LARK DISTILLING CO. LTD — Annual Report 2004

Sep 19, 2004

MONTEC INTERNATIONAL LIMITED

ACN 104 600 544

AND CONTROLLED ENTITIES

FINANCIAL REPORT

FOR THE YEAR ENDED 30 JUNE 2004

FINANCIAL REPORT

FOR THE YEAR ENDED 30 JUNE 2004

CONTENTS

Directors' Report
Statement of Financial Performance
Statement of Financial Position	8
Statement of Cash Flows	9
Notes to the Financial Statements	10
Directors' Declaration	38
Independent Audit Report	-39

DIRECTORS' REPORT

Your directors present their report on the Company and its controlled entities for the financial year ended 30 June 2004.

Directors

The names of directors in office at any time during or since the end of the year are:

Jim Grant - Non Executive Chairman, appointed 22 September 2003; deceased 4 July 2004. Malcolm Campbell - Managing Director, appointed 27 May 2003.

Terry Cuthbertson - Non Executive Director, appointed 22 September 2003; Appointed Non-Executive Chairman from 4 July 2004.

Peter Herd - Non Executive Director, appointed 19 September 2003.

Dr Xuegin Du - Executive Director, appointed 27 May 2003.

Spiro Lymberatos - Executive Director, appointed 27 May 2003; resigned 22 September 2003.

The term of office for each director is three years from the date of appointment, at which time they may offer themselves for reelection. Directors were in office from the start of the financial year to the date of this report unless otherwise stated.

Principal Activities

The principal activity of the economic entity during the financial year was the marketing and licensing of monounsaturated dairy technology.

There was no significant change in the nature of the economic entity's principal activity during the financial year.

Operating Results

The consolidated loss of the economic entity after providing for income tax and eliminating outside equity interests amounted to \$2,463,917 (2003: NIL).

Dividends Paid or Recommended

No interim dividend was declared or paid during the current financial year. The directors are recommending that no final dividend be paid in respect of the year ended 30 June 2004.

Review of Operations

The directors are pleased with the Company's progress against the objectives set out in the listing prospectus. Central to these objectives was having the Company's monounsaturated milk product on retail shelves and selling in China. This has been achieved through our pilot marketing program within the test market of Qingdao. This initiative has been very successful and has prepared the Company for market entry into major cities such as Beijing and Shanghai.

A list of the milestones achieved since listing include:

• Exercise of the Asia Pacific Call Option and other contractual arrangements to secure the intellectual property for monounsaturated dairy;
• The first shipment of monounsaturated dairy premix to Qingdao, China;
• Completion of Montec's 'Meng Tai' trademark application, finalisation of the milk packaging designs, receipt of Chinese statutory approvals and 'Meng Tai' milk packaging developed;
• Point of sale merchandising and in-store promotional materials developed and the launch media advertising campaign finalised;
• Full production trials completed and supermarket entry approval gained for both UHT (long life) and Fresh milk products;
• Montec's 'Meng Tai' milk on sale in Qingdao, China through supermarkets (direct entry), wholesale and vendor networks (convenience stores) and through agents who specialise in servicing other cities within the Shandong province; and
• Official launch of the 'Meng Tai' product and commencement of the media campaign.

DIRECTORS' REPORT (CONTINUED)

Review of Operations (continued)

The pilot launch in Qingdao has provided the Company with valuable intelligence. As a direct result of the experience in the Qingdao market the benefits of the agency channel for product distribution are apparent.

Product extension development work has been undertaken since listing with valuable progress made. The company has developed the following extensions to add to its existing liquid milk offering:

• Drinking yoghurt;
• A range of flavoured milks: and
• Monounsaturated ice-cream (both premium and soft serve).

These are the beginning of Montec's 'Healthy Dairy Cabinet' range of products and secure Montec's advance towards 'functional foods' classification. This classification will further reinforce Montec's technology and ingredients as a valuable requirement for dairy processors seeking to meet consumer requirements.

Significant Changes in State of Affairs

The only significant change in the state of affairs of the parent entity that occurred during the financial year was that on the 12^th November 2003 the Company listed on the ASX. The Company raised gross proceeds of \$10 million through the issue of 20 million new shares at \$0.50 per share.

After Balance Date Events

The board notes with deep regret the death of Mr Jim Grant in early July 2004. With Mr Grant's untimely death Mr Terry Cuthbertson has been appointed by the board as Chairman of the Company. There are no other matters or circumstances that have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the economic entity, the results of those operations, or the state of affairs of the economic entity in future financial years.

Future Developments

The likely developments in the operations of the economic entity and the expected results of those operations in future financial years are as follows:

i. As previously advised the Company is in negotiation with a network of agents throughout China called the National Agency Network. Under current discussion is the requirement for Montec to commit to delivering one million litres of milk per month initially, with this volume moving to three million litres per month by the end of the first 12 months. As the Beiling and Shanghai markets combined represent 50 percent of China's urban dairy consumption, the opportunity to establish distribution not only in these centres but also throughout greater urban China is attractive.

Environmental Issues

The economic entity's operations are not subject to significant environmental regulation.

Information on Directors

Jim Grant Qualifications	- Chairman (Non-executive) - Deceased -FCA, FAICD
Experience	- Appointed Chairman in 2003. Board member since 2003. Former CEO and Chairman of Deloitte Touche Tomatsu, Former directorships include Chairman of Co-operative Farmers and Graziers Direct Meat Supply Limited, Citistate Corporation, Midware Limited, Pizzey Limited, ZK Securities Limited, Deputy Chairman of ARAB Bank Australia Limited, Integral Energy Limited, Sydney Water Corporation, Permewan Wright Limited, Anderson Meat Industries Limited, Hecla Rowe Limited, Australian Graduate School of Management, The Royal Institute for Deaf and Blind Children and Citistate Aviation Pty Limited.
Interest in Shares and Options Special Responsibilities	-10,000 ordinary shares in Montec International Limited - Mr Grant was a Member of the Audit Committee
Malcolm Campbell	-Managing Director
Qualifications Experience	-B. Comm, MAICD -Managing Director of Montec International Limited from May 2003. Previous roles have included General Manager with Woolworths and Chief Business Analyst with Provest Limited. Malcolm Campbell's former directorships include Integrated Marketing and Business Services Pty Limited, Workforce Technologies Limited and Australian Healthy Dairy Corporation Pty Limited.
Interest in Shares and Options	-12,615,000 Ordinary Shares of Montec International Limited and options to acquire a further 5,000,000 shares in Montec International Limited.
Special Responsibilities	- Mr Campbell as Chief Executive Officer has overall management responsibility for Company operations and performance. Mr Campbell also holds the position and responsibility of Chief and Legal Representative of Montec International Limited within the People's Republic of China and is appropriately certified by the Chinese Government in respect of the office of these positions.
Terry Cuthbertson	- Director (Non-executive); Appointed Non-Executive Chairman from July 2004
Qualifications	-B. Bus, ACA
Experience	- Non-Executive Chairman of Austpac Resources N.L. and Non- Executive Director of Open Telecommunication Limited, Previously a Partner of KPMG and Director of KPMG Corporate Finance and NSW Partner in Charge of Mergers and Acquisitions, Group Finance Director of Tech Pacific Holding Limited, Director for Tech Pacific Holding Limited's businesses in Malaysia, Hong Kong, Singapore, India, Philippines, Indonesia and Thailand.
Interest in Shares and Options Special Responsibilities	-10,000 ordinary shares of Montec International Limited - Mr Cuthbertson is the Chairman of both the Audit Committee and the Nomination and Remuneration Committee
Peter Herd	- Director (Non-executive)
Qualifications Experience	-B. Ec (hons), FAICD - General Manager of Dairy Farmers' Milk and Beverage Division, Regional Director Australasia for Coca-Cola South Pacific, Division President for Coca-Cola Far East in the Philippines and Country Manager for Hong Kong, Taiwan and Indonesia.
Interest in Shares and Options	-10,000 ordinary shares of Montec International Limited
Special Responsibilities	— Mr Herd is a member of the Nomination and Remuneration Committee, and the Audit Committee from July 2004

DIRECTORS' REPORT (continued)

Information on Directors (continued)

Xueqin Du Qualifications	-Executive Director (Product Development) - Bachelor of Medicine from Harbin University of China, International Master's degree in food and nutrition planning from the University of the Philippines and a PhD degree from the Department of Food Science and Technology from the University of New South Wales.
Experience	— Vice Director of the Beijing Institute of Food Hygiene Inspection and Examination, Professional and Administrative Official of the Department of Nutrition and Food Hygiene within the Ministry of Public Health China and Research Fellow with the University of Sydney.
Interest in Shares and Options	-10,000 ordinary shares and 100,000 options over ordinary shares of Montec International Limited
Special Responsibilities	-Technical review and development of all product extensions
Spiro Lymberatos Qualifications Experience Interest in Shares and Options Special Responsibilities	-Executive Director - Resigned 22 September 2003 — Dip. Bus - Director of Ricor Solutions Pty Ltd -405,000 ordinary shares of Montec International Limited - Corporate Administration

Directors' and Executive Officers' Emoluments

Disclosure relating to directors' and executive officers' emoluments has been included in note 5 of the financial report.

Meetings of Directors

During the financial year, 26 meetings of directors (including committees) were held. Attendances were:

			COMMITTEE MEETINGS
		DIRECTORS'	AUDIT		NOMINATION AND
		MEETINGS	COMMITTEE		REMUNERATION
					COMMITTEE
	Number eligible to attend	Number Attended	Number eligible to attend	Number Attended	Number eligible to attend	Number Attended
n Grant	11	11	3	3
alcolm Campbell	$22^{\circ}$	21
rry Cuthbertson	11	10	3	3
ter Herd	13	11
iegin Du	22	16
iro Lymberatos	11	11

Jin $M\varepsilon$ Tei Pe Xu Sp

DIRECTORS' REPORT (continued)

Indemnifying Officers or Auditor

During or since the end of the financial year the Company has given an indemnity or entered an agreement to indemnify, or paid or agreed to pay insurance premiums as follows:

The Company has paid premiums to insure each of the following directors and executives against liabilities for costs and expenses incurred by them in defending any legal proceedings arising out of their conduct while acting in the capacity of director or executive of the Company, other than conduct involving a willful breach of duty in relation to the Company. The amount of the premium was \$31,900 for the below directors and executives.

Jim Grant Malcolm Campbell Terry Cuthbertson Peter Herd Xuegin Du lan Maltman

Options

Options that were granted over unissued shares or interest during or since the financial year by the Company or controlled entity to directors or the most highly remunerated officers as part of their remuneration are as follows:

• Options granted under the Montec International Limited Employee Option Plan were 100,000 $\bullet$ options granted to Xueqin Du at an exercise price of \$0.50 exercisable on or before 1 July 2007 under the terms of her Executive Service Agreement.
• $\bullet$ In addition, 336,667 options were granted to Ian Maltman directly at an exercise price of \$0.50 exercisable on or before 1 July 2006 under the terms of his Executive Service Agreement.

During the year ended 30 June 2004, no ordinary shares of Montec International Limited were issued on the exercise of options granted under the Montec International Limited Employee Option Plan. No shares have been issued since that date.

At the date of this report, the unissued ordinary shares of Montec International Limited under option are as follows:

		Number Under Option
30/06/05	\$0.50	4.323.430
30/06/06	\$0.50	5,000,000
30/06/07	\$0.35	2,548,500
30/06/05	\$0.50	609.826
01/07/07	\$0.50	(i) 100,000
01/07/06	\$0.50	336,667
		12.918.423

i. These options were issued under the Company's Executive Option Plan.

DIRECTORS' REPORT (continued)

Proceedings on Behalf of Company

No person has applied for leave of Court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part of those proceedings.

The Company was not a party to any such proceedings during the year.

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

Se Combell

Terry Cuthbertson Chairman Dated this 20^th day of September 2004.

Malcolm Campbell Managing Director

STATEMENT OF FINANCIAL PERFORMANCE

FOR THE YEAR ENDED 30 JUNE 2004

	Note		Economic Entity	Parent Entity
		Year ended	2 months ended 30 June 2004 30 June 2003 30 June 2004 30 June 2003	Year ended	2 months ended
		\$	\$	\$	\$
Revenues from ordinary activities	2	578,863		578,863
Cost of goods sold		(243, 784)		(243, 784)
Compliance and professional fees		(567, 752)		(561, 644)
Advertising and marketing expenses		(483, 683)		(483, 683)
Employment expenses		(915,902)		(909, 927)
Administrative expenses		(250, 768)		(248, 262)
Travel expenses		(142, 849)		(142, 849)
Insurance expenses		(73, 448)		(73, 448)
Borrowing costs		(1,240)		(1,240)
Depreciation and amortisation expense		(368, 773)		(352,603)
Loss from ordinary activities before income tax expense	3	(2,469,336)		(2, 438, 577)
Income tax expense relating to ordinary activities	4
Loss from ordinary activities after related income tax expense		(2,469,336)		(2, 438, 577)
Net loss attributable to outside equity interests		5,419
Net loss attributable to members of the parent entity		(2,463,917)		(2,438,577)
Net exchange difference on translation of financial report of self- sustaining foreign operation	21	(22, 140)
Total revenues, expenses and valuation adjustments attributable to members of the parent entity and recognised directly in equity		(2,486,057)		(2,438,577)
Total changes in equity other than
those resulting from transactions with owners as owners		(2,486,057)		(2, 438, 577)
Applying AASB 1027: Basic earnings per share (cents per share)	8b	(0.059)
Diluted earnings per share (cents per
share)	8b	(0.059)
Alternative EPS - Applying Issued Shares as at 30 June 2004: Basic earnings per share (cents per
share)	8с	(0.046)
Diluted earnings per share (cents per share)	8с	(0.046)

The Financial Statements should be read in conjunction with the accompanying notes.

STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE 2004

	Note	Economic Entity		Parent Entity
		2004 \$	2003 \$	2004 \$	2003 \$
CURRENT ASSETS
Cash assets	9	2,090,170	4,841	2,089,291	11
Receivables	10	145,690		172,471
Inventories	11	409,257		405,238
Other	16	279,654	16.909	267,478
TOTAL CURRENT ASSETS		2,924,771	21,750	2,934,478	11
NON-CURRENT ASSETS
Other financial assets	12			281,605	131,605
Property, plant and equipment	14	113,160	12,976	104,998
Intangible assets	15	4,512,190	1,293,499	4,271,447	1,186,195
TOTAL NON-CURRENT ASSETS		4,625,350	1,306,475	4,658,050	1,317,800
TOTAL ASSETS		7,550,121	1,328,225	7,592,528	1,317,811
CURRENT LIABILITIES
Payables	17	215,492	1,317,800	209,251	1,317,800
Interest-bearing liabilities	18	8,701		8,701
Provisions	19	25,923		25,923
TOTAL CURRENT LIABILITIES		250,116	1,317,800	243,875	1,317,800
NON-CURRENT LIABILITIES
Interest-bearing liabilities	18	13,052		13,052
TOTAL NON-CURRENT LIABILITIES		13,052		13,052
TOTAL LIABILITIES		263,168	1,317,800	256,927	1,317,800
NET ASSETS		7,286,953	10,425	7,335,601	11
EQUITY
Contributed equity	20	9,774,178	11	9,774,178	11
Reserves	21	(22, 140)
Accumulated losses	22	(2,463,917)		(2,438,577)
Parent entity interest		7,288,121	11	7,335,601	11
Outside equity interest	23	(1, 168)	10,414
TOTAL EQUITY		7,286,953	10,425	7,335,601	11

The Financial Statements should be read in conjunction with the accompanying notes.

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 30 JUNE 2004

	Note		Economic Entity	Parent Entity
		Year ended \$	2 months ended \$	Year ended 30 June 2004 30 June 2003 30 June 2004 30 June 2003 \$	2 months ended \$
CASH FLOWS FROM OPERATING ACTIVITIES
Receipts from customers		340,701		340,701
Payments to suppliers and employees		(2,849,501)		(2,789,860)
Interest received		125,439		125,439
Borrowing costs		(1,240)		(1,240)
Other		(21, 256)		(21, 256)
Net cash used in operating activities	27a	(2,405,857)		(2,346,216)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of non-current assets		(92, 992)		(92, 992)
Purchase of Intellectual property		(4,077,495)		(4,077,495)
Payment for subsidiary, net of cash acquired	27 b	(131, 605)	4,991	(131, 605)	11
Loan made to subsidiary				(55,690)
Net cash (used in) / provided by investing activities		(4,302,092)	4,991	(4, 357, 782)	11
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of shares		10,253,990		10,253,990
Cost of share issue		(1,456,203)		(1,456,203)
Payment for borrowing		(4,509)		(4,509)
Net cash provided by financing activities		8,793,278	$\overline{\phantom{a}}$	8,793,278
Net increase in cash held		2,085,329	4,991	2,089,280	11
Cash at 1 July 2003 Effect of exchange rates on cash		4,841		11
holdings in foreign currencies			(150)
Cash at 30 June 2004	9	2,090,170	4,841	2,089,291	11

The Financial Statements should be read in conjunction with the accompanying notes.

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES

The financial report is a general purpose financial report that has been prepared in accordance with Australian Accounting Standards, Urgent Issues Group Consensus Views, other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001.

The financial report covers the economic entity of Montec International Limited and controlled entities, and Montec International Limited as an individual parent entity. Montec International Limited is a listed public Company, incorporated and domiciled in Australia.

The financial report has been prepared on an accruals basis and is based on historical costs and does not take into account changing money values or, except where stated, current valuations of noncurrent assets. Cost is based on the fair values of the consideration given in exchange for assets.

The following is a summary of the material accounting policies adopted by the economic entity in the preparation of the financial report. The accounting policies have been consistently applied, unless otherwise stated.

a. Principles of Consolidation

A controlled entity is any entity controlled by Montec International Limited. Control exists where Montec International Limited has the capacity to dominate the decision-making in relation to the financial and operating policies of another entity so that the other entity operates with Montec International Limited to achieve the objectives of Montec International Limited. A list of controlled entities is contained in Note 13 to the financial statements.

All inter-Company balances and transactions between entities in the economic entity, including any unrealised profits or losses, have been eliminated on consolidation. Where controlled entities have entered the economic entity during the year, their operating results have been included from the date control was obtained.

Outside interests in the equity and results of the entities that are controlled are shown as a separate item in the consolidated financial report.

b. Income Tax

The economic entity adopts the liability method of tax-effect accounting whereby the income tax expense is based on the profit from ordinary activities adjusted for any permanent differences.

Timing differences which arise due to the different accounting periods in which items of revenue and expense are included in the determination of accounting profit and taxable income are brought to account as either a provision for deferred income tax or as a future income tax benefit at the rate of income tax applicable to the period in which the benefit will be received or the liability will become payable.

Future income tax benefits are not brought to account unless realisation of the asset is assured beyond reasonable doubt. Future income tax benefits in relation to tax losses are not brought to account unless there is virtual certainty of realisation of the benefit.

The amount of benefits brought to account or which may be realised in the future is based on the assumption that no adverse change will occur in income taxation legislation and the anticipation that the economic entity will derive sufficient future assessable income to enable the benefit to be realised and comply with the conditions of deductibility imposed by the law.

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)

c. Inventories

Inventories are measured at the lower of cost and net realisable value. Costs are assigned on the basis of weighted average costs.

d. Plant and equipment

Plant and equipment are measured on the cost basis. The carrying amount of plant and equipment is reviewed annually by directors to ensure it is not in excess of the recoverable amount from these assets. The recoverable amount is assessed on the basis of the expected net cash flows which will be received from the assets employment and subsequent disposal. The expected net cash flows have not been discounted to their present values in determining recoverable amounts.

Depreciation

The depreciable amount of all fixed assets including building and capitalised lease assets, but excluding freehold land, is depreciated on a straight line basis over their useful lives to the economic entity commencing from the time the asset is held ready for use.

The depreciation rates used for each class of depreciable assets are:

Class of Fixed Asset	Depreciation Rate
Plant and equipment	-37.5%
Leased plant and equipment	-37.5%

e. Leases

Leases of fixed assets where substantially all the risks and benefits incidental to the ownership of the asset, but not the legal ownership, are transferred to entities in the economic entity are classified as finance leases. Finance leases are capitalised, recording an asset and a liability equal to the present value of the minimum lease payments, including any guaranteed residual values. Leased assets are depreciated on a straight line basis over their estimated useful lives where it is likely that the economic entity will obtain ownership of the asset or over the term of the lease. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period.

Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are charged as expenses in the periods in which they are incurred.

f. Investments

Non-current investments are measured on the cost basis. The carrying amount of non-current investments is reviewed annually by directors to ensure it is not in excess of the recoverable amount of these investments. The recoverable amount is assessed from the quoted market value for listed investments or the underlying net assets for other non-listed investments. The expected net cash flows from investments have not been discounted to their present value in determining the recoverable amounts.

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)

g. Intangibles

Goodwill

Goodwill and goodwill on consolidation are initially recorded at the amount by which the purchase price for a business or for an ownership interest in a controlled entity exceeds the fair value attributed to its net assets at date of acquisition. Goodwill is amortised on a straight line basis over the period of 20 years. The balance is reviewed annually and any balance representing future benefits for which the realisation is considered to be no longer probable is written off.

Patents and Acquired Rights

Patents and acquired rights are recorded in the accounts at cost of acquisition and are amortised over the period in which their benefits are expected to be realised. The patents expire on 12 June 2012. The carrying amount of patents and acquired rights are reviewed annually to ensure they do not exceed the recoverable amount.

h. Foreign Currency Transactions and Balances

Foreign currency transactions during the year are converted to Australian currency at the rates of exchange applicable at the dates of the transactions. Amounts receivable and payable in foreign currencies at balance date are converted at the rates of exchange ruling at that date.

The gains and losses from conversion of assets and liabilities, whether realised or unrealised, are included in profit from ordinary activities as they arise.

The assets and liabilities of the overseas controlled entities, which are self-sustaining, are translated at year-end rates and operating results are translated at the rates ruling at the end of each month. Gains and losses arising on translation are taken directly to the foreign currency translation reserve.

i. Emplovee Benefits

Provision is made for the economic entity liability for employee benefits arising from services rendered by employees to balance date. Employee benefits expected to be settled within one year together with entitlements arising from wages and salaries, and annual leave which will be settled after one year, have been measured at the amounts expected to be paid when the liability is settled plus related oncosts. Other employee benefits payable later than one year have been measured at the present value of the estimated future cash outflows to be made for those benefits.

Contributions are made by the economic entity to employee superannuation funds and are charged as expenses when incurred.

The economic entity operates an ownership-based remuneration scheme through the employee option plan, details of which are provided in Note 28 to the financial statements.

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)

i. Cash

For the purpose of the statement of cash flows, cash includes:

• cash on hand and at call deposits with banks or financial institutions, net of bank overdrafts; and
• investments in money market instruments with less than 14 days to maturity. $\bullet$

k. Revenue

Revenue in the form of royalties from the utilisation of technology is recognised upon the utilisation of the technology by customers. Revenue from the recovery of raw materials supplied as part of the contractual agreement with dairy counterparties is recognised on delivery of raw materials to those customers.

Interest revenue is recognised on a proportional basis taking into account the interest rates applicable to the financial assets.

Dividend revenue is recognised when the right to receive a dividend has been established.

Revenue from the rendering of a service is recognised upon the delivery of the service to the customers.

All revenue is stated net of the amount of goods and services tax (GST).

I. Goods and Services Tax (GST)

Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the statement of financial position are shown inclusive of GST.

m. Comparative Figures

The company was incorporated on 2 May 2003 and hence the comparative figures represent the 2 month period from incorporation to 30 June 2003.

n. Change in Accounting Policy

There have been no changes in accounting policy during the financial year ended 30 June 2004.

o. Adoption of Australian Equivalents to International Financial Reporting Standards

Australia is currently preparing for the introduction of Australian Equivalents to International Financial Reporting Standards (AEIFRS) effective for financial years commencing 1 January 2005. This requires the production of accounting data for future comparative purposes at the beginning of the next financial year.

The economic entity's management, in consultation with its auditors, is assessing the significance of these changes and preparing for their implementation. The Audit Committee will oversee and manage the economic entity's transition to IFRS. We will seek to keep stakeholders informed as to the impact of these new standards as they are finalised.

FOR THE YEAR ENDED 30 JUNE 2004

The directors are of the opinion that the key differences in the economic entity's accounting policies which will arise from the adoption of AEIFRS are:

Impairment of Assets

The economic entity currently determines the recoverable amount of an asset on the basis of undiscounted net cash flows that will be received from the assets use and subsequent disposal. In terms of AASB 136: Impairment of Assets, the recoverable amount of an asset will be determined as the higher of fair value less costs to sell and value in use. It is likely that this change in accounting policy will lead to impairments being recognised more often than under the existing policy.

Goodwill on Consolidation

Under AASB 3: Business Combinations, goodwill is to be capitalised in the statement of financial position and subjected to an annual impairment test. Amortisation of goodwill is to be prohibited. Current accounting policy of the entity is to amortise goodwill on a straight line basis over the period of 20 years.

Income Tax

Currently, the economic entity adopts the liability method of tax-effect accounting whereby the income tax expense is based on the accounting profit adjusted for any permanent differences. Timing differences are currently brought to account as either a provision for deferred income tax or future income tax benefit. Under AASB 1020: Income Taxes, the economic entity will be required to adopt a balance sheet approach under which temporary differences are identified for each asset and liability rather than the effects of the timing and permanent differences between taxable income and accounting profit.

Share Based Remuneration

Currently, options over unissued shares provided to executives as part of their remuneration are not expensed through the profit and loss. With the introduction of change through AASB 2: Share Based Payment, the economic entity will be required to expense the fair value of the options granted as remuneration over the period that the options vest.

NOTE 2: REVENUE	Economic Entity		Parent Entity
	Year	2 months	Year	2 months
	ended	ended	ended	ended
			30 June 2004 30 June 2003 30 June 2004 30 June 2003
	\$	\$	\$	\$
Operating activities:
royalties	227,424		227,424
sales of goods	220,547		220,547
interest received	125,439		125.439
other revenue	5.453		5,453
Total Revenue	578,863		578,863

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 3: LOSS FROM ORDINARY ACTIVITIES	Economic Entity Parent Entity
	Year ended 30 June 2004	2 months ended 30 June 2003	Year ended	2 months ended 30 June 2004 30 June 2003
Loss from ordinary activities before income tax has been determined after:	\$	\$	\$	\$
Depreciation of non-current assets:
plant and equipment	(13, 217)		(8, 403)
leased plant and equipment	(5.853)		(5, 853)
Total depreciation	(19,070)		(14, 256)
Amortisation of non-current assets:
patents and acquired rights	(338, 348)		(338, 348)
goodwill on consolidation	(11, 355)
Total amortisation	(349,703)		(338, 348)
Rental expense on property	(56, 488)		(56, 488)
Foreign currency translation gains	4,957		4,957

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2004

	NOTE 4: INCOME TAX EXPENSE	Economic Entity			Parent Entity
		Year ended	2 months ended	Year ended	2 months ended
				30 June 2004 30 June 2003 30 June 2004 30 June 2003
		\$	\$	\$	\$
follows:	The difference between income tax expense provided in the financial statements and the prima facie tax expense is reconciled as
a. Prima facie tax revenue on loss from ordinary activities at 30% (2003: 30%)		(740, 801)		(731, 573)
Add:
	Tax effect of:
	non-deductible amortisation	31,778		28,372
	other non-allowable items	880		880
Less:
	Tax effect of:
	foreign currency exchange profit not subject to income tax	1,487		1,487
	Tax effect of future income tax benefit not brought to account	709,630		703,808
activities	Income tax expense attributable to ordinary

The directors estimate that the Parent Entity and its controlled entities have carry-forward income tax losses of \$2,365,433 (2003: Nil) available to offset against future years' taxable income. The benefits of these losses have not been brought to account as realisation is not virtually certain. The benefit will only be obtained if:

(i) The parent entity and its controlled entities derive future assessable income of the nature and of an amount sufficient to enable the benefits from the deductions for the losses to be realised.

(ii) The parent entity and its controlled entities continue to comply with the conditions for deductibility imposed by the law; and

(iii) No changes in tax legislation adversely affect the parent entity and its controlled entities in realising the benefit from the deductions for the losses.

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 5: DIRECTORS AND EXECUTIVE REMUNERATION

a. Names and positions held of Parent Entity Directors and Specified Executives in office at any time during the financial year are:

Parent Entity Directors

Jim Grant	Chairman - Non-Executive - Deceased 4 July 2004
Malcolm Campbell	Managing Director - Executive
Terry Cuthbertson	Director - Non-Executive
Peter Herd	Director - Non-Executive
Xueqin Du	Director - Executive
Spiro Lymberatos	Director - Executive - Resigned 22 September 2003

Specified Executives

lan Maltman	Chief Financial Officer
Michael See	Chief Operating Officer- Resigned 7 May 2004

The company only has two non-directors who meet the definition of executive under AASB 1046: Director and Executive Remuneration.

b. Parent Entity Directors' Remuneration

2004						Post
			Primary			Employment	Equity		Total
			Salary & Superannuation	Cash	Non-Cash	Super-
		Fees	Contribution	Benefit	Benefits	annuation	Shares Options
		\$	\$	\$	\$	\$	\$	\$	\$
Jim Grant	(i)	50.000	4.500			$\blacksquare$	5,000	$\blacksquare$	59,500
Malcolm Campbell	(ii)	120,000	10,800	50.000	68.102				$-248,902$
Terry Cuthbertson	(ii)	30.000	2,700			۰	5,000		37,700
Peter Herd	(iv)	32,700	$\overline{\phantom{0}}$			$\blacksquare$	5.000	$\sim$	37,700
Xuegin Du	${v}$	63,192	5,687	5.715	5,382	$\blacksquare$			11,580 11,783 103,339
Spiro Lymberatos	(vi)	75,000					$-200,000$		$-275,000$
		370,892	23,687	55,715	73,484		- 226,580 11,783 762,141

Options issued to directors and executives as remuneration are valued using the Black-Scholes Option Pricing Model. The value of shares issued to directors and executives as remuneration is assessed as the fair market value prevailing at the time of issue having regard to the market price of the shares, or other such indicator of value, at the time of issue.

i. Remuneration paid for period from 1 November 2003 to 30 June 2004.

ii. Remuneration paid for period from 1 November 2003 to 30 June 2004.

iii. Remuneration paid for period from 1 November 2003 to 30 June 2004.

iv. Remuneration paid for period from 1 November 2003 to 30 June 2004.

v. Remuneration paid for period from 1 November 2003 to 30 June 2004.

vi. Remuneration paid for period from 1 July 2003 to 31 January 2004.

No directors' remuneration was paid in the period to 30 June 2003.

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 5: REMUNERATION AND RETIREMENT BENEFITS (continued)

2004		Primary		Post Employment		Equity	Total
	Salary & Fees \$	Superannuation Contribution \$	Cash Benefit \$	Non-Cash Benefits \$	Super- annuation \$	Shares \$	Options S	\$
lan Maltman (i)	90,000	8.100	15.138	14.256		$\blacksquare$	31.213	158,707
Michael See (ii)	80.769	7.269	۰	٠	$\sim$	10.000	$\overline{\phantom{a}}$	98,038
	170.769	15,369	15,138	14.256		10,000	31,213	256,745

c. Specified Executives' Remuneration

The equity valuation methodology adopted is described in Note 5b above.

i. Remuneration paid for period from 1 November 2003 to 30 June 2004.

ii. Remuneration paid for period from 19 January 2004 to 21 April 2004.

No executives' remuneration was paid in the period to 30 June 2003.

d. Remuneration Options

Options Granted As Remuneration

			Terms & Conditions for each Grant
	Vested No.	Granted Number	Grant Date	Average Value per Option at Grant Date	First Exercise Price	Exercise Exercise Date	Last Date
Parent Entity Directors Xuegin Du	100.000	100.000	12/11/03	\$0.1178	\$0.50	Current	1/07/07
Specified Executives			Monthly
lan Maltman	336.667	336,667	between Nov 2003 and June 2004	\$0.0927	\$0.50	Current	1/07/06
	436.667	436.667

All options granted to the above directors and executives have vested. The options will expire following the last date for exercise noted in the table above. The exercise price is \$0.50 per option in accordance with the Executive Service Agreements. The service and performance criteria set to determine remuneration are included per Note h below.

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 5: REMUNERATION AND RETIREMENT BENEFITS (continued)

e. Shares Issued on Exercise of Remuneration Options

No. of ordinary shares issued	share	per share
		Amount paid per Amount unpaid

Options and Rights Holdings

Number of options held by Specified Directors & Executives

				Net		Total		Total
	Balance 01/07/03	Granted as Remuneration	Options Exercised	Change Other	Balance 30/06/04	Vested 30/06/04	Total Exercisable	Unexercis -able
Parent Entity Directors
Malcolm
Campbell				5.000.000	5,000,000 5,000,000			5.000.000
Xuegin Dul		100.000			100.000	100,000	100,000
Specified Executives
lan Maltman		336,667			336,667	336.667	336.667
Total		436,667		5,000,000	5.436.667 5.436.667		436,667	5.000.000

g. Shareholdings

Number of shares held by Parent Entity Directors and Specified Executives

	Balance	Received as	Options	Net Change	Balance
	1/7/03	Remuneration	Exercised	Other*	30/6/04
Parent Entity Directors
Jim Grant		10,000			10,000
Malcolm Campbell	49,956,000			$(37, 341, 000)$ **	12,615,000
Terry Cuthbertson		10,000			10,000
Peter Herd		10,000			10,000
Xuegin Du		10,000			10,000
Spiro Lymberatos		400.000		5,000	405,000
Specified Executives
lan Maltman
Michael See		20,000			20,000
	49,956,000	460,000		(37, 336, 000)	13,080,000

* Net Change Other refers to shares purchased or sold during the financial year, except;

** Includes effect of share consolidation on 21 August 2003.

In addition to her holding in Montec International Limited, Dr Xueqin Du has been issued with 5% of the issued share capital (as at 30 June 2003) of Chongqing Montec Co Ltd under the term of her Executive Service Agreement, and as foreshadowed in the Company's prospectus dated 22 September 2003.

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 5: REMUNERATION AND RETIREMENT BENEFITS (continued)

h. Remuneration Practices

The company's policy for determining the nature and amount of emoluments of board members and senior executives of the company is as follows:

The remuneration structure for executive officers, including executive directors, seeks to emphasise payment for results by ensuring that executive interests are aligned with those of the Company through equity ownership and/or entitlement.

The objective of the remuneration structure is to both reinforce the short and long-term goals of the Company and to provide a common interest between management and shareholders.

The remuneration structure for executive officers, including executive directors, is based on a number of factors, including particular experience of the individual concerned, and overall performance of the company. The contracts for service between the company and specified directors and executives are on a continuing basis the terms of which are not expected to change in the immediate future. Upon retirement specified directors and executives are paid employee benefit entitlements accrued to date of retirement.

A notice period of 3 months is provided for under each executive's service agreement, with the exception of the Managing Director. The Managing Director is on a 3 year contract which commenced on 12 November 2003. On completion of the contract the board can renew it for one or more successive periods of 1 year.

All options have been issued in accordance with the terms provided for under each Executive Service Agreement, and as outlined in the Company's prospectus at the time of listing. The key metrics of options on issue are detailed in note 5, table (d) above and note 28 below.

Malcolm Campbell had received a cash benefit during the year in the form of a Living Away from Home Allowance paid monthly. This benefit is provided on a tax paid basis to Mr. Campbell under the term of his Executive Service Agreement.

Both Xuegin Du and Ian Maltman have received cash benefits under the terms of their Executive Service Agreements whereby they receive this benefit on a tax paid basis to compensate them for income tax levied on remuneration options received. The cash benefits were paid on 16 June 2004.

	NOTE 6: AUDITORS' REMUNERATION	Economic Entity		Parent Entity
		Year ended	2 months ended	Year ended	2 months ended
				30 June 2004 30 June 2003 30 June 2004 30 June 2003
		\$	\$	\$	\$
entity for:	Remuneration of the auditor of the parent
	auditing and reviewing the financial reports	45.600		45.600
	other services: acting as independent accountant for the IPO	81,992		81,992
		127,592		127,592
	Remuneration of other auditors of subsidiaries for:
	auditing and reviewing the financial reports of subsidiaries	2.500		2.500

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 7: DIVIDENDS

No interim dividends have been declared or paid during the current financial year, nor in the a. previous financial year.

The directors are not recommending a final dividend be paid in the current financial year.

No final dividend was paid in the previous financial year.

		Economic Entity		Parent Entity
	2004	2003 \$	2004	2003
	\$		\$	\$
b. Balance of franking account at year end adjusted for franking credits arising from payment of provision for income tax and dividends recognised as receivables, franking debits arising from payment of proposed dividends and franking credits that may be prevented from distribution in subsequent financial years

NOTE 8: EARNINGS PER SHARE	Economic Entity Year ended 30 June 2004 \$
a. Reconciliation of earnings to net loss
Net loss	(2,469,336)
Net loss attributable to outside equity interest	(5, 419)
Earnings used in the calculation of basic and diluted EPS	(2,463,917)
b. Applying AASB 1027: Weighted average number of ordinary shares outstanding during the year used in calculation of basic EPS Weighted average number of options outstanding not treated as dilutive Weighted average number of ordinary shares outstanding during the year used in calculation of dilutive EPS	42,087,602 8,175,769 42,087,602
c. Alternative method - applying shares on issue as at 30 June 2004:
Number of ordinary shares outstanding at year end used in calculation of basic EPS	54,319,843
Number of options outstanding at year end not treated as dilutive	12,918,423
Number of ordinary shares outstanding at year end used in calculation of dilutive EPS	54,319,843

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 9: CASH ASSETS	Economic Entity		Parent Entity
	2004	2003	2004	2003
	\$	\$	\$	\$
Cash at bank	2,090,170	4,841	2,089,291	11
	2,090,170	4,841	2,089,291	11
Reconciliation of Cash Cash at the end of the financial year as shown in the statement of cash flows is reconciled to items in the statement of financial position as follows:
Cash	2,090,170	4,841	2,089,291	11
NOTE 10: RECEIVABLES	Economic Entity		Parent Entity
	2004	2003	2004	2003
	\$	\$	\$	\$
CURRENT Trade debtors
Provision for doubtful debts	89,366		89,366
	89,366		89,366
Short term deposits	8,321		8,321
Other debtors	48,003		47,037
Amounts receivable from:
partly-owned subsidiaries			27,747
	145,690	ä,	172,471
NOTE 11: INVENTORIES	Economic Entity	2003	Parent Entity
	2004 \$	\$	2004 \$	2003 \$
CURRENT
At cost Raw materials and stores	409,257		405,238
	409,257		405,238
NOTE 12: OTHER FINANCIAL ASSETS
Note	Economic Entity		Parent Entity
	2004 \$	2003 \$	2004 \$	2003
NON-CURRENT				\$
Unlisted investments, at cost

shares in controlled entities ---------------------------------------

13

131,605

281,605

the second control of the second

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 13: CONTROLLED ENTITIES

a. Controlled Entities	Country of Incorporation	Percentage Owned
		2004	2003
		S	S
Parent Entity:
Montec International Limited
Subsidiaries of Montec International Limited:
Chongging Montec Co Limited	China	85%	70%

b. Controlled Entities Acquired

On 8 September 2003 the parent entity acquired 15% of Chongqing Montec Co Limited for a purchase consideration of \$150,000 comprising shares. Montec International Limited is entitled to a corresponding share of profits earned from this date. The acquisition of 15% of Chongqing Montec Co Ltd followed an earlier acquisition as at 30 June 2003 of 70% of Chongqing Montec Co Ltd.

On 13 November 2003 a cash payment of \$131,605 was made to meet the outstanding obligation in respect of the acquisition of 70% of Chongqing Montec Co Ltd, transacted on 30 June 2003.

NOTE 14: PROPERTY, PLANT AND EQUIPMENT

2003
\$
79,120 (8, 403) 70,717 40,134 (5, 853) 34,281 104,998

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 14: PROPERTY, PLANT AND EQUIPMENT (continued)

a. Movements in Carrying Amounts

Movement in the carrying amounts for each class of property, plant and equipment between the beginning and the end of the current financial year.

2004	Plant and Equipment \$	Leased Plant and Equipment \$	Total \$
Economic Entity:
Balance at the beginning of year	12,976		12,976
Additions	79,120	40.134	119,254
Depreciation expense	(13, 217)	(5,853)	(19,070)
Carrying amount at the end of year	78,879	34,281	113,160
Parent Entity: Balance at the beginning of year
Additions	79,120	40,134	119,254
Depreciation expense	(8, 403)	(5,853)	(14, 256)
Carrying amount at the end of year	70,717	34.281	104.998

NOTE 15: INTANGIBLE ASSETS	Economic Entity		Parent Entity
	2004 \$	2003 \$	2004 \$	2003 \$
Goodwill, at cost	252.098	102.098
Accumulated amortisation	(11, 355)
	240.743	102.098
Patents and acquired rights, at cost	4.609.795	1.191.401	4.609.795	1.186.195
Accumulated amortisation	(338, 348)		(338, 348)
	4.271.447	1,191,401	4.271.447	1.186.195
Total Intangible Assets	4.512.190	1.293.499	4,271,447	1,186,195

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 16: OTHER ASSETS	Note	Economic Entity 2004 \$	2003 \$	Parent Entity 2004 \$	2003 \$
CURRENT		279,654	16.909	267,478
Prepayments		279.654	16.909	267,478
NOTE 17: PAYABLES		Economic Entity		Parent Entity
		2004	2003	2004	2003
		\$	\$	\$	\$
CURRENT
Unsecured liabilities
Trade creditors		83,099		83,098
Sundry creditors and accrued expenses		132,393	1,317,800	126,153	1,317,800
		215,492	1,317.800	209,251	1,317,800

NOTE 18: INTEREST BEARING LIABILITIES

			Economic Entity		Parent Entity
		2004	2003	2004	2003
		\$	\$	\$	\$
CURRENT
Lease liability	24	8,701	۰	8,701
		8,701		8,701
NON-CURRENT
Lease liability	24	13,052	$\blacksquare$	13,052
		13,052		13,052

Lease liabilities are secured against the leased asset, being a motor vehicle in Qingdao, China.

		Parent Entity
2004	2003	2004	2003
\$	\$	\$	\$
25,923	$\blacksquare$	25,923
25.923	٠	25,923
		6
		Economic Entity

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 20: CONTRIBUTED EQUITY			Economic Entity		Parent Entity
		2004	2003	2004	2003
	Note	\$	\$	S	\$
54,319,843 (2003:60,000,000) fully paid ordinary shares	20a	9,774,178	11	9,774,178	11
a. Ordinary shares
At the beginning of the reporting period		11		11
Share movements during the year:
-Issued $60,000,000$ shares on $2$ May 2003			11		11
-Issued shares consolidated to 14,412,682 on 21/8/03
-Issued $19,831,505$ shares on 8/9/03		1,126,241		1,126,241
-Issued 55,656 shares on 19/9/03		50		50
-Issued $20,000,000$ shares on 4/11/03		10,000,000		10,000,000
-Issued 20,000 shares on 7/5/04		10,000		10,000
Transaction costs relating to share issues		(1,362,124)		(1,362,124)
At reporting date		9,774,178	11	9,774,178	11

The fair value ascribed to ordinary shares issued is based on the level of cash subscribed or the fair value assessed for services rendered or assets acquired with those issued shares.

Ordinary shares participate in dividends and the proceeds on winding up of the parent entity in proportion to the number of shares held.

At shareholders meetings each ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands.

b. Options

• i. For information relating to the Montec International Limited employee option plan, including details of options issued, exercised and lapsed during the financial year and the options outstanding at year-end refer to Note 28.
• For information relating to share options issued to directors and executives ii. during the financial year refer to Note 28.
• iii. On 4 November 2003, 2,548,500 options were granted to accept ordinary shares at an exercise price of \$0.35 each. The options are exercisable on or before 30 June 2007.
• On 4 November 2003, 4,323,430 options were granted to accept ordinary shares at an iv. exercise price of \$0.50 each. The options are exercisable on or before 30 June 2005.
• On 21 October 2003, 5,709,826 options were granted to accept ordinary shares at an v. exercise price of \$0.50 each. The options are exercisable as follows:
• 5,000,000 before 30 June 2006
• 609.826 before 30 June 2005
• 100,000 before 1 July 2007
• At the end of each month for the period November 2003 to June 2004 options were vi. granted with a total of 336,667 options issued to accept ordinary shares at an exercise price of \$0.50 each. The options are exercisable on or before 1 July 2006.

At 30 June 2004, there were 12,918,423 (30 June 2003: NIL) unissued ordinary shares for which options were outstanding.

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 21: RESERVES	Note	Economic Entity			Parent Entity
		2004	2003	2004	2003
		\$	\$	S	\$
Foreign currency translation	21a	(22, 140)
		(22, 140)
a. Foreign Currency Translation Reserve
Movements During the Year:
Opening balance
Adjustment arising from the translation of foreign controlled entities' financial statements		(22, 140)
Closing balance		(22, 140)

The foreign currency translation reserve records exchange differences arising on translation of a foreign controlled subsidiary.

NOTE 22: ACCUMULATED LOSSES

	Economic Entity		Parent Entity
	2004	2003	2004	2003
	\$	S	S	\$
Retained losses at the beginning of the financial year
Net loss attributable to the members of the parent entity	(2,463,917)		$-(2,438,577)$
Retained losses at the end of the financial year	(2,463,917)		$-(2,438,577)$

NOTE 23: OUTSIDE EQUITY INTERESTS IN CONTROLLED ENTITIES

	Economic Entity		Parent Entity
	2004	2003	2004	2003
	\$	\$	\$	\$
Outside equity interest comprises:
Share capital	18,000	36,000
Reserves	1.945	3,891	۰
Retained losses	(21, 113)	(29.477)	$\blacksquare$	-
	(1, 168)	10.414

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 24: CAPITAL AND LEASING COMMITMENTS

	Note	Economic Entity		Parent Entity
		2004	2003	2004	2003
		\$	\$	\$	\$
a. Finance Lease Commitments
Pavable
not later than 1 year		10.620		10,620
later than 1 year but not later than 5 years		15,045		15,045
later than 5 years
Minimum lease payments		25,665		25,665
Less: future finance charges		3.912		3.912
Total Lease Liability	19	21.753		21.753

The finance lease liability is with respect to a motor vehicle utilised for business purposes in Qingdao, China. The lease is over a 3 year term at an implied interest rate of 6% per annum.

		Economic Entity			Parent Entity
		2004	2003	2004	2003
		\$	\$	\$	\$
	b. Operating Lease Commitments
statements	Non-cancelable operating leases contracted for but not capitalised in the financial
Payable
	not later than 1 year	38.741		38,741
	later than 1 year but not later than 5 vears
	later than 5 years
		38,741		38,741

The property lease is a non-cancelable lease with a one-year term, with rent payable monthly in advance. Contingent rental provisions within the lease agreement require the minimum lease payments shall be adjusted in accordance with a market rent review. An option exists to renew the lease at the end of the one-year term for an additional term of one year.

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 25: CONTINGENT LIABILITIES

There are no contingent liabilities of a material nature identified as at the date of this report.

NOTE 26: SEGMENT REPORTING	Australia	China	Eliminations	Economic Entity
Primary reporting - Geographic segments 2004	\$	\$	\$	\$
REVENUE
External sales	179,820	273,604		453,424
Other segments
Total sales revenue	179,820	273,604		453,424
Unallocated revenue				125,439
Total revenue from ordinary activities	179,820	273,604	$\overline{\phantom{a}}$	578,863
SEGMENT RESULT
Expenses	(2,480,337)	(567, 862)		$-$ (3,048,199)
Loss from ordinary activities before income tax expense	(2,300,517)	(294, 258)		$-(2,469,336)$
Income tax expense
Loss from ordinary activities after income tax expense	(2,300,517)	(294, 258)		$-(2,469,336)$
ASSETS
Segment assets	7,551,005	26,201	68,608	7,508,598
Total assets	7,551,005	26,201	68,608	7,508,598
LIABILITIES
Segment liabilities	215,404	33,987	27,746	221,645
Total liabilities	215,404	33,987	27,746	221,645
OTHER
Acquisitions of non current segment assets	3,824,459			3,824,459
Depreciation and amortisation of segment assets	(352, 604)			(352, 604)
	3,471,855			3,471,855

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 26: SEGMENT REPORTING (continued)	Australia	China	Elimination s	Economic Entity
Primary reporting - Geographical segments 2003	\$	\$	\$	\$
REVENUE
External sales
Other segments
Total sales revenue
Unallocated revenue
Total revenue from ordinary activities
SEGMENT RESULT
Expenses
Loss from ordinary activities before income tax expense
Income tax expense
Loss from ordinary activities after income tax expense
ASSETS
Segment assets	1,317,811	34,715	24,301	1,328,225
Total assets	1,317,811	34,715	24,301	1,328,225
LIABILITIES
Segment liabilities	1,317,800			1,317,800
Total liabilities	1,317,800		$\blacksquare$	1,317,800
OTHER
Acquisitions of non current segment assets	1,186,195			1,186,195
Depreciation and amortisation of segment assets
	1,186,195		$\qquad \qquad \blacksquare$	1,186,195

Primary reporting - Geographical segments

Accounting Policies

Segment revenues and expenses are those directly attributable to the segments and include any joint revenue and expenses where a reasonable basis of allocation exists.

Segment assets include all assets used by a segment and consist principally of cash, receivables, inventories, intangibles and property, plant and equipment, net of allowances and accumulated depreciation and amortisation. While most such assets can be directly attributed to individual segments, the carrying amount of certain assets used jointly by two or more segments is allocated to the segments on a reasonable basis. Segment liabilities consist principally of accounts payable, employee entitlements, accrued expenses, provisions and borrowings. Segment assets and liabilities do not include deferred income taxes.

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 26: SEGMENT REPORTING (continued)

Inter-segment Transfers

Segment revenues, expenses and result include transfers between segments. The prices charged on inter-segment transactions are the same as those charged for similar goods to parties outside of the economic entity at an arm's length. These transfers are eliminated on consolidation.

Secondary Reporting - Business Segments

Montec International has only one line of business, that being the sale and marketing of monounsaturated dairy technology.

NOTE 27: CASH FLOW INFORMATION	Economic Entity			Parent Entity
	Year ended	2 months ended	Year ended 30 June 2004 30 June 2003 30 June 2004 30 June 2003	2 months ended
	\$	\$	\$	\$
a. Reconciliation of Cash Flow from Operations with loss from Ordinary Activities after Income Tax
Loss from ordinary activities after income tax	(2,469,336)		(2,438,577)
Non-cash flows in loss from ordinary activities
Amortisation	349,703		338,348
Depreciation	19,070		14,256
Expensing of shares issued for services	200,000		200,000
Changes in assets and liabilities, net of the effects of purchase and disposal of subsidiaries
Increase in trade debtors	(130, 889)		(130, 889)
Increase in prepayments	(180, 952)		(178, 461)
Increase in inventories	(409, 257)		(405, 238)
Increase in trade creditors and accruals	189,881		228,422
Movement in provisions	25,923		25,923
Cash flow from operations	(2,405,857)		(2,346,216)

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 27: CASH FLOW INFORMATION (continued)

		Economic Entity			Parent Entity
		Year ended \$	2 months ended 30 June 2004 30 June 2003 30 June 2004 30 June 2003 \$	Year ended \$	2 months ended \$
	b. Acquisition of Entities On 30 June 2003, 70% of Chongqing Montec Co. Ltd. was acquired by Montec International Limited. A cash consideration of \$131,605 was paid in the year ended 30 June 2004 in fulfilled of this obligation. During the current year 15% of the controlled entity Chongqing Montec Co Limited was acquired. Details of this transaction are:
	Purchase consideration	150,000	131,605	150,000	131,605
	Cash consideration		131,605
	Cash (outflow)/inflow	(131, 605)	4,991
date:	Assets and liabilities held at acquisition
	Receivables	16,531	16,531
	Inventories
	Property, plant and equipment	12,976	12,976
	Creditors
	Goodwill on consolidation	252,098	102,098
	Outside equity interests in acquisitions

c. Non-cash Financing and Investing Activities

i. Share issues

On 8 September 2003, 600,000 ordinary shares were issued at a fair market value assessed at that time of \$150,000, for a 15% interest in Chongqing Montec Co Ltd. The fair market value of these shares was assessed after comparison with issues made to advisors around that time, the value of which was arrived at though mutual agreement.

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 28: EMPLOYEE BENEFITS

Employees Share Option Arrangement

i. On 12 November 2003, 100,000 share options were granted under the Executive Option Plan to an executive to take up ordinary shares at an exercise price of \$0.50 per share. These options are exercisable on or before 1 July 2007. The options have no voting or dividend rights.

ii. On 30 June 2004, 336,667 share options were granted (outside the Executive Option Plan) to an executive to take up ordinary shares at an exercise price of \$0.50 per share in accordance with the Executive's Service Agreement. These options are exercisable on or before 1 July 2006. The options have no voting or dividend rights.

The closing share market price of an ordinary share of Montec International Limited on the Australian Stock Exchange at 30 June 2004 was \$0.56 (The Company was not listed at 30 June 2003).

			Economic Entity	Parent Entity
		Year ended	2 months ended	Year ended	2 months ended 30 June 2004 30 June 2003 30 June 2004 30 June 2003
		No.	No.	No.	No.
a.	Movement in the number of share options held by employees are as follows: Opening balance
	Granted during the year	436.667
	Exercised during the year
	Lapsed during the year
	Closing Balance	436.667

				Economic Entity			Parent Entity
				Year ended	2 months ended	Year ended 30 June 2004 30 June 2003 30 June 2004 30 June 2003	2 months ended
				No.	No.	No.	No.
$b$	Details of share options outstanding as at end of year:
	Grant Date	Expiry and Exercise Date	Exercise Price
	12/11/2003	1/07/2007	\$0.50	100,000		100,000
	30/11/03 to 30/06/04	1/07/2006	\$0.50	336,667	۰	336.667	-
				436.667		436.667

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 28: EMPLOYEE BENEFITS (continued)

Fair value of shares issued during the reporting period is estimated to be the market price of shares of the parent entity on the Australian Stock Exchange as at close of trading on each of the issue dates. The fair value of shares issued to employees prior to listing has been assessed on the issue price to the public, being \$0.50 per share.

d. Date Shares Granted $8-Sep-03$ 7-May-04		30 June 2004
		Number of Shares Granted	Fair Value at Issue Date: Per Share	Aggregate Proceeds Received	Fair Value at Issue Date: Aggregate
		10.000	\$0.50		\$5,000
		20,000	\$0.50		\$10,000
		30,000			\$15,000

There were no shares granted as employee remuneration in the financial year ended 30 June 2003.

NOTE 29: EVENTS SUBSEQUENT TO REPORTING DATE

We note with deep regret the death of Mr Jim Grant in early July 2004. With Mr Grant's untimely death, Mr Terry Cuthbertson has been appointed by the board to act as Chairman of the Company.

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 30: RELATED PARTY TRANSACTIONS		Economic Entity		Parent Entity
	Year	2 months	Year	2 months
	ended	ended	ended	ended
		30 June 2004 30 June 2003 30 June 2004 30 June 2003
	\$	\$	\$	\$
Transactions between related parties are on normal commercial terms and conditions no more favorable than those available to other parties unless otherwise stated. Transactions with related parties:
i. Controlled entities
Two inter-company loans have been provided to Chongqing Montec Co Ltd for a combined amount of \$57,528. These loans have been partly recovered during the financial year, with an outstanding balance of \$27,747 as at 30 June 2004. The outstanding loans have been eliminated on consolidation.			27,747
ii. Director-related Entities
Montec International Limited made payments to Montec Holdings Pty Ltd, a wholly owned and controlled entity of Malcolm Campbell as follows:
payment of consideration for acquisition of acquired rights and interest in Chongqing Montec Co Ltd as outlined in the prospectus dated 22 September	785,500		785,500
2003.
reimbursement of costs incurred on behalf of Montec International Ltd in relation to the offer as outlined in the prospectus dated 22 September 2003	150,000		150,000
payment made to reimburse Montec Holdings Pty Ltd for costs incurred on behalf of Montec International Limited in respect of operations prior to listing.	165,000		165,000
payment made to IMBS Pty Ltd, a wholly owned and controlled entity of Malcolm Campbell for services provided to Montec International prior to listing.	10,000		10,000
iii. Directors No related party transactions with directors of Montec International Limited or controlled entities have occurred other than those noted in ii above.

iv. Share Transactions of Directors

No share transactions of directors occurred during the financial year other than those during the maintair year officer than alleged
foreshadowed in the prospectus dated 22
September 2003.

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 31: FINANCIAL INSTRUMENTS

Interest Rate Risk a.

The economic entity's exposure to interest rate risk, which is the risk that a financial instrument's value will fluctuate as a result of changes in market interest rates and the effective weighted average interest rates on classes of financial assets and financial liabilities, is as follows:

					Fixed Interest Rate Maturing
	Average	Weighted Effective Interest Ratel	Floating Interest Rate		Within Year 1		To 5 Years		Over 5 Years	Non- interest Bearing		Total
			\$		\$		\$			\$ \$		\$
	2004	2003	2004		2003 2004 2003		2004			2003 2004 2003 2004 2003		2004	2003
Financial Assets: Cash	4.80%	$\tilde{\phantom{a}}$	2.090.170 4.841		$\tilde{\phantom{a}}$						$\bullet!!\star$	2,090.170	4,841
Financial Liabilities: Lease liabilities	6.00%	$\blacksquare$	$\bullet\circ$	$\overline{\phantom{a}}$	8,701		13.052					21.753

All other assets and liabilities are non-interest bearing.

b. Credit Risk

The maximum exposure to credit risk, excluding the value of any collateral or other security, at balance date to recognised financial assets is the carrying amount, net of any provisions for doubtful debts of those assets, as disclosed in the statement of financial position and notes to the financial statements.

Credit risk for derivative financial instruments arises from the potential failure by counterparties to the contract to meet their obligations. The Company has no exposure to forward exchange contracts or interest rate swaps, nor other forms of derivative financial instruments.

Except for the following concentrations of credit risks, the economic entity does not have any material credit risk exposure to any single debtor or group of debtors under financial instruments entered into by the economic entity.

c. Net Fair Values

The net fair values of unlisted investments where there is no organised financial market, the net fair value has been based on a reasonable estimation of the underlying net assets or discounted cash flows of the investment. For other assets and other liabilities the net fair value approximates their carrying value.

d. Derivatives

The economic entity has not participated in the use of any derivative financial instruments during the year.

FOR THE YEAR ENDED 30 JUNE 2004

NOTE 32: COMPANY DETAILS

The registered office of the Company is:

Montec International Limited C/O Australian Company Secretaries Pty Ltd Level 5, 255 George St Sydney NSW 2000 Australia

The principal places of business are:

Montec International Limited -Sydney, Australia Level 6, 55 York Street Sydney NSW 2000

-Qingdao, China Level 7, Sanfod, No.96 Xiang Gang Zhong Road Qingdao PRC 266071

Chongqing Montec Co Limited -Chongqing, China Suite 214, No 106 Keyuan 3rd Hi-Tech Industrial Development Zone Chongqing PRC 400039

DIRECTORS' DECLARATION

The directors of the Company declare that:

1. The financial statements and notes, as set out on pages 7 to 37 are in accordance with the Corporations Act 2001:

a. comply with Accounting Standards and the Corporations Regulations 2001; and b, give a true and fair view of the financial position as at 30 June 2004 and of the performance for the year ended on that date of the Company and economic entity;

1. In the directors' opinion there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

This declaration is made in accordance with a resolution of the Board of Directors.

Terry Cuthbertson Chairman Dated this 20^th day of September 2004.

Standwel

Malcolm Campbell Managing Director

INDEPENDENT AUDIT REPORT TO THE MEMBERS OF MONTEC INTERNATIONAL LIMITED

Scope

The financial report and directors' responsibility

The financial report comprises the statement of financial position, statement of financial performance, statement of cash flows, accompanying notes to the financial statements, and the directors' declaration for both Montec International Limited (the company) and Montec International Limited and controlled entities (the consolidated entity), for the year ended 30 June 2004. The consolidated entity comprises both the company and the entities it controlled during that year.

The directors of the company are responsible for the preparation and true and fair presentation of the financial report in accordance with the Corporations Act 2001. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the financial report.

Audit approach

We conducted an independent audit in order to express an opinion to the members of the company. Our audit was conducted in accordance with Australian Auditing Standards, in order to provide reasonable assurance as to whether the financial report is free of material misstatement. The nature of an audit is influenced by factors such as the use of professional judgment, selective testing, the inherent limitations of internal control, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected.

We performed procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001, including compliance with Accounting Standards and other mandatory financial reporting requirements in Australia, a view which is consistent with our understanding of the company's and the consolidated entity's financial position, and of their performance as represented by the results of their operations and cash flows.

We formed our audit opinion on the basis of these procedures, which included:

• examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the financial report; and
• assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of significant accounting estimates made by the directors.

While we considered the effectiveness of management's internal controls over financial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls.

Level 17, 383 Kent Street Sydney NSW 2000 PO Locked Bag Q800 OVB Post Office Sydney NSW 1230 +61 2 8297 2400 F +61 2 9299 4445 E info@gtnsw.com.au W www.grantihomiton.com.au

Grant Thornton NSW A New South Wales Partnership ABN 26 034 787 757

Grant Thornton 零

INDEPENDENT AUDIT REPORT TO THE MEMBERS OF MONTEC INTERNATIONAL LIMITED (cont)

Independence

In conducting our audit, we followed applicable independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001.

Audit opinion

In our opinion, the financial report of Montec International Limited is in accordance with:

• $(a)$ the Corporations Act 2001, including:
• giving a true and fair view of the company's and consolidated entity's financial $\langle i \rangle$ position as at 30 June 2004 and of their performance for the year ended on that date; and
• complying with Accounting Standards in Australia and the Corporations $\langle n \rangle$ Regulations 2001; and
• $(b)$ other mandatory financial reporting requirements in Australia.

CL 200 June

GRANT THORNTON NSW Chartered Accountants

M A ADAM-SMITH Partner

Sydney

20 September 2004