FIRST LITHIUM LIMITED — Regulatory Filings 2006

Mar 15, 2006

ADVANCED ENGINE COMPONENTS LIMITED

Quality Company ISO 9891 Eig.13785
SAI Global

14 ENERGY STREET PO BOX 3126 MALAGA 6090 WESTERN AUSTRALIA

TEL: +61 8 9209 6900 FAX: +61 8 9209 6999

15th March 2006

Company Announcements Office The Australian Stock Exchange Limited

By: e-lodgement (ASX code ACE)

FINANCIAL REPORT FOR THE HALF-YEAR ENDED 31 DECEMBER 2005

The Directors of Advanced Engine Components Ltd (AEC) are pleased to release the financial report for the half-year ended 31 December 2005. The report details the continued progress with engine development and component supply contracts in China. France and Australia, and an improvement in the financial position of the Company.

The Company had a:

• 23% increase in income and a 28% increase in gross profit.
• 10% decrease in loss.
• $\bullet$ 30% improvement in operating cash flow
• 14 cent improvement in net asset backing per share.

compared to the reported 31 December 2004 results.

A shareholders meeting has been called for 24^th March 2006 to approve the conversion of approximately \$750,000 debt to equity. This will improve the net asset backing per share by a further 0.7 cents per share.

For further information please contact Tony Middleton (Managing Director) on (08) 9209 6911 or email: shares@advancedengine.com

Appendix 4D

Half Yearly Report

Name of Entity:	Advanced Engine Components Limited
ABN:	67 009 081 770
Reporting Period:	Half year ended 31 December 2005
Previous corresponding Period:	Half year ended 31 December 2004

Results for Announcement to the Market

\$A'000

Revenues from ordinary activities	Up	23%	ŤO.	1,302
(Loss) from ordinary activities after tax attributable to members	Down	10%	ŤO.	(748)
(Loss) for the period attributable to members	Down	10%	ŧо	(748)
Dividends	Amount per security		Franked security	amount per
Interim dividend	NIL¢		NIL¢

Results Commentary

Refer commentary in the attached Half-year Financial Report

Net Tangible assets per security

	Current period	Previous corresponding period
Net tangible asset backing per ordinary security	(0.002)	(0.141)

Control gained over entities having material effect

$N/A$

Loss of control of entities having material effect

$N/A$

Details of aggregate share of profits (losses) of associated and joint venture entities

$N/A$

This report is based on:

The accounts have been subject to review

Arfeddho

Sign here: ....... . . . . . . . . . . . . . . (Director/Company Secretary)

Date: 15 March 2006

Print name: A Middleton (Managing Director)

HALF-YEAR FINANCIAL REPORT

31 December 2005

Advanced Engine Components Limited

ABN 67 009 081 770

Table of Contents

	Directors' Report
	Auditor Independence Declaration
	Independent Review Report on the financial report to Advanced Engine Components Limited 6
	Directors' Declaration
	Consolidated Income Statement
	Consolidated Balance Sheet
	Statement of Changes in Equity
	Consolidated Cash Flow Statement
	Notes to the Financial Report
1	Summary of Significant Accounting policies
2	Going Concern Basis
3	Segment Information
4	Revenue and Expenses from Ordinary Activities
5	Dividends
6	Additional information
7	Interest-bearing liabilities
8	lssued capital
9	Contingent Liabilities and Contingent Assets
10	Subsequent Events

Directors' Report

The Directors of Advanced Engine Components Limited (AEC) submit herewith the financial report for the half-year ended 31 December 2005. In order to comply with the provisions of the Corporations Act 2001, the Directors report as follows:

Details of Directors

The names of the Directors of AEC during or since the end of the half-year are:
Graham Kevs	Thomas Liu	William Fang
Antony Middleton	William Lee

Review of Operations

During the period under review, the Company continued to supply components and services to frisbus and Iveco in France and the Public Transport Authority and its contractor in Perth, and continued the commercialisation of its core technology, the AEC Natural Gas Vehicle System (NGVS) in China and Australia.

Supply of spare parts to Irisbus continued for the 600 buses operating in France and the Company continued installation on these buses for the Closed Loop (lambda sensor) enhancement of the AEC NGVS, which was certified to Euro 4 exhaust emission standard in January 2004 in Switzerland. Irisbus buses with AEC Natural Gas Vehicle System technology have now covered over 66 million kilometres in route service since the first bus was commissioned in 2002.

Engine Development Programs

AEC has nine active natural gas ("NG") engine development programmes in progress for three different end suppliers.

First Auto Works (China):

The Company has made substantial progress on the Co-operation Agreement with First Auto Works (FAW) of China and has expanded the scope of the technical co-operation to include two further NG engine products. AEC and FAW are now developing the original 6.6L (6 cyl) and additionally a 7.1L (6 cyl) and a 3.2L (4 cyl) NG engine. The 6.6L engine achieved Euro 3 certification and has completed the first stage of endurance testing. This engine was displayed at the Clean Vehicles Fair in Beijing in November 2006 with significant interest from vehicle manufacturers. The 7.1L engine has been built for export to non critical emission countries and both models of engine are currently being installed in buses and trucks for road testing and demonstration to potential customers. The 3.2L engine was emissions certified to current Chinese standards and is currently undergoing endurance testing.

Weichai (China):

AEC entered into a product development agreement with Weifang Weichai Peterson Gas Engine Co (Weichai) in September 2004 to develop compressed natural gas (CNG,) liquefied natural gas (LNG) and liquefied petroleum gas (LPG) versions of a 9.7 litre 6 cylinder engine in a commercial arrangement under which Weichai would pay for the engine developments and ultimately purchase AEC NGVS components for these engines.

This agreement was amended in June 2005, substituting a 6.2L, 6-cylinder natural gas engine program for the LPG engine development part of the program. The substitution was made because Weichai believe that an additional natural gas engine product has more demand in the Chinese market than an LPG engine.

Development work on the 9.7L engine is complete and the engine was prepared for certification testing in China

As part of the development agreement with Weichai, AEC is entitled to receive milestone payments totalling AUD450,500. To date 30% has been invoiced to Weichai with the balance scheduled to be invoiced as AEC meets these milestones during the remainder of the 2006 calendar year.

Motive Alliance:

AEC has signed an Alliance Agreement to supply technical support and AEC NGVS components to Motive Energy Pty Ltd an industry based Australian consortium, which through its alliance partners will integrate the supply of fuel, infrastructure and vehicles for the Australian commercial NG vehicle market.

Under the Agreement AEC has delivered to Motive Energy the first of three versions of NG 7.8L Isuzu trucks.

Summarv:

AEC continues to develop components for its NGVS and the manufacture and supply to China of the AEC designed and patented NG injector commenced in Perth this period.

17 NGVS kits were supplied to China and eight buses and trucks are being prepared for FAW and Weichai for testing and commercial display.

Results of Operations

The consolidated loss after tax for the half year attributable to the members of Advanced Engine Components Limited was \$748,525 (2004: loss \$812,913).

The turnover of the Company increased in the period under review, compared to the previous corresponding period as a result of an increase in the number of kits supplied to Irisbus in France and from additional enhancements carried out on each of the 600 Irisbus vehicles.

Cash

At 31 December 2005, AEC had total cash reserves of \$1,501,132 (Dec 2004: \$79,923).

Cash flow from operating activities was a net outflow of \$438,912 compared to \$624,786 net outflow in the previous corresponding period.

Cash outflow from investing activities includes payments for plant and equipment of \$127,714 (Dec 2004: 49,326) and payment relating to development costs of \$516,328 (Dec 2004: \$139,843).

Financing activities produced a net cash inflow of \$1,275,970, primarily from the \$1,543,050 placement of 11,430,000 shares in December 2005 to nominated parties of Capital Investments Partners Pty Ltd offset by a repayment of borrowings of \$197,997 (Dec 2004 \$ 228,834) and lease payments of \$69,083 (Dec 2004: \$78,289).

Balance Sheet

At 31 December 2005, net assets increased to \$960,327 compared to \$203,405 as at 30 June 2005, primarily due to the receipt of capital raising funds in December 2005 of \$1,543,050.

Independence Declaration by Auditor

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

This independence declaration is on page 5 and forms part of this Directors' Report.

Signed in accordance with a resolution of Directors.

Arfeddhol

A Middleton Director Perth, Western Australia, 15 March 2006

Horwath Audit (WA) Pty Ltd

ABN 79 112 284 787 Chartered Accountants A member of Horwath International 128 Hay Street Subiaco WA 6008 PO Box 700 West Perth WA 6872 Email horwath@perth.horwath.com.au Telephone (08) 9380 8400 Facsimile (08) 9380 8499

15 March 2006

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

AUDITOR'S INDEPENDENCE DELCLARATION

This declaration is made in connection with my half-year review of the financial report of Advanced Engine Components Limited and Controlled Entities for the half-year ended 31 December 2005 and in accordance with the provisions of the Corporations Act 2001.

As lead auditor I declare that, to the best of my knowledge and belief, there have been:

• No contraventions of the auditor independence requirements of the Corporations $\bullet$ . Act 2001 in relation to this review;
• No contraventions of the Code of Professional Conduct of the Institute of $\bullet$ Chartered Accountants in Australia in relation to this review.

Yours sincerely HORWATH Audit (WA) Pty Ltd

A G BEVAN Director

Horwath Audit (WA) Ptv Ltd ABN 79 112 284 787 Chartered Accountants A member of Horwath International 128 Hay Street Subiaco WA 6008 PO Box 700 West Perth WA 6872 Email horwath@perth.horwath.com.au Telephone (08) 9380 8400 Facsimile (08) 9380 8499

Independent review report on the financial report to Advanced Engine Components Limited

We have conducted an independent review of the accompanying financial report of Advanced Engine Components Limited and the consolidated entity for the half-year ended 31 December 2005. The financial report comprises the consolidated balance sheet at 31 December 2005, and the consolidated income statement, statement of changes in equity, cash flow statement, summary of significant accounting policies and other explanatory notes, and the directors' declaration for the half vear then ended. The consolidated entity comprises both the company and the entities it controlled at the half-year end or during that half-year.

Directors' Responsibility for the Financial Report

The directors of the company are responsible for the preparation and fair presentation of the financial report in accordance with Accounting Standards in Australia and the Corporations Act 2001. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditor's Responsibility

Our responsibility is to perform an independent review of the financial report in order to state whether, on the basis of the procedures described, anything has come to our attention that would indicate that the financial report is not presented fairly in accordance with Accounting Standard AASB 134 "Interim Financial Reporting" and other mandatory financial reporting requirements in Australia and the Corporations Act 2001, so as to present a view which is consistent with our understanding of the consolidated entity's financial position, and performance as represented by the results of its operations and its cash flows, and in order for the company to lodge the financial report with the Australian Securities and Investments Commission.

Our review was conducted in accordance with Australian Auditing and Assurance Standards applicable to review engagements. A review is limited primarily to inquiries of the company's personnel and analytical procedures applied to the financial data. These procedures do not provide all the evidence that would be required in an audit, thus the level of assurance provided is less than that given in an audit. We have not performed an audit and, accordingly, we do not express an audit opinion.

Independence

We are independent of the company and group, and have complied with the independence requirements of the Corporations Act 2001.

Statement

Based on our review, which is not an audit, 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 2005 and of its performance for the half-year ended on that date; and
• (b) complying with Accounting Standard AASB 134 "Interim Financial Reporting" and the Corporations Regulations 2001.

Inherent uncertainty regarding continuation as a going concern

Without qualification to the review opinion expressed above, attention is drawn to the following matter. As a result of the matters detailed in Note 2, there is inherent uncertainty whether the Company will be able to continue as a going concern and therefore whether it will realize its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial report.

Dated the 15 day of March 2006.

HORWATH Audit (WA) Pty Ltd

A G Bevan Director

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 9 to 26:
• give a true and fair view of the financial position as at 31 December 2005 and of the $(i)$ performance for the half-year ended on that date of the consolidated entity; and
• $(ii)$ comply with Accounting Standards AASB 134 "Interim Financial Reporting" and the Corporations Regulations 2001; and
• $(b)$ subject to the matters referred to in Note 2 to the financial statements, there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable.

On behalf of the Board

Arfeddhol

A Middleton Director

Perth, Western Australia, 15 March 2006

Consolidated Income Statement

for the half-year ended 31 December 2005

		Consolidated
	Notes	31 Dec 05 \$	31 Dec 04 \$
Sales Revenue	4	1,302,690	1.057,841
Cost of goods sold		(599, 433)	(507, 811)
Gross profit		703,257	550,030
Other Revenue from ordinary operations		35,756	17,693
Distribution expenses		(11, 881)	(3,759)
Marketing expenses		(20, 454)	(8,829)
Occupancy expenses		(113, 833)	(100, 946)
Corporate expenses		(157, 118)	(244, 890)
Administration expenses		(660, 419)	(405, 666)
Development expenses		(378, 405)	(763,089)
Borrowing costs		(145, 428)	(220, 457)
Reversal of warranty provision		$\overline{v}$	345,000
Profit/(Loss) from ordinary activities before income tax expense		(748, 525)	(834, 913)
Income tax (expense) benefit relating to ordinary activities		$\sim$	$\overline{m}$
Profit/(Loss) attributable to members of the parent entity		(748, 525)	(834, 913)
Total changes in equity other than those resulting from transactions with owners as owners		(748, 525)	(834, 913)
Basic (loss) earnings per share		Cents (0.9)	Cents (2.6)

The above statement of financial performance should be read in conjunction with the accompanying notes.

Consolidated Balance Sheet

as at 31 December 2005

GE AT PLANCITION EAGL			Consolidated
	note	31 Dec 05 \$	30 Jun 05 \$
Current Assets
Cash and cash equivalents Trade receivables	6	1,501,132 495,957	1,308,116 479,299
Inventories		488,064	380,486
Other current assets		164,376	300,248
Total current assets		2,649,529	2,468,149
Non-Current Assets
Property, plant and equipment		928,934	905,447
Intangible assets		1,188,754	672,423
Total non-current assets		2,117,688	1,577,870
Total assets		4,767,217	4,046,019
Current Liabilities
Trade and other payables		730,528	512,441
Interest-bearing liabilities	7	1,026,402	1,225,215
Provisions		353,502	352,899
Total current liabilities		2.110,432	2.090,555
Non-Current Liabilities
Interest-bearing liabilities		1,677,000	1,734,001
Provisions		19,458	18,058
Total non-current liabilities		1,696,458	1,752,059
Total liabilities		3,806,890	3,842,614
Net assets		960,327	203,405
Equity
Parent entity interest
Contributed equity	8	10,896,190	9,476,993
Convertible notes Reserves - options		1,323,000 318,692	1,323,000 232,442
Reserves - asset revaluation		750,000	750,000
Accumulated losses		(12, 327, 555)	(11,579,030)
Total equity		960,327	203,405

The above statement of financial position should be read in conjunction with the accompanying notes.

Statement of Changes in Equity

for the half-year ended 31 December 2005

	Issued Capital	Convertible Notes	Accumulated Losses	Asset Revaluation Reserve	Employee Equity Benefits Reserve	Total Equity
	\$	\$	\$	\$	\$	\$
As at 1 July 2005	9,476,993	1,323,000	(11, 579, 030)	750,000	232,442	203,405
Loss for the period	w.	m	(748, 525)	$\ddot{\phantom{1}}$	$\mathbf{w}$	(748.525)
Total Expense for the
year recognised in
equity	9,476,993	1,323,000	(12, 327, 555)	750,000	232,442	(545, 120)
Issue of Share capital	1,543,050	$\overline{ }$			$\overline{1}$	1,543,050
Share issue costs	(123, 853)		$\overline{ }$	$\overline{ }$	$\overline{u}$	(123, 853)
Cost of share-based
payment					86,250	86,250
At 31 December 2005	10,896,190	1,323,000	(12, 327, 555)	750,000	318,692	960,327
As at 1 July 2004	25,809,199		(35,645,076)		$\mathbf{w}$	(9,835,877)
Loss for the period		$\ddot{\phantom{a}}$	(834, 913)	$\ddot{\phantom{a}}$	$\ddot{\phantom{a}}$	(834, 913)
Total Expense for the year recognised in
equity	25,809,199		(36,479,989)		$\overline{1}$	(10,670,790)
Share capital reduction
- permanently lost	(25,809,199)		25,809,199	$\blacksquare$	$\overline{1}$
Issue of Share capital	3,150,000	mw			$\blacksquare$	3,150,000
Share issue costs	(95,001)					(95,001)
Valuation gains taken
to equity		m		750,000		750,000
Cost of share-based
payment		ww			22,000	22,000
At 31 December 2004	3,054,999	$\blacksquare$	(10, 670, 790)	750,000	22,000	(6, 843, 791)

Consolidated Cash Flow Statement

for the half-year ended 31 December 2005

	Consolidated
	31 Dec 05 \$	31 Dec 04 S
Cash Flows from Operating Activities
Receipts from customers	1,289,100	1,502,001
Payments to suppliers and employees	(1,712,953)	(2,082,352)
Interest received	11,900	3,069
Income tax (paid) refund received		(887)
Interest paid and borrowing costs	(26.959)	(47.504)
Net cash (outflow) from operating activities	(438, 912)	(624, 786)
Cash Flows from Investing Activities
Payments for property, plant and equipment	(127, 714)	(49,326)
Proceeds from sale of property, plant and equipment		11.809
Payment for capital work in progress	(516, 328)	(139, 843)
Net cash inflow/(outflow) from investing activities	(644.042)	(177, 360)
Cash Flows from Financing Activities
Repayment of term loans	(197, 997)	(228, 834)
Proceeds from borrowings - other		26,865
Proceeds from borrowings - parent entity		210,001
Proceeds from issue of equity securities	1,543,050	850,000
Share issue expenses	(69,083)	(95,001) (78, 289)
Lease payments
Net cash inflow/(outflow) from financing activities	1.275,970	684.742
Net (decrease) increase in cash held	193,016	(117, 404)
Cash at the beginning of the half-year	1,308,116	197,327
Effects of exchange rate changes on the balance of cash held in foreign currencies		$n -$
Cash at the end of the half-vear	1.501.132	79,923

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

Notes to the Financial Report

$\blacksquare$ Summary of Significant Accounting policies

$(a)$ Basis of preparation

The half-year financial report is a general purpose financial report prepared in accordance with the Corporations Act 2001 and AASB 134 'Interim Financial Reporting'. Compliance with AASB 134 ensures compliance with International Financial Reporting Standard IAS 34 'Interim Financial Reporting'. The half-year financial report does not include notes of the type normally included in the annual financial report and should be read in conjunction with the 2005 annual financial report.

$(b)$ Statement of compliance

The half-year financial report complies with Australian Accounting Standards, which include Australian equivalents to International Financial Reporting Standards ("AIFRS"). Compliance with AIFRS ensures that the half-year financial report, comprising the financial statements and notes thereto, complies with International Financial Reporting Standards ("IFRS").

This is the first half-year financial report prepared based on AIFRS and comparatives for the half-year ended 31 December 2004 and full-full year 30 June 2005 have been restated accordingly. Reconciliations of:

• AIFRS equity as at 1 July 2004, 31 December 2004 and 30 June 2005; and
• AIFRS profit for the half-year 31December 2004 and fully year 30 June 2005, to the balances $\bullet$ reported in the 31 December 2004 half-year report and 30 June 2005 full-year financial report prepared under AGAAP are detailed in Note (v) below.

$(c)$ Basis of consolidation

The consolidated financial statements comprise the financial statements of Advanced Engine Components Limited (the parent company) and all the entities that Advanced Engine Components Limited controlled from time to time during the period and at the reporting date.

Information from the financial statements of subsidiaries is included from the date the parent company obtains control until the time such control ceases. Where there is a loss of control of a subsidiary, the consolidated financial statements include the results for the part of the reporting period during which the parent company has control.

Subsidiary acquisitions are accounted for using the purchase method of accounting.

The financial statements of subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist.

All inter-company balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full. Unrealised losses are eliminated unless costs can be recovered

Foreign currency translation $(d)$

Both the functional and presentation of currency of Advanced Engine Components Limited and its Australian subsidiaries is in Australian dollars (AUD).

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

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

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

The functional currency of the overseas subsidiaries (AEC China Holdings Limited and AEC (China) limited) is the Chinese Yuan.

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

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

$(e)$ Property, Plant and Equipment

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

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

• Plant and equipment over 3 to 13 years
• Leasehold improvements 10 years

Impairment

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

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

If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount.

The recoverable amount of plant and equipment is the greater of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

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

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

$(f)$ Borrowing costs

Borrowing costs are recognised as an expense when incurred.

$(g)$ Intangible assets

Research and development costs Research costs are expensed as incurred.

Development expenditure incurred on an individual project is carried forward when its future recoverability can reasonably be regarded as assured.

Following the initial recognition of the development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses.

Any expenditure carried forward is amortised over the period of expected future sales from the related project.

The carrying value of development cost is reviewed for impairment annually when the asset is not in yet in use, or when an event arises that may cause management to re-assess recoverability.

Summary of the policies applied to the Group's intangible assets is as follows:

	Development costs
Useful lives	Finite
Method used	3 years
Internally generated/acquired	Internally generated
Impairment test/recoverable amount testing	Amortisation method reviewed at each financial year-end;
	reviewed annually for indicator of impairment

$(h)$ Recoverable amount of assets

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

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

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

Investments $(i)$

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

After initial recognition, investments which are classified as held for trading and available-for-sale, are measured at fair value. Gains or losses on investments held for trading are recognised in the income statement.

Gains or losses on available-for-sale investments are recognised as a separate component of equity until the investment is sold, collected or otherwise disposed of, or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the income statement.

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

Other long-term investments that are intended to be held-to-maturity, such as bonds, are subsequently measured at amortised cost using the effective interest rate method.

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

For investments carried at amortised cost, gains and losses are recognised in income when the investments are derecognised or impaired, as well as through the amortisation process.

For investments that are actively traded in organised financial markets, fair value is determined by reference to Stock Exchange quoted market bid prices at the close of business on the balance sheet date.

For investments where there is no quoted market price, fair value is determined by reference to the current market value of another instrument which is substantially the same or is calculated based on the expected cash flows of the underlying net asset base of the investment. Purchases and sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place are recognised on the trade date i.e. the date that the Group commits to purchase the asset.

$(i)$ Inventories

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

$(k)$ Trade and other receivables

Trade receivables are recognised and carried at original amount less an allowance for any uncollectible amounts.

$(1)$ Cash and cash equivalents

Cash and short-term deposits in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less.

For the purposes of the Cash Flow Statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.

Interest-bearing loans and borrowings $(m)$

All loans are initially recognised at cost, being the fair value of the consideration received net of issue costs associated with the borrowing.

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement.

Gains and losses are recognised in the income statement when the liabilities are derecognised and as well as through the amortisation process.

$(n)$ Provisions

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

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

A provision for warranty is recognised for all products under warranty at the reporting date based on sales volumes and past experience of the level of repairs and returns.

A provision for dividends is not recognised as a liability unless the dividends are declared, determined or publicly recommended on or before the reporting date.

If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

Pension and employment benefits ${o}$

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

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

$(p)$ Share-base payment transactions

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

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

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

The fair value of equity-settled transactions is recognised, together with a corresponding increase in equity

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

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

• The extent to which the vesting period has expired, and $(1)$
• (ii) The number of awards that, in the opinion of the directors of the group, will ultimately vest. This opinion is formed based on the best available information at balance date. No adjustment is made for the likelihood of market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date.

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

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

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

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

The Group has applied the requirements of AASB 1 "First-time Adoption of Australian Equivalents to International Financial Reporting Standards" in respect of equity-settled awards and has applied AASB 2 "Share-Based Payments" only to equity instruments granted before 7 November 2002 that had not vested on or before 1 January 2005.

$(\mathbf{q})$ Leases

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

Operating Leases

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

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

Finance leases

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

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

$(n)$ Revenue

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

Sale of goods

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

Interest

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

$(s)$ Income fax

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

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

• except where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit; and
• in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

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

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

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

$(t)$ Other taxes

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

• where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and
• receivables and payables are stated with amounts of GST included.

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

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

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

$(u)$ AASB 1 Transitional exemptions

The Group has made its election in relation to the transitional exemptions allowed by AASB 1 "First-time Adoption of Australian Equivalents to International Financial Reporting Standards" as follows:

Business Combinations

AASB 3 "Business Combinations" was not applied retrospectively to past combinations (ie. business combinations that occurred before the date of transition to AIFRS).

Share Based Payments

AASB 2 "Share Based Payments" was not applied to equity instruments granted on or before November 2002 that vested before 1st January 2005.

(v) Impact of adoption of AIFRS

The impacts of adopting AIFRS on the total equity and profit after tax as reported under previous Australian Accounting Standards ("AGAAP") are as follows:

Reconciliation of total equity as presented under previous AGAAP to that under AIFRS $(i)$

	Consolidated
	30 June 2005 \$	31 December 2004 \$	1 July 2004 \$
Total equity under AGAAP Recognition as an expense the fair value of options	203.405	(6.843,791)	(9,835,877)
$q$ ranted $(A)$ Recognition as a reserve the fair value of options	(232, 442)	(22,000)	$\overline{r}$
$q$ ranted $(A)$	232.442	22,000	$-$
Total AIFRS impact	$-$	$\overline{a}$	$-$
Total equity under AIFRS	203.405	(6.843,791)	(9,835.877)

(A) Under AASB 2 Share Based Payments, the Company must recognise the fair value of options and an expense on a pro-rata basis in the income statement. Share based payment costs are not recognised under AGAAP.

$(ii)$ Reconciliation of profit before tax under previous AGAAP to that under AIFRS

	Consolidated
	Year ended	Half-year ended
	30 June 2005 \$	31 December
		2004
		\$
Prior year loss before tax as previously reported	(1.506, 187)	(812, 913)
Recognition as an expense the fair value of options granted $(A)$	(210.442)	(22,000)
Prior year profit before tax under AIFRS	(1.716, 629)	(834.913)

(A) Under AASB 2 Share Based Payments, the Company must recognise the fair value of options and an expense on a pro-rata basis in the income statement. Share based payment costs are not recognised under AGAAP.

Explanation of material adjustments to the cash flow statements under previous (iii) AGAAP to that under AIFRS

There are no material differences between the cash flow statement presented under AIFRS and the cash flow statement presented under previous AGAAP.

$\overline{2}$ Going Concern Basis

The consolidated entity incurred a loss for the half year of \$748,525 (2004: half-year loss of \$834,913). For the six months ended 31 December 2005 the consolidated entity had a net cash outflow from operating activities of \$438,912 (31 December 2004: \$624,786).

At 31 December 2005 the consolidated entity had cash assets of \$1,501,132 (30 June 2005: \$1,308,116). It is proposed, subject to shareholder approval on 24 March 2006, that \$747,221 of current interest bearing liabilities owing to 698 Capital Asia Pacific Limited be converted to equity. Subsequent to conversion of this debt, and based on the half yearly accounts, the consolidated entity will have working capital of \$1,286,318 (30 June 2005: \$377,594) and shareholders funds of \$1,707.548 (30 June 2005: \$203,405).

As at 31 December 2005 the Company had nine active engine development programmes completed or nearing completion. In addition, the Company is building its China based marketing capability and other commercialization infrastructure. These activities have required and will continue to require additional cash input prior to further significant cash revenue being generated.

At 31 December 2005 the consolidated entity has interest bearing liabilities of \$747,221 (current) and \$1.677,000 (non-current) owing to 698 Capital Asia Pacific Limited. Subject to shareholder approval. the \$747,221 will be converted to equity on 24 March 2006. 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. This support is subject to the successful completion of a capital raising of approximately \$1,500,000 within three months from signature of the Directors Declaration and, further, subject to 698 Capital International Limited remaining the majority shareholder of the Company.

Based on 698 Capital International Limited's support, the potential to raise additional working capital and the expectation of increased sales revenue over the next twelve months, the Directors consider it appropriate that the financial report be prepared on a going concern basis.

3 Segment Information

The consolidated entity has one primary reporting business segment being the development and sales of Natural Gas Vehicle Systems.

31 Dec 05
	31 Dec 04
S	s
1,302,690	1.057,841
11,900	3.069
6,888	14,624
16,968
35,756	17,693
1,338,446	1,075,534
121,766	169,445 15,485
23,662	35,527
(5,013)	101,423
95,088	28,322
1,183	34,768
7,956	8,528
	6,812
1,591 86,656	(686, 375) (3,579)
	79,923
	6,063
	78,399

$\mathbf s$ Dividends

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

6 Additional information

Reconciliation of cash

For the purposes of the Cash Flow Statement, cash and cash equivalents comprise the following:

		Consolidated
	31 Dec 05	30 June 05
Cash at bank	501,132	1.308,116
Short-term deposits	1,000,000	TOWN.
	1,501,132	1,308,116

$\overline{7}$ Interest-bearing liabilities

	Consolidated
	31 Dec 05	30 June 05
Loan from 698 Capital Asia Pacific Limited (A)	747,221	741,673
Lease liabilities	138.992	147,088
Insurance premiums finance	140,189	336,454
	1.026.402	1.225.215

(A) The loan with 698 Capital Asia Pacific Limited, a related party, will be converted to equity subject to shareholder approval announced in the Notice of General Meeting scheduled for 24 March 2006, refer also to the subsequent events note 11.

$\bf 8$ Issued capital

	Consolidated
	31 Dec 05	30 June 05
	\$	\$
Ordinary shares
Issued and fully paid	10,896,190	9.476,993
Convertible Notes
Issued to 698 Capital Asia Pacific Limited	3,000,000	3,000,000
Less: classified as non-current interest bearing loan	(1,677,000)	(1,677,000)
Equity component	1,323,000	1.323,000
	Number of
	shares	\$
Movements in ordinary shares on issue
As at 1 July 2005	82,534,266	9,476,993
Issued during the period for the placement to nominated parties
of Capital Investment Partners Pty Ltd	11,430,000	1,543,050
Less: capital raising costs	wn	(123, 853)
As at 31 December 2005	93,964,266	10.896,190

g Contingent Liabilities and Contingent Assets

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

CRMT commenced litigation against Irisbus on 8 July 2004 in the Commercial Court of Lyon and Irisbus have counterclaimed against CRMT requesting an expert evaluation of the facts in relation to the dispute between the two parties. CRMT has joined AEC to the action in relation to the counterclaim by Irisbus against CRMT.

The expert evaluation was expected to be completed by 31 July 2005 but has been extended to 30 September 2006. It requires legal and technical input from the Company, Irisbus and CRMT.

After completion of the expert valuation the parties can continue to bring actions against each other on the merits of the case. Any such action could last 12 to 24 months. Apart from the $\epsilon$ 1.508.217.56 claimed against Irisbus by CRMT, Irisbus has alleged that the costs of the operational problems amount to €10,000,000 but no quantum of loss has been officially claimed by Irisbus against AEC or CRMT.

After the expert has delivered it's finding, any party may amend or bring a fresh claim including their estimate as to the loss they have suffered. It will only be at this time that AEC will have an understanding of the quantum of claim (if any) that it is exposed to. Currently neither Irisbus nor CRMT is claiming any specific quantum of loss from AEC.

AEC will vigorously defend any claim made against it after the expert has concluded its evaluation. and will pursue all of its legal remedies against CRMT for any loss that CRMT may have occasioned to AEC.

AEC has instructed Delsol & Associes in Lyon, France to represent it in relation to the expert valuation, and in relation to any action commenced against or by AEC on the merits of the matter. The Directors have no reason to believe that the provision made for warranty in the accounts is

insufficient.

10 Subsequent Events

On the 1 February 2006 \$150,000 was paid as part settlement of the purchase of Gas Torque Engines Ptv Ltd.

A Notice of General Meeting on the 24 March 2006 was mailed to members on the 21 February 2006. Within the Notice there are two resolutions being put to members which will, if approved, effect the issued capital of the Company:

• resolution to approve the issue of 949,367 shares to the vendors of Gas Torque Engines Pty Ltd as part consideration of the purchase which settled an outstanding royalty dispute; and
• resolution to approve the issue of up to 5,555,555 shares to 698 Capital Asia Pacific Limited $\bullet$ on conversion of its existing secured loan to the Company.

Apart from the above, at the date of this report no matters or circumstances have arisen since 31 December 2005 that will significantly affect or may significantly affect:

• • the operations in the financial year subsequent to 31 December 2005 of the consolidated entity constituted by AEC and entities it controls from time to time; or
• the results of those operations; or
• the state of affairs in the financial year subsequent to 31 December 2005 of the consolidated entity.