FIRST LITHIUM LIMITED — Annual Report 2008

Aug 28, 2008

Appendix 4E Preliminary final report

Appendix 4E

Preliminary final report

1. Company details

Name of entity

Advanced Engine Components Limited

ABN or equivalent company Financial year ended (‘current Period ended (‘previous period’): reference period’) 067 009 081 770 30 June 2008 30 June 2007

2. Results for announcement to the market

2. Results for announcement to	the market $A’000’s
2.1 Revenues from operations 2.2 Loss from operations after tax attributable to members 2.3 Net loss for the period attributable to members	Up 52% to 4,672 Down 34% to (2,073) Down 34% to (2,073)
2.4Dividends		Amount per security	Franked amount persecurity
Final dividend proposed		Nil	Nil
Interimdividend		Nil	Nil
2.5 +Record date for determining entitlements to the final dividend.	N/A

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REVIEW OF OPERATIONS

The year under review has been the most significant in the recent history of AEC, with sales volumes increasing by 52% over the previous year, marking your company’s transition to a volume supplier of high technology engines, natural gas vehicle systems (“NGVS”) and components. In achieving this we have built on a long and sometimes frustrating period of R&D and the establishment of important business partnerships in our key markets. It is exciting, after years of dedicated preparation, to finally see the runs appearing on the board, and in steadily increasing numbers.

The company’s transition to a volume manufacturer, and the technological quality of its flagship NGVS were recognised during the year by Engineers Australia, who awarded AEC a prestigious Engineering Excellence Award for Products and Manufacturing for a submission entitled “Natural Gas Engine Technology for China”.

In all, this has been a year in which your company has taken positive steps towards achieving its mission to be the leading supplier of alternative fuel engine systems and components to the Asia Pacific Region through innovation and quality.

Some of the key aspects of our operations in the year under review were:

Market Development

China continues to provide the bulk of new product revenue, via our longstanding business partnerships. Our working relationships with some of China’s largest manufacturers of heavy duty engines continue to strengthen. We have now developed systems for 18 engines, giving our Chinese clients the ability to market NG vehicles in a comprehensive range of engine sizes, from 110hp to 380hp.

Sales from China in the period under review totalled $3.6 million and our focus on this market will shortly be further enhanced by the appointment of a senior Sales Manager and a senior Logistics and Production Manager for AEC’s China operations.

Our major Chinese clients, in addition to servicing an enormous home market, are also aggressive exporters, and their efforts have assisted us in our strategy of penetrating other Asia-Pacific markets, particularly those whose Governments are actively encouraging fleet operators to switch to NG for environmental, economic and energy security reasons. As a result, we have been able to secure good product exposure in Thailand and Indonesia, and sound headway has been made in developing markets for our products and systems in India and Korea.

In Thailand we have successfully moved into the supply of China-based engines incorporating NGVS. This has been achieved via a joint venture (“JV”) with Thai company Monika Motors. More than 100 engines have already been delivered to Thailand, primarily for use in buses.

AEC has a 21% interest in the JV, which means that in addition to opening up a very substantial new market, we will receive a share of profits generated by the Thai JV.

The domestic Australian market has not featured highly in your company’s priorities in recent years, despite Australia’s substantial reserves of this low-cost, environmentally friendly energy source. However, commercial interests are now setting the agenda, and AEC has positioned itself well to capitalise on the anticipated swing to the use of NG to fuel commercial vehicles.

Your company is now working closely with Isuzu to develop a NGVS to convert a range of new diesel truck engines to run on natural gas (“NG”), the first of which has already travelled 130,000km on the road. The new engines will meet the Euro 4 emission requirements recently introduced in Australia. This development program, which has won an AusIndustry “Commercial Ready Plus” grant, has considerable potential. Isuzu hold approximately 40% of Australia’s urban “return-to-base” truck market, and their vehicles are widely used by local authorities – a market sensitive to the need for environmental responsibility –for refuse collection and general transport work.

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Spare Parts and Consumables

Sales of spare parts and consumables increased by 25% in FY2008. The spare parts and consumable sales grow exponentially with the number of vehicles in service. Throughout FY2007 there was an average of approximately 700 vehicles using the ACE NGVS in service. This has grown to an average of approximately 900 throughout FY2008 and should average at least 1,500 vehicles in FY2009. Future revenue growth is assured with each vehicle in service requiring an average of approximately $1,400 in spare parts per annum. Throughout FY2007 and FY2008 the majority of sales of spares and consumables were to France and Australia. This will change significantly in FY2009 with the majority of vehicles using AEC NGVS, and therefore the majority of spares sold, being in China and other Asian countries.

New Products

In addition to the move to market complete engines – via the Thai JV described above and direct sales to Indonesia – your company is well advanced in the development of a new generation Electronic Control Unit (“ECU”) - the fifth since 1984. The new ECU, expected to be commercially available early calendar 2009, will be more efficient and economical than the existing version. In addition, the built-in intellectual property protection of ECU5 will allow greater flexibility in making the technology available to engine manufacturers.

AEC’s patented gas injector has achieved certification to ISO 15500 in a test program conducted by an independent gas certification agency, Gastec of the Netherlands. The ISO 15500 certification is a key requirement of our main customers. Development of in house designed and patented components enhances the NGVS cost competitiveness and AEC will continue to develop these components throughout 2009.

The Regional Market for Natural Gas Vehicles

As the price and availability of crude oil continues to cause global concern, the focus on low-cost, environmentally friendly fuels like NG continues to grow. In many of our target markets, national governments are moving actively to accelerate the swing to NG, using measures ranging from direct legislation, as in India, to capping the cost of NG to ensure a long-term price advantage over diesel, as in Thailand. The basic drivers behind this trend will not change in the years ahead - industry projections indicate a continuing and strengthening swing to NG, particularly in our region, where NG is plentiful and the need to improve air quality in major cities is a major priority.

AEC’s primary marketing strategy in recent years has been based on this trend, which is now building real momentum. Coupled with this is the progressive upgrading of exhaust emission requirements in our main target countries. For example, Australia adopted Euro4 standards in 2008, India will do so in 2010 and China moved to Euro3 standards in September 2008. These more stringent emission requirements are to AEC’s advantage due to the sophistication of the AEC NGVS.

Developing A Regional Profile For AEC

Your company has consistently taken every appropriate opportunity to present itself in regional markets as an industry leader, participating in transport trade exhibitions, and delivering technical papers at major conferences. These activities, coupled with the recognised excellence of our technology and the visibility NGVS-powered trucks and buses are gaining in our various markets, are helping AEC achieve its goal of being a regional leader in the important and fast-growing field of NG engine technology.

Our People

AEC currently employs 27 people in Australia and 20 in China. The Company recently appointed Mike Hill as Chief Operating Officer. Mike is based in Perth but is overseeing the appointment of a senior Sales Manager and senior Logistics & Production Manager for AEC’s China operations. These roles have become necessary to ensure AEC match the demands and requirements, for “on time in full” delivery of all orders within specified quality parameters and standards, from its growing number of China and Asia based customers.

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FINANCIAL REVIEW

The 2008 financial year was AEC’s fourth year in a row of year on year growth in sales. The 2008 sales of $4.67 million were 52% higher than 2007 sales of $3.08 million. The 2007 year was 20% higher than 2006 and 2006 was 45% higher than 2005. Since 2005, AEC’s sales have grown by over 160%.

The $2.07 million loss for the financial year was a 34% improvement on the $3.13 million loss for 2007. The improved loss was a result of higher sales revenue, improved margins and maintenance of overhead costs.

As at 30 June 2008 AEC’s working capital is $1.1 million lower than as at 30 June 2007. This reduction is due to the following:

• (a) a $0.75 million loan repayable by 31 October 2008 has moved from non current to current liabilities. AEC directors are confident this loan will be converted to share capital as a result of the conversion of 5.86 million options, exercisable at 12.8 cents per share, due to expire on 31 October 2008.

• (b) An additional $0.25 million loan from AEC’s major shareholder. This loan was repaid from the $0.87 million proceeds of the underwritten share options in July 2008.

AEC’s net asset position improved from $0.43 million at 30 June 2007 to $0.69 million at 30 June 2008. Of AEC’s $7.3 million total liabilities 65% relates to monies owed to the major shareholder for convertible notes, short term loans and accrued interest. This shareholder support has continued subsequent to year end with provision of a $2.0 million Sales Financing Facility to assist in funding working capital requirements of the expanding sales.

SUMMARY

The 2008 Financial Year has been very positive for AEC. This is expected to continue into the 2009 Financial Year and beyond with the key drivers for the business unlikely to change in the foreseeable future. These key drivers remain:

• the price of oil;

• • security of energy concerns; and

• environmental concerns.

As a result, the usage of compressed natural gas (CNG), liquefied natural gas (LNG), bio methane and HCNG are increasingly being accepted as the alternative fuel of choice for governments and heavy duty vehicle users.

Tony Middleton Managing Director 29 August 2008

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3. Consolidated income statement

3. Consolidated income statement
Revenues from operations Other income Expenses from ordinary activities, excluding borrowing costs (refer note 3.1) Borrowing costs	Current period - $A'000	Previous corresponding period -$A'000
	4,673 176 (6,473) (449)	3,077 239 (6,012) (435)
Loss before income tax Income tax(expense)/refund	(2,073) -	(3,131) -
Net loss for the year Netloss attributable tominorityinterests	(2,073) -	(3,131) -
Net loss attributable to members	(2,073)	(3,131)

Notes to the consolidated income statement

3.1 Expenses from ordinary activities (excluding borrowing costs)

Details of “Expenses from ordinary activities” by nature	Details of “Expenses from ordinary activities” by nature	Current period $A'000	Previous corresponding period $A'000
	Cost of sales Employee benefits expense Depreciation and amortisation expense Other expenses from ordinaryactivities	(2,827) (2,705) (424) (517)	(2,328) (2,698) (350) (636)
	Total Expenses	(6,473)	(6,012)

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3.2 Other disclosures relating to the income statement

	Current period - $A'000	Previous corresponding period -$A'000
Net gain/(loss) on the disposal of assets: - property, plant and equipment	-	44
Net revenue/(expense) since the beginning of the reporting period resulting from deductions from the carrying amounts of assets : - amortisation of non-current assets - depreciation of non-current assets -Provision for doubtful debts written back	(219) (205) 130	(133) (217) -

3.3 Revision of Accounting Estimates

Details of Revision of Accounting Estimates in accordance with AASB 118

None

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4 Condensed consolidated balance sheet Current assets Cash and cash equivalents Trade and other receivables Inventories	At end of current period $A’000	As shown in last annual report $A'000
	169 2,062 1,499	611 923 1,465
Total current assets	3,730	2,999
Non-current assets Investments accounted for using the equity method Other financial assets Property, plant and equipment (net) Intangibles assets (net)	40 - 600 3,587	- - 783 2,834
Total non-current assets	4,227	3,617
Total assets	7,957	6,616
Current liabilities Trade and other payables Interest-bearing loans and borrowings Provisions	1,964 2,067 257	1,131 1,127 183
Total current liabilities	4,288	2,441
Non-current liabilities Interest-bearing loans and borrowings Provisions	2,975 -	3,731 11
Total non-current liabilities	2,975	3,742
Total liabilities	7,263	6,183
Net assets	694	433
Equity Contributed equity Reserves Accumulated losses	17,482 1,149 (17,937)	15,258 1,039 (15,864)
Equity attributable to members of the parent entity Minority interests in controlled entities	694 -	433 -
Total equity	694	433

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5 Condensed consolidated statement of cash flows

5Condensed consolidated statement o	f cash flows
Cash flows related to operating activities Receipts from customers (inclusive of gst) Payments to suppliers and employees (inclusive of gst) Interest received Interest and other costs of financepaid	Current period $A'000	Previous corresponding period -$A'000
	3,534 (5,140) 19 (91)	4,180 (7,099) 22 (99)
Net operating cash flows	(1,678)	(2,996)
Cash flows related to investing activities Payment for purchases of property, plant and equipment Payment for purchases of joint venture, net of cash acquired Payment for capitalised development costs	(21) (70) (1,081)	(62) - (853)
Net investing cash flows	(1,172)	(915)
Cash flows related to financing activities Proceeds from issues of shares Transaction costs associated with issue of shares Proceeds from borrowings Repayments of borrowings Payments of finance lease liabilities	2,300 (76) 1,666 (1,482) -	3,670 (211) 477 (443) (77)
Net financing cash flows	2,408	3,416
Net increase (decrease) in cash held Effects of exchange rate changes on cash and cash equivalents Cashat beginning ofperiod	(442) - 611	(495) 18 1,088
Cash at end ofperiod	169	611

5.1 Non-cash financing and investing activities

Details of financing and investing transactions which have had a material effect on consolidated assets and liabilities but did not involve cash flows are as follows.

During the financial year 2008:

(i) Insurance premiums with a fair value of $214,174 (2007: $287,062) were financed over twelve months from May 2009.

(ii) Development costs of $Nil (2007: $521,451) were transferred from Trade Receivables. These are not reflected in the Statement of Cash Flows.

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5.2 Reconciliation of cash

5.2 Reconciliation of cash
Reconciliation of cash at the end of the period (as shown in the condensed consolidated statement of cash flows) to the related items in the accountsis asfollows.	Current period $A'000	Previous corresponding period - $A'000
Cash Cash on hand and at bank	- 169	- 611
Total cash at end of period	169	611

5.3 Reconciliation of profit from ordinary activities after income tax to net cash inflow from operating activities

	Current period $A'000	Previous corresponding period - $A'000
Net Loss Depreciation and amortisation Government grant received for capitalised development costs Deemed loss of goodwill on disposal of investment Provision for doubtful debt written back Cost of share based payment Share of loss of joint venture Unrealised foreign exchange (gain)/loss (Increase) decrease in assets: (Increase) decrease in trade and other receivables (Increase) decrease in inventories Increase (decrease) in liabilities: Increase (decrease) in trade and other payables Increase(decrease)inprovisions	(2,073) 424 109 - (130) 88 29 22 (1,009) (34) 833 63	(3,131) 350 - 300 - - - 40 60 (866) 241 10
Net cash (used in) from operating activities	(1,678)	(2,996)

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6 Segment Information

Geographic segments

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. The Group’s geographic segments are determined based on the relative performance of the segment. The following table present revenue, expenditure and certain asset information regarding geographic segments for the year ended 30 June 2008.

Primary reporting geographic segments 30 June 2008 Revenue Sales to external customers Inter-segment sales Inter-segment sales elimination Segment revenue Non-segment revenue: Interest and other revenue Share of loss of joint venture Profit/(loss) before tax and finance costs Finance costs Net profit/(loss) for the year Assets and liabilities Investments accounted for using the equity method Segment assets Segment liabilities Other segment information Capital expenditure Depreciation Amortisation Government grant received for capitalised development costs Unrealised exchange loss Amount set aside for provisions Provision for doubtful debt written back Total non cash expenses	France $’000	Australia $’000	South East Asia $’000	China $’000	Consolidated $’000
	885 - -	181 1,480 (1,480)	1,747 - -	1,859 80 (80)	4,672 1,560 (1,560)
	885	181	1,747	1,859	4,672
	142	33	-	1	176
	681	(3,623) (449)	(29) 1,065 -	282 -	(29) (1,595) (449)
	681	(4,072)	1,036	282	(2,073)
	- -	5,419 (6,593)	40 - -	2,498 (670)	40 7,917 (7,263)
	-	15	-	6	21
	- - - - - -	(195) (219) (109) (22) (123) 130	- - - - - -	(10) - - - - -	(205) (219 (109) (22) (123) 130
	-	(538)	-	(10)	(547)

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7 Dividends

7.1 Individual dividends per security

==> picture [429 x 169] intentionally omitted <==

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

Date Amount per Franked Amount per
dividend is security amount per security of
payable security at foreign
30% tax source
dividend
N/A N/A N/A N/A
Final dividend: Current year
N/A N/A N/A N/A
Previous year
N/A N/A N/A N/A
Interim dividend: Current year
N/A N/A N/A N/A
Previous year
----- End of picture text -----

7.2 Total dividend per security (interim plus final)

		Current year	Previous year
	+Ordinary securities	N/A	N/A

8 Dividend Reinvestment Plans The[+] dividend or distribution plans shown below are in operation.

The last date(s) for receipt of election notices for the +dividend or distribution plans N/A

Any other disclosures in relation to dividends (distributions).

9 Consolidated retained profits

Retained profits at the beginning of the financial period Net profit attributable tomembers	Current period - $A'000	Previous corresponding period -$A'000
	(15,864) (2,073)	(12,733) (3,131)
Retained profits at end of financial period	(17,937)	(15,864)

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10 NTA backing

10 NTA backing
	Current period ($)	Previous corresponding Period ($)
Net tangible asset backing per+ordinary security	(0.020)	(0.019)

11 Control over entities

11.1 Control gained over entities

Name of entity (or group of entities)	N/A
Date control gained		N/A
Contribution of such entities to the reporting entity’s profit/ (loss) from ordinary activities during the period (where material).		Nil
Profit(loss) from ordinary activities and extraordinary items after tax of the controlled entity (or group of entities) for the whole of the previous corresponding period.		Nil

11.2 Loss of control over entities

	11.2 Loss of control over entities	es
	Name of entity (or group of entities) N/A Date control lost Contribution of such entities to the reporting entity’s profit/ (loss) from ordinary activities during the period (where material). Consolidated profit/(loss) from ordinary activities of the controlled entity (or group of entities) whilst controlled during the whole of the previous corresponding period (where material).	N/A
			Nil
			Nil
			Nil

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12 Earnings per share

12 Earnings per share
	Current period ($)	Previous corresponding Period ($)
Net Loss attributable to ordinary equity holders of the parent Weighted average number of ordinary shares for basic earnings per share Effect of dilution: Share options Weighted average no of ordinary shares adjusted for the effect of dilution. Loss per Share - Basic loss per share - Dilutedloss pershare	(2,072,610) 137,734,574 44,161 137,775,202 ($0.015) ($0.015)	(3,131,445) 112,743,598 2,807,801 115,551,399 ($0.028) ($0.028)

13 Details of associates and joint venture entities

Name of associate/joint venture	Reporting entity’s percentage holding	Reporting entity’s percentage holding	Reporting entity’s percentage holding	Reporting entity’s percentage holding
Monika AEC Limited	Current Period		Previous corresponding period
		21		N/A
Group’s aggregate share of associates’ and joint venture entities’ profits/(losses) : Profit/(loss) from ordinary activities before tax Income tax on ordinary activities Profit/(loss) from ordinary activities after tax Extraordinary items net of tax Net profit/(loss) Adjustments Share of net profit/(loss) of associates and joint venture entities		Current period $A'000		Previous corresponding period - $A'000
		(16) -		N/A N/A
		(16) -		N/A N/A
		(16) (12)		N/A N/A
		(28)		N/A

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14 Significant Information

Details of any other significant information needed by an investor to make an informed assessment of the entity’s financial performance and financial position.

None

15. This report is based on[+] accounts to which one of the following applies. (Tick one)

� The[+] accounts have been � The[+] accounts have been audited. subject to review. � The[+] accounts are in the process of being reviewed. √ The[+] accounts are in the � The[+] accounts have not yet process of being audited. been audited or reviewed.

16. If the accounts have not yet been audited or subject to review and are likely to be subject to dispute or qualification, details are described below

17. If the accounts have been audited or subject to review and are subject to dispute or qualification, details are described below

Sign here: ............................................................ Date: 29 August 2008 (Managing Director) Print name: A Middleton

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