FIRST LITHIUM LIMITED — Interim / Quarterly Report 2009

Feb 26, 2009

APPENDIX 4D

HALF YEARLY REPORT

Name of Entity: ABN: Reporting Period: Previous corresponding period:

Advanced Engine Components Limited 67 009 081 770

Half year ended 31 December 2008 Half year ended 31 December 2007

Results for Announcement to the Market:

Movement % 2008 $’000
Revenue from ordinary activities Up 43.2% to 2,662 (Loss) from ordinary activities after tax attributable to members Down 24.9% to 719 (Loss)for theperiod attributable to members Down 24.9% to 719
Dividends Interim Dividend Previous corresponding period	Amount per security Nil ¢ Nil¢	Franked amount per security Nil ¢ Nil¢

Results Commentary

Refer commentary in the attached Half Year Financial Report.

Net Tangible assetsper security
Net tangible assets per security as at 31 December 2008 Net tangible assetsper securityas at 30 June 2008	$ (0.022) (0.020)
Details of entities over which control has been gained or lost duringtheperiod,includingthe following.	N/A
Details of individual and total dividends or distributions and dividend or distributionpayments.	N/A
Details of any dividend or distribution reinvestment plans in operation	N/A
Details of associates and joint venture entities including the name of the associate or joint venture entity and details of the reportingentity’spercentage holdingin each of these entities.	Refer to Note 7 in the attached Half Year Financial Report

This report is based on :

The accounts have been subject to review.

Sign here:

Director/Company Secretary

Date: 27 February 2009 Print Name: A Middleton (Managing Director)

H A L F - Y E A R F I N A N C I A L R E P O R T

F o r t h e 6 m o n t h s e n d e d 3 1 D e c e m b e r 2 0 0 8

Advanced Engine Components Limited and its Controlled Entities

ABN 67 009 081 770

Advanced Engine Components Limited Half-Year Report – 31 December 2008

Table of Contents
Directors’ Report	1
Directors’ Declaration	4
Consolidated Income Statement	5
Consolidated Balance Sheet	6
Statement of Changes in Equity	7
Consolidated Cash Flow Statement	8
Notes to the financial report	9
1. Basis of Preparation of Half-year Report	9
2. Critical Accounting Estimates and Judgements	9
3. Going Concern Basis	10
4. Segment Information	11
5. Revenue and Expenses from Continuing Operations	12
6. Dividends	12
7. Investment in Joint Venture	13
8. Borrowings	13
9. Equity Securities Issued	13
10. Commitments and Contingencies	14
11. Share Based Payment Plan	14
12. Related Party Transactions	14
13. Subsequent Events	15
Audit Independence Declaration	16
Independent Review Report to the Members	17

Advanced Engine Components Limited Half-Year Report – 31 December 2008

Directors’ Report

The Directors of Advanced Engine Components Limited (the “Company”) and its controlled entities submit herewith the financial report for the six months ended 31 December 2008 (“half year”).

Details of Directors

The names of the Directors of the Company during or since the end of the half-year are:

Mr Graham Keys Mr Antony Middleton Mr Albert Pun Mr Thomas Liu

Review of Operations

AEC’s operating results reflect the growing effect of the global financial crisis throughout the six month period. In the first quarter, sales were consistent with previous periods at $1,664,000. However, the second quarter recorded a 40% fall in sales to $998,000.

The third quarter of FY2009 has seen an improvement in sales and sales demand, particularly in China. Although oil prices remain relatively low, Government initiatives in AEC’s target markets, for security of energy supply, environmental considerations and economic stimulus are all beneficial to the future demand for natural gas vehicles. The Board expect the third and fourth quarters of FY2009 to be more consistent with the first quarter sales rather than the second quarter.

The change in trading conditions, through the six month period, has also had an impact on the split of AEC’s sales. In the first quarter sales of natural gas engines and NGVS kits represented 84% of all sales with 16% made up of sales of spares and consumables. For the second quarter this split had changed to 76% spares and consumables and 24% engines and NGVS.

This change demonstrates the increasing durability of AEC’s business model. AEC has over 1,000 engines utilising the AEC NGVS in active service. This number increases with each engine and/or kit AEC sells. The consistent increasing demand for spares and consumables provides a regular ongoing source of revenue to AEC despite variances in economic conditions.

AEC has strengthened the China Management team to assist the existing General Manager of China, David Wang. Jeffrey Song has been appointed as Sales Manager and David Yuan has been appointed as Operations Manager. Both have significant knowledge and experience in China’s automotive industry.

With the above appointments, together with a move to new premises at Dalian in China, AEC will fast track the localisation of all procurement and production, to China, for China and South East Asia sales.

During the six month period, as well as ongoing developments in China, South East Asia and Australia, AEC signed an Agreement with Tata Motors Limited of India. Tata Motors is India’s largest automobile company with operations in the UK, South Korea, Thailand and Spain as well as India. Pursuant to the Agreement AEC will design, develop, test and certify CNG kits as part of Tata’s natural gas vehicle system. AEC’s development work is well progressed and in line with agreed milestones.

During the six month period AEC substantially completed development of the fifth generation electronic control unit (ECU). Subsequent to year end ECU5 has been provided to a range of AEC customers to commence

Page 1

Advanced Engine Components Limited Half-Year Report – 31 December 2008

Directors’ Report (continued)

Review of Operations (continued)

road trials. ECU5 is a major benefit to AEC’s future sales initiatives as the system is more cost competitive than ECU4 with increased efficiencies and capabilities.

AEC’s biggest operating challenge remains management of cash flow in the current economic conditions. AEC has received the benefit of a $2,000,000 sales financing facility from 698 Capital Asia Pacific Ltd and extension of the CIM Special Situation Fund $750,000 loan. However, customer delays of deliveries and payments require AEC management to concentrate on converting the existing $6,907,000 in stock and receivables into cash, in the most expedient manner, together with reduction of all possible costs.

AEC’s mission is to be the leading supplier of alternative fuel engine systems and components to the Asia Pacific Region through innovation and quality. The Company’s activities and results during the last six months have continued to demonstrate AEC’s drive toward that goal.

Results of Operations

Sales for the 6 months totalled $2,662,000 (2007: $1,859,000). Loss for the 6 months was $719,000 (2007: $958,000).

The result is a 43% increase in sales and a 25% reduction in the loss for the 6 months compared to 31 December 2007. Including “Other revenue from continuing operations”, principally foreign exchange gains, the improvement in revenue compared to the corresponding period for 2007 was 92%.

Through the increased revenue and reduced loss, the loss per share has halved compared to the corresponding period in 2007.

Although the result is pleasing, with the downturn in demand brought about by the global financial crisis, the Company did not achieve its sales targets. The start of the 2009 calendar year has seen improved demand and the Board is confident the year on year sales growth, that has been evident since 30 June 2005, will continue for the year ended 30 June 2009.

The gross profit margin for the six months was disappointing. At 28% the margin is below the gross profit margin achieved for the six months to 31 December 2007 (46%). The gross profit margin, relating only to purchases and labour, improved from 43% in December 2007 to 47% in December 2008. This improvement was offset by additional freight charges, resulting from the weakening Australian dollar, and additional warranty costs.

The high warranty claims were a result of the number of new engine models and new engine assemblers involved in China and Thailand. AEC has put processes, systems and controls in place to ensure future warranty claims are reduced to levels acceptable to AEC.

Overheads, including Distribution Expenses and Development Expenses, have increased by $744,000 over the corresponding period in 2007. As well as the effects of the weakened Australian dollar, principal increases have been in Distribution ($57,000) as a result of additional sales; Corporate Expenses ($163,000) for loan negotiation and documentation, management and cash flow assistance and business case analysis; Administration wages and travel ($190,000) from expanded Chinese operations; and Development Expenses ($143,000) through increased costs of external testing in China. The Board is constantly reviewing costs and management are focussed on reducing overhead costs for the second half of the 2009 financial year.

Page 2

Advanced Engine Components Limited Half-Year Report – 31 December 2008

Directors’ Report (continued)

Working capital and cash flow

At 31 December 2008 AEC had current assets, net of trade and other payables, of $4,403,000 compared to $1,766,000 at 30 June 2008. However, cash was minimal and immediate cash flow requirements rely on conversion of the stock and debtors into cash.

AEC’s net cash outflow from operating activities deteriorated from $1,063,000 in the corresponding 2007 period to $2,098,000 in the six months to 31 December 2008. This deterioration largely occurred in the second quarter with customers delaying deliveries and payments. As a result there was a build up of stock and accounts payable rather than cash. This is reflected by receipts from customers being similar for the two periods. However, payments to suppliers and employees increased by $927,000 in the 2008 period. As stated above, AEC’s biggest operating challenge remains management of cash flow in the current economic conditions.

At 31 December 2008 net assets had increased to $735,000 compared to $694,000 at 30 June 2008.

Events Subsequent to Reporting Date

In February 2009, AEC settled an accounts payable balance with a cash and equity settlement. The equity component comprised 960,000 fully paid shares issued at a consideration of 6 cents per share. The cash component will be paid in three equal installments in March, April and May 2009.

Pursuant to the $750,000 loan agreement, as extended on 23 December 2008, subsequent to year end CIM Special Situation Fund (“CIM”) has been issued with 2,500,000 options exercisable at 6 cents per share on or before 30 November 2011. CIM is entitled to a further 1,250,000 options per month, exercisable at the preceding months VWAP on or before 30 November 2011, for each month the loan remains outstanding.

Subsequent to year end Norvest Corporate Pty Ltd, a company associated with AEC Chairman Graham Keys, has agreed to provide a $155,000 short term finance facility to fund the purchase and sale of injectors to Irisbus in France. This facility will result in AEC sales to Irisbus of a minimum $854,000 on or before 30 June 2009.

There are no other matters or circumstances that have arisen since 31 December 2008 that have or may significantly affect the operations, results, or state of affairs of the consolidated entity in future financial years.

Independence Review by Auditor

Section 307C of the Corporations Act 2001 requires our auditors, BDO Kendalls Audit & Assurance (WA) Pty Ltd to provide the Directors of the Company with an Independence Declaration in relation to the review of the half-year financial report.

This independence declaration is on page 16 and forms part of this Directors’ Report.

Signed in accordance with a resolution of Directors

==> picture [143 x 36] intentionally omitted <==

A Middleton

Director

Perth, Western Australia, 27 February 2009

Page 3

Advanced Engine Components Limited Half-Year Report – 31 December 2008

Directors’ Declaration

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

In the opinion of the Directors:

• (a) the financial statements and notes of the consolidated entity, set out on pages 5 to 15, are in accordance with the Corporations Act 2001, including:

• (i) giving a true and fair view of the financial position as at 31 December 2008 and of the performance for the half-year ended on that date of the consolidated entity; and

• (ii) complying with Accounting Standards AASB 134 Interim Financial Reporting and the Corporations Regulations 2001; and

• (b) subject to the matters referred to in Note 3 to the financial statements, there are reasonable grounds to believe that Advanced Engine Components Limited will be able to pay its debts as and when they become due and payable.

On behalf of the Board

==> picture [143 x 36] intentionally omitted <==

A Middleton

Director

Perth, Western Australia, 27 February 2009

Page 4

Advanced Engine Components Limited

Half-Year Report – 31 December 2008

Consolidated Income Statement

for the half-year ended 31 December 2008

			Consolidated	Consolidated
		Notes	31 Dec 08	31 Dec 07
			$	$
Sales revenue from continuing operations		5	2,662,041	1,858,864
Cost ofgoods sold			(1,906,318)	(1,005,569)
Grossprofit			755,723	853,295
Other revenue from continuing operations		5	1,259,618	179,175
Distribution expenses			(86,423)	(29,718)
Marketing expenses			(247,732)	(212,897)
Occupancy expenses			(153,040)	(112,893)
Corporate expenses			(296,844)	(133,495)
Administration expenses			(1,120,614)	(853,487)
Development expenses			(553,716)	(410,258)
Borrowing costs	5		(276,078)	(237,568)
Loss from continuing operations before income tax expense			(719,106)	(957,846)
Income tax expense			-	-
Loss attributable to members of the parent entity			(719,106)	(957,846)
			Cents	Cents
Basic and diluted loss per share			(0.49)	(1.0)

The above Consolidated Income Statement should be read in conjunction with the accompanying notes.

Page 5

Advanced Engine Components Limited

Half-Year Report – 31 December 2008

Consolidated Balance Sheet

as at 31 December 2008

as at 31 December 2008
		Consolidated
	Notes	31 Dec 08	30 Jun 08
		$	$
ASSETS
Current Assets
Cash and cash equivalents		91,217	169,476
Trade and other receivables		4,676,222	2,062,056
Inventories		2,230,829	1,499,257
Total Current Assets		6,998,268	3,730,789
Non-Current Assets
Investment accounted for using the equity method	7	40,317	40,317
Property, plant and equipment		517,462	599,424
Intangible assets		3,991,478	3,586,873
Total Non-Current Assets		4,549,257	4,226,614
Total Assets		11,547,525	7,957,403
LIABILITIES
Current Liabilities
Trade and other payables		2,595,592	1,964,298
Borrowings	8	4,874,148	2,066,958
Provisions		367,135	257,002
Total Current Liabilities		7,836,875	4,288,258
Non-Current Liabilities
Borrowings	8	2,975,557	2,974,912
Total Non-Current Liabilities		2,975,557	2,974,912
Total Liabilities		10,812,432	7,263,170
Net Assets		735,093	694,233
EQUITY
Contributed equity		18,308,419	17,482,203
Reserves		1,082,877	1,149,127
Accumulated losses		(18,656,203)	(17,937,097)
Total Equity		735,093	694,233

The above Consolidated Balance Sheet should be read in conjunction with the accompanying notes.

Page 6

Advanced Engine Components Limited Half-Year Report – 31 December 2008

Statement of Changes in Equity

for the half-year ended 31 December 2008

	Issued Capital $ Convertible Note $ Asset Revaluation Reserve $ Share Based Payments Reserve $ Foreign Exchange Translation Reserve $ Accumulated Losses $ Total Equity $
As at 1 July 2008 Foreign exchange on translation Total expense for the period recognised in equity: Loss for the period Total expense recognised for the period Issue of share capital Exercise of options Share issue costs Options issued At 31 December 2008 As at 1 July 2007 Foreign exchange on translation Total expense for the period recognised in equity: Loss for the period Total expense recognised for the period Issue of share capital Share issue costs At 31 December 2007	17,324,203 158,000 750,000 329,166 69,961 (17,937,097) 694,233 - - - - (89,199) - (89,199)
	- - - - (89,199) - (89,199) - - - - - (719,106) (719,106)
	- - - - (89,199) (719,106) (808,305) 872,306 - - - - - 872,306 825 - - - - - 825 (46,915) - - - - - (46,915) - - - 22,949 - - 22,949
	18,150,419 158,000 750,000 352,115 (19,238) (18,656,203) 735,093
	15,099,939 158,000 750,000 241,492 48,097 (15,864,487) 433,041 - - - - (391,420) - (391,420)
	- - - - (391,420) - (391,420) - - - - - (957,846) (957,846)
	- - - - (391,420) (957,846) (1,349,266) 2,294,436 - - - - - 2,294,436 (44,066) - - - - - (44,066)
	17,350,309 158,000 750,000 241,492 (343,323) (16,822,333) 1,334,145

The above Statement of Changes in Equity should be read in conjunction with the accompanying notes.

Page 7

Advanced Engine Components Limited

Half-Year Report – 31 December 2008

Consolidated Cash Flow Statement

for the half-year ended 31 December 2008

	Consolidated	Consolidated
	31 Dec 08	31 Dec 07
	$	$
Cash Flows from Operating Activities
Receipts from customers	1,058,270	1,121,554
Payments to suppliers and employees	(2,883,695)	(1,957,177)
Interest received	3,548	10,055
Interestpaid and borrowingcosts	(276,078)	(237,568)
Net cash outflow from operating activities	(2,097,955)	(1,063,136)
Cash Flows from Investing Activities
Payments for investment in joint venture	-	(69,703)
Payments for property, plant and equipment	(14,270)	(8,211)
Payment for capitalised development costs	(589,692)	(534,447)
Net cash outflow from investing activities	(603,962)	(612,361)
Cash Flows from Financing Activities
Additions of borrowings	2,807,835	1,076,125
Repayment of borrowings	-	(1,356,403)
Proceeds from issue of equity securities	873,131	2,294,436
Transaction costs associated with issue of shares	(46,915)	(44,066)
Loans to otherparties	(1,010,393)	-
Net cash inflow from financing activities	2,623,658	1,970,092
Net increase/(decrease) in cash held	(78,259)	294,595
Cash at the beginningof the half-year	169,476	611,139
Cash at the end of the half-year	91,217	905,734

The above Consolidated Cash Flow Statement should be read in conjunction with the accompanying notes.

Page 8

Advanced Engine Components Limited Half Year Report – 31 December 2008 Notes to the Financial Statements

1 Basis of Preparation of Half-year Report

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

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

Except as described below, the accounting policies and methods of computation adopted are consistent with those of the previous financial year and corresponding interim reporting period.

Investment in Joint Venture

Joint ventures are those entities over whose activities the consolidated entity has joint control. Joint ventures are accounted for using equity method (equity accounted investees). The consolidated financial statements include the consolidated entity’s share of the income and expenses of equity accounted investees, after adjustments to align the accounting policies with those of the consolidated entity, from the date that significant influence or joint control commences until the date that significant influence or joint control ceases. When the consolidated entity’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest (including any long-term investments) is reduced to nil and the recognition of further losses is discontinued except to the extent that the consolidated entity has an obligation or has made payment on behalf of the investee.

2 Critical Accounting Estimates and Judgements

Estimated Impairment of Property Plant and Equipment and Goodwill

In accordance with AASB 136 Impairment of Assets, the Group assesses at each reporting date where there is an indication that an asset may be impaired. An asset is impaired if its carrying amount exceeds its recoverable amount which is the amount to be recovered through use or sale of the asset. The recoverable amount of the Group’s various cash generating units (CGU’s) have been determined based on value-in-use calculations of these units.

No impairment charge has been recorded during the half year period.

• a) Key assumptions used for value-in-use calculations

Value-in-use calculations use cash flow projections based on financial budgets approved by management covering a 2 year period to determine a unit’s recoverable amount that is then compared with the carrying value of the assets of that unit

In calculating the value-in-use for each CGU, the following key assumptions were used:

• a pre-discount rate of 10% is applied, which represents the Group’s weighted average cost of capital

• Gross margin 30%

• Growth rate 25%

Page 9

Advanced Engine Components Limited Half-Year Report – 31 December 2008 Notes to the Financial Statements

2 Critical Accounting Estimates and Judgements (continued)

Estimated Impairment of Property Plant and Equipment and Goodwill (continued)

b) Impact of possible changes in key assumptions

As indicated above, the impairment testing process utilised a range of key assumptions. Given the volatility of the current economic climate, it is possible that market conditions could occur that fall outside the range of sensitivity analysis conducted, the impact of which will continue to be monitored.

3 Going Concern Basis

The consolidated entity incurred a loss for the half year of $719,000 (2007: half-year loss of $958,000). For the six months ended 31 December 2008 the consolidated entity had a net cash outflow from operating activities of $2,098,000 (31 December 2007: $1,063,000).

At 31 December 2008 the consolidated entity had cash assets of $91,000 (30 June 2008: $169,000) and negative working capital of $839,000 (30 June 2008: negative $557,000). At 31 December 2008 the consolidated entity has net assets of $735,000 (30 June 2008: $694,000).

Despite the consolidated entity’s improved net asset position, as at 31 December 2008, it continued to have negative working capital, incur losses and have net cash outflows from operating activities. The Directors are confident that the increased sales of completed engines, kits, spares and consumables, together with potential cash flows from conversion of stock and accounts receivable, will reverse this situation in the future. However, unforeseen timing delays in receiving future sales orders or in collecting sales receivables owing, together with continuing engine development programmes may require additional cash input from either debt or equity raisings.

At 31 December 2008, the consolidated entity has interest bearing liabilities of $3,742,000 (current) including accrued interest and $2,960,000 (non-current) owing to 698 Capital Asia Pacific Limited. 698 Asia Pacific Capital Limited is a related party of the Company’s major shareholder 698 Capital International Limited. 698 Capital International Limited has resolved to provide financial support, in circumstances that will enable the Company to be able to meet its debts as and when they fall due, at least until one year from the signature of the Directors’ Declaration. The financial support, of 698 Asia Pacific Capital Limited and 698 Capital International Limited, is subject to 698 Capital International Limited 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 Limited’s support, known sales since 31 December 2008, ability to convert $6,907,000 in stock and receivables into cash and the expectation of continued increased sales revenue over the next twelve months, the Directors consider it appropriate that the financial report be prepared on a going concern basis.

Page 10

Advanced Engine Components Limited Half Year Report – 31 December 2008 Notes to the Financial Statements

4 Segment Information

Primary reporting geographic segments Half Year 2008 France $ Australia $ Revenue Sales to external customers 261,925 52,974 Inter-segment sales - - Inter-segment sales elimination - - Segment revenue 261,925 52,974 Non-segment revenue: Interest & other revenue - 113,883 Profit/(loss) before tax & finance costs 156,602 (1,178,765) Finance costs - (276,078) Net profit/(loss) for the period 156,602 (1,454,843) Primary reporting geographic segments Half Year 2007 France $ Australia $ Revenue Sales to external customers 464,214 59,828 Inter-segment sales - 435,852 Inter-segment sales elimination - (435,852) Segment revenue 464,214 59,828 Non-segment revenue: Interest & other revenue 141,700 37,074 Profit/(loss) before tax & finance costs 360,255 (1,230,029) Finance costs - (237,568) Net profit/(loss) for the period 360,255 (1,467,597)	Primary reporting geographic segments Half Year 2008 France $ Australia $ Revenue Sales to external customers 261,925 52,974 Inter-segment sales - - Inter-segment sales elimination - - Segment revenue 261,925 52,974 Non-segment revenue: Interest & other revenue - 113,883 Profit/(loss) before tax & finance costs 156,602 (1,178,765) Finance costs - (276,078) Net profit/(loss) for the period 156,602 (1,454,843) Primary reporting geographic segments Half Year 2007 France $ Australia $ Revenue Sales to external customers 464,214 59,828 Inter-segment sales - 435,852 Inter-segment sales elimination - (435,852) Segment revenue 464,214 59,828 Non-segment revenue: Interest & other revenue 141,700 37,074 Profit/(loss) before tax & finance costs 360,255 (1,230,029) Finance costs - (237,568) Net profit/(loss) for the period 360,255 (1,467,597)	China $	South East Asia $ Consolidated $
	261,925 52,974 - - - -	2,149,544 1,550,850 (1,550,850)	197,598 2,662,041 100,266 1,651,116 (100,266) (1,651,116)
	261,925 52,974	2,149,544	197,598 2,662,041
	- 113,883	1,145,735	- 1,259,618
	156,602 (1,178,765) - (276,078)	579,135 -	- (443,028) - (276,078)
	156,602 (1,454,843)	579,135	- (719,106)
		China $	South East Asia $ Consolidated $ - 1,858,864 - 438,826 - (438,826) - 1,858,864 - 179,175 - (720,278) - (237,568) - (957,846)
	464,214 59,828 - 435,852 - (435,852)	1,334,822 2,974 (2,974)
	464,214 59,828	1,334,822
	141,700 37,074	401
	360,255 (1,230,029) - (237,568)	149,496 -
	360,255 (1,467,597)	149,496

Page 11

Advanced Engine Components Limited Half Year Report – 31 December 2008 Notes to the Financial Statements

		Consolidated	Consolidated
		31 Dec 08	31 Dec 07
		$	$
5	Revenue and Expenses from Continuing Operations
	Revenue from Continuing Operations
	Sales revenue	2,662,041	1,858,864
	Other revenue:
	Interest revenue	3,548	10,055
	Other income	41,174	141,700
	Foreign exchange gain	1,214,216	27,420
	Profit on sale of assets	680	-
	Total other revenue	1,259,618	179,175
	Total revenue	3,921,659	2,038,039
	Expenses from Continuing Operations
	Borrowing costs
	Interest:
	Director related entities:
	698 Capital Asia Pacific Limited	228,255	190,609
	Other entities	47,823	46,959
	Other disclosure items in respect of the loss from continuing operations
	Depreciation and amortisation:
	Depreciation of plant and equipment	81,230	80,028
	Amortisation of leasehold improvements	15,001	23,303
	Amortisation of capitalised development costs	109,716	109,716
	Net transfers to/(from) provisions:
	Provisions for warranties	23,867	309
	Employee entitlements	101,364	41,625
	Operating lease rental expenses:
	Minimum lease payments	116,295	84,489
	Net gains:
	Profit on sale of plant and equipment	680	-
__________________
6	Dividends
	No dividend has been paid or proposed in respect of the current or previous half	year.
_______________

Page 12

Advanced Engine Components Limited Half Year Report – 31 December 2008 Notes to the Financial Statements

7 Investment in Joint Venture

The Company has entered into a joint venture arrangement in Thailand to build new natural gas (“NG”) powered vehicles and re-power existing diesel vehicles with NG engines. The Company is partners in joint venture with Monika Motors Limited (56%) and a Thai based strategic investment company (18%). The Company has a 26% interest in the joint venture. The joint venture commenced operations in 2007.

8 Borrowings

Current: Insurance premiums finance Loan from 698 Capital Asia Pacific Limited (A) Commercial loan from Westpac Loan from CIM Special Situations Fund Limited Loan from CCM Management Limited Loan from Directors Non-Current: Convertible note Commercial loan from Westpac Total Borrowings	Consolidated 31 Dec 08 $ 30 June 08 $ 80,315 214,174 2,892,109 1,045,479 29,783 28,538 761,548 778,767 1,010,393 - 100,000 -
	4,874,148 2,066,958
	2,959,611 2,943,771 15,946 31,141
	2,975,557 2,974,912
	7,849,705 5,041,870

• (A) 698 Capital Asia Pacific Limited is a related party.

9 Equity Securities Issued

Issues of ordinary shares during the half- year Exercise of unlisted options at $0.128 on or before 30 November 2009 Issued during the period to KGI Asia Limited (“KGI”) as underwriters to the shortfall (if any) in the exercise of 4,361,529 options expiring on 30 June 2008 (A) Issued during the period for right issues to existing shareholders pursuant to Prospectus dated 17 October 2007 Less: capital raising costs	2008 2007 2008 2007 Shares Shares $ $
	6,446 859 825 110 4,361,529 - 872,306 - - 14,339,644 - 2,294,326 - - (46,915) (44,066)
	4,367,975 14,340,503 826,216 2,250,370

• (A) In May 2008 KGI Asia Limited (“KGI”) agreed to underwrite the shortfall, if any, in the exercise of the 4,361,529 option expiring on 30 June 2008. In accordance with that agreement, in July 2008, KGI subscribed and were issued with 4,361,529 shares in AEC at 20 cents per share.

Page 13

Advanced Engine Components Limited Half Year Report – 31 December 2008 Notes to the Financial Statements

10 Commitments and Contingencies

Since the last annual reporting date, there have been no material changes to any contingent liabilities or contingent assets.

11 Share Based Payment Plans

On 28 November 2008 and 23 December 2008, 425,000 share options and 80,000 share options respectively were granted to the Chairman (250,000) and consultants (230,000) pursuant to resolutions passed at the 2008 Annual General Meeting. The options are exercisable at $0.20 on or before 31 December 2010. The fair value of the options granted is estimated as at the date of grant using a binominal model, taking into account the terms and conditions upon which the options were granted. The following table lists the inputs to the model used for the half-year ended 31 December 2008:

	Options	Options
	issued 28	issued 23
	November	December
	08	08
Dividend yield (%)	0%	0%
Expected volatility (%)	126.8%	127.3%
Risk-free interest rate (%)	3.175%	2.835%
Contractual life (years)	2.09 years	2.02 years
Estimated fair value of each option at grant date	$0.0317	$0.0247

On 28 November 2008 5,000,000 share options were issued to a related party 698 Capital International. The options are exercisable at $0.20 on or before 31 December 2010. The options were issued in consideration of 698 Capital International reducing the interest rate by 0.75% charged on a $2,000,000 Finance Facility provided to the Company to support known and future sales growth. The fair value of these options has been valued at $7,500, which is the expected value of the interest reduction on the facility.

12 Related Party Transactions

Mr Graham Keys

Mr Keys is a Director and the major Shareholder of Norvest Corporate Pty Ltd, which provides various corporate, capital raising, accounting and company secretarial services to the Company at normal commercial rates. During the period Norvest Corporate Pty Ltd supplied corporate, capital raising, accounting and company secretarial services to the Company to the value of $173,130 (2007: $70,328).

During the period Norvest Pty Ltd made a loan to the Company amounting to $100,000. No interest and security were noted for this loan. The loan is reflected as Current in Note 8. The loan was repaid subsequent to 31 December 2008.

During the period 275,000 options (refer Note 11) were issued to Mr Keys. The options are exercisable at $0.20 on or before 31 December 2010.

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Advanced Engine Components Limited Half-Year Report – 31 December 2008 Notes to the Financial Statements

12 Related Party Transactions (continued)

Other transactions with related parties

On 12 August 2008 698 Capital Asia Pacific Ltd (“698”), a company of which Mr A Pun is a Director, agreed to and subsequently provided a $2,000,000 Sales Financing Facility to AEC. A $17,500 facility fee was paid to 698 together with interest at 0.75% below the Base Rate shown by the National Australian Bank Indicator Rate at the date of execution.

During the period 5,000,000 options were issued to a related entity 698 Capital Asia Pacific Limited. Refer to further detail in Note 11 above.

13 Subsequent Events

In February 2009, AEC settled an accounts payable balance with a cash and equity settlement. The equity component comprised 960,000 fully paid shares issued at a consideration of 6 cents per share. The cash component will be paid in three equal installments in March, April and May 2009.

Pursuant to the $750,000 loan agreement, as extended on 23 December 2008, subsequent to year end CIM Special Situation Fund (“CIM”) has been issued with 2,500,000 options exercisable at 6 cents per share on or before 30 November 2011. CIM is entitled to a further 1,250,000 options per month, exercisable at the preceding months VWAP on or before 30 November 2011, for each month the loan remains outstanding.

Subsequent to year end Norvest Corporate Pty Ltd, a company associated with AEC Chairman Graham Keys, has agreed to provide a $155,000 short term finance facility to fund the purchase and sale of injectors to Irisbus in France. This facility will result in AEC sales to Irisbus of a minimum $854,000 on or before 30 June 2009.

There are no other matters or circumstances that have arisen since 31 December 2008 that have or may significantly affect the operations, results, or state of affairs of the consolidated entity in future financial years.

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BDO K endalls Audit & Assurance (WA) Pty Ltd 128 H a y Street SUBI A CO WA 6008 PO B o x 700 WEST PERTH WA 6872 Phon e 61 8 9380 8400 Fax 61 8 9380 8499 aa.pe r th@bdo.com.au www. b do.com.au

ABN 7 9 112 284 787

27 February 2009

The Directors Advanced Engine Compo n ents Limited 11 Energy Street MALAGA WA 6090

Dear Sirs

DECLARATION OF INDEPENDENCE BY PETER TOLL TO THE DIRECTORS OF ADVANCED ENGINE COMPONENTS LIMITED

As lead auditor of Advan c ed Engine Components Limited for the half-year ended 31 December 2008, I declar e that, to the best of my knowledge and b e lief, there have been no contraventions of:

• the auditor independence requirements of the Corporations Act 20 0 1 in relation to the audit; and

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

This declaration is in resp e ct of Advanced Engine Components Limited and the entities it controlled during the peri o d.

Peter Toll Director

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BDO Kendalls Audit & Assurance (WA) Pty Ltd Perth, Western Australia.

BD O Kendalls is a national association of sep a rate partnerships and entities

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BDO Kendalls Audit & Assurance (WA) Pty Ltd 128 Hay Street SUBIACO WA 6008 PO Box 700 WEST PERTH WA 6872 Phone 61 8 9380 8400 Fax 61 8 9380 8499 aa.perth@bdo.com.au www.bdo.com.au

ABN 79 112 284 787

INDEPENDENT AUDITOR’S REVIEW REPORT

To the members of Advanced Engine Components Limited

Report on the Half-Year Financial Report

We have reviewed the accompanying half-year financial report of Advanced Engine Components Limited, which comprises the balance sheet as at 31 December 2008, and the income statement, statement of changes in equity and cash flow statement for the half-year ended on that date, a statement of accounting policies, other selected explanatory notes and the directors’ declaration of the consolidated entity comprising the disclosing entity and the entities it controlled at the half-year end or from time to time during the half-year.

Directors’ Responsibility for the Half-Year Financial Report

The directors of the disclosing entity are responsible for the preparation and fair presentation of the half-year 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 half-year 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.

Auditor’s Responsibility

Our responsibility is to express a conclusion on the half-year financial report based on our review. We conducted our review in accordance with Auditing Standard on Review Engagements ASRE 2410 Review of Interim and Other Financial Reports Performed by the Independent Auditor of the Entity , in order to state whether, on the basis of the procedures described, we have become aware of any matter that makes us believe that the financial report is not in accordance with the Corporations Act 2001 including: giving a true and fair view of the disclosing entity’s financial position as at 31 December 2008 and its performance for the half-year ended on that date; and complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001 . As the auditor of Advanced Engine Components Limited, ASRE 2410 requires that we comply with the ethical requirements relevant to the audit of the annual financial report.

A review of a half-year financial report consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

BDO Kendalls is a national association of separate partnerships and entities

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Independence

In conducting our review, w e have complied with the independence re q uirements of the Corporations Act 2001 .

Conclusion

Based on our review, which is not an audit, we have not become aware o f any matter that makes us believe that th e half-year financial report of Advanced Engine Component Limited is not in accordance with the Corporations Act 2001 including:

• (a) giving a true and fai r view of the consolidated entity’s financial p osition as at 31 December 2008 and o f its performance for the half-year ended on that date; and

• (b) complying with Accounting Standard AASB 134 Interim Financi a l Reporting and Corporations Regulations 2001.

Material uncertainty regardi n g continuation as a going concern

Without qualification to the review conclusion expressed above, attentio n is drawn to the following matter. As a resu l t of the matters detailed in Note 3, there is m a terial uncertainty whether the company will b e able to continue as a going concern and th e refore whether it will realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the fi n ancial report.

BDO Kendalls Audit & Assurance (WA) Pty Ltd

Peter Toll

Director Perth, Western Australia Dated this 27[th] day of Febru a ry 2009