recognised immediately. However, if a new option is substituted for the cancelled option, and designated as a replacement option on the date that it is granted, the cancelled and new option are treated as if they were a modification of the original option, as described in the previous paragraph.

The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of earnings per share.

y. contributed equity

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

z. earnings per share

• (i) Basic earnings per share

Basic earnings per share is determined by dividing net profit after income tax attributable to members of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year.

(ii) Diluted earnings per share

Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares.

33

notes to tHe financial statements FOr thE YEar EnDED 30 JunE 2007

aa. new standards and interpretation not yet adopted

aaSB 7 Financial instruments: Disclosures (august 2005) replaces the presentation requirements of financial instruments in AASB 132. AASB 7 is applicable for annual reporting periods beginning on or after 1 January 2007, and will require extensive additional disclosures with respect to the Company’s financial instruments and share capital. It is not expected to have an impact on the financial results of the Company.

aaSB 2005-10 amendments to australian accounting Standards (September 2005) makes consequential amendments to AASB 132 Financial Instruments: Disclosure and Presentation, AASB 101 Presentation of Financial Statements, AASB 114 Segment Reporting, AASB 117 Leases, AASB 133 Earnings Per Share, AASB 139 Financial Instruments: Recognition and Measurement, AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards, AASB 4 Insurance Contracts, AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts arising from the release of AASB 7. AASB 2005-10 is applicable for annual reporting periods beginning on or after 1 January 2007 and is expected to only impact disclosures contained within the Company’s financial report.

aaSB 8 Operating Segments replaces the presentation requirements of segment reporting in AASB 114 Segment Reporting. AASB 8 is applicable for annual reporting periods beginning on or after 1 January 2009 and is not expected to have an impact on the financial results of the Company and the Group as the standard is only concerned with disclosures.

aaSB 2007-3 amendments to australian accounting Standards arising from AASB 8 makes amendments to AASB 5 Noncurrent Assets Held for Sale and Discontinued Operations, AASB 6 Exploration for and Evaluation of Mineral Resources, AASB 102 Inventories, AASB 107 Cash Flow Statements, AASB 119 Employee Benefits, AASB 127 Consolidated and Separate Financial Statements, AASB 134 Interim Financial Reporting, AASB 136 Impairment Assets, AASB 1023 General Insurance contracts and AASB 1038 Life Insurance Contracts. AASB 2007-3 is applicable for annual reporting periods beginning on or after 1 January 2009 and must be adopted in conjunction with AASB 8 Operating Segments. This standard is only expected to impact disclosures contained within the financial report

interpretation 10 interim Financial reporting and impairment prohibits the reversal of an impairment loss recognised in a previous interim period in respect of goodwill, an investment in an equity instrument or a financial asset carried at cost. Interpretation 10 will become mandatory for the Company’s 2008 financial statements, and will apply to goodwill, investment in equity instruments, and financial assets carried at cost prospectively from the date that the Company first applied the measurement criteria of AASB 136 and AASB 139 respectively (i.e., 1 July 2004 and 1 July 2005, respectively). Interpretation 10 is not expected to have any impact on the financial report.

interpretation 11 aaSB 2 Share-based Payment – Group and treasury Share transactions addresses the classification of a share-based payment transaction (as equity or cash settled), in which equity instruments of the parent or another group entity are transferred, in the financial statements of the entity receiving the services. Interpretation 11 will become mandatory for the Company’s 2008 financial report. Interpretation 11 is not expected to have any impact on the financial report.

aaSB 2007-1 amendments to australian accounting Standards arising from AASB Interpretation II amends AASB 2 Share-based Payments to insert the transitional provisions of IFRS 2, previously contained in AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards. AASB 2007-1 is applicable for annual reporting periods beginning on or after 1 March 2007 and is not expected to have any impact on the financial report.

interpretation 12 Service concession arrangements addresses the accounting for service concession operations, but not grantors, for public to private service concession arrangements. Interpretation 12 will apply for the Company’s 2009 financial report. Interpretation 12 is not expected to have any impact on the financial report.

34

notes to tHe financial statements FOr thE YEar EnDED 30 JunE 2007

aaSB 2007-2 amendments to australian accounting Standards arising from AASB Interpretation 12 makes amendments to AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards, AASB 117 Leases, AASB 118 Revenue, AASB 120 Accounting for Government Grants and Disclosures of Government Assistance, AASB 121 The Effects of Changes in Foreign Exchange Rates, AASB 127 Consolidated and Separate Financial Statement, AASB 131 Interest in Joint Ventures, and AASB 139 Financial Instruments: Recognition and Measurement. AASB 2007-2 is applicable for annual reporting periods beginning on or after 1 January 2008 and must be applied at the same time as Interpretation 12 Service Concession Arrangements.

aaSB 123 – Borrowing costs. Amends AASB 123 to remove the option of reorganising borrowing costs as an expense, to the extent that they are directly attributable to acquisition of a qualifying asset.

aaSB 2007-6 – Consequential amendments to a number of AASB’s (123, 101, 107, 111, 116, 138). Interpretations 1 and 2 arising from the amendments to AASB 123.

aaSB 4 – Determining Whether an arrangement contains a lease .

bb. fair value estimation

The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes.

The carrying value less impairment provisions of trade receivables and payables are assumed to approximate their fair values due to their short-term nature. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments.

cc. accounting estimates and judgements

Estimated and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances.

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are:

Share-based payment transactions

The cost of share based payments to employees is measured by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined with assistance of an external valuer, using the Black-Scholes formula, taking into accounts the terms and conditions upon which the instruments were granted.

impairment testing

The directors evaluate estimates and judgements incorporated into the financial report based on historical knowledge and best available current information. Estimates assume a reasonable expectation of future events and are based on current trends and economic data. Critical estimates relating to impairment testing are detailed in note 6.

35

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

4. Going Concern Issue

The consolidated entity incurred a loss for the year of $3,131,445 (2006 $1,386,454) and a net cash outflow from operating activities of $2,996,149 (2006 $1,402,994).

At 30 June 2007 the consolidated entity had cash assets of $611,139 (2006 $1,088,013) and working capital of $558,872 (2006 $982,218). At 30 June 2007 the consolidated entity had net assets of $433,041 (2006 $47,961).

AEC has eighteen different versions of natural gas engines, developed or in final developmental stages, with four large original equipment heavy duty engine manufacturers in China. Over 70 trucks and buses, using natural gas engines incorporating the AEC NGVS, are currently undergoing various trials with a wide range of customers. Each of these end customers has the capability of purchasing significant engine numbers upon the final purchasing decision being made. During the 2007 financial year AEC sold over 450 NGVS kits to its Chinese customers.

Late in the 2007 financial year AEC commenced direct sales of natural gas engines to vehicle manufacturers. The direct sale of NG engines has not required AEC to add new skills or find additional working capital. In the last quarter of the 2007 financial year AEC sold over 60 NG engines to Thailand.

AEC’s sale of spare parts continued throughout the 2007 financial year and will increase exponentially as more vehicles using the AEC NGVS are in commercial use.

AEC’s marketing and sales progress is approximately 12 months behind the Company’s expectation in September 2006. Accordingly, profitability and cash flows have been similarly deferred. To achieve profits and positive cash flow AEC will require additional working capital of approximately $2,250,000 to repay short term working capital funding provided by 698 Capital Asia Pacific Ltd and to fund increased inventories and receivables. AEC intends raising the required working capital through a share issue in the December 2007 quarter.

At 30 June 2007 the consolidated entity had interest bearing liabilities of $834,452 (current) and $2,909,175 (non current) owing to 698 Capital Asia Pacific Ltd. In addition, other payables (current) include $507,709 of accrued interest owing on the convertible note held by 698 Capital Asia Pacific Ltd. Subsequent to 30 June 2007 698 Capital Asia Pacific Ltd agreed to increase its existing $750,000 interest bearing loan (current) to not more than $1,750,000. 698 Capital Asia Pacific Ltd is a related party of the Company’s major shareholder 698 Capital International Ltd. 698 Capital International Ltd has agreed to provide financial support, in circumstances that will enable the Company not to be unable to meet its debts as and when they fall due, at least one year from the signature of the Directors’ Declaration. This support is subject to the Company raising additional working capital of a minimum $1,500,000 prior to 31 December 2007 and subject to 698 Capital International Ltd remaining the major shareholder of the Company holding not less than 40% of the ordinary issued shares in the Company.

Based on 698 Capital International Ltd’s support, known potential to raise the additional working capital and the future prospects of the Company, the Directors consider it appropriate that the financial report be prepared on a going concern basis.

36

notes to tHe financial statements FOr thE YEar EnDED 30 JunE 2007

5. Segment Information

The Group’s primary segment reporting format is geographic segment as the Group’s risks and rates of return are affected predominantly by relative performance of product in the geographic segment. Secondary segment information reported is business segment being performance of its product.

The operating businesses are organised and managed separately according to the relative performance of each geographic area with each segment representing a strategic business that offers varying opportunities and faces different economic conditions.

While the France segment was predominantly NGVS kits the French market has now moved to the spares market. The China segment is in the early marketing stage with the initial commercial sales of NGVS kits to FAW and Weichai having commenced in the financial year 2007. The Australian market is developing and is offering both kits and spares.

Transfer prices between the Australian parent company and Chinese subsidiary company are set at an arms length basis in a manner similar to transactions with third parties. Segment revenue, segment expenses and segment result include transfers between business segments. Those transfers are eliminated on consolidation.

Geographic segments

The Group’s geographic segments are determined based on the relative performance of the segment. The following table presents revenue, expenditure and certain asset information regarding geographic segments for the years ended 30 June 2007 and 30 June 2006.

P 3	r	i 0		J	u	a n	r	y e		r 2		e 0	p 0		o 7	r	t	i	n		g		g	e		o	g		r	a	p		h	i	c		s	e		g			e		n	t	s																							F	r		a $	n	c		e												u	s	t $	r		a	li	a													h	i $	n		a										o	n		s	o	l $	i	d	a		t	e	d
r S I I	a n n	e l t t	e e e	v s r r	e - -	t s s	n e e	o	u g g	e	e x	t e e		e n n	r t t	n	a s s	l a a	l l	c e e	s s	u	s e	t l	o i			i	e n	r a	s t	i	o	n																																				7		7	8		,	9	4	2	- -						(		1 1	, ,	1 3 3	4 4 4		4 2 2	, , ,	0 8 8	6 6 6		4 7 7	)							2	,	1 (	5 7 7		3 1 1	, , ,	7 3 3	1 7 7		1 1 1	)						(	3 1 1	, , ,	0 4 4		7 1 1	6 4 4	, , ,	7 2 2	1 3 3		7 8 8	)
s		e		g				e		n	t		r		e		v	e		n		u	e																																															7		7	8		,	9	4	2											1	4		4	,	0	6		4								2	,	1	5		3	,	7	1		1								3	,	0		7	6	,	7	1		7
N I	n	o t	e	n r	- e	s	e s	t	g	a	n	e d		n	t o	t	r h	e	v e	r	e	n r	u e	v	e e	:	n	u		e																																																	-										2	3		8	,	4	2		1															2	3		4										2		3	8	,	6	5		5
P F	r i	n	o a	fi	t n	/ c	( e	l	o c	s	s o	) s	t	b s		e	f	o	r		e	t		a	x		a	n		d		f	i	n	a	n		c	e		c		o	s	t	s																								5		7	9		,	3	2	8	-						(		2	, (	8 4	1 3		8 5	, ,	4 1	7 0		8 3	) )								(	4	5		7	,	1	9		2 -	)						(	2	, (	6 4		9 3	6 5	, ,	3 1	4 0		2 3	) )
n			e	t		p		r		o	f	i	t	/	(	l	o		s	s	)		f	o		r		t		h		e		y		e	a		r																															5		7	9		,	3	2	8							(		3	,	2	5		3	,	5	8		1	)								(	4	5		7	,	1	9		2	)						(	3	,	1		3	1	,	4	4		5	)
a S S	e e	s	g g	s	e	t e e		s n n	t t	a	a li	n s a	s b	d e	il	l t it	i s i	a e	b s		i	li	t	i		e	s																																																				- -						(		5 6	, ,	3 1	5 9		8 5	, ,	7 2	0 5		3 4	)							1	,	2	5 1		7 2	, ,	5 0	1 8		1 3							(	6 6	, ,	6 1		1 8	6 3	, ,	2 1	1 7		4 1	)
C		a	t p	h i	t	e a	r l		s e	x	e	p	g e		n	d	e i	t	n u	t r		i e	n		f	o		r				a	t	i		o		n																																									-									(	8	9		7	,	8	6		6	)									(	1		7	,	2	4		4	)								(	9		1	5	,	1	1		0	)
D A U A D		e n e	r	p o e o e	r	e r a u	c ti li n e	i s s t	a a e d	t t s	i i d l	o o e o	e t s	n n s	x a	c s o	h i f	d	a e g	n	g f o	o o	e r	d	g p	a	i r i	n o ll	s	vi o	s	i n	o	d	n i	s s	p		o	s	a	l		o	f		i	n	v	e		s	t			e	n		t																				- - - - -									( ( (	2 1 ( ( 3	0 3 5 7 0		1 2 7 2 0	, , , , ,	1 9 5 6 0	6 1 3 5 0		2 7 4 4 0	) ) ) ) )									(	1		5	,	8	9		0 - - - -	)								( ( (	2 1 ( ( 3		1 3 5 7 0	7 2 7 2 0	, , , , ,	0 9 5 6 0	5 1 3 5 0		2 7 4 4 0	) ) ) ) )
T		o	t	a	l		n	o		n		c	a		s	h		e		x	p	e		n	s	e		s																																																			-									(	7	6		4	,	2	6		7	)									(	1		5	,	8	9		0	)								(	7		8	0	,	1	5		7	)

37

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

5. Segment Information continued

P 3		ri 0		J	u	a n	r	y e		r 2		e 0	p 0		o 6	r		ti	n		g		g	e		o	g		r	a	p		h	i	c		s	e		g				e	n	t	s																							F	r		a $	n	c		e												u	s	t	$	r	a	li	a													h	i $	n		a										o	n		s	o	l $	i	d		a	t	e	d
r S I I	a n n	e l t t	e e e	v s r r	e - -	t s s	n	o e e	u g g	e	e x	e e	t	e n n	r t t	n	s s	al a a	l l	c e e	s s	u	s e	t l	o i	m		i	e n	r a	s t	i	o	n																																			1	,	9	6		5	,	2	6		8 - -									(	4 2 2	1 2 2		5 9 9	, , ,	4 0 0	6 7 7		6 3 3	)									1 (	8 1 1		9 7 7	, , ,	9 8 8		7 1 1	8 3 3	)							2	, (	5 2 2		7 4 4	0 6 6	, , ,	7 8 8		1 8 8	2 6 6	)
s		e		g				e		n	t		r		e		v	e		n		u	e																																														1	,	9	6		5	,	2	6		8										4	1		5	,	4	6		6										1	8		9	,	9		7	8								2	,	5		7	0	,	7		1	2
N I	n	o t	e	n r	- e	s	e s	t	g	a	n	e d		n	t o	t	r h	e	v e	r	e	n r	e	u v	e	: e	n	u		e																																																	-											7		9	,	5	9		6													8	,	1		9	5												8	7	,	7		9	1
P F I	r i n	n c	o a o	fi	t n	/ c	( e e	l	o t	s c a	s o	) s x	t	b s e	x	e	f p	o e	r	n	e s	e	t	a	x		a	n		d		f	i	n	a	n		c	e		c		o	s	t	s																							1	,	1	7		2	,	7	9		8 - -							(	1	, (	9 3	1 4		9 7 4	, , ,	1 0 5	1 2 3		5 9 1	) )								(	2	9		7	,	6		3	9 - -	)						(	1	, (	0 3		4 4	3 7 4	, , ,	9 0 5		5 2 3	6 9 1	) )
			e	t			p	r		o	f	i	t	/	(	l	o		s	s	)		f		o	r		t		h		e		y		e	a		r																														1	,	1	7		2	,	7	9		8							(	2	,	2	6		1	,	6	1		3	)								(	2	9		7	,	6		3	9	)						(	1	,	3		8	6	,	4		5	4	)
a S S	e e	s	g g	s	e	e e	t	s n n	t t	a	a li	n s a	s b	d e	il	l t it	i s i	a e	s	b	i	l	i	t	i	e	s																																																				- -							(	5 5	, ,	6 3	7 9		5 9	, ,	1 5	3 8		8 9	)								(	3 5	4 7		7 4	, ,	1 7		4 3	9 7	)						(	6 5	, ,	0 9		2 7	2 4	, ,	2 3		8 2	7 6	)
C		a	t p	h i	t	e a	r l		s e	x	e	p	g e		n	d	e i	t	n u	t r		i e		n	f	o		r				a	t	i		o		n																																									-									(	2	2		5	,	5	1		0	)									(	1		9	,	7		6	8	)								(	2		4	5	,	2		7	8	)
D A A F U A	a	e i n	r r	p o o o	r v e	e r r a a u	ti ti l li n	ci s s u s	a a a e t	t t t e s	i i i d	o o o o e	f e t	n n n	r x a	o e c s	f h i	d	c a e	u n	o n g f	n o	e e	v r r	e a g	r t a p	t i i r	i o n o	b n s	l v	e is	o i	n p o	t	o i n	t o s	e	n	e s		q i	u s	i s	t u	y e		d																																- - - - - -									(	2 ( (	1 3 8 1	(	1 1 5 6 6 1	, , , , , ,	9 1 4 2 0 8	9 8 9 5 0 7		6 3 5 0 4 1	) ) ) )																	- - - - - -									(	2 ( (		1 ( 3 8 1	1 1 5 6 6 1	, , , , , ,	9 1 4 2 0 8		9 8 9 5 0 7	6 3 5 0 4 1	) ) ) )
T		o	t	a	l		n	o		n		c	a		s	h		e		x	p		e	n	s	e		s																																																			-									(	3	1		7	,	0	4		9	)																	-									(	3		1	7	,	0		4	9	)
s T N		e h	e	c	o V	S	n r ,	o	d a	u s	a p s	r o	y c	c	u ia	r r t	e r	e e	p n d		o tl c	y	r o	t o	i	n p p	e	g r o	a n	f t	o e	e n	r s t		a	i n	a t	h d	t i	n p	– r	o	o	b n d	u e	u	s b c	i t	n u s	s .	e i	s n	e	s s	s	s	e s	e	g	g			e e	n	n	t	t t	s h		a	t		b	e	i	n	g		t	h		e		c	o						e	r	c	i	a	li	s	a	t	i	o		n		a	n	d		s	a	l	e		o		f	t	h		e		A		E				p	a	t	e		n	t	e	d

secondary reporting format – business segments

The Group currently operates within one business segment that being the commercialisation and sale of the AEC patented NGVS, associated component and products.

38

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

6 ( ( ( ( (	. a b c d e	) ) )	) )	R r S	a S	e l a	e e l	v v s e	e s	e r	n	n e o	u v f	e	e g	e n o	f u	r o	a e d	o : s	n				c	E o		x n		t	i	e n		n u	s i		e n	g	s		o		p		e	r	a		t	i	o		n		s																	E							R						P	2	0	$	0	6																								E				E				T	I		T	Y	2		0	0 $		6
																																																																	2	0		0		7																																				2		0		0	7
																																																																			$																																										$
																																																																																		2	,	5	7		0	,	7	1		2																																2	,7		3		0	,	0	5	6
																																																													3	,	0		7	6	,	7		1	7																																2	,	2	6		5	,	8	7		3
				t		o		t	a	l		s		a	l	e		s		r		e	v		e	n		u		e																															3	,	0		7	6	,	7		1	7											2	,	5	7		0	,	7	1		2											2	,	2	6		5	,	8	7		3											2	,7		3		0	,	0	5	6
				O I F O	n o	t t t	h e r h	e r e	r e i e	g r	r s n	e t i	r e n	v c	e e x o	n v c	e	u h	e n a e	s u n		e g	e		g	a	i	n																																																									3 4 1		1 1 4	, , ,	8 0 8	7 9 2		6 0 5																																			3 3 1		1 2 4,	, ,	8 8 8	7 9 2	6 5 5
																																																																	2	1	,	9		8	0																																			2		1	,	7	4		6
																																																																							-																																										-
																																																															2		1	6	,	6		7	5																																		2	1		6	,	6	7		5
				T		o	t	a	l		o	t	h		e	r		r	e	v		e	n		u	e																																					2		3	8	,	6		5	5														8		7	,	7	9		1													2	3		8	,	4	2		1														7		9,		5	9	6
				t		o		t	a	l		r		e		v	e		n		u	e																																																												2	,	6	5		8	,	5	0		3																															2		,8		0		9,		6	5	2
																																																													3	,	3		1	5	,	3		7	2																																2	,	5	0		4	,	2	9		4
				c I	n	o c	l e o	s u p s	t d t	r	e e o	o d c f	f i	i a i	i n t n	n i v	c o	v e	o n n	e s t	n t	o	t o r	o f i	e	r s s	i a	e l	e	s s	:																																																					6	7		5 8	, ,	6 6	3 4		4 9																																	6		9		5, 0,		6 3	3 7	4 0
																																																																							-																																										-
																																																															5	9		5	,	5		3	6																																1	,	4	1		6	,	0	8		3
				e S A L S	u o h	n	a p n n a	g e g r	p u e	l e r a s	s a l b	o n e	y a n l r a	n e v s	e u a i e	d a v c	e t e d	s i e	b a o l p	l e a	e a n a	r y	n i e v	e e x e	s e	fi p	t e n	t	s n s	s	e e e	s x	x	p	p e	e	n	n s	e	s s	e																																									1	,	5 1 1	3 4 0 8		7 0 5 6 6	, , , , ,	7 7 7 8 2	1 0 0 4 5		2 2 9 2 0																															1		,3 1 1		8 4 0 8		8, 0, 5, 6, 6,		7 7 7 8 2	2 0 0 4 5	5 2 9 2 0
																																																													2	,	3	9		6	,	1		4	9																																2	,	2	2		0	,	3	3		1
																																																															1	5		7	,	1		3	7																																		1	5		7	,	1	3		7
																																																															1	1		9	,	5		1	9																																		1	1		9	,	5	1		9
																																																																2		4	,	7		7	1																																			2		4	,	7	7		1
																																																																							-																																										-
				T		o	t	a	l																																																				2	,	6	9		7	,	5		7	6											1	,	8	7		7	,	2	1		5											2	,	5	2		1	,	7	5		8										1	,	7		2		8,		2	2	8
				f I D 6 O F O	i n 9 i	t i t n t	n e r 8 h a h	a r e	e c e n e	n t C r c r	s o a e	c t: fi	e r p c n	it i	r a r h a	c e l e a n	l c r c	o a A t g i	s t o a	t e s e l	d i r s	s a s l	p o	e P a	n a a n	t c y	i i a s	ti f b	e i l	c e	s	- L	t u	d n		d	e	r		f	i	n	a	n		c	e		l	e	a	s		e																														2	8 5		1 7 7	, , ,	1 6 2 9	6 6 5 4		4 6 3 6																																	2		8 5	7	1, 7, ,	1 6 2 9		6 6 5 4	4 6 3 6
																																																															3	3		4	,	7		2	5																																		3	3		4	,	7	2		5
																																																																							-																																										-
																																																																				6		4	6																																							6	4		6
																																																																9		9	,	7		3	2																																			9		9	,	7	3		2
																																																															4	3		5	,	1		0	3													3	4		7	,	0	2		9													4	3		5	,	1	0		3												3		4	7	,	0		2	9
				l O M		e p i	n	a e i	s r	a	e t u	i	p n	g	a l	y l e	e	a	a s	s e	e e	p	n r	t e a	s y	n	t	a e	l	n	e t	x s	p		e	n		s	e	s																																												1	6		4	,	0	3		6																																	1		3	0	,	6		5	3
																																																															1	7		5	,	2		7	9																																		1	1		8	,	1	4		7

39

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

		AEC 2007 $	GROUP AEC 2006 2007 $ $	ENTITY 2006 $
6. **(f) **	Revenue and Expenses_continued_ Development costs Development costs charged directly to the income statement	821,295	561,557 781,004	561,557
**(g) **	other disclosure items in respect of the loss from continuing operations Net bad and doubtful debts arising from other entities Depreciation of plant and equipment Amortisation of leased plant and equipment Amortisation of leasehold Improvements Amortisation of intangible assets Foreign exchange net (gain) / loss Net (gain) from sales of assets in the ordinary course of business Net transfer to / (from) provisions: Provision for warranties Provision for diminution of loan Write off for diminution of investment Employee entitlements Amortisation of convertible note equity	- 197,833 - 19,219 132,917 217,756 (43,573) 4,224 - 300,000 68,430 31,680	(5,013) - 194,516 181,943 1,183 - 17,480 19,219 - 132,917 40,640 108,288 - (43,573) 1,591 4,224 - 411,278 - 300,013 (13,462) 68,430 35,495 31,680	(5,013) 194,516 1,183 17,480 - 34,554 - 1,591 427,326 - (13,462) 35,495

40

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

7	.			T T t m r L I T d S S T D r	h a o n e h u e	a h e u t c a e e c	e l e s o x d a n f it	x t s u r d e o h	r p i i e e p g	a e r p s b f c r r h	o li e e f t b y o r n	ti c e a e i i r e is o	o d s f t c b a t a d l	u d o a l s e e d	n f r t e e r t d i	n c c b o e x y a n	i t l o i d g	li y l i / f n s d x	a o o n ( p i t	t f G w c b a c a n ff a a	i e a e s x	o a r s o l y o s	c o n o c t r e	n c e u e	u f u l e d n t	b o p e it n a e c s	e u ’ ) t t n r	t s t s i t d e e	n a n s u s l	t a x g c a	i p n	e n t ti ti	e g p 3 h a b o n	n li 0 ic l t	l c x e g	t o a % h a r t	s b e	a s b a l c o	x l r e	b e e o t	e i g a	e i n x	x f n n n	p o c o c is l	r t o o	e o e	n e d s	s s	e t e e e	a : s	x t	a a n	n	d x o	t																	E							R						P	2	0	$	0	6																								E				E				T	I		T	Y	2		0	0 $		6
																																																																	2	0		0		7																																				2		0		0	7
																																																																			$																																										$
																																																																																	(	1	, (	3 4 3	9 1 2 6 2		0 7 5 3 7 4	, , , , , ,	9 2 8 2 2 9 5	8 9 7 2 8 0 3		5 6 5 8 5 8 1	) )																													(	1	(	,3 4 3		9 1 2 6 2		2, 7, 5 3, 8, 4,	,	0 6 8 2 2 2 5	9 3 7 2 8 4 3	9 0 5 8 5 2 1		) )
																																																												(	3	,	1	3		1	,	4		4	5	)																													(		3	,	0	8		5	,	5	3		1	)
																																																														(	9	3		9	,	4		3	4	)																															(		9	2		5	,	6	5		9	)
																																																																							-																																										-
																																																															1		0	6	,	8		9	1																																		1	0		6	,	8	9		1
																																																															2		0	0	,	2		0	4																																		2	0		0	,	2	0		4
																																																															6		3	2	,	3		3	8																																		6	1		8	,	5	6		4
																																																																																																																	-
				T		o	t	a	l	i	n		c	o				e		t	a		x		b	e		n	e	f	i	t																																							-																4	,	5	3		1																					-																4,		5	3	1
				T $ D r D T	e	h n e c e a	e il f f x	e o e	f ( g l	r 2 r r o	a 0 r n r s	n e is e s	0 d d e	k 6 e	i t d t s	n : a a	g $ r	x e x	a n l	c il a a a	) s t s	c s s	o e e e		u t t t	n s o s:	t a	t	b n h	d e	a	la l f	i o	n a	c b ll	e i o	li	t	a i i	t e n	s	y g	e n :	a	o	r t		e	n	d			w		a	s																										5	,	7 7	8 7		0 5	, ,	3 3	2 6		9 5																															5		,7 7		8 5		0, 6,		6 8	6 6	3 3
																																																													7	,	2	1		8	,	3		8	5																																7	,	1	0		2	,	7	7		3
																																																															3	8		5	,	0		3	4																																		3	5		8	,	3	6		6
				O D		t e	h f	e	e	r r	r	t e	e d		t	a	p	o x		r li	a a	r b	y	il	d it	i i	ff e	e s		r	e	n		c	e	s																									7	,	6	0		3	,	4		1	9											6	,	5 6	5 7		5 6	, ,	6 5	9 2		4 5											7	,	4	6		1	,	1	3		9										6		,5 6		3 7		7, 6,		5 5	2 2	6 5
																																																															5	8		9	,	8		5	0																																		5	8		9	,	8	5		0
				N		e	t		d		e	f	e	r	r	e		d		t	a	x			a	s	s	e	t	s																															7	,	0	1		3	,	5		6	9											5	,	8	7		9	,	1	6		9											6	,	8	7		1	,	2	8		9										5		,8		6		1,		0	0	1
				N w t F g i j	o r n o	e il a o i	t l r d n	b x t u o i	d p n	e h . in g	e e	f a It g t	e v o p h	r is s e	r a n u o	e il s r n .	a p c	d b o o T o	t l l o t n	a e i s h	d e e e s	x a s x r o	a l	a g t p e i	s a i o e d	s i f c w a	e n o i t i t	t s n n ll e	s t c e d	d b	h l o	a t e t	h e h a	v i e e n x	e c g	h i t o r	n s a e	d l r c g	o a x o i	t e a o	d t t u n	b i i s e	e u o o p e .	c	e t n n w q	n i , u	b il	b l A l e	r e d e n	l c	o t v e	u e a c e	g n t s	c	h p t t	t o e o o	t r d f t	o a o h	E	a r n r e	c y g	c i d	o d n a e	if e f	u f c e	n e	r o rr	t e n	a o s e	s n d	c o	i e li t	t p d a	i s o	s a x	a n t	n n e e a	o d n d s	t s	t ts t e	p a a t	s	r x L x ,	o l i	b g d	o i r e	a s t o f	b s e e	l e u	e s d p r	, r	c h e	a a d	it a s s	n t t	h n h a	i b	n e o e x	t t r l	e i	h u e a	e ti l d b	l e i	i is c o li	t e t	e e y	d s ,	. d	e n u	t o n	d o t	i -	a f a u	t o p t	e il	f r p is	u e	e	t a d	u a r	r t t	e t a	a o x	t x	h - b l	a c e o		t o a s	t n s	a s n e	x y s	o	p li b b	d e	r y	o a n	f t e n	it e f o	s d it t

Net deferred tax assets have not been brought to account as it is not probable within the immediate future that tax profits will be available against which deductible temporary differences and tax losses can be utilised.

tax consolidation legislation

For the purposes of income taxation, Advanced Engine Components Limited has not elected to form a tax-consolidated group. It is not expected the Group will elect to form a consolidated tax group, as there does not appear to be any benefit in doing so. There will be no consequences to the deferred tax assets, deferred tax liability, un-utilised tax losses by not joining the consolidated tax regime.

41

notes to tHe financial statements FOr thE YEar EnDED 30 JunE 2007

8. Disposal of Investment in Controlled Entity

On 20 August 2006, Gas Torque Engines Pty Ltd (“GTE”) was deregistered. This subsidiary was acquired on 1 February 2006 with no assets and no liabilities. From acquisition to the date of deregistration this subsidiary had not traded nor had it incurred any assets or liabilities. The purpose of acquiring GTE was to enable the Company’s participation in Motive Energy Pty Ltd to proceed unimpeded.

Upon deregistration of GTE the $300,000 consolidated goodwill on acquisition has been written off. With the deregistration of GTE all remaining assets, being the right to an interest in an investment of $300,000, transferred to the Company. This right to an interest in an investment has been written off at 30 June 2007.

9 1	.		.				L f - - A A r - - - - o - -	h o L e I f	o o B e u u v C P t F t T G	e l r s d d i r h h B a r	s t d e a i i i e u i R t	s i b s s l t t r o e S h e x a	l e g a i u o w r r r e r n	o r h s p c t u & e c t	s s t i e e r n y s r s o	s e c r l n s o e e e a	e o o d A f t r a r K p	a f d a s s l e o s t a v c v	r t s f y r i c i e p p	t t a n h o r s h e c c n l l	r h v d a p s a t u e a e o e d i i	S i r s h r r u a c	b e e d e e t e a f s n s a n a	h u r r p i i ll c t	a p a il n n ti - s i	t a g u s e c a n t e o	r a t h r e n a n	b r e a o g	e l e e s ( c x	e n n d r h ia s a	t u e a o p l e t	t l r f r i	o o e a r v o	s n A e i n	b s y ) c	o e p e r	r p u - P o	d r t r s e	i e B t l	n o r y a	f i t	a s t L e	r o h t d	y r d	a r :	e d r s K p	i e a a	q n e u r	u a t	i r n d i	t y d i e	y a t s	s l a	h l	s n	a d	r	e	s																	E							R						P 2		0 $	0		6																						E		C		E				T	I		T	Y	2	0	$	0		6
																																																																					2	0		0		7																																			2	0		0		7
																																																																							$																																								$
																																																																																						8	(	1 9	, , 3 1 1 1	3 9 ( (	8 6 $ $ 6 9 1 9 7	, , , , ,	6, 0, 0. 0 0 0 9 7 0	4 0 . 0 4 2 2 6	0 0	5 1 1 1 0 8 5 - 7 1	4 9	) 5 5	) )																											( 8		1 9	, , 3 1 1 1	3 9 ( ( 9 7	8 6 $ $ 6 9 1 , ,	7 0 0 0 , , ,	, , . . 0 0 9 7 0	5 0 0 0 0 4 2 2 6	0 8 5 7 1	6 1 1 1 -	8 9 5 5	) ) )
																																																																		(	3	,	1		3	1	,	4		4	5	)																												(	3	,	0		8	5	,	5		3	1	)
																																																																1		1	2	,	7		4	3	,	5		9	8																												1	1		2	,	7	4	3	,	5		9	8
																																																																						(	$		0	.	0	2	8		)																															(	$	0	.	0		2	7		)
																																																																						(	$		0	.	0	2	8		)																															(	$	0	.	0		2	7		)
																																																																					5		7	,	9	6		1																																	3		8	,	0	5		5
																																																																					1		5	,	9	5		2																																	1		5	,	9	5		2
																																																																							3	,	4	2		3																																			3	,	4	2		3
																																																																							7	,	1	8		1																																			7	,	1	8		1
																																																																					2		6	,	5	7		6																																	2		6	,	5	7		6
																																																																							8	,	3	0		5																																			8	,	3	0		5
																																																																				1	1		9	,	3	9		8													9		3	,	7	6		1													9	9	,		4	9		2													9	3	,		7	6	1

42

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

1			.		f	F c	o a o	r s ll a	a h o s	s t h	h	h a i a	e n n t	d	a p g b		n u c a a	r a t n	p s	h 3 k	o	s 0 a	e e n	a q J	s u d	s ui n i	o v e n	h f	t al	h	E h e a	e n n	t	s d	u	i a c	v s	o	a h	l	F p	e l	o r	n is	t w	s e	S t	t	a h	e	t	e			e		n	t	,																E	C					R							P 2	0	$	0		6																				A		E		C		E				T	I		T	Y	2	0	$	0	6
																																																																				2	0		0		7																																			2	0		0		7
																																																																						$																																								$
																																																																																					1	,	0	8		8	,	0	1	3																														1	,	0		3	6	,	9		9	4
																																																																			6	1		1	,	1	3		9																															4		4	1	,		8	8	4
						r o u L a A	e p s o f d	e t	c e s e d n A o P S	o r d s r f	n a f i n e o e r n h	t i r n o n i o r a	ci i n o p - e n v r	l o c n r o v i e e	i n o o - e c r s a	a p c u t e i l	t s a c r is e s o is o	i e c i r d t n p	o a r e s a e a e t	n f a o h ti ti l f d i	t t n t o n o o e o	o e i t a i t s o f	r o i t n n s n r o n	f n n x e a t s	l i u a s o d r	o n s i m n s f o i e e	s c n s e f i x	s o : d t c g g	g s i n p	f a o o n e	r o n o u e	o e p t n	v d i x s	t e o e o c e	a r r r h	x a t t i n d	c t i i ll a	o t i s b o n	n o o a l o f g	t e	ti n i n l e	n n s o n o	e n d a (	u t o i g	i t s n a	n c o e p i	g a f n	e o )	s s /	h q a l	u l o	f i s	l t s	o y	w		s																										(	1		,	3 2	8 1 3 ( 8	6 2	3 5 6	, , , , ,	4 1 4 0 2	5 7 9 2 5	4 9 5 5 0	- -	) )																											(	1	,	3 2 4		8 1 3 2 8	7 3 5 7 2 6	, , , , , ,	5 1 4 3 0 2		6 7 9 2 9 5	8 9 5 - 6 5 0	)
																																																															(	3	,		1	3		1	,	4	4		5	)																											(	3	,	0		8	5	,	5		3	1		)
																																																																			3	4		9	,	9	6		9																															3		3	4	,		0	7	9
																																																																											-																																								-
																																																																			3	0		0	,	0	0		0																															3		0	0	,		0	1	3
																																																																											-																															4		1	1	,		2	7	8
																																																																				3		9	,	5	6		5																																								-
																																																																											-																																								-
					( I	c I n	h n	e a h u u c u u	t a c r r r r r	n n r r r e r r	c g e e e a e e	a e g a s	s e s n n n n	s s t t e t t	h i e i /	n i ) t n ( t a	( n / r d r n	u d a v e a	s n n e d e d d	e e c e	e t e c n r n	d t r t e	a e a o a a o	i s a a n r n n	n s s i s -	) s s d e e d c	e e e s )	o t t i o i o u	s s n t n t r	p h h r	e a a l e	r n a e i e n	n s r a r	a d d s b t	ti l e r i p	n i l e l a p	a i t c it r	g b a s: i y o	i b e e a	a li i i s b v	c t li v : l is	t i t a e i	i e i b o	v s e l s	i s e n	ti : s	e s		s		b	e	f	o		r	e						(	2	,		4	4		1	,	9	1		1	)							(	1	( (	,	0 3 2 2	5 4 2 2	3	7 8 5	, , , ,	5 2 1 5 4	5 8 1 1 4	5 5 5 4 7		) ) )							(	2	,	0		4	0	,	1		6	1		)							(	1	( ,	6 0 1		2 3 2 5	3 8 8 4	, , , ,	2 0 2 7 4		2 0 8 4 4	3 4 8 4 7	) )
																																																																				6		0	,	4	0		6																														(	7		0	8	,	0		9	9		)
																																																																	(		8	6		6	,	0	6		6	)																													(	6		9	0	,		5	7	4		)
																																																																			2	4		1	,	3	2		5																															3		1	5	,		0	7	7
																																																																				1		0	,	0	9		7																																	1	0	,		0	9	7
								e	t		c	a		s	h		(	u	s		e	d		i	n	)		o		p	e	r		a	ti	n		g		a	c	t	i	v	i	ti	e		s														(	2		,	9	9		6	,	1	4		9	)							(		1	,	4	0		2	,	9	9	4		)							(	3	,	1		1	3	,		6	6	0		)							(	1	,	4		7	7	,	7		4	8	)
						(i (i (i (i (i	) i ii ) i	o u ) ) u )	n r r	- i I I i I	c n n s n n	g o s s g s	a u e	s t n u e t u v	h h v r h r e	a a l	f e e n o e n o	i r f	n y s c s y c p	a e i e e e	a o h a	n n p a p	c r r r r r e	i e e e e e n	n o s t	g n f m n m	d 6 o d c	iu iu o	a e 9 n e s	n d 8 d t	a s	d 3 s c 3 s	i	n 0 a q 0 o	u f	v J p it i J it	e u i s u $	s n t h it n h 5	t a i	i e l a o e a 2	n f f 1	g 2 a n 2 a ,	0 s i 0 i 4	i r o r	a 0 a f 0 5	c 6 v 7 v 1	t P a G a	i t a l t l	vi h c u a h u	t i s e	i e f e e e r	e r i T r	s e c o e o e	f o f t	L r r	t $ q $	a d 3 e 2 a	s u r n	d 6 e 8 s	t e 6 e 7 f	h b ,1 E t ,0 er	e t n h r	f 7 g e 6 e	o o 7 i 2	f n f d	ll e o	o $ l fr	e s l e	7 o o	i 5 r P r	n e t e	0 y i	g , fi n fi T	0 n L g n	n 0 t r	o a d n a a	0 n n d	n t c a o c	- e n e e	c o t -	a d f d R	s e a c e	o i a o	h q r s c	u v h v e	fi i e v e i	n t r a f r v	a y l i a	t u n t b	n e a	c n l	i $ e e e	n l o c l s	g 0 v f in v (	. e $ e r	a 1 g e	3 1	n 5 5 a f	d n e	o 0 o r	i p n , d n	n e t 0 i t	v r 0 n	e h h o	s s 0 v s t	s h f . e f	ti r s r e	n a t	r o i o 1	g e n 6	. g (	t i	r t i	a r )	n a a a ).	s y n y	a	s	c 2 a 2	ti 0 c 0	o t	0 i 0	n 6 o 7	s . n .	:	s:

non-cash financing and investing activities

During the year ended 30 June 2006 there was the following non-cash financing and investing transactions:

(i) Conversion of 698 Capital Asia Pacific Ltd debt of $750,000 to equity @$0.135 per share.

(ii) Insurance premiums with a fair value of $366,177 were financed over twelve months from May 2006. (iii) I ssue of shares on acquisition of Gas Torque Engines Pty Ltd at fair value of $150,000.

During the year ended 30 June 2007 there were the following non-cash financing and investing transactions:

(i) Insurance premiums with a fair value of $287,062 were financed over twelve months from May 2007.

(ii) Development costs of $521,451 were transferred from Trade Receivables (refer Note 16(ii)).

43

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

		AEC 2007 $	GROUP AEC 2006 2007 $ $	ENTITY 2006 $
12.	Trade and Other Receivables Trade receivables (i) Provision for doubtful debts	884,570 (314,299)	1,382,087 425,060 (314,299) (314,299)	1,381,408 (314,299)
	GST recoverable New Tel Limited Provision for doubtful debts Other receivables: Prepayments Deposit with suppliers Inter company loan Less provision for diminution of loan Inter companytrade receivable	570,271 115,142 - - 233,092 4,813 - - -	1,067,788 110,761 - - 400,000 - (400,000) - 309,513 233,092 127,874 - - 838,604 - (838,604) - 1,201,085	1,067,109 - 400,000 (400,000) 309,513 105,445 485,755 (427,326) 229,072
		923,318	1,505,175 1,544,938	1,769,568
	Non hedging foreign currency receivable above (ii)	101,004	545,143 1,302,089	774,215

• (i) Trade receivables are non-interest bearing and are generally on 30 to 90 day terms. An allowance for doubtful debts is made when there is objective evidence that a trade receivable is impaired.

• (ii) Non hedging foreign currency receivable represents the net receivable from a foreign customer expressed in Euro63,143 (2006: Euro 321,253).

13. Inventories

Inventories
Raw materials – at cost Work in progress – at cost Finished goods – at cost	696,556 110,217 658,457	201,895 63,244 334,025	696,556 110,217 235,999	201,895 63,244 87,059
Total Inventories at the lower of cost and net realisable value	1,465,230	599,164	1,042,772	352,198

Inventories recognised as an expense during the year ended 30 June 2007 amounted to $595,536 (2006: $678,649).

14. Other Financial Assets (Non-current)

	investment in controlled entities (note 26) Less: Disposal of Investment (refer note 26) Less: Provision for diminution	- -	- -	456,013 (300,000) (156,013)	456,013 - (156,000)
		-	-	-	300,013

These financial assets are carried at amortised cost.

Investment in Gas Torque Engine Pty Ltd was de-registered on 20 August 2006 (refer to note 26).

44

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

15. Plant and Equipment

Plant and Equipment
	AEC Group Plant and Equipment $ Leased Plant & Equipment $ Leasehold Equipment $ Capital WIP $ Total $
Gross carrying amount at 1 July 2005 (i) Additions	2,326,065 737,541 196,888 - 3,260,494 66,147 - 36,615 142,516 245,278
Balance at 30 June 2006 Disposals Additions	2,392,212 737,541 233,503 142,516 3,505,772 - (737,541) - - (737,541) 28,058 - - 34,131 62,189
Balance at 30 June 2007	2,420,270 - 233,503 176,647 2,830,420
accumulated depreciation / amortisation at 1 July 2005 (i) Depreciation expense	(1,580,188) (736,358) (38,501) - (2,355,047) (194,516) (1,183) (17,480) - (213,179)
Balance at 30 June 2006 Assets disposed Depreciation expense	(1,774,704) (737,541) (55,981) - (2,568,226) - 737,541 - - 737,541 (197,833) - (19,219) - (217,052)
Balance at 30 June 2007	(1,972,537) - (75,200) - (2,047,737)
net book value as at 30 June 2007	447,733 - 158,303 176,647 782,683
as at 30 June 2006	617,508 - 177,522 142,516 937,546

45

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

15. Plant and Equipment continued

	AEC ENTITY Plant and Equipment $ Leased Plant & Equipment $ Leasehold Equipment $ Capital WIP $ Total $
Gross carrying amount at 1 July 2005 (i) Additions	2,326,065 737,541 196,888 - 3,260,494 46,379 - 36,615 142,516 225,510
Balance at 30 June 2006 Disposals Additions	2,372,444 737,541 233,503 142,516 3,486,004 - (737,541) - - (737,541) 10,814 - - 34,131 44,945
Balance at 30 June 2007	2,383,258 - 233,503 176,647 2,793,408
accumulated depreciation / amortisation at 1 July 2005 (i) Depreciation expense	(1,580,188) (736,358) (38,501) - (2,355,047) (194,516) (1,183) (17,480) - (213,179)
Balance at 30 June 2006 Assets disposed Depreciation expense	(1,774,704) (737,541) (55,981) - (2,568,226) - 737,541 - - 737,541 (181,943) - (19,219) - (201,162)
Balance at 30 June 2007	(1,956,647) - (75,200) - (2,031,847)
net book value as at 30 June 2007	426,611 - 158,303 176,647 761,561
as at 30 June 2006	597,740 - 177,522 142,516 917,778

(i) Revaluation of plant and equipment

An independent valuation of plant and equipment was undertaken by Garside and Webb (Specialist Auctioneers and Valuers) on 13 April 2005. The valuation was based upon a going concern basis. No revaluation was undertaken for the year ended 30 June 2006 or 2007.

(ii) If plant and equipment were measured using the cost model the carrying amounts would be as follows:

	AEC 2007 $	GROUP AEC 2006 2007 $ $	ENTITY 2006 $
Cost Accumulated depreciation and impairment	1,670,270 (1,635,242)	1,642,212 1,633,258 (1,549,909) (1,619,352)	1,622,444 (1,549,909)
Net carrying amount	35,028	92,303 13,906	72,535

(iii) Plant and equipment are subject to a first charge to secured loan from 698 Capital Asia Pacific Ltd.

46

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

16. Intangible Assets

Intangible Assets
	AEC GROUP AEC ENTITY Development Costs $ Goodwill $ Total $ Development Costs $ Total $
at 1 July 2005 Additions – internal development Acquisition of subsidiary	672,423 - 672,423 672,423 919,966 - 919,966 919,966 - 300,000 300,000 -	672,423 919,966 -
net of accumulated amortisation at 30 June 2006 Additions – internal development (i) Transfer from debtor account (ii) Disposal of Investment (refer note 26) Amortisation charge	1,592,389 300,000 1,892,389 1,592,389 852,921 - 852,921 852,921 521,451 - 521,451 521,451 (iii) - (300,000) (300,000) - (132,917) - (132,917) (132,917)	1,592,389 852,921 521,451 - (132,917)
net of accumulated amortisation at 30 June 2007	2,833,844 - 2,833,844 2,833,844	2,833,844

Development costs have been capitalised at cost. This intangible asset has been assessed as having a finite life of five years and amortised using a straight-line method over the period.

• (i) During the year total development costs incurred were $1,674,216 (2006: $1,481,523). Of this $821,295 (2006: $561,557) was expensed, whilst $852,921 (2006: $919,966) was capitalised.

• (ii) Development costs of $521,451, invoiced to Motive Energy Pty Ltd as part of an Alliance Agreement signed in September 2005 with the intent that the debt be converted to shares in that company, have been transferred to Development Costs as the debt is considered unrecoverable either in cash or shares but will be recovered through AEC’s commercialisation of the NGVS product developed.

• (iii) Goodwill on acquisition of Gas Torque Engines Pty Ltd (acquired in February 2006) was written off during the year upon the subsidiary company being de-registered on 20 August 2006 (refer note 26).

17. Trade and Other Payables

AEC GROUP AEC ENTITY 2007 2006 2007 2006 $ $ $ $
Trade payables (i) 187,172 167,142 215,835 167,144 Other payables (ii) 934,720 717,372 918,139 655,700 Non-hedging foreign currency payable (iv) 9,072 5,125 9,072 5,125
1,130,964 889,639 1,143,046 827,969
(i) Trade payable are non-interest bearing and are predominantly settled on 30-day terms. (ii) Other payables includes $507,709 (2006: $280,609) of accrued interest owing on the convertible note held by 698 Capital Asia Pacific Ltd (refer note 20) a related party. (iii) Information regarding effective interest rate and credit risk of current payable is set out in note 28. (iv) The Australian dollar equivalent of foreign currency balances included in the financial statements which are not effectively hedged are as follows: US Dollars Payables - Current 834 - 834 - Euro Payables - Current 8,238 5,125 8,238 5,125

• (ii) Other payables includes $507,709 (2006: $280,609) of accrued interest owing on the convertible note held by 698 Capital Asia Pacific Ltd (refer note 20) a related party.

• (iv) The Australian dollar equivalent of foreign currency balances included in the financial statements which are not effectively hedged are as follows:

47

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

		AEC 2007 $	GROUP AEC 2006 2007 $ $	ENTITY 2006 $
18.	Borrowings (current liabilities) unsecured: Insurance premiums finance (i) Loan from 698 Capital Asia Pacific Ltd (ii) Secured: Commercial loan from Westpac (iii) Finance lease liabilities (iv) (note 24)	265,978 834,452 26,204 -	318,186 265,978 758,507 834,452 - 26,204 77,233 -	318,186 758,507 - 77,233
		1,126,634	1,153,926 1,126,634	1,153,926

(i) Terms are flat interest of 4.27% per annum on borrowed amount repayable over 12 months to May 2008.

(ii) Terms are 9% interest per annum payable quarterly in arrears and the principal is repayable on demand.

(iii) Terms are interest at 8.5% per annum repayable along with Principal over 48 months to June 2010. (iv) Secured over the individual assets leased. Terms are 5.09% per annum payable 60 monthly instalments.

(v) total facilities

- Insurance premium finance loan	287,062	366,177	287,062	366,177
Facilities used at reporting date
- Insurance premium finance loan	287,062	366,177	287,062	366,177
assets pledged as security
The carrying amounts of assets pledged
as security are:
Fixed & floating charge over assets
- Plant and equipment	447,733	617,508	426,611	597,740

(v) Fair value disclosures

Details of the fair values of borrowings and interest rate exposure for the Group are set out in note 28.

19. Provisions

Provisions
AEC Group and AEC Entity 2007 2006 Warranties $ Long Service Leave $ Total $ Warranties $ Long Service Leave $ Total $ Opening balance 88,438 95,816 184,254 86,847 96,960 183,807 Arising during the year 4,224 24,674 28,898 1,591 9,753 11,344 Utilised (10,673) (8,128) (18,801) - (10,897) (10,897)
Closing balance 81,989 112,362 194,351 88,438 95,816 184,254
Current 81,989 101,228 183,217 88,438 78,131 166,569
Non current - 11,134 11,134 - 17,685 17,685

warranties

A provision is recognised for expected warranty claims on products sold during the year based on past experience of the level of repairs and returns. Assumptions used to calculate the provision for warranties were based on current sales levels and current information available about returns based on the warranty period for all products sold.

48

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

2 2 a	.		. .			S L	e o	c o o	a n	r u n	r r v	e f e	r r	d o t e	: i r	b c	i l i	e a	n l	g I l	o	s	o a	t n	( S e	S f	F ( r	ii o	( )	i	n )		-	c		u e	s	r t	r p		e a	c		t (	ii	i	L )	i		a			i	li	t	i		e	s	)															E	C					R							P 2	0	$	0		6																				A		E		C		E				T	I		T	Y	2	0	$	0	6
																																																																				2	0		0		7																																			2	0		0		7
																																																																						$																																								$
																																																																																					2	,	7 8 1	5 7 0		9 7 9	, , ,	0 4 9	6 9 5	2 5 0																														2	,	7 8 1		5 7 0	9 7 9	, , ,	0 4 9		6 9 5	2 5 0
																																																																			7	6		0	,	2	7		4																															7		6	0	,		2	7	4
																																																																2		,	9	0		9	,	1	7		5																													2	,	9		0	9	,		1	7	5
																																																																				6		1	,	7	7		5																																	6	1	,		7	7	5
																																																																3		,	7	3		1	,	2	2		4										3	,	7	4		6	,	5	0	7										3	,	7		3	1	,		2	2	4										3	,	7		4	6	,	5		0	7
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																																																															1	5		,	0	9		9	,	9	3		9																												1	5	,	0		9	9	,		9	3	9
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49

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

		number $ number $
21.	Contributed Equity and Reserves continued Shares Issued - • Issue of 16,250,000 ordinary shares for cash @ $0.12, issued pursuant to a placement in November 2006 16,250,000 1,950,000 16,250,000 1,950,000 • Issue of 4,714,000 ordinary shares for cash @ $0.12, issued pursuant to share purchase plan in December 2006 4,714,000 565,680 4,714,000 565,680 • Options exercised 7,619,026 1,154,694 7,619,026 1,154,694 • Transfer from Share Based Payments Reserve - 55,200 - 55,200 • Share issue costs - (211,383) - (211,383)
	Balance as at 30 June 2007	129,052,214 15,099,939 129,052,214 15,099,939

terms and conditions

Holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholders meetings.

In the event of winding up of the Company, ordinary shareholders rank after all other shareholders and creditors, and are fully entitled to any surplus proceeds of liquidation.

b.

	AEC 2007 $	GROUP 2006 $	AEC 2007 $	ENTITY 2006 $
convertible notes Balance as at 1 July Adjustment on adoption of AIFRS	158,000 -	1,323,000 (1,165,000)	158,000 -	1,323,000 (1,165,000)
Balance as at 30 June	158,000	158,000	158,000	158,000
total contributed equity	15,257,939	11,743,748	15,257,939	11,743,748

On 6 April 2005, Advanced Engine Components Limited issued 3,000,000 Convertible Notes at $1.00 each to 698 Capital Asia Pacific Ltd. The Convertible Notes can be converted into fully paid ordinary shares at 40 cents per share at any time on or before 31 December 2009. The Convertible Notes are secured by a first fixed and floating charge over all present and future assets and undertakings of the Company and its subsidiaries. Interest is paid annually in arrears at a rate of 7.57%. The equity component of the Convertible Note was revalued on adoption of AIFRS and an adjustment of $1,165,000 was transferred to Borrowings (non-current liabilities) during the year ended 30 June 2006.

c. options

As at 30 June 2007, the following were unissued ordinary shares under options –

• 20,000,000 (2006: 20,000,000) options exercisable at 20 cents per share on or before 15 April 2008 subject to the Company’s 30 day volume weighted average share price exceeding 50 cents.

• 4,361,529 (2006: 5,625,000) options exercisable at 20 cents per share on or before 30 June 2008.

• 450,000 (2006: 1,250,000) options exercisable at 19 cents per share on or before 31 December 2008.

• Nil (2006: 5,555,555) options exercisable at 13.5 cents per share on or before 31 October 2007.

• Options, for shares to a maximum value of $750,000 (2006: nil), exercisable at the lower of 20 cents or a 20% discount to the share issue price should an issue take place on or before 31 October 2008.

50

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

22. Other Reserves

	AEC GROUP AEC ENTITY Asset Revaluation Reserve $ Share Based Payments Reserve $ Foreign Currency Translation Reserve $ Total $ Asset Revaluation Reserve $ Share Based Payments Reserve $ Total $
at 1 July 2005 Share based payment Currency translation	750,000 210,442 - 960,442 750,000 210,442 960,442 - 86,250 - 86,250 - 86,250 86,250 - - (9,437) (9,437) - - -
Balance as at 30 June 2006 Transferred to share capital Currency translation	750,000 296,692 (9,437) 1,037,255 750,000 296,692 1,046,692 - (55,200) - (55,200) - (55,200) (55,200) - - 57,534 57,534 - - -
Balance as at 30 June 2007	750,000 241,492 48,097 1,039,589 750,000 241,492 991,492

nature and purpose of reserves

asset revaluation reserve

The asset revaluation reserve is used to record increases in the fair value of plant and equipment and decreases to the extent that such decreases relate to an increase on the same asset previously recognised in equity.

Employee equity benefits reserve

This reserve is used to record the value of equity benefits provided to employees and Directors as part of their remuneration. When the options are exercised the amount recorded in the Employee Equity Benefits Reserve relevant to those options is transferred to share capital.

Foreign currency translation reserve

The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiary.

Options

Refer note 25 for details of Employee Share Option Plan .

23. Accumulated Losses

Accumulated Losses
	AEC 2007 $	GROUP AEC 2006 2007 $ $	ENTITY 2006 $
Accumulated losses at the beginning of the year Net loss after income tax	(12,733,042) (3,131,445)	(11,346,588) (12,734,156) (1,386,454) (3,085,531)	(11,346,588) (1,387,568)
Accumulated losses at the end of the year	(15,864,487)	(12,733,042) (15,819,687)	(12,734,156)

51

notes to tHe financial statements FOr thE YEar EnDED 30 JunE 2007

24. Commitments for Expenditure

Finance leases

Leasing arrangements

The Group leases plant and equipment under finance leases expiring from 1 to 5 years. At the end of the lease term the Group has the option to purchase the plant and equipment at a price deemed to be a bargain purchase option.

AEC 2007 $ Finance lease liabilities No later than 1 year - Later than 1 year and not later than 5 years -	GROUP AEC 2006 2007 $ $ 80,480 - - -	ENTITY 2006 $ 80,480 -
Minimum finance lease payments - Less future finance charges -	80,480 - (3,247) -	80,480 (3,247)
Finance lease liabilities -	77,233 -	77,233
Included in the financial statements as: Borrowings (current liabilities) (note 18) - Borrowings (non-current liabilities) (note 20) -	77,233 - - -	77,233 -
-	77,233 -	77,233
Operating leases Not later than 1 year 149,248 Later than 1 year and not later than 5 years 566,924	132,389 118,152 543,624 551,376	120,121 543,624
716,172	676,013 669,528	663,745

The Group leases property and equipment under non-cancellable and cancellable operating leases expiring from 1 to 6 years. Leases generally provide the Group with a right of renewal at which time all terms are re-negotiated.

25. Share Based Payment Plans

employee share option plan

Share options have been granted to eligible staff including the Managing Director during the year ended 30 June 2006 totalling 1,250,000 options (2007: Nil). The exercise price of the options is equal to 110% of the weighted average sale price of shares trading on ASX calculated over a 5 business day period ending on the day prior to the date of grant. The options are exercisable on or before 31 December 2008. The expense recognised in the income statement in relation to share based payment for year 2006 is disclosed in note 22.

52

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

25. Share Based Payment Plans continued

The following table details number, weighted average exercise prices (WAEP) and movements in share options issued under the Employee Share Option Plan:

==> picture [447 x 109] intentionally omitted <==

----- Start of picture text -----

||||||
|---|---|---|---|---|
|2007|2007|2006|2006|
|Nos.|WAEP|Nos.|WAEP|
|Outstanding at the beginning of the year|1,250,000|19 cents|-|-|
|-|-|-|
|Exercised during the year|(800,000)|
|Granted during the year|-|-|1,250,000|19 cents|
|Outstanding at the end of the year|450,000|19 cents|1,250,000|19 cents|
|-|-|
|Exercisable at the end of year|450,000|1,250,000|

----- End of picture text -----

(i) The outstanding balance as at 30 June 2007 is represented by 450,000 options, granted on 23 November 2005,

over ordinary shares with an exercise price of $0.19 each, exercisable on or before 31 December 2008.

• (ii) The weighted average remaining contractual life for the share options outstanding as at 30 June 2007 is one and a half years.

• (iii) The exercise prices for options outstanding at the end of the year was $0.19.

• (iv) The weighted average fair value of options granted during the year 2006 was $0.069.

• (v) The fair value of the equity settled options granted under the options is estimated using Black-Scholes options pricing model taking into account the terms and conditions upon which the instruments were granted.

• (vi) There is no alternative to equity settlement option.

The following table lists the inputs to the model used for the year ended 30 June 2006:

==> picture [326 x 79] intentionally omitted <==

----- Start of picture text -----

|||
|---|---|
|Dividend Yield (%)|0%|
|Expected volatility (%)|54%|
|Risk-free interest rate (%)|5.37%|
|Expected life of option (years)|2 years|
|Option exercise price ($)|$0.19|
|Spot share price at grant date ($)|$0.18|

----- End of picture text -----

==> picture [465 x 138] intentionally omitted <==

----- Start of picture text -----

||||||||||
|---|---|---|---|---|---|---|---|---|
|Vested and|
|Balance|Granted|Exercised|Forfeited|Balance|Exercisable|
|Exercise|at Start of|during|During|During|at End of|at End of|
|Grant Date|Expiry Date|Price|the Year|the Year|the Year|the Year|the Year|the Year|
|consolidated and parent entity – 2007|
|23 Nov 2005|31 Dec 2008|$0.19|1,250,000|-|(800,000)|-|450,000|450,000|
|-|-|
|Weighted average exercise price|$0.19|$0.19|$0.19|$0.19|$0.19|
|consolidated and parent entity – 2006|
|23 Nov 2005|31 Dec 2008|$0.19|-|1,250,000|-|-|1,250,000|1,250,000|
|-|-|-|
|Weighted average exercise price|$0.19|$0.19|$0.19|$0.19|

----- End of picture text -----

No options expired during the periods covered by the above tables.

53

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

26. Controlled Entities

==> picture [428 x 165] intentionally omitted <==

----- Start of picture text -----

|||||
|---|---|---|---|
|OWNERSHIP INTEREST|
|Country of|2007|2006|
|Name of Entity|Incorporation|%|%|
|parent entity|
|Advanced Engine Components Limited|Australia|
|controlled entities|
|Transcom NGVS Research Pty Ltd.|Australia|100|100|
|AEC Vehicle Technology Pty Ltd.|Australia|100|100|
|AEC China Holdings Ltd.|British Virgin Island|100|100|
|AEC China Ltd.|China|100|100|
|Gas Torque Engines Pty Ltd. *|Australia|-|100|

----- End of picture text -----

• Gas Torque Engines Pty Ltd was de-registered on 20 August 2006 (refer to note 8).

27. Financial Risk Management Objectives and Policies

The Group’s principal financial instruments comprise loans, convertible notes, finance leases, cash and short term deposits.

The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial assets and liabilities such as trade receivables and payables, which arise directly from its operations. The main risks arising from the Group’s financial instruments are cash flow interest rate risk, liquidity risk, foreign currency risk and credit risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below.

cash flow interest rate risk

The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s long term debt obligations. The Group’s policy is to manage its interest cost using a fixed rate debt.

Foreign currency risk

The Group does not enter into forward exchange rate contracts to hedge purchase or sale commitments. The Group continually reviews its foreign exchange risk and minimises its exposure by sourcing non core components in the same currency.

commodity price risk

The Group’s exposure to price risk is minimal.

credit risk

Credit risk refers to the risk that a counter-party will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted the policy of only dealing with creditworthy counter-parties and obtaining sufficient collateral or other security where appropriate, as a means of mitigating the risk of financial loss from defaults. The Group measures credit risk on a fair value basis.

The credit risk on financial assets, excluding investments, of the Group, which have been recognised on the Balance Sheet, is the carrying amount, net of any provision for doubtful debts. As at 30 June 2007, 63% (2006: 83%) of the Group’s trade debtors was owed by two customers in the NGVS business segment. These debtors comprise of large multinational vehicle and component manufacturers and therefore the credit risk associated with these parties is considered to be minimal.

54

notes to tHe financial statements FOr thE YEar EnDED 30 JunE 2007

28. Financial Instruments

(a) fair values

The carrying amount of financial assets and financial liabilities recorded in the financial statements approximates their respective net fair values, determined in accordance with the accounting policies disclosed in note 3 to the financial statements.

(b) interest rate risk

The following table details the Group’s exposure to interest rate risk as at 30 June 2007:

==> picture [447 x 210] intentionally omitted <==

----- Start of picture text -----

||||||||
|---|---|---|---|---|---|---|
|Average|>1-<2|>3-<4|Non-Interest|
|Interest Rate|<1 Year|Years|Years|Bearing|Total|
|2007|%|$|$|$|$|$|
|Financial assets|
|Cash|4.50|609,139|-|-|2,000|611,139|
|Receivables|-|-|-|570,271|570,271|
|609,139|-|-|572,271|1,181,410|
|Financial liabilities|
|Payables - current|-|-|-|1,130,964|1,130,964|
|Insurance finance|4.27|265,978|-|-|-|265,978|
|Loan – 698 Capital|9.00|834,452|-|-|-|834,452|
|Loan – CIM SSF*|9.00|-|760,274|-|-|760,274|
|Convertible note|7.57|-|-|2,909,175|-|2,909,175|
|Commercial loan|8.50|26,204|26,448|35,327|-|87,979|
|1,126,634|786,722|2,944,502|1,130,964|5,988,822|

----- End of picture text -----

The following table details the Group’s exposure to interest rate risk as at the 30 June 2006:

==> picture [447 x 224] intentionally omitted <==

----- Start of picture text -----

||||||||
|---|---|---|---|---|---|---|
|Average|>1-<2|>3-<4|Non-Interest|
|Interest Rate|<1 Year|Years|Years|Bearing|Total|
|2006|%|$|$|$|$|$|
|Financial assets|
|Cash|4.09|1,086,013|-|-|2,000|1,088,013|
|Receivables|-|-|-|1,067,788|1,067,788|
|1,086,013|-|-|1,069,788|2,155,801|
|Financial liabilities|
|Payables - current|-|-|-|889,639|889,639|
|Insurance finance|4.27|318,186|-|-|-|318,186|
|Loan – 698 Capital|9.00|758,507|-|-|-|758,507|
|Loan – CIM SSF|9.00|-|759,062|-|-|759,062|
|Convertible note|7.57|-|-|2,877,495|-|2,877,495|
|Commercial loan|8.50|-|-|109,950|-|109,950|
|Finance lease liabilities|5.09|77,233|-|-|-|77,233|
|1,153,926|759,062|2,987,445|889,639|5,790,072|

----- End of picture text -----

55

notes to tHe financial statements FOr thE YEar EnDED 30 JunE 2007

29. Related Party Disclosure

transactions and balances with Key management personnel

Directors

mr antony middleton

During the year ended 30 June 2006, Mr Middleton made a loan to the Company amounting to $60,000, which was repaid in full during that year. Interest at 15% per annum on the loan, amounting to $345 was paid during the year 2006 to Mr Middleton and related entities. No such loan was made for the year ended 30 June 2007.

During the current year, at a shareholders meeting held on 22 February 2007 shareholders approved the application by Mr Middleton and/or his related parties applying for 833,334 shares in the Company pursuant to the Share Placement. Mr Middleton and/or his related parties applied for 833,344 shares in the Company for a subscription of $100,000. Mr Middleton received a commission rebate of $4,166 in relation to the shares issued.

mr Graham Keys

Mr Keys is a Director and the major shareholder of Norvest Corporate Pty Limited, which provides various corporate, capital raising, accounting and company secretarial services to the Company at normal commercial rates. During the year Norvest Corporate Pty Limited supplied corporate, capital raising, accounting and company secretarial services to the Company to the value of $202,010 (2006: $125,315). Of this amount $89,696 (2006: $24,635) was in respect of work performed in the raising of equity and $6,900 (2006: $15,937) was in respect of work performed in the raising of loan finance. As at 30 June 2007, the Company owed Norvest Corporate Pty Ltd $14,000 (2006: $35,708), this amount is reflected in other payables and is non interest bearing.

During the current year, Norvest Corporate Pty Limited made a loan to the Company amounting to $130,000, which was repaid in full during the year. No interest or security was required for this loan.

During the current year the Company paid directors fees of $25,000 (2006: $25,000) to Mr Keys.

During the prior year, Mr. Keys and related entities made a loan to the Company of $60,000, which was repaid in full during the financial year 2006. Interest at 15% per annum on the loan, amounting to $321, was paid during the year 2006 to Mr Keys. No such loan was made for the year ended 30 June 2007.

During the current year, at a shareholders meeting held on 22 February 2007, shareholders approved the application by Mr Keys and/or his related parties applying for 833,334 shares in the Company pursuant to the Share Placement. Mr Keys and/or his related parties applied for 833,344 shares in the Company for a subscription of $100,000. Mr Keys received a commission rebate of $4,166 in relation to the shares issued.

56

notes to tHe financial statements FOr thE YEar EnDED 30 JunE 2007

29. Related Party Disclosure continued

subsidiaries

The following table provides the total amount of transactions that were entered into with subsidiaries for the relevant financial years:

Year ended 30 June 2007

==> picture [447 x 151] intentionally omitted <==

----- Start of picture text -----

||||||
|---|---|---|---|---|
|Sales to|Loan to|Purchases from|Amounts owed|
|AEC ENTITY|subsidiaries|subsidiaries|subsidiaries|by subsidiaries|
|AEC China Limited|1,391,100|-|71,371|1,201,085|
|-|-|-|
|AEC China Holdings Limited|199,738|
|Year ended 30 June 2006|
|Sales to|Loan to|Purchases from|Amounts owed|
|AEC ENTITY|subsidiaries|subsidiaries|subsidiaries|by subsidiaries|
|AEC China Limited|229,072|286,017|17,813|515,089|
|-|-|
|AEC China Holdings Ltd|199,738|199,738|

----- End of picture text -----

other balances with related parties

During the year 698 Capital Asia Pacific Ltd, a related entity, advanced the Company $750,000 (2006: $750,000) and charged interest on this advance at an interest rate of 9% per annum. This loan is un-secured. At year-end the 698 Capital Asia Pacific Ltd loan, including accrued interest, stood at $834,452 (2006: $758,507). Refer to note 18. The loan is at call.

During the prior year $750,000 of a previous loan was converted to equity, at 13.5 cents per share, following approval by shareholders in general meeting on 24 March 2006.

698 Capital International Ltd have agreed to provide financial support, in circumstances that will enable the Company not to be unable to meet its debts as and when they fall due, at least one year from signature of the Directors’ Declaration. This support is subject to the Company raising additional working capital of a minimum $1,500,000 prior to 31 December 2007 and subject to 698 Capital International Ltd remaining the major shareholder of the Company holding not less than 40% of the ordinary issued shares in the Company.

As at 30 June 2007 Mr Liu and Mr Lee were Directors of 698 Capital International Ltd and 698 Capital Asia Pacific Ltd. Subsequent to 30 June 2007 Mr Liu and Mr Lee resigned as Directors of 698 Capital Asia Pacific Ltd. At the time of Mr Liu and Mr Lee’s resignation Mr Pun was appointed a Director of 698 Capital International Ltd.

Other than the convertible note (refer note 21(b), loans, sales and purchases from related parties are made in arm’s length transactions on normal commercial terms. Outstanding balances at year-end are unsecured, interest free and settlement occurs in cash.

57

notes to tHe financial statements

FOr thE YEar EnDED 30 JunE 2007

30. Key Management Personnel Disclosures

(a) Directors

The following persons were directors of the Company during the financial year:

• (i) chairman – non-executive

• Mr. G Keys

• (ii) Executive directors

• Mr. A Middleton

• (iii) non- Executive directors

Mr. T Liu

Mr. W Fang (resigned 28 November 2006) Mr. W Lee (resigned 10 September 2007)

Mr. A Pun (appointed 28 November 2006)

(b) other Key management personnel

The following persons also had authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, during the financial year:

==> picture [434 x 81] intentionally omitted <==

----- Start of picture text -----

||||
|---|---|---|
|Name|Position|Employer|
|Mr. E Parry (i)|Chief Financial Officer and Company Secretary|Advanced Engine Components Limited|
|Mr. B Neumann|Engine Development Manager|Advanced Engine Components Limited|
|Mr. N McLaren|Electronics Division Manager|Advanced Engine Components Limited|
|Mr. M McKay|Senior Mechanical Engineer|Advanced Engine Components Limited|
|Mr. D Wang|General Manager|AEC China Ltd|

----- End of picture text -----

• (i) Resigned 21st February, 2007

All of the above persons were also key management persons during the year ended 30 June 2006. Mr. E Parry commenced employment with the Group on 2 November 2005. Mr. A Hardwick, Chief Financial Officer and Company Secretary resigned on 2 November 2005.

(c) Key management personnel compensation

==> picture [446 x 114] intentionally omitted <==

----- Start of picture text -----

||||||
|---|---|---|---|---|
|AEC GROUP|AEC ENTITY|
|2007|2006|2007|2006|
|$|$|$|$|
|Short-term employee benefits|679,428|587,716|563,722|478,805|
|Post-employment benefits|69,516|57,041|69,516|57,041|
|-|-|
|Share-based payments|48,990|42,090|
|748,944|693,747|633,238|577,936|

----- End of picture text -----

The Company has taken advantage of the relief provided by Corporations Regulation 2M.6.04 and has transferred the detailed remuneration disclosures to the Directors Report. The relevant information can be found in sections (a) to (c) of the Remuneration Report on pages 9 to 10.

(d) equity instrument Disclosures relating to Key management personnel

• (i) Options provided as remuneration and shares issued on exercise of such options

Details of options provided as remuneration and shares issued on the exercise of such options, together with terms and conditions of the options, can be found in section (d) of the Remuneration Report on pages 11 to 12.

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notes to tHe financial statements FOr thE YEar EnDED 30 JunE 2007

(ii) Option holdings

The numbers of options over ordinary shares in the Company held during the financial year by each Director of the Company and other key management personnel of the Group, including their personally related parties, are set out in section (d) of the Remuneration Report on pages 11 to 12.

(iii) Share holdings

The numbers of shares in the Company held during the financial year by each Director of the Company and other key management personnel of the Group, including their personally related parties, are set out in section (e) of the Remuneration Report on page 13.

(e) loans to Key management personnel

There were no loans made to Directors of the Company or other key management personnel of the Group, including their personally related parties during the financial year (2006: nil).

(f) other transactions with Key management personnel

All other transactions with key management personnel are set out in note 29.

31. Contingencies

The Company entered into an arrangement with two of its French customers, CRMT and Irisbus, pursuant to which CRMT installed AEC NGVS and other parts into the GNV EURO 3 gas engine for use by Irisbus in the manufacture of gas powered buses.

CRMT commenced litigation against Irisbus on 8 July 2004 in the Commercial Court of Lyon for recovery of €1,508,217.56 owed. Irisbus counterclaimed against CRMT requesting an expert evaluation of the facts in relation to the dispute between the two parties. CRMT joined AEC to the action in relation to the counterclaim by Irisbus against CRMT.

In April 2007 Irisbus terminated the expert evaluation. However, Irisbus have not withdrawn their action against CRMT for costs of operational problems amounting to €10,000,000. No quantum of loss has been officially claimed by Irisbus against CRMT. Irisbus has made no claim on AEC.

The purpose of the expert evaluation was to enable any party to amend or bring a fresh claim including their estimate as to the loss they had suffered. Only when an expert evaluation is available (if ever) will AEC have an understanding of the quantum of claim (if any) that it is exposed to. Currently neither Irisbus nor CRMT is claiming any specific quantum of loss from AEC.

AEC will vigorously defend any claim made against it should the action proceed and involve AEC. AEC will pursue all of its legal remedies against CRMT for any loss that CRMT may have occasioned to AEC. AEC has instructed Delsol & Associes in Lyon, France in relation to any action commenced against or by AEC on the merits of the matter.

Irisbus has advised that it has paid CRMT for all AEC NGVS kits supplied by CRMT. AEC’s French lawyers have filed a summary of proceedings against CRMT for recovery of all monies owed by CRMT, all AEC stock held by CRMT and recovery of all costs incurred by AEC in pursuing the action.

The Directors have no reason to believe that the provision made for warranty in the accounts is insufficient.

59

notes to tHe financial statements FOr thE YEar EnDED 30 JunE 2007

32. After Balance Sheet Date Events

Subsequent to the end of the financial year 698 Capital Asia Pacific Ltd has agreed to advance a further $1,000,000 loan as an extension of the $750,000 loan facility referred to at note 18. The additional loan is on the same terms and conditions as the initial $750,000 including being at call, 9% interest per annum and unsecured. Pursuant to the loan agreement any draw down in excess of $1,000,000 including all accrued interest, must be repaid either by cash payment or, at the lenders option, a combination of cash and shares. Repayment of any additional borrowing must occur upon the earlier of the Company raising a minimum of $1,500,000 through the issue of shares and 15 July 2008.

In July 2007, AEC entered into a Joint Venture agreement for Thailand with Monika Motors Limited (51%), Consumers Distributing Limited (19%) and Mr Tawatchai (9%) AEC has a 21% interest in the Joint Venture. The Joint Venture will build natural gas engines, natural gas powered vehicles and re-power existing vehicles with natural gas engines. The Joint Venture will purchase completed natural gas engines and base engines from AEC’s original equipment manufacturing clients in China. AEC has a commitment to fund 2.1 million Thai Baht (approximately A$75,000) of the initial capital.

In August 2007, AEC’s solicitors in France filed a Summary of Proceedings against Centre de Recherché en Machines Thermiques (“CRMT”) for recovery of the debt owing of approximately $300,000 and NGVS kits held. The matter will be heard by the Commercial Court of Lyon in October 2007.

There are no other matters or circumstances that have arisen since 30 June 2007 that have or may significantly affect the operations, results, or state of affairs of the group in future financial years.

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Directors’ Declaration

In accordance with a resolution of Directors of Advanced Engine Components Limited, I state that

In the opinion of the Directors:

• (a) the financial report and the additional disclosures included in the Directors Report designated as audited of the Company and of the consolidated entity are in accordance with the Corporations Act 2001, including:

• (i) giving a true and fair view of the Company’s and consolidated entity’s financial position as at 30 June 2007 and of their performance for the year ended on that date; and

• (ii) complying with Accounting Standards and the Corporations Regulations 2001; and

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

This declaration has been made after receiving the declarations required to be made to the Directors in accordance with sections 295A of the Corporations Act 2001 for the financial period ended 30 June 2007.

On behalf of the Board

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a middleton

Managing Director

Perth, 28th day of September 2007

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inDepenDent auDitor’s report

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To The Members of Advanced Engine Components Limited

Report on the Financial Report and AASB 124 Remuneration Disclosures Contained in the Directors’ Report

We have audited the accompanying financial report of Advanced Engine Components Limited, which comprises the balance sheet as at 30 June 2007, and the income statement, statement of changes in equity and cash flow statement for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration of the consolidated entity comprising the company and the entities it controlled at the year’s end.

We have also audited the remuneration disclosures contained in the directors’ report. As permitted by the Corporations Regulations 2001, the consolidated entity has disclosed information about the remuneration of directors and executives (“remuneration disclosures”), required by Accounting Standard AASB 124 Related Party Disclosures, under the heading “Remuneration Report” in the directors’ report and not in the financial report.

Directors’ Responsibility for the Financial Report and the AASB 124 Remuneration Disclosures Contained in the Directors’ Report

The directors of the company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is 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. In Note 2, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that compliance with the Australian equivalents to International Financial Reporting Standards ensures that the financial report, comprising the consolidated and parent financial statements and notes, complies with International Financial Reporting Standards.

The directors of the company are also responsible for the remuneration disclosures contained in the directors’ report.

Auditor’s Responsibility

Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. Our responsibility is to also express an opinion on the remuneration disclosures contained in the directors’ report based on our audit.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report and the remuneration disclosures contained in the directors’ report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report and the remuneration disclosures contained in the directors’ report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report and the remuneration disclosures contained in the directors’ report 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

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inDepenDent auDit report

reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report and the remuneration disclosures contained in the directors’ report.

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

Independence

In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, provided to the directors of Advanced Engine Components Limited on 28 September 2007, would be in the same terms if provided to the directors as at the date of this auditor’s report.

Auditor’s Opinion on the Financial Report

In our opinion:

• (a) the financial report of Advanced Engine Components Limited is in accordance with the Corporations Act 2001, including:

• (i) giving a true and fair view of the company’s and consolidated entity’s financial position as at 30 June 2007 and of its performance for the year ended on that date; and

• (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and

• (b) the consolidated financial statements and notes also complies with International Financial Reporting Standards as disclosed in Note 2.

Auditor’s Opinion on the AASB 124 Remuneration Disclosures Contained in the Directors’ Report

Material Uncertainty Regarding Continuation as a Going Concern

Without qualification to the audit opinion expressed above, attention is drawn to the following matter. As a result of the matters detailed in Note 4, there is inherent uncertainty whether the Company and it’s controlled entities will be able to continue as a going concern and therefore whether it will realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial report

BDo Kendalls audit & assurance (wa) pty ltd

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peter toll Director

Perth, Western Australia Dated the 28th day of September 2007.

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aDDitional stocK excHanGe information aS at 13 SEPtEMBEr 2007

Number of Holders of Equity Securities

ordinary share capital

129,052,214 shares are held by 1,016 individual holders.

options

For details of options on issue. refer note 21(c).

Distribution of Holders of Equity Securities

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|||||||
|---|---|---|---|---|---|
|FuLLY PAID ORDINARY SHARES|
|Holders|total units|%|
|1|-|1,000|51|17,755|0.01|
|1,001|-|5,000|216|744,453|0.58|
|5,001|-|10,000|180|1,536,080|1.19|
|10,001|-|100,000|493|16,100,540|12.48|
|100,001 and over|76|110,653,386|85.74|
|Totals|1,016|129,052,214|100.00|

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Substantial Shareholders

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||||
|---|---|---|
|FuLLY PAID|
|ordinary shareholders|number|percentage|
|698 Capital International Ltd|55,332,713|42.88|
|HSBC Custody Nominees (Australia) Limited|14,870,000|11.52|
|CIM Special Situations Fund LImited|11,322,536|8.77|

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Twenty Largest Holders of Quoted Equity Securities

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|||||
|---|---|---|---|
|FuLLY PAID|
|ordinary shareholders|number|percentage|
|1|698 Capital International Ltd|55,332,713|42.88|
|2|HSBC Custody Nominees (Australia) Limited|14,870,000|11.52|
|3|CIM Special Situations Fund Limited|11,322,536|8.77|
|4|Citicorp Nominees Pty Limited|2,865,750|2.22|
|5|Jildane Pty Limited|2,531,651|1.96|
|6|Chemco Pty Ltd|1,500,000|1.16|
|7|Seibu Pty Ltd GL Keys Super Fund Account|1,497,334|1.16|
|8|Mr Vivekananthan|1,125,000|0.87|
|9|Seibu Pty Ltd GL Keys Family Account|1,100.000|0.85|
|10|Mr Rodney Ralph and Philip Geoffrey Gregory|1,017,000|0.79|
|11|Mr Paul Robert Baster|1,000,000|0.77|
|12|Mr Boyd Stewart Milligan|948,418|0.73|
|13|Mr Robert Bruce Thompson and Mrs Lorraine Florence Thompson|830,000|0.64|
|11|MF Custodians Ltd|723,200|0.56|
|12|Mr David Creighton Gellatly|700,000|0.54|
|13|Allan Graham Jenzen|650,330|0.50|
|15|Ledge Finance Limited|500,000|0.39|
|16|Mr Peter James West and Mrs Suzanne Beverley West|500,000|0.39|
|17|Mr Charles Gregory Smith Jr|418,823|0.32|
|18|Aileendonan Investments Pty Ltd|400,000|0.31|
|19|Chipman Nominees Pty Ltd|400,000|0.31|
|20|Mr Tony Middleton|400,000|0.31|
|100,632,755|77.98|

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