FIRST LITHIUM LIMITED — Interim / Quarterly Report 2010

Feb 28, 2010

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 2009 Half year ended 31 December 2008

Results for Announcement to the Market:

Movement % 2009 $’000
Revenue from ordinary activities Down 73.4% to 707 (Loss) from ordinary activities after tax attributable to members Up 141.7% to 1,738 (Loss)for theperiod attributable to members Up 141.7% to 1,738
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 2009	(0.047)
Net tangible assetsper securityas at 30 June 2009	(0.036)
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	Monica AEC Joint Venture – 26%
name of the associate or joint venture entity and details of the
reportingentity’spercentage holdingin each of these entities.

Page 16

This report is based on :

The accounts have been subject to review.

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

Sign here: …………………………. Director

Date: 26 February 2010

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 9

Advanced Engine Components Limited and its Controlled Entities

ABN 67 009 081 770

Advanced Engine Components Limited Half-Year Report – 31 December 2009

Table of Contents

Directors’ Report	1
Directors’ Declaration	5
Consolidated Statement of Comprehensive Income	6
Consolidated Statement of Financial Position	7
Consolidated Statement of Changes in Equity	8
Consolidated Statement of Cash Flows	10
Notes to the financial report	11
1. Basis of Preparation of Half-year Report	11
2. Critical Accounting Estimates and Judgements	12
3. Going Concern Basis	13
4. Segment Information	14
5. Dividends	15
6. Borrowings	15
7. Equity Securities Issued	16
8. Commitments and Contingencies	16
9. Related Party Transactions	16
10. Subsequent Events	16
Audit Independence Declaration	18
Independent Review Report to the Members	19

Advanced Engine Components Limited Half-Year Report – 31 December 2009

Directors’ Report

The Directors of Advanced Engine Components Limited (the “Company”) and its controlled entities submit (“AEC”) herewith the financial report for the six months ended 31 December 2009 (“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 Arnold Chan

Mr Vivekananthan MV Nathan (appointed 18 February 2010)

Mr Manharlal Bhaichand Gathani Jain (appointed 18 February 2010)

Review of operations

AEC’s operating results, for the six month period, reflect a period of consolidation following the effects of the global financial crisis over the previous twelve months.

Sales revenue was 40% of the revenue recorded in the same period for 2008. Reported sales are only 26% of December 2008 revenue due to a write back of a $342,000 sale recorded in the 30 June 2009 financial year. AEC requested return of the stock when it became clear the customer did not have an end sale and intended holding AEC’s components as consignment stock.

AEC is taking a similar approach, of recovering stock, to assist in reducing the long outstanding debt owing by Weifang Weichai Peterson Gas Engine Co. Ltd. AEC is confident the recovered stock will be readily saleable to other customers in France, China and India.

Sales through the period, and all future sales, only occur where payment terms are clearly understood and agreed. AEC now require either part or full payment on delivery or penalties for not complying with agreed terms.

Although sales were low, AEC developed and strengthened key relationships with Norinco Equipment Co Ltd of China and SHIGAN Quantum Technologies Pvt Ltd of India. These relationships have increased sales opportunities in China and India domestic markets as well as the export markets of those countries. In addition, engine development work in the half year, with First Auto Works (FAW) in China, Tata Motors Limited (TML) in India and the Isuzu engine in Australia will lead to increased sales in the second six months of the financial year.

During the period, development of the fifth generation electronic control unit (ECU) was completed and commercial production commenced. This fifth generation ECU has been in development since 2005 and is a significant improvement on the ECU4. The benefits include lower cost; intellectual property is more secure; it is less complex and more user friendly; has increased reliability; and is more powerful. Unfortunately, development of the ECU5 slowed AEC sales in the last six months as some customers held back orders until the ECU5 was available.

Sales of natural gas vehicles and therefore sales of AEC components historically has been closely related to oil price. The first half of the December 2009 six month period saw a rapid rise from US$30 per barrel to US$60. The second three months has seen the price stabilise in the US$60 to US$70 per barrel range. Although the oil price directly effects the economics of the vehicle purchaser it is the security of supply of oil and the environmental impact that are major drivers of Government decision makers. All three factors (price of oil at US$60 per barrel or above, security of supply and environmental considerations), will continue to be major drivers of demand for AEC products.

Page 1

Advanced Engine Components Limited Half-Year Report – 31 December 2009

Directors’ Report (continued)

Subsequent to 31 December 2009 AEC announced a minimum $2,800,000 capital raising and an additional $800,000 in available debt facilities. This additional working capital will be of significant assistance to AEC in satisfying the expected increase in customer demand.

Results of operations

Reported sales for the 6 months totalled $707,000. Reported loss for the 6 months was $1,738,000.

Reported sales are 26% of reported sales for the same period in 2008. The loss after income tax from continuing operations is a 5% improvement on 2008.

The actual sales for the 6 months were $1,051,000 before adjustment for prior year sales written back. This result is disappointing as it is the lowest six month sales since June 2005.

The low sales do not accurately reflect the medium or long term sales potential for AEC products.

Only 6% of sales in the six months related to sales of natural gas vehicle systems (NGVS). However, FAW’ sold over 100 natural gas / electric hybrid engines, developed in conjunction with AEC, using AEC NGVS kits from stock purchased in 2006. The hybrid engines and the Deutz 1013 natural gas engine, developed using the AEC ECU5, will be FAW, China’s largest automotive manufacturer, flagship alternative fuels products for calendar 2010 and beyond.

AEC’s development of TML’s naturally aspirated natural gas engines is now complete. Development of Norinco’s Deutz 1015 natural gas engine is nearing completion. These engines will commence sales in calendar 2010 and require large numbers of AEC systems and components. In addition, a number of vehicle trials in China, using the AEC NGVS, have been progressing for some time and should achieve commercial orders in the immediate future.

45% of the six month sales relate to AEC sales of engines incorporating the AEC NGVS. These sales were to two markets – Indonesia and Hangzhou, in China. There will now be 84 vehicles in Indonesia and 36 vehicles in Hangzhou using AEC facilitated engines. Both of these markets will continue to expand. In addition, the market in Thailand has again become active as the price of oil increases. The Monika AEC joint venture, in Thailand, has sold a number of engines from stock purchased from AEC in prior periods during the current six month period. As this stock runs down new engines will be purchased.

48% of the six month sales relate to AEC sales of spares. Spares continue to be a major revenue source for AEC. The six month period was low as France purchased a lower number than in previous periods. This is a result of the customers build up of stocks in past periods. These stocks have now been run down and larger orders have recommenced in the second half. Purchase of spares in the Chinese market continues to grow as the number of vehicles increase.

The gross profit margin for the six months was negative. Margins on sales of kits, engines and spares have been consistent with prior periods. It is the mix of sales, with a greater percentage of lower margin engine sales, and the write back of the margin on the kits recovered that have lead to the negative gross margin. The level of warranty claims is consistent with prior periods but negatively impacts on the margin due to the low sales for the period.

Overheads before depreciation, including Distribution Expenses and Development Expenses, are 25% lower than the corresponding period in 2008. These savings reflect the flow-on of cost control measures introduced as a result of the global financial crisis.

Page 2

Advanced Engine Components Limited Half-Year Report – 31 December 2009

Directors’ Report (continued)

Financing costs are 70% higher than in 2008. With the impact of the global financial crisis on the financial, capital and consumer markets the Board made a strategic decision that funding, by necessity, be through debt rather than equity. With the improvement of AEC’s market opportunities late in 2009 AEC was able to raise capital subsequent to year end to fund the next stage of development.

The high financing costs were offset by taxation refunds for research and development costs incurred by AEC.

Working capital and cash flow

AEC’s net cash flow from operating activities improved by $2,413,000 from the previous corresponding period. The improvement is due to the emphasis on recovery of outstanding debts, the restriction on build up of inventory, cost control measures introduced, related party financiers accepting accrual rather than payment of interest due and the tax recoveries on research and development expenditure.

Cash and cost control will remain a major focus for AEC in the second half of the 2009 financial year. However, the capital raising and debt restructure was put in place post 31 December 2009 will ensure AEC’s financial position is capable of taking advantage of known opportunities.

At 31 December 2009 AEC had cash assets of only $121,000, negative working capital of $7,334,000 and liabilities exceeded assets by $2,769,000. Subsequent to that date the Company has completed a share placement raising $1,200,000, announced a rights issue which will raise a minimum $1,658,000 and restructured its debt. As a result of these, and related events, cash assets will increase to $1,800,000, working capital improves by $5,800,000 and assets exceed liabilities by $3,100,000.

Events subsequent to reporting date

Subsequent to 31 December 2009, the Company has placed 21,818,182 shares at $0.055 per share to raise $1,200,000. A non renounceable rights issue offer will be made to all eligible shareholders, on the basis of one new share for every three shares held as at 3 March 2010, at $0.055 per share.

Subsequent to 31 December 2009, 698 Capital Asia Pacific Ltd (“698”), a party related to AEC’s major shareholder, consolidated their $750,000 short term loan, their $3,000,000 sales financing facility, together with all outstanding interest on those loans, into a single loan repayable at call. In addition, 698 extended the loan facility by a further $800,000 to $4,968,632. As at the date of this report the facility has been drawn down to $4,263,466. The loan retains security of a fixed charge over the accounts receivable and inventory and continues at the previous interest rate of 11.68% with interest payable quarterly in arrears.

Subsequent to 31 December 2009, 698 extended repayment of the $3,000,000 due under the convertible notes which expired on 31 December 2009 to 31 December 2011. The loan retains the fixed and floating charge over the assets of AEC and has the same interest rate being the Better Business Loan Reference Rate as quoted by the Commonwealth Bank plus 1%. 698 has agreed to take up 20,000,000 shares of its 21,474,577 share entitlement under the rights issue. 698’s equity subscription will raise $1,100,000 which will be used to pay the accrued interest on the expired convertible notes. Subject to AEC shareholder approval, 698 will receive 3,000,000 options, exercisable at $0.055 per share on or before 30 November 2011, as consideration for extending its loan facilities.

Page 3

Advanced Engine Components Limited Half-Year Report – 31 December 2009

Directors’ Report (continued)

Independence Review by Auditor

Section 307C of the Corporations Act 2001 requires our auditors, BDO Audit (WA) Pty Ltd to provide the Directors of Advanced Engine Components Limited with an Independent Review in relation to the review of the half year financial report.

This independence declaration is on page 18 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, 26 February 2010

Page 4

Advanced Engine Components Limited Half-Year Report – 31 December 2009

Directors’ Declaration

The Directors of the Company declare that:

• (a) the financial statements and notes of the consolidated entity, set out on pages 6 to 17, are in accordance with the Corporations Act 2001, and:

• (i) comply with Accounting Standard AASB 134 Interim Financial Reporting Corporations Regulations 2001, and;

• (ii) give a true and fair view of the financial position as at 31 December 2009 and of the performance for the half year ended on that date of the consolidated entity; and

• (b) in the Directors’ opinion and 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.

This declaration is made in accordance with a resolution of the Board of Directors and is signed for and on behalf of the Directors by:

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

A Middleton

Director

Perth, Western Australia, 26 February 2010

Page 5

Advanced Engine Components Limited

Half-Year Report – 31 December 2009

Consolidated Statement of Comprehensive Income

for the half year ended 31 December 2009

	Consolidated	Consolidated
Notes	31 Dec 09	31 Dec 08
	$	$
Sales revenue from continuing operations	707,069	2,662,041
Cost ofgoods sold	(728,569)	(1,906,318)
Grossprofit	(21,500)	755,723
Other revenue from continuing operations	50,459	45,402
Distribution expenses	(15,861)	(86,423)
Marketing expenses	(22,000)	(247,732)
Occupancy expenses	(134,112)	(153,040)
Corporate expenses	(252,805)	(296,844)
Administration expenses	(1,176,818)	(1,120,614)
Development expenses	(269,949)	(553,716)
Borrowing costs	(474,598)	(276,078)
Impairment loss	(150,673)	-
Foreign exchange gains	102,482	1,214,215
Loss before income tax expense	2,365,375	(719,106)
Income tax benefit	626,904	-
Loss after income tax from continuing operations	(1,738,471)	(719,106)
Net loss for the half year attributable to the owners of
Advanced Engine Components Limited	(1,738,471)	(719,106)
___________________
Other comprehensive income
- Exchange difference on translation of foreign operations	106,695	(89,199)
Total comprehensive loss for the half year attributable
to owners of Advanced Engine Components Limited	(1,631,776)	(818,305)
	Cents	Cents
Basic and diluted loss per share	(1.17)	(0.49)

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

Page 6

Advanced Engine Components Limited

Half-Year Report – 31 December 2009

Consolidated Statement of Financial Position

as at 31 December 2009

as at 31 December 2009
		Consolidated
	Notes	31 Dec 09	30 Jun 09
		$	$
ASSETS
Current Assets
Cash and cash equivalents		120,617	279,955
Trade and other receivables	2(ii)	3,018,457	4,199,320
Inventories		1,759,316	1,604,622
Total Current Assets		4,898,390	6,083,897
Non-Current Assets
Investment accounted for using the equity method		40,317	40,317
Property, plant and equipment		331,993	418,926
Intangible assets	2(i)	4,282,800	4,232,970
Total Non-Current Assets		4,655,110	4,692,213
Total Assets		9,553,500	10,776,110
LIABILITIES
Current Liabilities
Trade and other payables		2,746,305	2,734,467
Borrowings	6	9,113,862	8,821,580
Provisions		372,618	324,254
Total Current Liabilities		12,232,785	11,880,301
Non-Current Liabilities
Borrowings		-	-
Total Non-Current Liabilities		-	-
Total Liabilities		12,232,785	11,880,301
Net Assets		(2,679,285)	(1,104,191)
EQUITY
Contributed equity	7	18,381,081	18,366,020
Reserves		1,455,729	1,307,413
Accumulated losses		(22,516,095)	(20,777,624)
Total Equity		(2,679,285)	(1,104,191)

The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes.

Page 7

Advanced Engine Components Limited

Half-Year Report – 31 December 2009

Consolidated Statement of Changes in Equity

for the half year ended 31 December 2009

	Issued Capital $ Convertible Note $ Asset Revaluation Reserve $ Share Based Payments Reserve $ Foreign Exchange Translation Reserve $ Accumulated Losses $ Total Equity $
Balance 1 July 2008 Total comprehensive income for the period Loss Other comprehensive income Foreign currency translation differences Total comprehensive income for the period Transactions with owners, recorded directly in equity Contributions by and distributions to owners Contributions of equity, net of transaction costs Share based payments Total contributions by and distributions to owners Balance 31 December 2008	17,324,203 158,000 750,000 329,166 69,961 (17,937,097) 694,233
	- - - - - (719,106) (719,106) - - - - (89,199) - (89,199)
	- - - - (89,199) (719,106) (808,305) 826,216 - - - - - 826,216 - - - 22,949 - - 22,949
	826,216 - - 22,949 - - 849,165
	18,150,419 158,000 750,000 352,115 (19,238) (18,656,203) 735,093

Page 8

Advanced Engine Components Limited Half-Year Report – 31 December 2009

Consolidated Statement of Changes in Equity

for the half year ended 31 December 2009

	Issued Capital $ Convertible Note $ Asset Revaluation Reserve $ Share Based Payments Reserve $ Foreign Exchange Translation Reserve $ Accumulated Losses $ Total Equity $
Balance 1 July 2009 Total comprehensive income for the period Loss Other comprehensive income Foreign currency translation differences Total comprehensive income for the period Transactions with owners, recorded directly in equity Contributions by and distributions to owners Contributions of equity, net of transaction costs Share based payments Total contributions by and distributions to owners Balance 31 December 2009	18,208,020 158,000 750,000 494,940 62,473 (20,777,624) (1,104,191)
	- - - - - (1,738,471) (1,738,471) - - - - 106,695 - 106,695
	- - - - 106,695 (1,738,471) (1,631,776) 15,061 - - - - - 15,061 - - - 41,621 - - 41,621
	15,061 - - 41,621 - - 56,682
	18,223,081 158,000 750,000 536,561 169,168 (22,501,095) (2,679,285)

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

Page 9

Advanced Engine Components Limited

Half-Year Report – 31 December 2009

Consolidated Statement of Cash Flows

for the half year ended 31 December 2009

	Consolidated	Consolidated
	31 Dec 09	31 Dec 08
	$	$
Cash Flows from Operating Activities
Receipts from customers	2,662,994	1,058,270
Payments to suppliers and employees	(2,936,869)	(2,883,695)
Income tax refund	676,904	-
Interest received	458	3,548
Interest paid and borrowing costs	(88,620)	(276,078)
Net cash inflow/(outflow) from operating activities	314,867	(2,097,955)
Cash Flows from Investing Activities
Payments for investment in joint venture	-	-
Payments for property, plant and equipment	(3,739)	(14,270)
Payment for capitalised development costs	(560,819)	(589,692)
Net cash outflow from investing activities	(564,558)	(603,962)
Cash Flows from Financing Activities
Additions of borrowings	547,175	2,807,835
Repayment of borrowings	(456,883)	-
Proceeds from issue of equity securities	61	873,131
Transaction costs associated with issue of shares	-	(46,915)
Loans to other parties	-	(1,010,393)
Net cash inflow from financing activities	90,353	2,623,658
Net (decrease) in cash held	(159,338)	(78,259)
Cash at the beginning of the half year	279,955	169,476
Cash at the end of the half year	120,617	91,217

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

Page 10

Advanced Engine Components Limited Half Year Report – 31 December 2009 Notes to the Financial Statements

1 Basis of Preparation of Half-year Report

These general purpose financial statements for the half year reporting period ended 31 December 2009 have been prepared in accordance with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Act 2001.

These half year financial statements do not include all the notes of the type normally included within the annual financial statements. Accordingly, this report is to be read in conjunction with the annual financial statements for the year ended 30 June 2009 and any public announcements made by Advanced Engine Components Limited during the half year 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 half year reporting period.

Change in Accounting Policy

(i) Determination and presentation of operating segments

As of 1 July 2009 the AEC determines and presents operating segments based on the information that internally is provided to the Board of Directors who make key operating decisions. This change in accounting policy is due to the adoption of AASB 8 Operating Segments. Previously operating segments were determined and presented in accordance with AASB 114 Segment Reporting. The new accounting policy in respect of segment operating disclosures is presented as follows.

Comparative segment information has been represented in conformity with the transitional requirement of AASB 8. Since the change in accounting policy only impacts presentation and disclosure aspects, there is no impact on earnings per share.

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of AEC’s other components. An operating segment’s operating results are reviewed regularly by the Board of Directors to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

Segment results that are reported to the Board of Directors include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets (primarily the capitalised research and development), head office expenses, and income tax assets and liabilities.

(ii) Presentation of financial statements

AEC applies revised AASB 101 Presentation of Financial Statements (2007), which became effective as of 1 July 2009. As a result, AEC presents in the consolidated statement of changes in equity all owner changes in equity, whereas all non-owner changes in equity are presented in the consolidated statement of comprehensive income. This presentation has been applied in these half year financial statements as of and for the 6 month period ended on 31 December 2009.

Comparative information has been represented so that it also is in conformity with the revised standard. Since the change in accounting policy only impacts presentation aspects, there is no impact on earnings per share.

Page 11

Advanced Engine Components Limited Half-Year Report – 31 December 2009 Notes to the Financial Statements

2 Critical Accounting Estimates and Judgements

In the application of AEC’s accounting policies, management is required to make judgments, estimates and assumptions about carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

(i) Estimated impairment of intangible assets

In accordance with AASB 136 Impairment of Assets, AEC assesses at each reporting date whether 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 AEC’s various cash generating units (CGU’s) have been determined based on value-in-use calculations of these units.

An impairment charge of $150,673 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 5 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 12.75% is applied, which represents the Group’s average cost of debt

• • Gross margin 24%

• Growth rate 30%

Based on current contract negotiations the Directors expect to meet the forecast sales growth and growth margins, as indicated above.

• b) Impact of possible changes in key assumptions

As indicated above, the impairment testing process utilised a range of key assumptions. Recoverability of the amounts capitalised as development costs are dependent upon AEC being able to achieve the key assumptions as stated above.

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.

(ii) Trade receivables

As at 31 December 2009, an amount of $1,187,972 (2008: $2,156,371) is due from Weifang Weichai Peterson Gas Engine Co. Ltd. The amounts owing have been outstanding for in excess of 365 days. The Company continues to negotiate recovery through a combination of return of stock, part payment and other avenues. Accordingly, the recoverability of the receivable is dependent upon the company

Page 12

Advanced Engine Components Limited Half-Year Report – 31 December 2009 Notes to the Financial Statements

successfully negotiating the settlement of this debt. The Directors expect the amounts will be recovered at the amounts stated in the financial report.

3 Going Concern Basis

The consolidated entity incurred a loss after income tax from continuing operations for the half year of $1,738,471 (2008: half year loss of $1719,107). At 31 December 2009 the consolidated entity had cash assets of $120,617 (30 June 2009: $279,955), negative working capital of $7,334,395 (30 June 2009: negative $5,796,404) and liabilities exceeded total assets by $2,679,285 (30 June 2009: $1,104,000).

Subsequent to 31 December 2009 the Company has completed a share placement raising $1,200,000 and announced a rights issue to shareholders registered as at 3 March 2010. The rights issue will raise a minimum of $1,658,000 from shareholders related to Directors of the Company. In addition, interest bearing loans owing to 698 Capital Asia Pacific Ltd (“698”), a party related to AEC’s major shareholder, have been restructured. The loan restructure results in additional $800,000 borrowings available to the Company and a transfer of $3,000,000 from short term to long term debt. $1,100,000 of the capital raising will be used to pay accrued interest on the $3,000,000. Had these transactions been in place at 31 December 2009, without raising any rights issue monies other than through parties related to the Directors, the pro forma cash assets would be $1,879,000 before costs, working capital improves to a negative $1,476,000, the net asset position improves to a positive $3,179,000 and, if required, the Company has an $800,000 additional borrowing facility on which to draw.

Despite the significant improvement resulting from the subsequent events there is no certainty as to whether the Company will record its maiden profit or return to a positive working capital position in the near future. The Directors are confident that current negotiations, existing key relationships and the improved funding position will improve the sales, cash flow and overall financial position. However, timing delays in receiving future sales orders or in collecting sales receivables owing, unforeseen costs or need to repay debt, may require additional cash input from future debt or equity raisings.

After the debt restructure referred to above, the consolidated entity has interest bearing liabilities of $4,263,000 (current) and $3,000,000 (non-current) owing to 698. 698 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 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 the events subsequent to 31 December 2009, 698 Capital International Limited’s support 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 13

Advanced Engine Components Limited Half Year Report – 31 December 2009 Notes to the Financial Statements

4 Segment Information

(a) Description of segments

Management has determined the operating segments based on the reports reviewed by the Board in making strategic decisions. The Board considers the business from a geographic and product perspective. There are two key geographic segments, Australia and China, which produce, procure and sell AEC products to their own and other geographic regions. AEC Australia supplies product to Australia, China and France. Australia will also supply products to India in calendar 2010. AEC China supplies product to China, Australia and South East Asia. China will also supply products to South Asia and Africa in calendar 2010.

AEC has four product segments. Namely, sale of spares and services, sale of NGVS kits and components, sale of completed engines purchased from original equipment manufacturers incorporating AEC NGVS and research and development of new products. The Australian segment is responsible for research and development.

The Board considers the performance of the two key geographic segments in making strategic decisions. All geographic segments for the three product segments, other than research and development, are considered both jointly and separately for revenue and direct costs as there is considerable integration of all segments. Research and development does not have revenue of its own as it contributes and assists all segments.

In the strategic decision making process, assets and liabilities are only considered by the two key geographical segments.

(b) Segment information provided to the strategic steering committee

The segment information provided to the Board for the reportable segments for the 6 months ended 31 December 2009 was as follows:

Reporting segments Revenue Total segment revenue Inter-segment revenue Revenue from external customers Adjusted EBITDA Total segment assets Total segment liabilities	Australia $ China $ Total $
	361,103 402,185 763,288 (46,691) (9,528) (56,219)
	314,412 392,657 707,069
	(612,434) (480,435) (1,092,869)
	4,324,142 2,919,298 7,243,440
	2,890,341 3,773,732 6,664,073

The segment information provided to the Board for the reportable segments for the 6 months ended 31 December 2008 was as follows:

Reporting segments Revenue Total segment revenue Inter-segment revenue Revenue from external customers Adjusted EBITDA Total segment assets Total segment liabilities	Australia $ China $ Total $
	1,922,810 2,332,609 4,255,419 (1,550,850) (42,528) (1,593,378)
	371,960 2,290,081 2,662,041
	(2,195,184) (3,771,769) (1,142,720)
	5,609,040 4,694,682 10,303,722
	2,707,609 3,771,769 6,479,378

Page 14

Advanced Engine Components Limited Half-Year Report – 31 December 2009 Notes to the Financial Statements

4 Segment Information continued

(c) Other segment information - Adjusted EBITDA

The Board assesses the performance of the operating segments on a measure of adjusted EBITDA. The measurement basis excludes other income, corporate costs, financing costs, unrealised foreign exchange movements, depreciation, amortisation and intangible asset impairment expense. A reconciliation of adjusted EBITDA to operating profit before income tax is provided as follows:

Adjusted EBITDA Other income Corporate costs Finance costs Unrealised Foreign Exchange movements Depreciation Amortisation Impairment of intangible assets Loss before income tax from continuing operations	Consolidated 31 Dec 09 $ 31 Dec 08 $
	(1,092,869) (1,142,720) 68,613 114,166 (261,451) (347,373) (474,598) (276,077) (398,493) - (2,932) (96,231) (155,453) (185,088) (150,674) -
	(2,467,857) (1,933,323)

5 Dividends

No dividend has been paid or proposed in respect of the current or previous half year.

6 Borrowings

Current: Insurance premiums finance Loan from 698 Capital Asia Pacific Limited (A) Commercial loan from Westpac Loan from syndicate (B) Loan from CIM Special Situations Fund Limited Convertible Note held by 698 Capital Asia Pacific Ltd (A) Loan from Norvest Corporate Pty Ltd (B) Loan from CCM Global Limited Loan from 698 Capital Asia Pacific Ltd (A) Total Borrowings	Consolidated 31 Dec 09 $ 30 June 09 $
	33,731 134,922 907,397 869,589 15,947 31,141 759,555 - - 759,247 2,991,291 2,975,451 990 46,361 1,010,393 1,010,393 3,394,558 2,994,476
	9,113,862 8,821,580

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

(B) Syndicate members and Norvest Corporate Pty Ltd are related to Directors of the Company.

Page 15

Advanced Engine Components Limited Half-Year Report – 31 December 2009 Notes to the Financial Statements

7 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	Half Year Half Year 2009 2008 2009 2008 Shares Shares $ $
	479 6,446 61 825 - 4,361,529 - 872,306
	479 4,367,975 61 826,216

8 Commitments and Contingencies

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

9 Related Party Transactions

Prior to 30 June 2009 698 Capital Asia Pacific Ltd (“698”), a company of which Mr A Pun is a Director, agreed to increase their Sales Financing Facility to AEC to $3 million. On 24 August 2009 the Company drew down the remaining $220,000 balance of the facility. 698 received a $16,750 facility fee and six million options, as approved by shareholders on 25 November 2009, for increasing and extending the facility.

On 3 July 2009 shareholders approved the issue of up to 9,360,000 share options to parties related to Graham Keys, Antony Middleton and Albert Pun for providing $720,000 to, in part, refinance the $750,000 CIM SSF facility. To 31 December 2009 5,760,000 of these options had been issued. A further 720,000 were issued in January 2010.

10 Subsequent Events

Subsequent to 31 December 2009, the Company has placed 21,818,182 shares at $0.055 per share to raise $1,200,000. A non renounceable rights issue offer will be made to all eligible shareholders, on the basis of one new share for every three shares held as at 3 March 2010, at $0.055 per share.

Subsequent to 31 December 2009, 698 Capital Asia Pacific Ltd (“698”), a party related to AEC’s major shareholder, consolidated their $750,000 short term loan, their $3,000,000 sales financing facility, together with all outstanding interest on those loans, into a single loan repayable at call. In addition, 698 extended the loan facility by a further $800,000 to $4,968,632. As at the date of this report the facility has been drawn down to $4,263,466. The loan retains security of a fixed charge over the accounts receivable and inventory and continues at the previous interest rate of 11.68% with interest payable quarterly in arrears.

Page 16

Advanced Engine Components Limited Half-Year Report – 31 December 2009 Notes to the Financial Statements

10 Subsequent Events contined

Subsequent to 31 December 2009, 698 extended repayment of the $3,000,000 due under the convertible notes which expired on 31 December 2009 to 31 December 2011. The loan retains the fixed and floating charge over the assets of AEC and has the same interest rate being the Better Business Loan Reference Rate as quoted by the Commonwealth Bank plus 1%. 698 has agreed to take up 20,000,000 shares of its 21,474,577 share entitlement under the rights issue. 698’s equity subscription will raise $1,100,000 which will be used to pay the accrued interest on the expired convertible notes. Subject to AEC shareholder approval, 698 will receive 3,000,000 options, exercisable at $0.055 per share on or before 30 November 2011, as consideration for extending its loan facilities.

Page 17

38 Station Street Subiaco, WA 6008 PO Box 700 West Perth WA 6872 Australia

Tel: +8 6382 4600 Fax: +8 6382 4601 www.bdo.com.au

==> picture [78 x 30] intentionally omitted <==

26 February 2010

The Directors Advanced Engine Components Limited 14 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 Advanced Engine Components Limited for the half-year ended 31 December 2009, 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 review; and

• No contraventions of any applicable code of professional conduct in relation to the review.

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

==> picture [131 x 26] intentionally omitted <==

Peter Toll Director

==> picture [48 x 16] intentionally omitted <==

BDO Audit (WA) Pty Ltd Perth, Western Australia

BDO Audit (WA) Pty Ltd ABN 79 112 284 787 BDO is a national association of separate partnerships and entities. Liability limited by a scheme approved under Professional Standards Legislation.

38 Station Street Subiaco, WA 6008 PO Box 700 West Perth WA 6872 Australia

Tel: +8 6382 4600 Fax: +8 6382 4601 www.bdo.com.au

==> picture [78 x 30] intentionally omitted <==

INDEPENDENT AUDITOR’S REVIEW REPORT TO THE MEMBERS OF ADVANCED ENGINE COMPONENTS LIMITED

Matters Relating to the Electronic Presentation of the Half-Year Financial Report

This auditor’s report relates to the half-year financial report of Advanced Engine Components Limited for the period ended 31 December 2009 included on Advanced Engine Components Limited’s web site. The disclosing entity’s directors are responsible for the integrity of Advanced Engine Components Limited’s web site. We have not been engaged to report on the integrity of Advanced Engine Components Limited’s web site. The auditor’s review report refers only to the statements named below. It does not provide an opinion on any other information which may have been hyperlinked to/from these statements. If users of this halfyear report are concerned with the inherent risks arising from electronic data communications, they are advised to refer to the hard copy of the reviewed half-year financial report to confirm the information included in the reviewed half-year financial report presented on this web site.

Report on the Half-Year Financial Report

We have reviewed the accompanying half-year financial report of Advanced Engine Components Limited, which comprises the statement of financial position as at 31 December 2009, and the statement of comprehensive income, statement of changes in equity and statement of cashflows 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 controls 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 an 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 2009 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.

BDO Audit (WA) Pty Ltd ABN 79 112 284 787 BDO is a national association of separate partnerships and entities. Liability limited by a scheme approved under Professional Standards Legislation.

==> picture [78 x 30] intentionally omitted <==

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.

Independence

In conducting our review, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001 would be in the same terms if it had been given to the directors at the time that this auditor’s review report was made.

Basis for Qualified Auditor’s Conclusion

Attention is drawn to the recoverability of the consolidated entity’s trade receivables as disclosed in Note 2 (ii) owing from Weichai Peterson Gas Engine Co. Ltd. Negotiations are currently in progress however as at the date of our report these have not been finalised and accordingly, we were unable to perform sufficient audit procedures in relation to the recoverability of these receivables at the value recorded in the statement of financial position.

Conclusion

Based on our review, which is not an audit, except for the effect of such adjustments, if any, as might have been determined to be necessary had we been able to satisfy ourselves as to the recoverability of the trade receivables, we have not become aware of any matter that makes us believe that the half-year financial report of Advanced Engine Components Limited is not in accordance with the Corporations Act 2001 including:

• (a) giving a true and fair view of the consolidated entity’s financial position as at 31 December 2009 and of its performance for the half-year ended on that date; and

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

Material Uncertainty Regarding Continuation as a Going Concern

Without qualifying our conclusion above, we draw attention to Note 3 in the financial report which indicates that the consolidated entity incurred a net loss of $1,738,471 during the halfyear ended 31 December 2009 and, as of that date, the consolidated entity’s current liabilities exceeded its total assets by $7,334,395. These conditions, along with other matters as set forth in Note 3 indicate the existence of a material uncertainty which may cast significant doubt about the consolidated entity’s ability to continue as a going concern and therefore whether it will be able to realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the report.

==> picture [78 x 30] intentionally omitted <==

Material Uncertainty Regarding Recoverability of Intangible Assets

Without qualification to the conclusion expressed above, attention is drawn to the recoverability of the consolidated entity’s intangible assets as disclosed in Note 2 (i) (b) relating to engine development costs. The recoverability of the intangible asset is dependent upon the consolidated entity being able to meet it’s forecast revenues and profits in the future. Should the consolidated entity not be successful, uncertainty exists which may cast doubt about the recoverability of this intangible asset at the value recorded in the financial position.

BDO Audit (WA) Pty Ltd

==> picture [129 x 35] intentionally omitted <==

Peter Toll Director

Signed in Perth, Western Australia Dated this 26[th] day of February 2010.