LARK DISTILLING CO. LTD — Annual Report 2006

Sep 28, 2006

MONTEC INTERNATIONAL LIMITED

ACN 104 600 544

AND CONTROLLED ENTITIES

FINANCIAL REPORT

FOR THE YEAR ENDED 30 JUNE 2006

FINANCIAL REPORT

FOR THE YEAR ENDED 30 JUNE 2006

CONTENTS

Directors' Report	1
Income Statement	13
Balance Sheet	14
Statement of Changes in Equity	15
Cash Flow Statement	16
Notes to the Financial Statements	17
Directors' Declaration	59
Auditor's Independence Declaration	60
Independent Audit Report	61

DIRECTORS' REPORT

Your directors present their report on the Company and its controlled entities for the financial year ended 30 June 2006.

Directors

The names of directors in office at any time during or since the end of the year are: Terry Cuthbertson Malcolm Campbell (resigned 28 July 2006) Peter Herd Xuedin Du Lin Yuansheng Roger McGrath (alternate for Mr Lin Yuansheng, appointed 19 July 2006)

The term of office for each director is three years from the date of appointment, at which time they may offer themselves for re-election. Directors have been in office since 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 minority interests amounted to \$5,253,706 (2005: \$4,458,940 after restatement under A-IFRS).

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 vear ended 30 June 2006.

Review of Operations

The financial year ended 30 June 2006 has been one of significant challenge and less visible results. The Company had been set for a full scale roll out its monounsaturated dairy technology through Shanghai and Beijing in the form of dairypure branded milk products during December 2005. This did not happen as there was a change in food standards in China that required a re-engineering of the Company's monounsaturated technology to ensure compliance with this new standard. This compliance was subsequently achieved through valuable support from Beijing Sanyuan Foods, our processing partner in China.

Further delays were then encountered by the Montec team in China emanating from a conflux of factors including protracted efforts to secure distribution arrangements that required store entry being contracted. These most recent issues causing the delay are thought to have been resolved. With these matters addressed the Company is confident of distribution execution over the next six months subject to no unforeseen issues eventuating, and sufficient capital being available.

DIRECTORS' REPORT (CONTINUED)

Review of Operations (continued)

The Company has made some progress on new technology development in addition to the modifications to existing technology mentioned above. During June 2006, Montec submitted an application for patent protection for monounsaturated ice-cream. The Company plans to develop a range of commercial opportunities from this technology development. A range of commercial opportunities continue to be pursued in certain of the Asia Pacific countries which will, if successful, result in further licensing arrangements being contracted.

From a financial perspective the year ended 30 June 2006 has been characterised as a period of further development where expenditure has been incurred with an expectation of future revenues being earnt.

Significant Changes in State of Affairs

There was no significant change in the state of affairs of the economic entity during the financial year.

After Balance Date Events

Other than matters raised in Note 30 and the point noted below 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 vears.

On 28^th July 2006 the Managing Director, Mr Malcolm Campbell ceased employment with the company by way of mutual agreement. Mr Peter Herd, a non-executive director of the company has assumed the position of Managing Director on a temporary basis until a suitable replacement can be found.

Future Developments

The likely developments in the operations of the economic entity and the expected results of those operations in future financial vears are to be:

• The recognition of royalties following the sale of commercial quantities of monounsaturated dairy emanating from commercial arrangements that have been established by Montec to date. This activity is expected to be in a range of locations through China, including Beijing and Shanghai, and across a range of monounsaturated dairy products; and
• The commercialising of Montec's proprietary technology with appropriate customers in a number of Asia Pacific countries.

These initiatives will require further capital to be made available to the Company, as highlighted in note 1a.

Environmental Issues

The economic entity's operations are not subject to significant environmental regulation under a law of China, or of the Commonwealth or of a state or territory of Australia.

Adoption of Australian Equivalents to IFRS

As a result of the introduction of Australian equivalents to International Financial Reporting Standards (AIFRS), the Company's financial report has been prepared in accordance with those standards. A reconciliation of adjustments arising on the transition to AIFRS is included in Note 2 to this report.

Information on Directors

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., Open Telecommunication Limited and My Net Fone 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 - 10,000 ordinary shares of Montec International Limited
Special Responsibilities	- Mr Cuthbertson is the Company's Chairman and member of both the Audit Committee and Nomination and Remuneration Committee
Listed Entity Directorships	- Mr Cuthbertson is Chairman of Austpac Resources N.L, SZ Net Limited and My Net Fone Limited.
Malcolm Campbell	— Managing Director (resigned 28 July 2006)
Qualifications	-B. Comm, MAICD
Experience	- Managing Director of Montec International Limited from May 2003 to July 2006. 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 - 12,600,000 ordinary shares of Montec International Limited.
Special Responsibilities	- Mr Campbell as Chief Executive Officer had overall management responsibility for Company operations and performance. Mr Campbell also held the position and responsibility of Chief and Legal Representative of Montec International Limited within the People's Republic of China.
Listed Entity Directorships	$-$ None
Peter Herd	- Director (Non-executive) and Temporary Managing Director from 28 July 2006.
Qualifications	— B. Ec (hons), FAICD
Experience	- Previously General Manager of Dairy Farmers' Milk and Beverage Division, previously Regional Director of 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 directly, and an additional 4,460 Montec International Limited shares held indirectly.
Special Responsibilities	- Mr Herd was Chairman of both the Audit Committee and the Nomination and Remuneration Committee until 28 July 2006, at which time these responsibilities were reassigned in view of his executive role.
Listed Entity Directorships	- None

Information on Directors (continued)

Xueqin Du	-Executive Director (Product Development)
Qualifications	- 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 through 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 800,000 options over ordinary shares of Montec International Limited
Special Responsibilities	-Technical review and development of all product extensions
Listed Entity Directorships	— None
Lin Yuansheng	- Director (Non-executive)
Qualifications	-Bachelor of Agriculture (Agronomy)
Experience	- Managing Director of BAIC Australia Pty Ltd, the Australian subsidiary of Beijing Sanyuan Group Co Limited (Sanyuan Group). Sanyuan Group is the largest food, beverage and dairy company in China and is listed on the Shanghai stock exchange. Previously Managing Director of BAIC Scriven Ltd (Hong Kong). Through his association with Sanyuan Group, he was responsible for successfully introducing Kraft, Starbucks, Hormel and Baskin & Robbins to China.
Interest in Shares and Options	$-3,846,154$ ordinary shares as a consequence of his directorship of BAIC Australia Pty Limited
Special Responsibilities	-Key relationship holder with Beijing Sanyuan Foods, and integral to China business development and special project reviews within that country
Listed Entity Directorships	$-$ None
Roger McGrath	- Alternate Director representing Lin Yuansheng
Qualifications	- Wool Classing Certificate
Experience	- Previously a director of KPMG and brings to the board 40 years of experience.
Interest in Shares and Options	-5,000 ordinary shares of Montec International Limited
Special Responsibilities	-Alternate Director
Listed Entity Directorships	$-$ None

DIRECTORS' REPORT (CONTINUED)

Company Secretary

The following person held the position of Company Secretary at the end of the financial year:

Nick Geddes FCA, FCIS - Mr Geddes is the principal of Australian Company Secretaries, a company secretarial practice, that he formed in 1993. Mr Geddes is a member of the National Council of Chartered Secretaries Australia and Chairman of the NSW Branch of that Institute. His previous experience, as a Chartered Accountant and Company Secretary, includes investment banking and development and venture capital in Europe, Africa, the Middle East and Asia. Mr Geddes is a Fellow of the Chartered Institute of Company Secretaries in Australia and a Chartered Accountant (Fellow of both the Institute of Chartered Accountants in Australia and the Institute of Chartered Accountants in England and Wales).

Mr Geddes was appointed Company Secretary on 18 September 2003.

Remuneration Report

This report details the nature and amount of remuneration for each director and executive of Montec International Limited (the Company).

Remuneration Philosophy

The performance of the Company depends upon the quality of its directors and executives. To prosper, the company must attract, motivate and retain highly skilled directors and executives.

To this end, the Company embodies the following principles in its remuneration framework:

• provide competitive rewards to attract high calibre executives: $\blacksquare$
• link executive rewards to shareholder value;
• a significant portion of executive remuneration at risk, dependent upon meeting pre-determined performance benchmarks: and
• establish appropriate, demanding performance hurdles in relation to variable executive remuneration.

Remuneration Committee

The remuneration Committee of the Board of Directors of the Company is responsible for determining and reviewing compensation arrangements for the directors, the Chief Executive Officer, Chief Financial Officer and the senior management team.

The Remuneration Committee assesses the appropriateness of the nature and amount of remuneration of directors and senior managers on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality board and executive team

Remuneration Structure

In accordance with best practice corporate governance, the structure of non executive director and senior management remuneration is separate and distinct.

Remuneration Report (continued)

Non Executive Director Remuneration

Objective

The board seeks to set aggregate remuneration at a level which provides the company with the ability to attract and retain directors of the highest calibre, whilst incurring a cost which is acceptable to shareholders.

Structure

The Company's constitution and the ASX Listing Rules specify that the aggregate remuneration of nonexecutive directors shall be determined from time to time by a general meeting. An amount not exceeding the amount determined is then divided between the directors as agreed. The latest determination was as outlined in the Company's Initial Public Offering prospectus of \$300,000 per annum.

The amount of aggregate remuneration sought to be approved by shareholders and the manner in which it is apportioned amongst directors is reviewed annually. The board considers advice from external parties as well as the fees paid to non executive directors of comparable companies when undertaking the annual review process.

Each director receives a fee for being a director of the company.

Non executive directors are encouraged by the board to hold shares in the company. Although not in accordance with the ASX Corporate Governance Best Practices, the board considers it good governance for directors to have a stake in the company.

The remuneration of non executive directors for the period ending 30 June 2006 is detailed in note 6b of the financial statements.

Executive Officer and Executive Director Remuneration

Objective

The Company aims to reward executives with a level and mix of remuneration commensurate with their position and responsibilities within the Company and so as to:

• " reward executives for company and individual performance against targets set by reference to appropriate benchmarks:
• " align the interests of executives with those of shareholders;
• " link reward with the strategic goals and performance of the company; and
• " ensure total remuneration is competitive by market standards.

Structure

In determining the level and make up of executive remuneration, the Remuneration Committee has had reference to external measures including independent salary surveys detailing market levels of remuneration for comparable executive roles.

Remuneration Report (continued)

Employment contracts are entered into with the Chief Executive Officer, Chief Financial Officer and Technical Director. These are summarised below.

Remuneration consists of the following key elements:

• Fixed remuneration: and
• Variable remuneration

The proportion of fixed remuneration and variable remuneration is established for each senior manager by the Remuneration Committee.

Fixed Remuneration

Objective

The level of fixed remuneration is set so as to provide a base level of remuneration which is both appropriate to the position and is competitive in the market.

Fixed remuneration is reviewed annually by the Remuneration Committee and the process consists of a review of company and individual performance, relevant comparative remuneration in the market and internally, and where appropriate external advice on policies and practices.

Structure

Senior managers are given the opportunity to receive their fixed (primary) remuneration in a variety of forms including cash and fringe benefits.

Variable Remuneration - Short Term Incentive

Objective

The objective of the short term incentive arrangement is to link the achievement of the company's operational targets with the remuneration received by the executive charged with meeting those targets. The total potential short term incentive available is set at a level so as to provide sufficient incentive to the senior manager to achieve the operational targets.

Structure

Actual short term incentive payments granted to each senior manager depend on the extent to which specific operating targets set at the beginning of the financial year are met. The operational targets consist of a number of key performance indicators covering both financial and non financial measures of performance. The company has predetermined benchmarks which must be met in order to trigger payments under the short term incentive arrangement.

The aggregate of annual short term incentive payments available for executives across the company is determined and approved by the Remuneration Committee. Payments are usually delivered as a cash bonus.

Remuneration Report (continued)

Variable Remuneration - Long Term Incentive

Objective

The obiective of the long term incentive arrangement is to reward senior managers in a manner which aligns this element of remuneration with the creation of shareholder wealth.

As such, long term incentive arrangements are only made to executives who are able to influence the generation of shareholder wealth and thus have a direct impact on the company's performance against relevant long term performance hurdles.

Structure

Long term incentive grants to executives are delivered in the form of options. The Remuneration Committee determines what is the appropriate value to be provided to the executive and delivers this in the form of options valued utilizing the Black-Scholes option valuation model. The benefit of the long term incentive that is earned by the executive is only realised through share price appreciation, thereby aligning shareholder interest and executive reward.

Employee Contracts

Chief Executive Officer and Managing Director

Pursuant to an executive service agreement between Montec and Malcolm Campbell dated 1 July 2003, as amended prior to his resignation, Mr Campbell was on a three year contract commencing 12 November 2003 and expiring 11 November 2006. The contract was terminated by mutual agreement effective 28^th July 2006.

Mr Campbell received a base salary of \$180,000 and a superannuation contribution at a rate of 9 percent of the base salary earned during the year. Mr Campbell also received a net \$60,000 living away from home allowance benefit to compensate him for the time he has been required to spend overseas, and certain other benefits such as life insurance coverage, which are subject to fringe benefits tax. As Mr Campbell has statutory responsibilities in China he was paid a China salary equivalent to \$38,000 per annum, in addition to his base salary.

Chief Financial Officer

Pursuant to an executive service agreement between Montec and Ian Maltman dated 5 June 2003, as amended. Mr Maltman is entitled to a three month notice period.

Mr Maltman received a base salary of \$157,500 and a superannuation contribution at a rate of 9 percent of the base salary earned during the year. Mr Maltman received options over ordinary shares, details of which are set out in note 6c. Under the terms of the executive service agreement Mr Maltman received a cash benefit on a tax paid basis to compensate for income tax levied on remuneration options received. The cash benefits were paid quarterly during the financial year.

Technical Director

Pursuant to an executive service agreement between Montec and Xuegin Du dated 5 September 2003, as amended, Dr Du is entitled to a three month notice period.

Dr Du received a base salary of \$105,000 and a superannuation contribution at a rate of 9 percent of the base salary earned during the year. As Dr Du has statutory responsibilities in China she earnt a China salary equivalent to \$12,000 per annum.

Remuneration Report (continued)

Details of Remuneration for the year ended 30 June 2006

The remuneration for each director and executive officer of the consolidated entity during the year was as follows:

	Fees \$	Salary & Superannuation Contribution \$	Cash Benefit \$	Non-Cash Benefits \$	Options \$	Total \$	Performance Related %
Directors
Terry Cuthbertson	75,000	6,750				81,750
Malcolm Campbell	180,000	16,200	108,653	71,205		376,058
Peter Herd	49,050					49,050	$\blacksquare$
Xuegin Du	105,000	9,450	25,867	13,059	28,591	181,967
Lin Yuansheng	45,000	4,050	8,000			57,050	÷
	454,050	36,450	142,520	84,264	28,591	745,875
Specified Executives
lan Maltman	157,500	14,175	13,867	13,059	28,591	227,192	$\overline{ }$
	157,500	14,175	13,867	13,059	28,591	227,192

Options issued as Part of Remuneration for the year ended 30 June 2006

Options are issued to directors and executives as part of their remuneration. The options are not issued based on performance criteria, but are issued to increase goal congruence between executives, directors and shareholders.

	Granted No.	Options Granted as Part of Remuneration	Total Remuneration Represented by Options	Options Exercised	Options Lapsed	Total
		\$	%	\$	(\$)	\$
Specified Executives
Xuegin Du	700,000	28,591	15.7	$\blacksquare$	$\blacksquare$	28,591
lan Maltman	700,000	28,591	12.6		$\blacksquare$	28,591
	1,400,000	57,182				57,182

DIRECTORS' REPORT (CONTINUED)

Meetings of Directors

					COMMITTEE MEETINGS
		DIRECTORS' AUDIT MEETINGS COMMITTEE		NOMINATION AND REMUNERATION COMMITTEE
	Number eligible to attend	Number Attended	Number eligible to attend	Number Attended	Number eligible to attend	Number Attended
Terry Cuthbertson	11	11	3	3	2	2
Malcolm Campbell	11	10
Peter Herd	11	11	3	3	2	2
Xuegin Du	11	7
Lin Yuansheng	11	8
Roger McGrath

During the financial year, 16 meetings of directors (including committees) were held. Attendances by each director during the vear were as follows:

Audit Committee Investigation

The Audit Committee conducted an investigation into allegations raised by external parties of improprieties involving the former Managing Director Mr Malcolm Campbell and a sales and marketing contractor to the Company Mr Spiro Lymberatos. Investigations by the Audit Committee found that an entity, International Services and Trading Limited ("ISTC"), that was controlled by Mr Lymberatos and domiciled in the British Virgin Islands, had been interposed between Montec and its supplier. A one off transaction resulted in a trading margin being extracted by ISTC at the expense of Montec. This margin extracted at Montec's expense although detrimental, was not considered by the Company to be material under Generally Accepted Accounting Standards.

Mr Lymberatos terminated his contracting arrangements with Montec following the allegations being raised and certain evidence being presented to him by the Audit Committee.

Whilst a number of inconsistencies and irregularities were noted in the information and explanations tendered to the Audit Committee by Mr Campbell during the investigation, sufficient evidence did not exist to pursue the matter further. Mr Campbell ceased employment with the Company on 28 July 2006.

Subsequent to the departure of the previous Managing Director Malcolm Campbell in July 2006 and the necessary review of operations initiated in China during August, a further but as vet incomplete review is being undertaken in relation to the Company's China business model. Further details are set out in Note 30 to the financial report.

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 $\ddot{\phantom{0}}$ 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 \$39,060 for the below directors and executives.
• Terry Cuthbertson Malcolm Campbell Peter Herd Xuegin Du Lin Yuansheng Roger McGrath 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:

• 700,000 options granted to lan Maltman at an exercise price of \$0.50 exercisable on or before 30 June $\bullet$ 2008 under the terms of his Executive Service Agreement.
• 700,000 options granted to Xuegin Du at an exercise price of \$0.50 exercisable on or before 30 June 2008 under the terms of her Executive Service Agreement.

During the year ended 30 June 2006, 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:

Grant Date	Date of Expiry	Exercise Price	Number Under Option
12 October 2003	30/06/06	\$0.50		5,000,000
4 November 2003	30/06/07	\$0.35		2,509,500
21 October 2003	30/06/06	\$0.50		609,826
21 October 2003	01/07/07	\$0.50	$\left( i\right)$	100,000
30 November 2003 to
30 June 2004	01/07/06	\$0.50	$\left( i\right)$	336,667
19 August 2004	01/07/07	\$0.56	$\left( i\right)$	24.000
16 September 2004	01/07/06	\$0.50	$\left( i\right)$	168,333
16 September 2004	01/07/07	\$0.50	$\left( i\right)$	505,000
29 June 2005	30/06/06	\$0.55		100.000
28 July 2005	30/06/08	\$0.50	$\left( i\right)$	1,400,000
28 July 2005	30/06/08	\$0.50	$\left( i\right)$	24,000
18 November 2005	30/06/08	\$0.50	$\left( i\right)$	30,000
				10.807.326

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

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 a party to legal proceedings during the year. These proceedings have been explained at note 23 to the financial statements.

Non-audit Services

The board of directors, in accordance with advice from the audit committee, is satisfied that the provision of non-audit services during the year is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisfied that the services disclosed below did not compromise the external auditor's independence for the following reasons:

• all non-audit services are reviewed and approved by the audit committee prior to commencement to $\bullet$ ensure they do not adversely affect the integrity and objectivity of the auditor; and
• the nature of the services provided do not compromise the general principles relating to auditor $\bullet$ independence as set out in the Institute of Chartered Accountants in Australia and CPA Australia's Professional Statement F1: Professional Independence.

There were no non-audit services provided for which fees were paid/payable to the external auditors during the year ended 30 June 2006.

Auditor's Independence Declaration

The lead auditor's independence declaration for the year ended 30 June 2006 has been received and can be found on page 60 which forms part of this report.

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

Me

Terry Cuthbertson Chairman Dated this 29th day of September 2006

Peter Herd Managing Director

INCOME STATEMENT

FOR THE YEAR ENDED 30 JUNE 2006

	Note	Economic Entity		Parent Entity
		2006	2005	2006	2005
		\$	\$	\$	\$
Revenue	3	797,373	632,046	797,373	632,046
Other income		9,870
Raw materials sold		(479, 661)	(284, 769)	(479, 661)	(284, 769)
Compliance and professional fees		(784, 151)	(445,908)	(783, 597)	(445, 874)
Advertising and marketing expenses		(632, 137)	(601, 024)	(632, 137)	(601, 024)
Employee benefits expenses		(1,470,647)	(1,366,009)	(1,485,166)	(1,362,435)
Administrative expenses		(546, 582)	(341, 451)	(519, 298)	(316, 504)
Travel expenses		(232, 034)	(180, 778)	(231, 941)	(180, 778)
Insurance expenses		(104, 459)	(91, 136)	(104, 459)	(91, 136)
Finance costs			(658)		(658)
Depreciation and amortisation expense		(441, 922)	(570, 280)	(439, 484)	(567, 855)
Write off of certain acquired rights			(959, 422)		(959, 422)
Impairment write down of patents		(1,369,356)		(1,369,356)
Other expenses			(251, 523)		(347, 340)
Loss from ordinary activities before income tax expense	4	(5,253,706)	(4,460,912)	(5,247,726)	(4,525,749)
Income tax expense relating to ordinary activities	5
Loss from ordinary activities after related income tax expense		(5,253,706)	(4,460,912)	(5,247,726)	(4,525,749)
Net loss attributable to outside equity interests			1,972
Net loss attributable to members of the parent entity		(5, 253, 706)	(4,458,940)	(5, 247, 726)	(4,525,749)
Earning per share:
Basic earnings per share (cents per share)	9b	(0.080)	(0.072)
Diluted earnings per share (cents per share) The Financial Statements should be read in conjunction with the accompanying notes.	9b	(0.080)	(0.072)

BALANCE SHEET

AS AT 30 JUNE 2006

	Note	Economic Entity		Parent Entity
		2006	2005	2006	2005
		\$	\$	\$	\$
CURRENT ASSETS
Cash and cash equivalents	10	2,271,951	5,198,307	2,270,123	5,196,864
Trade and other receivables	11	67,002	63,691	67,002	63,691
Inventories	12	175,740	456,711	175,740	456,711
Other current assets	13	127,127	110,231	127,127	110,231
TOTAL CURRENT ASSETS		2,641,820	5,828,940	2,639,992	5,827,497
NON-CURRENT ASSETS
Financial assets	14			1
Property, plant and equipment	16	128,057	147,160	128,057	147,160
Intangible assets	17	1,027,733	2,793,833	1,027,733	2,793,833
TOTAL NON-CURRENT ASSETS		1,155,790	2,940,993	1,155,791	2,940,993
TOTAL ASSETS		3,797,610	8,769,933	3,795,783	8,768,490
CURRENT LIABILITIES
Trade and other payables	18	258,200	190,012	261,598	205,499
Short-term provisions	19	222,360	61,539	222,360	61,539
TOTAL CURRENT LIABILITIES		480,560	251,551	483,958	267,038
TOTAL LIABILITIES		480,560	251,551	483,958	267,038
NET ASSETS		3,317,050	8,518,382	3,311,825	8,501,452
EQUITY
Issued capital	20	15,407,680	15,407,680	15,407,680	15,407,680
Reserves		128,929	76,555	159,193	101,094
Accumulated losses		(12, 219, 559)	(6,965,853)	(12, 255, 048)	(7,007,322)
TOTAL EQUITY		3,317,050	8,518,382	3,311,825	8,501,452

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

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 30 JUNE 2006

					Reserves
Economic Entity		Note Share Capital Accumulated Share Ordinary	Losses		Foreign Options Exchange Interests	Minority	Total
		\$	\$	\$	\$	\$	\$
Balance at 1 July 2004	2	9,774,178	(2,506,913)	42,996	(22, 140)	(1, 168)	7,286,953
Adjustment arising from the translation of foreign controlled entities' financial statements					(2,399)		(2,399)
Net income recognised directly in equity					(2,399)		(2,399)
Loss for the period			(4,458,940)				1, 168 (4, 457, 772)
Total recognised income and expenses for the period			(4,458,940)	$\overline{\phantom{a}}$	(2,399)		1,168 (4,460,171)
Equity remuneration reserve on recognition of employee share options expenses	21a			58,098			58,098
Shares issued during the year		5,867,502					5,867,502
Transaction costs		(234,000)					(234,000)
Balance at 30 June 2005			15,407,680 (6,965,853) 101,094		(24, 539)		8,518,382
Adjustment arising from the translation of foreign controlled entities' financial statements					(5, 725)		(5, 725)
Net income recognised directly in equity					(5, 725)		(5, 725)
Loss for the period			(5,253,706)	58,099			$-$ (5,195,607)
Total recognised income and expenses for the period			(5,253,706)	58,099	(5, 725)		$-$ (5,201,332)
Balance at 30 June 2006			15,407,680 (12,219,559) 159,193		(30, 264)		3,317,050
Parent Entity
Balance at 1 July 2004	2		9,774,178 (2,481,573)	42,996			7,335,601
Net income recognised directly in equity
Loss for the period			(4, 525, 749)				$-$ (4,525,749)
Total recognised income and expenses for the period			(4, 525, 749)				$-$ (4,525,749)
Equity remuneration reserve on recognition of employee share options expenses	21a			58,098			58,098
Shares issued during the year		5,867,502					5,867,502
Transaction costs		(234,000)					(234,000)
Balance at 30 June 2005			15,407,680 (7,007,322)	101,094			8,501,452
Net income recognised directly in equity
Loss for the period			(5,247,726)	58,099			$-(5,189,627)$
Total recognised income and expenses for the period			(5,247,726)	58,099			$-(5,189,627)$
Balance at 30 June 2006			15,407,680 (12,255,048) 159,193				3,311,825

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

CASH FLOW STATEMENT

FOR THE YEAR ENDED 30 JUNE 2006

	Note	Economic Entity		Parent Entity
		2006	2005	2006	2005
		\$	\$	\$	\$
CASH FLOWS FROM OPERATING ACTIVITIES
Receipts from customers		621,573	432,610	621,573	432,610
Payments to suppliers and employees		(3,716,200)	(3,081,745)	(3,716,585)	(3,082,416)
Interest received		191,910	242,723	191,910	242,723
Finance costs			(658)		(658)
Net cash used in operating activities	25a	(2,902,717)	(2,407,070)	(2,903,102)	(2,407,741)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment		(23, 638)	(73, 721)	(23, 638)	(73, 721)
Purchase of Intellectual property			(18, 103)		(18, 103)
Payment for subsidiary, net of cash acquired	25 b	(1)	(4, 195)	(1)	(4, 195)
Other			(106)
Net cash used in investing activities		(23, 639)	(96, 125)	(23, 639)	(96, 019)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of shares			5,867,502		5,867,502
Cost of share issues			(234,000)		(234,000)
Payment for borrowing			(22, 170)		(22, 169)
Net cash provided by financing activities			5,611,332		5,611,333
Net (decrease)/increase in cash held		(2,926,356)	3,108,137	(2,926,741)	3,107,573
Cash at start of year		5,198,307	2,090,170	5,196,864	2,089,291
Cash at end of year	10	2,271,951	5,198,307	2,270,123	5,196,864

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

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2006

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 of Montec International Limited and controlled entities, and Montec International Limited as an individual parenting entity, complies with Australian Accounting Standards, which include A-IFRS, in their entirety. Compliance with A-IFRS ensures that the financial report also complies with International Financial Reporting Standards (IFRS) in their entirety.

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.

Basis of Preparation

First-time Adoption of Australian Equivalents to International Financial Reporting Standards

Montec International Limited and the controlled entities, and Montec International Limited as an individual parent entity have prepared financial statements in accordance with the Australian equivalents to International Financial Reporting Standards (A-IFRS) from 1 July 2005.

In accordance with the requirements of AASB 1: First-time Adoption of Australian Equivalents to International Financial Reporting Standards, adjustments to the parent entity and consolidated entity accounts resulting from the introduction of A-IFRS have been applied retrospectively to 2005 comparative figures. These consolidated accounts are the first financial statements of Montec International Limited to be prepared in accordance with Australian equivalents to IFRS.

The accounting policies set out below have been consistently applied to all years presented. Reconciliations of the transition from previous Australian GAAP to A-IFRS have been included in Note 2 to this report.

Reporting Basis and Conventions

The financial report has been prepared on an accruals basis and is based on historical costs modified by the revaluation of selected non-current assets, and financial assets and financial liabilities for which the fair value basis of accounting has been applied.

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Accounting Policies

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 15 to the financial statements. All controlled entities have a June financial year-end.

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. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with those policies applied by the parent entity.

Minority 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 charge for current income tax expense is based on the profit for the year adjusted for any nonassessable or disallowed items. It is calculated using tax rates that have been enacted or are substantively enacted by the balance sheet date.

Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. No deferred income tax will be recognised from the initial recognition of an asset or liability, excluding a business combination, where there is no effect on accounting or taxable profit or loss.

Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or liability is settled. Deferred tax is credited in the income statement except where it relates to items that may be credited directly to equity, in which case the deferred tax is adjusted directly against equity.

Deferred income tax assets are recognised to the extent that it is probable that future tax profits will be available against which deductible temporary differences can be utilised.

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.

As all the controlled entities are foreign companies Montec International Limited has not formed a tax consolidated group under the tax consolidation regime.

c. Inventories

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

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 been discounted to their present values in determining recoverable amounts.

Depreciation

The depreciable amount of all fixed assets 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	10% - 37.5%

The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

An asset carrying amount is written down immediately to its recoverable amount if the assets carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These gains and losses are included in the income statement.

e. Leases

Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are charged on a straight-line basis unless another method is more representative of the time pattern of the users benefits

f. Financial Instruments

Recognition

Financial instruments are initially measured at cost on trade date, which includes transaction costs, when the related contractual rights or obligations exist. Subsequent to initial recognition these instruments are measured as set out below.

Financial assets at fair value through profit and loss

A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management and within the requirements of AASB 139: Recognition and Measurement of Financial Instruments. Derivatives are also categorized as held for trading unless they are designated as hedges. Realised and unrealized gains and losses arising from changes in the fair value of these assets are included in the income statement in the period in which they arise.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are stated at amortised cost using the effective interest rate method.

Held-to-maturity investments

There are no held-to-maturity investments during the financial year ended 30 June 2006.

Available-for-sale financial assets

Available-for-sale financial assets include any financial assets not included in the above categories. Available-for-sale financial assets are reflected at fair value. Unrealized gains and losses arising from changes in fair value are taken directly to equity.

Financial liabilities

Non-derivative financial liabilities are recognised at amortised cost, comprising original debt less principal payments and amortisation.

Derivative instruments

There are no derivative instruments during the financial year ended 30 June 2006.

Fair value

Fair value is determined based on current bid prices for all quoted investments. Valuation techniques are applied to determine the fair value for all unlisted securities, including recent arm's length transactions, reference to similar instruments and option pricing models.

Impairment

At each reporting date, the group assesses whether there is objective evidence that a financial instrument has been impaired. In the case of available-for sale financial instruments, a prolonged decline in the value of the instrument is considered to determine whether impairment has arisen. Impairment losses are recognised in the income statement.

g. Impairment of Assets

At each reporting date, the group reviews the carrying values of its tangible and intangible assets to determine whether there is any indication that those assets have been impaired. If such an indication exists, the recoverable amount of the asset, being the higher of the asset's fair value less costs to sell and value in use, is compared to the asset's carrying value. Any excess of the asset's carrying value over its recoverable amount is expensed to the income statement.

Impairment testing is performed annually for goodwill and intangible assets with indefinite lives.

Where it is not possible to estimate the recoverable amount of an individual asset, the group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

h. 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 been discounted to their present value in determining the recoverable amounts.

i. 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 on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisition of associates is included in investments in associates. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

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 and adjusted for any impairment losses. 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.

J. Foreign Currency Transactions and Balances

Functional and presentation currency

The functional currency of each of the group's entities is measured using the currency of the primary economic environment in which that entity operates. The consolidated financial statements are presented in Australian dollars which is the parent entity's functional and presentation currency.

Transaction and balances

Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary items are translated at the year-end exchange rate. Non-monetary items measured at historical cost continue to be carried at the exchange rate at the date of the transaction. Non-monetary items measured at fair value are reported at the exchange rate at the date when fair values were determined.

Exchange differences arising on the translation of monetary items are recognised in the income statement, except where deferred in equity as a qualifying cash flow or net investment hedge.

Exchange differences arising on the translation of non-monetary items are recognised directly in equity to the extent that the gain or loss is directly recognised in equity, otherwise the exchange difference is recognised in the income statement.

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Group companies

The financial results and position of foreign operations whose functional currency is different from the group's presentation currency are translated as follows:

• assets and liabilities are translated at year-end exchange rates prevailing at that reporting date;
• income and expenses are translated at average exchange rates for the period; and
• retained earnings are translated at the exchange rates prevailing at the date of the transaction. $\mathbf{r}$

Exchange differences arising on translation of foreign operations are transferred directly to the group's foreign currency translation reserve in the balance sheet. These differences are recognised in the income statement in the period in which the operation is disposed.

k. 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, have been measured at the amounts expected to be paid when the liability is settled plus related on-costs. 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 26 to the financial statements.

L Provisions

Provisions are recognised when the group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that outflow can be reliably measured.

m. Cash and Cash Equivalents

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. $\bullet$

n. 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 customers 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.

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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).

o. 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.

Cash flows are presented in the cash flow statement on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows.

p. Comparative Figures

Where required by accounting standards, comparative figures have been adjusted to conform with changes in presentation for the current financial year.

Critical accounting estimates and judgments

The directors evaluate estimates and judgments incorporated into the financial report based on historical knowledge and best available current information. Estimates assume a reasonable expectation of future events and are based on current trends and economic data, obtained both externally and within the group.

Key Estimates

The group assesses impairment at each reporting date by evaluating conditions specific to the group that may lead to impairment of assets. Where an impairment trigger exists, the recoverable amount of the asset is determined. Value-in-use calculations performed in assessing recoverable amounts incorporate a number of key estimates.

Provision for Management Restructure

Whilst no final decision had been made in relation to a management restructure as at 30 June 2006 (nor obligation crystallised) there was a reasonable expectation of the need for certain management changes as at 30 June 2006. Subsequent to year end a management restructure did occur. As such, a provision of \$111,854 has been booked for the management restructure as at 30 June 2006.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Patent Impairment

An impairment review of both the Australian and New Zealand patents held by Montec that relate to monounsaturated dairy production has been conducted. This review has necessitated a write down of the carrying value of these two patents. This amount was assessed after discounting the currently anticipated future cash flows associated with these patents and comparing it with the net book value. The net write down which has resulted from this impairment testing, and which has been reflected in the financial accounts, is \$1,369,356.

For further details of the calculation of the patent impairment, refer to Note 17.

Key Judgments

Stock Obsolescence Provision

Included in inventory as at 30 June 2006 is a provision for stock obsolescence relating to certain forms of packaging printed for use in China. The carrying value of this packaging is unlikely to be recovered and an obsolescence provision has been made in the accounts. The amount of the provision is \$67,637.

g. Going Concern

An assessment of the Company's China business model has been completed following a visit to China in August 2006. The assessment of the China business concludes that whilst the longer term business model of licensing both technology and proprietary brands is expected to be viable in the longer term, it will take sometime to transition to this preferred model. This transitional arrangement was not envisaged in the initial planning, but is seen as essential in overcoming factors which restricted growth through out 2006 and to provide the initial critical mass in overall distribution an outlet numbers, specifically in Beijing and Shanghai. Over the immediate future an agreement with Beijing Sanyuan Foods Co Ltd ("BSF") requires that Montec through its China based agent will fund ex works product purchases and store entry fees to facilitate the roll out and pipeline fill of Montec monounsaturated milk brands in Beijing and Shanghai.

The full rollout in Beijing and Shanghai will require significant expenditure on consumer marketing and the previously unforeseen need to fund ex works product purchases. Full and timely exploitation of this opportunity will require further working capital investment. This will necessitate a capital raising in the near future, the terms and quantum of which the Directors at the time of signing the financial report are considering.

The September 2006 agreement with BSF, which supersedes all previously agreements, formalises the partnership arrangement whereby BSF will produce and sell Montec branded monounsaturated milk and so provide a secure platform for the roll out of the Montec brands in China, specifically Beijing and Shanghai.

Co-ordinated by Montec's China agent Qingdao Meng Tai Ru Trading and Commercial Co Ltd ("MTR"), distribution will be undertaken by BSF to their retail channels in Beijing and Shanghai with the support of Montec's sales development team in other channels in these cities and wider geographical coverage provided by the National Agency Network ("NAN") in selected cities plus MTR's retail channels in Qingdao.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The company's core liquid milk business whilst not in itself expected to provide the previously envisaged financial returns, will establish the processing partnership and an extensive distribution network with BSF as the base for further innovative product introductions. These include a range of drinking voghurt and ice-cream products which will be the subject of the Company's proprietary intellectual property and may include patent protection. The Company is investigating opportunities for closer ties with BSF which may lead to direct investment by Montec to expand the Montec product range into chilled milk and other dairy products.

The Directors, at the time of signing the Financial Report, have initiated discussions with a number of parties that have expressed interest in supporting the Company with its capital requirements. At the time of signing, no financial commitment is contracted.

Given the above outlook the Directors are confident that if sufficient and appropriate capital is made available, the Company will be able to continue as a going concern.

However, should sufficient and appropriate capital not be available to the Company on a timely basis the Directors will be required to significantly alter the Company's existing business plan and model. This would see the Company continue on a substantially smaller scale with a cessation of the pursuit of the China and broader Asia Pacific markets and a reduction in expenditure on staff and directors. The business would, under this scenario, operate on existing capital reserves combined with the ongoing licensing arrangement with Dairy Farmers which has provided a monthly income stream historically. The Company has prepared cash flow forecasts for this "worst case" scenario and the directors are therefore satisfied that the Company would be able to continue to operate as a going concern on this basis.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

	Note	Previous GAAP at 1 July 2004 \$	Effect of transition to Australian equivalents to IFRS \$	Australian equivalents to IFRS at 1 July 2004 \$
Economic Entity
Reconciliation of Equity at 1 July 2004
ASSETS
CURRENT ASSETS
Cash and cash equivalents		2,090,170		2,090,170
Trade and other receivables		145,690		145,690
Inventories		409,257		409,257
Other current assets		279,654		279,654
TOTAL CURRENT ASSETS		2,924,771		2,924,771
NON-CURRENT ASSETS
Financial assets
Property, plant and equipment		113,160		113,160
Intangible assets		4,512,190		4,512,190
TOTAL NON-CURRENT ASSETS		4,625,350		4,625,350
TOTAL ASSETS		7,550,121		7,550,121
CURRENT LIABILITIES
Trade and other payables		215,492		215,492
Short-term borrowings		8,701		8,701
Short-term provisions		25,923		25,923
TOTAL CURRENT LIABILITIES		250,116		250,116
NON-CURRENT LIABILITIES
Long-term borrowings		13,052		13,052
TOTAL NON-CURRENT LIABILITIES		13,052		13,052
TOTAL LIABILITIES		263,168	$\qquad \qquad \blacksquare$	263,168
NET ASSETS		7,286,953		7,286,953
EQUITY
Issued capital		9,774,178		9,774,178
Reserves	2(a)	(22, 140)	42,996	20,856
Accumulated losses	2(b)	(2,463,917)	(42,996)	(2,506,913)
Parent interest		7,288,121		7,288,121
Minority interest		(1, 168)		(1, 168)
TOTAL EQUITY		7,286,953		7,286,953

FOR THE YEAR ENDED 30 JUNE 2006

	Note	Previous GAAP at 30 June 2005 \$	Effect of transition to Australian equivalents to IFRS \$	Australian equivalents to IFRS at 30 June 2005 \$
Economic Entity
Reconciliation of Equity at 30 June 2005
ASSETS
CURRENT ASSETS
Cash and cash equivalents		5,198,307		5,198,307
Trade and other receivables		63,691		63,691
Inventories		456,711		456,711
Other current assets		110,231		110,231
TOTAL CURRENT ASSETS		5,828,940		5,828,940
NON-CURRENT ASSETS
Financial assets Property, plant and equipment		147,160		147,160
Intangible assets		2,793,833		2,793,833
TOTAL NON-CURRENT ASSETS		2,940,933		2,940,933
TOTAL ASSETS		8,769,933		8,769,933
CURRENT LIABILITIES
Trade and other payables		190,012		190,012
Short-term borrowings
Short-term provisions		61,539		61,539
TOTAL CURRENT LIABILITIES		251,551		251,551
NON-CURRENT LIABILITIES
Long-term borrowings
TOTAL NON-CURRENT LIABILITIES
TOTAL LIABILITIES		251,551		251,551
NET ASSETS		8,518,382		8,518,382
EQUITY
Issued capital		15,407,680		15,407,680
Reserves	2(a)	(24, 539)	101,094	76,555
Accumulated losses	2(b)	(6,864,759)	(101, 094)	(6,965,853)
Parent interest		8,518,382		8,518,382
Minority interest
TOTAL EQUITY		8,518,382		8,518,382

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

	Note	Previous GAAP at 1 July 2004 \$	Effect of transition to Australian equivalents to IFRS \$	Australian equivalents to IFRS at 1 July 2004 \$
Parent Entity
Reconciliation of Equity at 1 July 2004
ASSETS
CURRENT ASSETS
Cash & cash equivalents		2,089,291		2,089,291
Trade and other receivables		172,471		172,471
Inventories		405,238		405,238
Other current assets		267,478		267,478
TOTAL CURRENT ASSETS		2,934,478		2,934,478
NON-CURRENT ASSETS
Financial assets		281,605		281,605
Property, plant and equipment		104,998		104,998
Intangible assets		4,271,447		4,271,447
TOTAL NON-CURRENT ASSETS		4,658,050		4,658,050
TOTAL ASSETS		7,592,528		7,592,528
CURRENT LIABILITIES
Trade and other payables		209,251		209,251
Short-term borrowings		8,701		8,701
Short-term provisions		25,923		25,923
TOTAL CURRENT LIABILITIES		243,875		243,875
NON-CURRENT LIABILITIES
Long-term borrowings		13,052		13,052
TOTAL NON-CURRENT LIABILITIES		13,052		13,052
TOTAL LIABILITIES		256,927		256,927
NET ASSETS		7,335,601		7,335,601
EQUITY
Issued capital		9,774,178		9,774,178
Reserves	2(a)		42,996	42,996
Retained earnings	2(b)	(2, 438, 577)	(42,996)	(2,481,573)
TOTAL EQUITY		7,335,601		7,335,601

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

	Note	Previous GAAP	Effect of transition to Australian	Australian equivalents to
		at 30 June 2005 \$	equivalents to IFRS \$	IFRS at 30 June 2005 \$
Parent Entity
Reconciliation of Equity at 30 June 2005
ASSETS
CURRENT ASSETS
Cash & cash equivalents		5,196,864		5,196,864
Trade and other receivables		63,691		63,691
Inventories		456,711		456,711
Other current assets		110,231		110,231
TOTAL CURRENT ASSETS		5,827,497		5,827,497
NON-CURRENT ASSETS
Financial assets
Property, plant and equipment		147,160		147,160
Intangible assets		2,793,833		2,793,833
TOTAL NON-CURRENT ASSETS		2,940,993		2,940,993
TOTAL ASSETS		8,768,490		8,768,490
CURRENT LIABILITIES
Trade and other payables		205,499		205,499
Short-term provisions		61,539		61,539
TOTAL CURRENT LIABILITIES		267,038		267,038
TOTAL LIABILITIES		267,038		267,038
NET ASSETS		8,501,452		8,501,452
EQUITY
Issued capital		15,407,680		15,407,680
Reserves	2(a)		101,094	101,094
Retained earnings	2(b)	(6,906,228)	(101, 094)	(7,007,322)
TOTAL EQUITY		8,501,452		8,501,452

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

	Note	Previous GAAP \$	Effect of transition to Australian equivalents to IFRS \$	Australian equivalents to IFRS \$
Economic Entity
Reconciliation of profit or loss for the full year to 30 June 2005
Revenues		632,046		632,046
Raw materials sold		(284, 769)		(284, 769)
Employee benefits expense	2(c)	(1,307,911)	(58,098)	(1,366,009)
Advertising and Marketing expenses		(601, 024)		(601, 024)
Compliance and professional fees		(445,908)		(445,908)
Administrative expenses		(341, 451)		(341, 451)
Travel expenses		(180, 778)		(180, 778)
Insurance expenses		(91, 136)		(91, 136)
Finance costs		(658)		(658)
Depreciation and amortisation expense	2(d)	(582, 885)	12,605	(570, 280)
Write off of certain acquired rights	2(d)	(959, 422)		(959, 422)
Other expenses from ordinary activities		(238, 918)	(12,605)	(251, 523)
Loss before income tax expense		(4,402,814)	(58,098)	(4,460,912)
Income tax expense
Loss after income tax expense		(4,402,814)	(58,098)	(4,460,912)
Loss attributable to minority interest		1,972		1,972
Loss attributable to members of the parent entity		(4,400,842)	(58,098)	(4, 458, 940)

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

	Note	Previous GAAP \$	Effect of transition to Australian equivalents to IFRS \$	Australian equivalents to IFRS \$
Parent Entity
Reconciliation of profit or loss for 2005
Revenues from ordinary activities		632,046		632,046
Raw materials sold		(284, 769)		(284, 769)
Employee benefits expense	2(c)	(1,304,337)	(58,098)	(1,362,435)
Advertising and Marketing expenses		(601, 024)		(601, 024)
Compliance and professional fees		(445, 874)		(445, 874)
Administrative expenses		(316, 504)		(316, 504)
Travel expenses		(180, 778)		(180, 778)
Insurance expenses		(91, 136)		(91, 136)
Finance costs		(658)		(658)
Depreciation and amortisation expense		(567, 855)		(567, 855)
Write off of certain acquired rights		(959, 422)		(959, 422)
Other expenses from ordinary activities		(347, 340)		(347, 340)
Loss before income tax expense		(4,467,651)	(58,098)	(4, 525, 749)
Income tax expense
Loss after income tax expense		(4,467,651)	(58,098)	(4, 525, 749)
Loss attributable to members of the parent entity		(4,467,651)	(58,098)	(4, 525, 749)

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

Note 2: First-time Adoption of Australian Equivalents to International Financial Reporting Standards (continued)

		30 June 2005 S	1 July 2004 \$
a	Reserves comprise:
	Economic Entity
	Equity Remuneration reserve	101,094	42,996
	Total	101,094	42,996
b	Retained earnings comprise:
	Economic Entity
	Recognition of employee share options expenses	(101, 094)	(42,996)
	Total	(101, 094)	(42,996)

The A-IFRS adjustment reflects the expensing of the fair value of options over c ordinary shares issued and vested as remuneration with the recognition of an associated equity remuneration reserve. The combined impact of the expensing of 2004 and 2005 financial year equity remuneration of \$101,094 is reflected in an equity remuneration reserve.

d The adjustment reflects the adding back of the 2005 financial year goodwill amortisation expenses of \$12,605. At 30 June 2005 the company provided for the entire balance of goodwill, so reversal of amortisation of \$12,605 would result in an additional provision

NOTE 3: REVENUE

		Economic Entity		Parent Entity
		2006	2005	2006	2005
		\$	\$	\$	\$
Operating activities:
	royalties	335,054	295,737	335,054	295,737
	cream sales	20,795		20,795
	sales of goods	237,549	91,286	237,549	91,286
$\overline{\phantom{000000000000000000000000000000000000$	interest income - other persons	191,910	242,723	191,910	242,723
	other revenue	12,065	2,300	12,065	2,300
	Total Revenue	797,373	632.046	797,373	632,046

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 4: LOSS FROM ORDINARY ACTIVITIES

	Economic Entity		Parent Entity
	2006	2005	2006	2005
	\$	\$	\$	\$
Loss from ordinary activities before income tax has been determined after:
Depreciation of non-current assets:
plant and equipment	(45, 179)	(33,984)	(42, 741)	(31, 559)
Amortisation of non-current assets:
patents and acquired rights	(396, 743)	(536, 296)	(396, 743)	(536, 296)
Rental expense on property	(106, 087)	(67, 177)	(106, 087)	(67, 177)
Foreign currency translation (losses)/gains	845	(7,716)	2,861	(7,018)
Write off of certain acquired rights		(959, 422)		(959, 422)
Impairment write down:
patents	(1,369,356)		(1,369,356)
investments				(285, 800)
goodwill		(226, 634)
net assets of subsidiary	9,870	(12, 284)
Other expenses:
Loss on reserve				(61, 540)
Legal fees	(518, 392)	(182, 938)	(518, 392)	(182, 938)
Total other expenses	(518, 392)	(182, 938)	(518, 392)	(244, 478)

FOR THE YEAR ENDED 30 JUNE 2006

	NOTE 5: INCOME TAX EXPENSE	Economic Entity		Parent Entity
		2006 \$	2005 \$	2006 \$	2005 \$
	The prima facie tax on loss from ordinary activities before income tax is reconciled to income tax as follows:
	a. Prima facie tax receivable on loss from ordinary activities at 30% (2005: 30%)	(1,576,112)	(1,338,274)	(1,574,318)	(1, 357, 725)
Add:
	Tax effect of:
	non-deductible amortisation	3,530	45,395	3,530	45,395
	other non-allowable items	440,913	316,957	440,913	316,957
Less:
	Tax effect of:
	foreign currency exchange profit not subject to income tax	2,964	2,867	2,964	2,867
	other allowable items	(22, 409)	27,938	(22, 409)	27,938
account	Tax effect of deferred tax assets not brought to	1,112,224	1,006,727	1,110,430	1,026,178
	Income tax expense attributable to entity
	The applicable weighted average effective tax rates are as follows:	$-$ %	-%	$-$ %	$-\frac{9}{6}$

The directors estimate that the Parent Entity and its controlled entities have carry-forward income tax losses of \$3,707,413(2005: \$3,355,757) available to offset against future years' taxable income. The benefits of these losses have not been brought to account as there is no convincing evidence of future taxable profits to offset losses. 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.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 6: KEY MANAGEMENT PERSONNEL COMPENSATION

a. Names and positions held of parent entity key management personnel in office at any time during the financial year are:

Key Management Personnel

TO FINITION CHILE FOR SOUTH OF
Terry Cuthbertson	Chairman - Non-Executive
Malcolm Campbell	Managing Director - Executive
Peter Herd	Director - Non-Executive
Xuegin Du	Director - Executive
Lin Yuansheng	Director - Non-Executive
lan Maltman	Chief Financial Officer

b. Key Management Personnel

2006					Post
		Primary			Employment	Equity		Total
	Salary & Fees	Superannuation Contribution	Cash Benefit	Non-Cash Benefits	Super- annuation		Shares Options
	\$	\$	\$	\$	\$	\$	\$	\$
Terry Cuthbertson	75,000	6,750	$\tilde{\phantom{a}}$				$\overline{\phantom{m}}$	81,750
Malcolm Campbell	180,000	16,200	108,653	71,205			$\blacksquare$	$-376,058$
Peter Herd	49,050						$\blacksquare$	49,050
Xuegin Du	105,000	9,450	25,867	13,059			$-28,591$	181,967
(i) Lin Yuansheng	45,000	4,050	8,000					57,050
lan Maltman	157,500	14,175	13,867	13,059			$-28,591$	227,192
	611,550		50,625 156,387	97,323			$-57,182$ 973,067

2005			Primary			Post Employment		Equity	Total
		Fees	Salary & Superannuation Contribution	Cash Benefit	Non-Cash Benefits	Super- annuation		Shares Options
		\$	\$	\$	\$	\$	\$	\$	\$
Terry Cuthbertson		74,773	6,730					$\blacksquare$	81,503
Malcolm Campbell		180,000		16,200 145,111	96,174				437,485
Peter Herd		69,050						$\blacksquare$	69,050
Xuegin Du		100,000	9,900	37,483			$\blacksquare$	Ŧ	147,383
Lin Yuansheng	(i)	13,306	1,198	12,903				Ŧ	27,407
Jim Grant	(ii)	1,154	104						1,258
lan Maltman		150,000	13,500	27,138	25,557			$-55,955$	272,150
		588,283		47.632 222.635	121,731			$-55,955$	1,036,236

i. Compensation paid for period from 17 March 2005 to 30 June 2005.

ii. Compensation paid for period from 1 July 2004 to 4 July 2004.

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 6: KEY MANAGEMENT PERSONNEL COMPENSATION (CONTINUED)

c. Compensation Options

Options Granted As Compensation

			Terms & Conditions for Each Grant
	Vested No.	Granted Number	Grant Date	Average Value per Option at Grant Date	First Exercise Exercise Exercise Price	Date	Last Date
Key Management Personnel
Xuegin Du	700.000	700.000	28/7/05	0.04084	\$0.50	Current	30/6/08
lan Maltman	700,000	700,000	28/7/05	0.04084	\$0.50	Current	30/6/08
	1,400,000 1,400,000

All options granted to the above key management personnel 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 Agreement. The service and performance criteria set to determine compensation are included per Note 6h below.

d. Shares Issued on Exercise of Compensation Options

	shares issued	No. of ordinary Amount paid per Amount unpaid share	ber share
Key Management Personnel
Xuegin Du	$\mathbf{u}_i$	w	$\overline{\phantom{a}}$
lan Maltman	$\mathbf{u}$		$\overline{\phantom{a}}$

e. Options and Rights Holdings

Number of options held by Key Management Personnel

	Balance 01/07/05	Granted as Compensation	Options Exercised	Net Change Other		Balance 30/06/06	Total Vested 30/06/06	Total Exercisable	Total Unexercis -able
Key Management Personnel
Malcolm. Campbell	5,000,000	w		$\tilde{ }$	w.		5.000.000 5.000.000	5,000,000
Xuegin Du	100.000	700.000		w	w	800.000	800.000	800.000
lan Maltman	1.010.000	700.000		$\omega$		$-1.710.000$ 1.710.000		1.710.000
Total	6,110,000	1,400,000		۰		$-7,510,000$ $7,510,000$		7.510.000

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 6: KEY MANAGEMENT PERSONNEL COMPENSATION (CONTINUED)

f. Shareholdings

Number of shares held by Key Management Personnel

	Balance 1/7/05	Received as Compensation	Options Exercised	Net Change Other*	Balance 30/6/06
Key Management Personnel
Terry Cuthbertson	10,000				10,000
Malcolm Campbell	12,600,000		÷	۰.	12,600,000
Peter Herd	10,000		$\blacksquare$		10,000
Xuegin Du	10,000		$\blacksquare$		10,000
Lin Yuansheng	3,846,154	$\blacksquare$	$\blacksquare$	÷	3,846,154
	16,476,154	$\blacksquare$	٠		16,476,154

* Net Change Other refers to shares purchased or sold during the financial year.

h. Compensation Practices

The board's policy for determining the nature and amount of compensation of key management personnel of the company is as follows:

The compensation structure for key management personnel 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 compensation 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 compensation structure for key management personnel 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 key management personnel are on a continuing basis the terms of which are not expected to change in the immediate future. Upon retirement key management personnel are paid employee benefit entitlements accrued to date of retirement.

A notice period of three months is provided for under each executive's service agreement, with the exception of the Managing Director. The Managing Director was on a three vear contract that commenced on 12 November 2003, but which was terminated by mutual agreement on 28 July 2006.

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 6, table (c) above and note 26 below.

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

Xuegin Du and Ian Maltman received cash benefits under the terms of their Executive Service Agreement whereby they receive this benefit on a tax paid basis to compensate for income tax levied on compensation options received. The cash benefits were paid quarterly during the financial year.

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 7: AUDITORS' REMUNERATION		Economic Entity		Parent Entity
		2006	2005	2006	2005
		\$	\$	\$	\$
entity for:	Remuneration of the auditor of the parent
	auditing and reviewing the financial reports	47,000	47,750	47.000	47.750
	Remuneration of other auditors of subsidiaries for:
	auditing and reviewing the financial reports of subsidiaries		2.446		2.446

NOTE 8: DIVIDENDS

No interim dividends have been declared or paid during the current financial year, nor in the previous a. 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
	2006 S	2005 S	2006 S	2005 S
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 recognised as a liability and franking credits that may be prevented from distribution in subsequent financial vears
Impact of any proposed dividends not recognised as a liability.

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 9: EARNINGS PER SHARE	Economic Entity 2006 S	Economic Entity 2005 S
a. Reconciliation of earnings to net loss
Net loss	(5,253,706)	(4,460,912)
Net loss attributable to outside equity interest		1,972
Earnings used in the calculation of basic and diluted EPS	(5,253,706)	(4,458,940)
b. Applying AASB 133: 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	65,916,002 10,572,712 65,916,002	62,089,414 13,471,036 62.089.414

NOTE 10: CASH AND CASH

VIL IV. VMVIIMIV EQUIVALENTS	Economic Entity		Parent Entity
	2006 \$	2005 \$	2006 \$	2005 \$
Cash at bank and in hand	2,271,951	5,198,307	2,270,123	5,196,864
	2,271,951	5,198,307	2,270,123	5,196,864
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 and cash equivalents	2,271,951	5,198,307	2,270,123	5,196,864
NOTE 11: TRADE AND OTHER RECEIVABLES
CURRENT
Trade receivables	41,618	57,120	29,969	46,079
Provision for doubtful debts	(11, 649)	(11, 041)
	29,969	46,079	29,969	46,079
Term receivables	37,033	17,612	37,033	17,612
	67,002	63,691	67,002	63,691

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 12: INVENTORIES	Note	Economic Entity		Parent Entity
		2006 \$	2005 \$	2006 \$	2005 \$
CURRENT
At cost
Raw materials and consumables		247,259	545,215	243,377	541,571
Provision for Stock Obsolescence		(71, 519)	(88, 504)	(67, 637)	(84, 860)
		175,740	456,711	175,740	456,711
NOTE 13: OTHER CURRENT ASSETS
Prepayments		127,127	110,231	127,127	110,231
		127,127	110,231	127,127	110,231
NOTE 14: FINANCIAL ASSETS
NON-CURRENT
Unlisted investments, at cost
Shares in controlled entities	14a, 15			285,801	285,800
Provision for write down to
recoverable amount				(285, 800)	(285, 800)
				1
a. Unlisted investments movement during the year
Balance at beginning of the financial year					285,800
Additional investment				1
Balance at the end of the financial year				1	285,800

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 15: CONTROLLED ENTITIES

a. Controlled Entities		Country of Incorporation	Percentage Owned
			2006	2005
			\$	\$
	Parent Entity:
	Montec International Limited
	Subsidiaries of Montec International Limited:
$\overline{\phantom{m}}$	Chongqing Montec Co Limited	China	100%	100%
	Montec International (HK) Limited	Hong Kong	100%	$\blacksquare$

b. Controlled Entities Acquired

On 23 March 2006 the parent entity acquired 100% of Montec International (HK) Limited for a purchase consideration of \$1. Montec International (HK) Limited had been dormant prior to, and since the date of purchase by Montec International Limited.

NOTE 16: PROPERTY, PLANT AND EQUIPMENT

	Economic Entity		Parent Entity
	2006	2005	2006	2005
	Ş	\$	\$	\$
PLANT AND EQUIPMENT
Plant and equipment
At cost	228,702	205,722	216,612	192,975
Provision for write off plant and equipment	(2,938)	(5,737)
Accumulated depreciation	(97, 707)	(52, 825)	(88, 555)	(45, 815)
Total Property, Plant and Equipment	128,057	147,160	128.057	147,160

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 16: 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.

2006	Plant and Equipment \$	Leased Plant and Equipment \$	Total \$
Economic Entity:
Balance at the beginning of year	147,160		147,160
Additions	23,638		23,638
Transfer asset in or out
Movement on exchange	(361)		(361)
Movement on provision disposals of assets	2,799		2,799
Depreciation expense	(45, 179)		(45, 179)
Carrying amount at the end of year	128,057		128,057
Parent Entity:
Balance at the beginning of year	147,160		147,160
Additions	23,638		23,638
Transfer asset in or out
Depreciation expense	(42, 741)		(42, 741)
Carrying amount at the end of year	128,057		128,057

NOTE 17: INTANGIBLE ASSETS	Economic Entity		Parent Entity
	2006	2005	2006	2005
	\$	\$	\$	\$
Goodwill, at deemed cost	250,594	250,594
Impairment write down of goodwill	(250, 594)	(250, 594)
Patents and acquired rights, at cost	3,441,704	3,441,704	3,441,704	3,441,704
Accumulated amortisation	(1,044,615)	(647, 871)	(1,044,615)	(647, 871)
Impairment write down of patents	(1,369,356)		(1,369,356)
	1,027,733	2,793,833	1,027,733	2,793,833
Total Intangible Assets	1,027,733	2,793,833	1,027,733	2,793,833

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 17: INTANGIBLE ASSETS (CONTINUED)

Impairment Disclosures - Patents and acquired rights

Patents are allocated to cash generating units which are based on the groups reporting segments. All patents recognised relate to the Australian segment. The recoverable amounts of the patents are determined based on value-in-use calculations. Value in use is calculated based on present value of cash flow projections over a 6 year period. The cash flows are discounted using the vield of 10 year government bonds at the beginning of the budget period, adjusted for a market risk premium and the company's Weighted Average Cost Capital (WACC). The following assumptions were used in the value-inuse calculations:

	Discount Rate	Growth Rate
Acquired patents	17.1%	$\overline{ }$

Management has based the value in use calculations on budgeted results for the acquired patents. Discount rates are pre-tax and adjusted to incorporate risks associated with the company.

No growth rate after 6 years has been factored into the calculations as the Patents expire at that future point in time.

Impairment Disclosures - Goodwill

Goodwill is allocated to cash generating units which are based on the groups reporting segments. Upon first-time adoption of A-IFRS, goodwill was reviewed for impairment on 1 July 2004 and 30 June 2005. using value-in-use calculations. The value-in-use calculations based on present value cash flow forecasts. discounted government bond vield rates (adjusted for a market risk premium and the company's WACC as used above) calculated that as at 30 June 2005 the goodwill recoverable amount was \$nil and therefore an impairment loss was recognised.

NOTE 18: TRADE AND OTHER
PAYABLES	Economic Entity		Parent Entity
	2006	2005	2006	2005
	\$	\$	\$	\$
CURRENT
Unsecured liabilities
Trade creditors	98,195	61,748	98.195	61,748
Sundry creditors and accrued expenses	160,005	128,264	160,005	128,264
Amount payable to:
- wholly-owned subsidiaries			3,398	15,487
	258.200	190.012	261.598	205.499

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 19: SHORT-TERM PROVISIONS

CURRENT
Employee benefits		110,506	61,539	110,506	61,539
Provision for management restructure		111,854		111,854
		222,360	61,539	222,360	61,539
a. Number of employees at year-end		9	9	8	8
NOTE 20: CONTRIBUTED EQUITY		Economic Entity 2006 2005		2006	Parent Entity 2005
	Note	\$	\$	\$	\$
65,916,002 (2005: 65,916,002) fully paid ordinary shares	20a	15,407,680	15,407,680	15,407,680	15,407,680
a. Ordinary shares At the beginning of the reporting period		15,407,680	9,774,178	15,407,680	9,774,178
Share movements during the year:
- Conversion of 50,005 options over ordinary shares at a \$0.35 exercise price per share on 29/11/04			17,502		17,502
- Share placement of 7,700,000 ordinary shares at \$0.50 per share on 28/9/2004			3,850,000		3,850,000
- 1 st tranche of share placement of 1,923,077 ordinary shares at \$0.52 per share on 26/11/04 - 2 nd tranche of share placement of			1,000,000		1,000,000
1,923,077 ordinary shares at \$0.52 per share on 31/1/05			1,000,000		1,000,000
Transaction costs relating to share issues			(234,000)		(234,000)
At reporting date		15,407,680	15,407,680	15,407,680	15,407,680
b. Number of ordinary shares		No.	No.	No.	No.
At the beginning of reporting period		65,916,002	54,319,843	65,916,002	54,319,843
Shares issued during the year:
- 28 September 2004			7,700,000		7,700,000
- 26 November 2004			1,923,077		1,923,077
- 31 January 2005			1,923,077		1,923,077
Options converted to ordinary shares during the year:
-29 November 2004			50,005		50,005
At reporting date		65,916,002	65,916,002	65,916,002	65,916,002

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 20: CONTRIBUTED EQUITY (CONTINUED)

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.

c. Options

• i. For information relating to the Montec International Limited employee option plan, including details of options issued, exercised and lapsed during the financial vear and the options outstanding at year end refer to Note 26.
• ii. For information relating to share options issued to directors and executives during the financial vear refer to Note 26.

At 30 June 2006, there were 10,807,326 (30 June 2005;13,665,751) unissued ordinary shares for which options were outstanding.

NOTE 21: RESERVES

a. Foreign Currency Translation Reserve

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

b. Option Reserve

The option reserve records items recognised as expenses on valuation of employee share options.

NOTE 22: CAPITAL AND LEASING COMMITMENTS

	Note		Economic Entity		Parent Entity
		2006	2005	2006	2005
		\$	\$	\$	\$
Operating Lease Commitments
Non-cancelable operating leases contracted for but not capitalised in the financial statements
Payable
- not later than 1 year			20,708		20,708
			20,708		20,708

The property lease is currently on a month to month basis, with rent payable in advance.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 23: CONTINGENT ASSETS AND LIABILITIES

Other than the contingent assets and liabilities noted in Note 30, and contingent liabilities noted below. there were no other contingent assets or contingent liabilities at 30 June 2006.

Charles Stuart Baxter

There has been a claim made against Montec International Limited in proceedings commenced by Charles Baxter against Malcolm Campbell and Montec International Limited in the Supreme Court of New South Wales.

Basis for Proceedings

The proceedings derive from Mr Baxter's claim to be entitled to shares of Montec International Limited held by Mr Campbell. The entitlement is alleged to arise under arrangements which Mr Baxter entered into with Mr Campbell prior to Montec International Limited's listing on the ASX. Under those arrangements, Mr Baxter has already received some shares in Montec International Limited from Mr Campbell, but not the entire amount that he alleges he is due.

Nature of Proceedings

Montec International Limited is the second defendant in the proceedings.

The only orders sought against Montec International Limited are conditional orders which, in the event that judgement is entered against Mr Campbell, require Montec International Limited to take the necessary steps to put into effect any order made for the transfer of shares.

As a result of this conditional nature of the orders sought against it. Montec International Limited has submitted to judgement and taken no active role in defending the proceedings on the basis that there be no costs order against it.

Since the submitting appearance was filed. Mr Campbell has continued to defend the proceedings, and has filed a cross-claim against Mr Baxter, seeking to enforce a concurrent obligation under which Mr Baxter is allegedly required to transfer shares in a separate company to Mr Campbell.

The proceedings are presently still in the interlocutory stages. On 9 August 2006, Montec International Limited was served with a subpoena from Mr Baxter, seeking documents in Montec International Limited's possession concerning, amongst other things, Mr Campbell's previous dealings with Montec International Limited. The directors believe that no liability is likely to accrue in relation to this matter.

European Patent Litigation

Option Agreement

On 5 August 2005, Montec International Limited entered into an option agreement with Mr Robert Baxter, Mr Denis Pickwell, Mr Hassan Kokab and Belland Corporation Pty Limited (Option Agreement). Mr Baxter, Mr Pickwell and Mr Kokab (the Grantors) have rights under a Settlement Agreement in relation to European patents in fourteen European countries for mono-premix technology (European Patents). The European Patents relate to the same mono-premix technology as the patents currently held by Montec International Limited for Australia and New Zealand. At the time of signing the financial report for the year ended 30 June 2005 the expenditure incurred was not considered material and therefore no disclosure as a subsequent event was deemed necessary at that time.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 23: CONTINGENT LIABILITIES (CONTINUED)

Pursuant to the Option Agreement:

• . The Grantors and Belland Corporation have agreed with Montec International Limited to enforce their rights to an assignment of the European Patents with a view to requiring the present patent holder to assign the European Patents to Belland Corporation;
• . The Grantors and Belland Corporation grant Montec International Limited an option to take an assignment of the Patents. The consideration for the grant of the option is the payment by Montec International Limited of the amount of AUD\$25,004 and the indemnification of the Grantors by Montec International Limited in respect of certain legal and other costs;
• $\blacksquare$ On the exercise of the option by Montec International Limited, Belland Corporation and Montec International Limited (or a nominee of Montec International Limited) will execute a Patent Assignment Agreement pursuant to which Belland Corporation will assign to Montec International Limited (or its nominee) its interest in the European Patents. The purchase price of the European Patents is AUD\$3,000,000 less certain legal and other costs. The purchase price will be payable partly by way of shares in Montec International Limited and partly by way of cash. Shares issued in settlement will be valued at not less than \$0.50 per share under the arrangement.

Enforcement of rights

On 9 August 2005, Mr Baxter exercised (by notice) his rights to the European Patents under the Settlement Agreement (the other Grantors have assigned their rights under the Settlement Agreement to Mr Baxter). However, in breach of the Settlement Agreement and contrary to the notice given by Mr Baxter, Associated Food Technology Pty Limited (AFT) (the patentee of the European Patents) failed to assign the European Patents to Belland Corporation and purported to assign the European Patents to an American company, Coolham Holdings Inc.

Subsequently, Mr Baxter and Belland Corporation commenced proceedings against AFT, AFI Management Pty Limited (AFIM) and Coolham in the Supreme Court of New South Wales seeking, among other things, a declaration that Belland Corporation is entitled to the European Patents and that AFT should forthwith assign the European Patents to Belland Corporation. These proceedings are continuing. Pursuant to the Option Agreement, Montec International Limited is indemnifying Mr Baxter in respect of the legal costs he incurs in the proceedings.

Cross-Claim

On 20 July 2006, AFT and AFIM brought a Cross-Claim against Mr Malcolm Campbell, Montec International Limited and Mr Baxter. The Cross-Claim alleges that Mr Campbell, on his own behalf and on behalf of Montec International Limited, conspired with Robert Mervyn Baxter wrongfully with the sole or predominant intention of injuring AFT and AFIM and causing loss to AFT and AFIM by interfering with the business relationship between AFT and Coolham Holdings inc, including interfering with a purported assignment by AFT to Coolham of the European Patents.

Outlook

Montec International Limited understands that, if the case proceeds to a final hearing, it will not be heard and determined before the end of 2007. Montec International Limited believes that Mr Baxter and Belland Corporation's claim is reasonably arguable and that the Cross-Claimants' conspiracy claim has only a remote prospect of success. Other than in respect of legal costs, the directors believe that it is not possible to quantify any likely liability at this stage.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 24: SEGMENT REPORTING

	Australia	China	Eliminations Economic	Entity
Primary reporting - Geographic segments 2006	\$	\$	S	\$
REVENUE
External sales	278,190	327,273		605,463
Other segments
Total sales revenue	278,190	327,273		605,463
Unallocated revenue				201,780
Total revenue from ordinary activities				807,243
SEGMENT RESULT
Expenses	$(3,556,254)$ $(2,504,695)$			$- (6,060,949)$
Loss from ordinary activities before income tax expense				(5,253,706)
Income tax expense
Loss from ordinary activities after income tax expense				(5,253,706)
ASSETS
Segment assets	2,920,143	880,865	(3,398)	3,797,610
Total assets	2,920,143	880,865	(3, 398)	3,797,610
LIABILITIES
Segment liabilities	471,958		(3,398)	468,560
Total liabilities	471,958	۰	(3,398)	468,560
OTHER
Acquisitions of non current segment assets	317	23,321		23,638
Depreciation and amortisation of segment assets	226,027	215,895		441,922

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 24: SEGMENT REPORTING (CONTINUED)

	Australia	China	Eliminations	Economic Entity
Primary reporting - Geographic segments 2005	\$	\$	\$	\$
REVENUE
External sales	276,451	112,872		389,323
Other segments
Total sales revenue	276,451	112,872		389,323
Unallocated revenue				242,723
Total revenue from ordinary activities				632,046
SEGMENT RESULT
Expenses	$(2,313,205)$ $(2,779,753)$			$- (5,092,958)$
Loss from ordinary activities before income tax expense				(4,460,912)
Income tax expense
Loss from ordinary activities after income tax expense				(4,460,912)
ASSETS
Segment assets	8,111,325	674,095	(15, 487)	8,769,933
Total assets	8,111,325	674,095	(15, 487)	8,769,933
LIABILITIES
Segment liabilities	250,480	16,558	(15, 487)	251,551
Total liabilities	250,480	16,558	(15, 487)	251,551
OTHER
Acquisitions of non current segment assets	11,884	79,940		91,824
Depreciation and amortisation of segment assets	(482, 103)	(100, 782)		(582, 885)

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.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 24: SEGMENT REPORTING (CONTINUED)

Inter-segment Transfers

Segment revenues, expenses and result include transfers between segments. The prices charged on inter-seament 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.

Impairment Loss

An impairment loss amounting to \$1,369,356 relating to acquired rights within the Australian segment was recognised as an expense for the year ended 30 June 2006.

NOTE 25: CASH FLOW INFORMATION

	Economic Entity		Parent Entity
	2006	2005 \$	2006	2005 \$
a. Reconciliation of Cash Flow from Operations with loss from Ordinary Activities after Income Tax
Loss from ordinary activities after income tax	(5,253,706)	(4,460,912)	(5,247,726)	(4, 525, 749)
Non-cash flows in loss from ordinary activities
Amortisation	396,743	548,901	396,743	536,296
Depreciation	45,179	33,984	42,741	31,559
Write-off of certain Acquired Rights		959,422		959,422
Impairment write down patents	1,369,356		1,369,356
Staff share option expenses	58,099	58,098	58,099	58,098
Impairment write down investment			-	285,800
Impairment write down goodwill		226,634
Impairment write down net asset of subsidiary	(9, 870)	12,284
Other non cash items	3,058	415	1	415
Changes in assets and liabilities, net of the effects of purchase and disposal of subsidiaries
Decrease/(increase) in trade and other receivables	23,409	81,999	(3,311)	108,780
Decrease/(increase) in prepayments	(16,080)	169,423	(16, 896)	157,247
Decrease/(increase) in inventories	280,733	(47, 454)	280,971	(51, 473)
Increase/(decrease) in trade creditors and accruals	39,541	(25, 480)	56,099	(3,752)
Increase/(decrease) in provisions	160,821	35,616	160,821	35,616
Cash flow from operations	(2,902,717)	(2,407,070)	(2,903,102)	(2,407,741)

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 25: CASH FLOW INFORMATION (CONTINUED)

	Economic Entity		Parent Entity
	2006	2005	2006	2005
b. Acquisition of Entities During the current year 100% of the controlled entity Montec International (HK) Limited was acquired. Details of this transaction are:	\$	\$	\$	\$
Purchase consideration	1	4,195	1	4,195
Cash consideration	1	4,195	1	4,195
Cash (outflow)/inflow	(1)	(4, 195)	(1)	(4, 195)
Assets and liabilities held at acquisition date:
Cash	1		1
Receivables		6,874		6,874
Inventories		547		547
Property, plant and equipment		762		762
Creditors		(2,484)		(2,484)
Goodwill/(Discount) on consolidation		(1,504)		(1,504)
Minority interests in acquisitions
During the prior year the remaining 15% of the controlled entity Chongqing Montec Co Limited was acquired.	1	4,195	1	4,195
a, Nan anah Eingnaing and Increating

c. Non-cash Financing and Investing Activities

i.Share issues

There were no non cash financing or investing activities undertaken during the financial year ended 30 June 2006.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 26: EMPLOYEE BENEFITS

Employee Share Option Arrangements

i. On 28 July 2005, 700,000 share options were granted to an executive to take up ordinary shares at an exercise price of \$0.50 per share in accordance with an Executive's Service Agreement. These options are exercisable on or before 30 June 2008. The options have no voting or dividend rights.

ii. On 28 July 2005, 700,000 share options were granted to an executive to take up ordinary shares at an exercise price of \$0.50 per share in accordance with an Executive's Service Agreement. These options are exercisable on or before 30 June 2008. The options have no voting or dividend rights.

iii. On 23 July 2005, 24,000 employee share options were granted to staff to take up ordinary shares at an exercise price of \$0.50 per share in accordance with the company's Employee Share Option Plan. The options are exercisable on or before 30 June 2008. The options have no voting or dividend rights.

iv. On 18 November 2005, 30,000 employee share options were granted to staff to take up ordinary shares at an exercise price of \$0.50 per share in accordance with the company's Employee Share Option Plan. The options are exercisable on or before 30 June 2008. 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 2006 was \$0.22 (30 June 2005: \$0.39).

		Economic Entity		Parent Entity
		2006	2005	2006	2005
		No.	No.	No.	No.
a. follows:	Movement in the number of share options held by employees are as
Opening balance		1.134.000	436.667	1,134,000	436,667
	Granted during the year	1,454,000	745,333	1,454,000	745,333
	Exercised during the year
	Lapsed during the year		48,000		48,000
Closing Balance		2,588,000	1,134,000	2,588,000	1,134,000

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 26: EMPLOYEE BENEFITS (CONTINUED)

				Economic Entity		Parent Entity
				2006	2005	2006	2005
				No.	No.	No.	No.
b.	Details of share options outstanding as at end of year:
	Grant Date	Expiry and Exercise Date	Exercise Price
	19/8/2004	1/7/07	\$0.56	24,000	24,000	24,000	24,000
	16/9/2004	1/7/06	\$0.50	168,333	168,333	168,333	168,333
	16/9/2004	1/7/07	\$0.50	505,000	505,000	505,000	505,000
	12/11/2003	1/7/07	\$0.50	100,000	100,000	100.000	100,000
	30/11/2003 to 30/6/2004	1/7/06	\$0.50	336,667	336,667	336,667	336,667
	23/7/2005	1/7/08	\$0.50	24,000	$\overline{\phantom{a}}$	24,000
	28/7/2005	1/7/08	\$0.50	1,400,000	٠	1,400,000
	18/11/2005	1/7/08	\$0.50	30,000	$\overline{\phantom{a}}$	30,000
				2,588,000	1,134,000	2,588,000	1,134,000

Details of Shares Granted c.

There were no shares granted to employees as remuneration in the financial year ended 30 June 2006 $(2005: \n ni \n or \n a \n a \n b \n c \n b \n c \n c \n d \n b \n c \n d \n d \n e \n d \n b \n c \n c \n d \n e \n c \n e \n c \n e \n c \n e \n c \n e \n c \n e \n c \n e \n c \n e \n c \n e \n c \n e \n c \n e \n c \n e \n c \n e \n c \n e \n c \n e \n c \n e \n c \n e \n$

NOTE 27: EVENTS SUBSEQUENT TO REPORTING DATE

Other than the subsequent event noted in Note 30 and those noted below, there were no other material events subsequent to reporting date.

Cessation of Managing Director's Employment

The board of Montec International Limited resolved not to reappoint Malcolm Campbell to a future term as Managing Director of the Company. They further resolved that it would be in the best interest of the Company to end the current contract appointing Malcolm Campbell as Managing Director. The cessation of Matcolm Campbell's employment occurred on 28 July 2006 by mutual agreement.

Peter Herd was appointed by the board on 28 July 2006 to the act as temporary Managing Director until a suitable replacement can be engaged.

Appointment of Roger McGrath as an Alternate Director

The board of Montec International Limited resolved to appoint Mr Roger McGrath as an Alternate Director of the Company for Mr Lin Yuansheng, effective 19 July 2006.

Mr McGrath was previously a Director of KPMG and brings to the Board over 40 years of experience.

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 28: RELATED PARTY TRANSACTIONS

	Economic Entity		Parent Entity
	2006	2005	2006	2005
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
The inter-company position with Chongqing Montec Co Ltd is as follows:
- inter-company payable			3,398	15,487
The outstanding loan has been eliminated on consolidation.
There were no inter-company receivables or payables with respect to Montec International (HK) Limited.
ii. Director-related Entities No transactions with director related entities occurred in the year ended 30 June 2006.
iii. Directors The following related party transactions with directors of Montec International Limited occurred during the financial year ended 30 June 2006:
Consulting fees payable to Lin Yuansheng for strategic advice and marketing services related to china expansion.	8,000		8,000
The following related party transactions with directors of Montec International Limited or controlled entities occurred during the financial year ended 30 June 2005:
a payment of \$4,195 was made to Dr Du as consideration for the purchase of 5% of Chongqing Montec Co Ltd.		4,195		4,195
the issue of 100,000 Montec International Limited options exercisable at \$0.55 per share and expiring on 30 June 2006 was made as consideration for 10% of Chongging Montec Co Limited to Dr Weiyuan Wang, a director of that entity. The implied value of this consideration was \$8,390 applying the Black Scholes option valuation methodology.		8,390		8,390
A payment to Peter Herd for consulting services related to arrangements with Dairy Farmers.		20,000		20,000
Consulting fees payable to Lin Yuansheng for
strategic advice and marketing services related to China expansion.		12,903		12,903

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 28: RELATED PARTY TRANSACTIONS (CONTINUED)

		Economic Entity	Parent Entity
	2006	2005	2006	2005
	\$	\$	\$	\$
iv. Share Transactions of Directors
No share transactions of directors occurred during the financial year ended 30 June 2006.
No share transactions of directors occurred during the financial year ended 30 June 2005, other than the following:
The purchase by BAIC Australia Pty Limited, of which Mr Lin Yuansheng is a director, of fully paid ordinary shares in Montec International Limited in accordance with a placement agreement dated 22 nd October 2004. At the time of the share subscription, Mr Lin Yuansheng was not a director of Montec International Limited.		2,000,000		2,000,000
Malcolm Campbell sold 15,000 ordinary shares in the company that had been acquired on market in the prior financial year.		7,500		7,500

NOTE 29: FINANCIAL INSTRUMENTS

a. Interest Rate Risk

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
	Weighted Average Rate		Effective Interest Floating Interest Within Year 1 Rate			To 5 Years		Over 5 Years		Non-interest Bearing		Total
			\$000		\$000			\$000		\$000		\$000		\$000
	2006	2005	2006	2005	2006	2005	2006	2005		2006 2005	2006	2005	2006	2005
Financial Assets:
Cash	5.65%	$5.22\%$	2,272	5,198	$\tilde{\phantom{a}}$	$\cdot$			$\cdot$	$\mathbf{r}$			2,272	5,198
Financial Liabilities: Lease liabilities

All other assets and liabilities are non-interest bearing.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 29: FINANCIAL INSTRUMENTS (CONTINUED)

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 vear.

NOTE 30: CHINA BUSINESS STRUCTURE

The Company's business activities in China have necessitated dealing with a local company (counterparty) domiciled in China. This arrangement has been required as the Company does not have the relevant business license or tax status to effectively conduct business as a principal in the country.

The Company has therefore conducted business in a manner whereby the China domiciled counterparty incurred expenses in relation to advertising and marketing support, and related administrative expenses including salaries of counterparty staff, which the Company agreed to be charged for by the counterparty. The Company remitted funds in advance (under loan agreement) with all approved charges deducted from the loan balance. This expenditure was to support the marketing of finished products purchased, owned and traded by the counterparty that were in-turn manufactured with input of certain raw materials sourced from Montec including the Company's proprietary premix for which it charged the counterparty a royalty. The Company did also derive income from the sale of cream recovered by the counterparty through its contracting of product manufacture. Based on these arrangements the Company did not generally enter into agreements with processors to manufacture stock on the Company's behalf, or into arrangements with supermarkets to sell stock. This was to be completed by the engaged counterparty. In the case of Beijing Sanyuan Foods a direct agreement was entered into in June 2005 to express the special relationship with this party, which is also a substantial shareholder in the Company. However, the transactions regarding processing and trading arrangements were contracted with the counterparty in the usual manner

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 30: CHINA BUSINESS STRUCTURE (CONTINUED)

Subsequent to year end, an ongoing and yet incomplete review, has shown that differences exist between the information Montec historically relied upon for financial reporting and the historical financial records of the counterparty recently provided to the Company at the Company's request.

Review of this information subsequently provided by the counterparty indicates that the counterparty believed that the arrangement was that it was not acting on its own behalf, but on behalf of the Company, by producing inventory and selling this onto customers at a margin.

The Company has reviewed all agreements it understands to be in place with the counterparty and is satisfied that its understanding of the arrangements in place between the Company and the counterparty. as described above and as accounted for by the Company, correctly reflect the Company's rights and obligations under these agreements.

While the inconsistencies require further investigation the counterparty has confirmed that the net prepaid balance the Company understands to be available as at 30 June 2006 is consistent with that reflected in the Company's accounts.

The Company does not believe that the implications of any irregularities will be material to the historical financial information previously reported. However, further investigation may result in either a claim made by the Company or against the Company or a combination of these outcomes. However, at this stage of the review it is not possible to reliably estimate whether any such actions will arise or the likely amounts of any such contingent assets or liabilities. The results of the Company's further investigation will be made available to its shareholders as this information becomes available and any monies found to be outstanding on account of the Company will be aggressively pursued by the Company.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEAR ENDED 30 JUNE 2006

NOTE 31: 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 Room 7A2, Shum Yip Centre B, No.9 Shandong Road Qingdao PRC 266071

Beijing China Room 3002, Building No.1, 88 Jian Guo Road, Beijing PRC 100025

Shanghai China Room 407, Building No.2, 500 Cao Bao Road, Shanghai PRC 200233

Chongqing Montec Co Limited Chongging, 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 13 to 58 are in accordance with the Corporations Act 2001 and:
• comply with Accounting Standards and the Corporations Regulations 2001; and a.
• give a true and fair view of the financial position as at 30 June 2006 and of the performance for b. the year ended on that date of the Company and economic entity;
• 1. The Chief Executive Officer and Chief Financial Officer have each declared that:
• the financial records of the company for the financial year have been properly maintained in а. accordance with section 286 of the Corporations Act 2001;
• the financial statements and notes for the financial year comply with the Accounting Standards; $b.$ and
• c. the financial statements and notes for the financial year give a true and fair view.
• 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 29th day of September 2006

DK 6

Peter Herd Managing Director

AUDITOR'S INDEPENDENCE DECLARATION TO THE DIRECTORS OF MONTEC INTERNATIONAL LIMITED

In accordance with the requirements of section 307C of the Corporations Act 2001, as lead auditor for the audit of Montec International Limited for the year ended 30 June 2006, I declare that, to the best of my knowledge and belief, there have been:

• $(a)$ no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and
• $\langle \mathbf{b} \rangle$ no contraventions of any applicable code of professional conduct in relation to the audit.

Canot That NSU

GRANT THORNTON NSW Chartered Accountants

M A ADAM-SMITH Partner

Sydney

29 September 2006

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

Grant Thomton NSW ABN 25 034 787 757

Liability limited by a scheme approved under Professional Standards Legislation

An independent New South Wales partnership entitled to frade under the international name Grant Thornton. Grant Thornton is a trademark owned by Grant Thornton International and used under licence by independent firms and entities throughout the world

INDEPENDENT AUDIT REPORT TO THE MEMBERS OF MONTEC INTERNATIONAL LIMITED

Scope

The financial report and directors' responsibility

The financial report comprises the statement of balance sheet, income statement, statement of changes in equity, cash flow statement, accompanying notes to the financial statements, and the directors' declaration for both Montec International Limited (the company) and the company and its controlled entities (the consolidated entity), for the year ended 30 June 2006. 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
PQ Locked Bag Q800 QVB Post Office Sydney NSW 1230 +61 2 8297 2400 F +61 2 9299 4445 E info@ethsw.com.au W www.grantthornton.com.au

Grant Thornton NSW ABN 25 034 787 757

Liability limited by a scheme approved under Professional Standards Legislation

An independent New South Wales partnership entitled to trade under the international name Grant Thornton. Grant Thornton is a trademark owned by Grant Thornton totemational and used under licence by independent firms and entities throughout the world

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:
• $(i)$ giving a true and fair view of the company's and consolidated entity's financial position as at 30 June 2006 and of their performance for the year ended on that date; and
• $\langle \textbf{ii} \rangle$ complying with Accounting Standards in Australia and the Corporations Regulations 2001; and
• (b) other mandatory financial reporting requirements in Australia.

GRANT THORNTON NSW Chartered Accountants

M A ADAM-SMITH Partner

Sydney

29 September 2006