LARK DISTILLING CO. LTD — Annual Report 2007

Oct 11, 2007

AnnuAL REPORT 2007

MONTEC INTERNATIONAL LIMITED ACN 104 600 544 AND CONTROLLED ENTITIES

Table of ConTenTs

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Chairman’s Letter	1
Managing Director’s Report	2
Corporate Governance Statement	4
Directors’ Report	6
Income Statement	18
Balance Sheet	19
Statement of Changes in Equity	20
Cash Flow Statement	22
Notes to the Financial Statements	23
Directors’ Declaration	54
Auditor’s Independence Declaration	55
Independent Audit Report	56
Additional Information	58

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CHAIRMAN’S LETTER

Dear Shareholder,

The 2007 financial year has been one of encouraging progress for Montec International Limited (“Montec” or the “Company”) in key areas of its business in China, with exciting developments in new product initiatives and resultant commercial opportunities.

Whilst significant progress has been made, the past financial year remained one of challenge for Montec as is reflected in its loss of approximately $3.4 million for the financial year ended 30 June 2007. The results largely reflect the increasingly competitive marketplace for liquid dairy products in China, with the consequent effect on volume and margins, and the impact of high costs of market entry and continuing marketing support. This issue has been further addressed in the Managing Director’s report as are the immediate plans for the Company’s business in China. Importantly, the company secured

funding in May 2007 through a well supported placement and renounceable rights issue which addresses the business’ immediate capital needs.

I would like to commend the work of the acting Managing Director Peter Herd and his team for their efforts in developing the Company’s business over the last financial year.

On behalf of the board of directors and management, I would like to thank all stakeholders in the Company for their continued support during Montec’s fourth year as a public company.

Yours Faithfully

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Terry Cuthbertson Chairman

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Terry Cuthbertson

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ANNUAL REPORT 2007

Peter Herd

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MANAGING DIRECTOR’S REPORT

November 2006, to raise approximately $0.6 million before costs and provide the resources to fully launch our business model, ahead of a combined placement and renounceable rights issue which raised approximately $3.9 million before costs in May 2007. These capital raisings have addressed the Company’s near term funding needs, based on the business plans now in place.

During the past year valuable progress has been made to establish the “dairypure” brand of UHT milk in China, to provide the platform for further product extensions, in line with our objective of establishing a range of “healthy” dairy products in that market. Following a review of the China business in August 2006 the Company adopted a business model for UHT milk which included both licencing the technology and co-packing arrangements, reflecting the needs of the business at that time. While this model has been maintained for UHT milk throughout the year, a flexible approach to new product extensions has been adopted, as partnerships and business circumstances require.

new product categories in the coming year.

In Australia, the Company has maintained the licencing arrangements with Dairy Farmers, whereby Dairy Farmers market the “Farmers Best” brand of chilled milk. The investigation of new product licencing opportunities, appropriate to the Australian market or product extensions to the China business have been initiated during the past year and will be actively pursued in the future.

The Company was successful in achieving a negotiated settlement to the litigation, which surrounded the ownership of European patents for monounsaturated dairy. The settlement, which results in the rights to the European patents not being pursued, was considered to be in the best interests of the Company’s shareholders as it ends a frustrating and distracting chapter and allows for a more appropriate focus by both the Board and management on the Company’s core business interests.

The Company’s business development in China during 2007 has centred on Beijing, Shanghai, Qingdao and Dalian. Distribution to-date has been achieved through a combination of agent relationships and the company’s production partner Beijing Sanyuan Foods Co Ltd, with overall co-ordination provided by Montec’s own market development team. Although a rather pragmatic response to our business needs, this general structure does provide an appropriate base for future market development and product extensions. The registration of Montec’s wholly owned foreign entity, Beijing Montec Commercial Limited, early in the new year will complete the core business structure, to provide greater flexibility in conducting our China business and in extending partnership arrangements.

At year end approximately 2,800 stores stock Montec’s monounsaturated UHT liquid milk, partnerships that will facilitate growth and product extensions have been established and a business management and market development team appropriate to our business model is now in place. This has been achieved in an increasingly competitive retail environment, against a background of continuing resource constraints throughout much of the year and the need to regularly review and, as changing circumstances required, adjust our business model and market entry strategy.

The initial priority for the China business team in 2006/07 was to aggressively pursue availability of the Company’s “dairypure” brand plain and flavoured UHT milk in leading hyper markets, supermarkets and convenience stores, so as to establish the distribution network in appropriate channels and achieve market presence for the brand. After some early success this expansion slowed in the second half of the 2007 financial year, due partially to a decision to conserve funds prior to the May capital raising, but also as the market development team focused on

While growth in availability remains a key priority of the business, the focus of marketing efforts is now increasingly directed to growing volume and revenue in this outlet base and preparing for extensions of the “dairypure” brand to

Progressing the Company’s China expansion initiatives necessitated a capital raising program during the year. This comprised a limited private placement to sophisticated investors in

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introducing revised packaging graphics and a 12 x 250 ml multi pack to existing customers in conjunction with an increase in wholesale pricing. The twelve pack has been well received by retailers and offers potential to leverage volume as our major supermarket offering. The associated change to pack graphics responded to market feedback suggesting a design that better reflected the “dairypure” premium positioning.

The retail milk market, while increasingly competitive, continues to segment between low priced traditional offerings and premium, specialty products, resulting in some upward price movement at this premium end. This has provided Montec the opportunity to increase wholesale prices, a strategy which will be pursued as opportunity presents in the future. While the price increases provided some limited margin improvement, the review of our business commenced in June 2007 demonstrated that high store entry costs and initial marketing expenditure, coupled with lower than projected volume growth per store, made the continued pursuit of this pace of roll-out unrealistic and diverted available resources from volume building activities. Reducing the pace of roll-out will allow market development resources to be better directed toward growing UHT milk volume within the current store base and the management of new product introductions.

Montec’s China business strategy envisages UHT milk being the company’s market entry offering, to provide a base on which to launch

additional premium dairy products, building to the “healthy dairy cabinet”. This strategy is further strengthened by the opportunity to build this product range on Montec’s own “dairypure” brand. During the year fruit flavour formulations for Montec’s patented monounsaturated ice cream process were finalised in China in preparation for launch. Agreement in principle has been reached with Beijing Allied Faxi Foods, a subsidiary of Beijing Sanyuan Group and marketer of premium branded “Baxy” ice cream, for a product licencing arrangement whereby Faxi will produce and market a co-branded product, focusing on Beijing and Shanghai. A chilled, monounsaturated drinking yoghurt, packed in 1 litre gable-top cartons, is planned for launch in the restaurant trade, initially in Beijing. Restaurants represent a major consumption occasion for chilled drinking yoghurt and offer higher margins and lower market entry costs than retail supermarkets.

Opportunity has been identified to extend the Company’s “dairypure” brand to UHT fermented milk drinks, an established, high volume category targeting young consumers and particularly appropriate to Montec’s “healthy dairy” concept. Three premium products, two fruit flavoured and one enhanced dietary fibre version have been formulated for introduction under the “dairypure” brand during first quarter of the new year. The product will be produced in Jinhua under a new production partnership initiated with Zhejiang Jinhua Jalo Dairy and

marketed initially in Jinhua and Beijing, prior to roll-out to areas already serviced with Montec’s UHT milk offering.

Product extensions, loyal to Montec’s overall “healthy dairy” concept, produced and jointly marketed under partnership arrangements with local companies will increase market penetration, and build volume and revenues. Establishing this product base, building partner relationships and continuing to seek further partnership opportunities within the framework of a flexible business model will continue to be the priorities for the management team during the year ahead.

I take this opportunity to thank the Chairman, Terry Cuthbertson, members of the Board and the executive team, particularly Dr. Xueqin Du and Ian Maltman, for their support and counsel over the past year.

Yours Faithfully

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Peter Herd Managing Director Montec International Limited

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ANNUAL REPORT 2007

CORPORATE GOVERNANCE STATEMENT

Unless discussed below, all the best practice recommendations of the ASX Corporate Governance Council have been applied for the financial year ended 30 June 2007.

Board Composition

The skills, experience and expertise relevant to the position of each director who is in office at the date of the annual report and their term of office are detailed in the director’s report.

The names of independent directors of the Company were:

• Terry Cuthbertson

• Peter Herd

(assumed Acting Managing Director’s role from 28th July 2006)

• James Manny (from 26th October 2006)

When determining whether a nonexecutive director is independent, the director must not fail any of the following materiality thresholds:

• Less than 5% of Company shares are held by the director and any entity or individual directly or indirectly associated with the director;

• No sales are made to or purchases made from any entity or individual directly or indirectly associated with the director; and

• None of the director’s income or the income of an individual or entity directly or indirectly associated with the director is derived from a contract with any member of the economic entity other than income derived as a director of the entity.

Independent director’s have the right to seek independent professional advice in the furtherance of their duties as directors at the Company’s expense. Written approval must be obtained from the chairman prior to incurring any expense on behalf of the Company.

The names of the members of the nomination and remuneration committee and their attendance at meetings of the committee are detailed in the directors’ report.

Trading Policy

The Company’s policy regarding directors and employees trading in its securities, is set by the board of directors. The policy restricts directors and employees from acting on material information until it has been released to the market and adequate time has been given for this to be reflected in the securities prices.

Audit Committee

The names and qualifications of those appointed to the audit committee and their attendance at meetings of the committee are included in the directors’ report. We note that during the financial year ended 30 June 2007 the board and audit committee were chaired by the same individual from 28 July 2006.

Mr Herd assumed the Managing Director’s role from 28 July 2006 and as a result, Mr Cuthbertson assumed the role of Chairman of the audit committee. Whilst not in accordance with best practice recommendations of the ASX, it was considered the most appropriate arrangement given the circumstances.

The Company is committed to ensuring that the most efficient and effective service is derived from the external audit function and has determined it will tender audit services on a three year cycle rather than automatically reappointing the incumbent. The Company recognises the importance of audit partner rotation and has adopted a policy requiring lead audit partner rotation every five years.

Performance Evaluation

An annual performance evaluation of the board and all board members will be conducted by the Chairman in December 2007, as this will be approximately one year since the last evaluation. The Chairman will speak to each director individually regarding their role as director. The outcomes of these discussions will be implemented and the performance criteria and goals for the next year will be established.

Remuneration Policies

The remuneration policy, which sets the terms and conditions for the Chief Executive Officer and other senior executives, has been reviewed by the remuneration committee and approved

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by the board. Executives receive a base salary, superannuation and fringe benefits. The remuneration committee reviews executive packages annually by reference to Company performance, executive performance, comparable information from industry sectors and other listed companies and independent advice. The policy is designed to attract the highest calibre executives and reward them for performance which results in long-term growth in shareholder value.

Executives may also be invited to participate in the employee option arrangements.

The amount of remuneration for all directors and the highest paid specified executives, including all monetary and non-monetary components, are detailed in note 5 to the financial report. All remuneration paid to executives is valued at the cost to the Company and expensed. Options are valued using either the Black-Scholes or Binomial Option Pricing Model.

The board expects that the

remuneration structure implemented will result in the Company being able to attract and retain the best executives to run the economic entity. It will also provide executives with the necessary incentives to work to grow long-term shareholder value.

put to the board for approval. All options and incentives are linked to predetermined performance criteria. The board can exercise its discretion in relation to approving incentives and options and can recommend changes to the committee’s recommendations. Any change to the terms of issue must be justified by reference to measurable performance criteria.

Nomination and Remuneration Committee

The names of the members of the remuneration committee and their attendance at meetings of the committee are detailed in the directors’ report.

There are no schemes for retirement benefits other than statutory superannuation for non-executive directors.

Other Information

Information relating to the Company’s corporate governance practices and policies is to be made publicly available on the Company’s website at www.montec-international.com.au in due course.

This material will include:

• A description of the procedure for selection and appointment of new directors to the board, and the charters for both the remuneration and nomination committee and the audit committee. Along with the audit committee charter will be the Company’s policy on lead audit partner rotation and the policy for appointment of external auditors;

• The Company’s share trading policy and an outline of its focus and principles of corporate governance. These principles of corporate governance are designed to promote ethical and responsible decision making;

• The Company’s approach to compliance with ASX Listing Rule disclosure requirements; and

• A description of the Company’s risk management policy and internal compliance and control systems.

The Company is committed to the recognition of the legitimate interests of all shareholders and complies with legal and ethical frameworks to deliver this outcome.

The payment of share options and other incentive payments are reviewed by the remuneration committee annually as part of the review of executive remuneration and a recommendation is

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ANNUAL REPORT 2007

DIRECTORS’ REPORT

Your directors present their report on the Company and its controlled entities for the financial year ended 30 June 2007.

Directors

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

Terry Cuthbertson

Peter Herd

Xueqin Du

Mei Zhan Yan

(appointed 20 June 2007)

Lin Yuansheng (resigned 20 June 2007)

James Manny (appointed 26 October 2006)

Roger McGrath (alternate for Mr Lin Yuansheng, resigned 13 March 2007)

Malcolm Campbell

(resigned 28 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 consolidated entity during the financial year was the marketing and licensing of monounsaturated dairy technology and the sale of finished products incorporating this food science.

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

Operating Results

The consolidated loss of the consolidated entity after providing for income tax and eliminating minority interests amounted to $3,389,170. (2006: $5,253,706)

Dividends Paid or Recommended

No interim dividend was declared or paid during the current financial year. The directors are recommending that no final dividend be paid in respect of the year ended 30 June 2007.

Review of Operations

The financial year ended 30 June 2007 has seen valuable progress in the Company’s efforts to establish its retail brand “dairypure” in the Chinese market place. At year end approximately 2,804 stores stocked Montec’s monounsaturated liquid milk products with a sound foundation having been set for further expansion. The Company’s objective is to secure distribution through a sufficient number of retail points of presence, combined with

acceptable turnover of product by outlet, for the business to become commercial.

The Company’s business development for the financial year ended 30 June 2007 has centred on Beijing, Shanghai and other cities including Qingdao and Dalian. Distribution to-date has been achieved through a combination of agent relationships, the channels available to the company’s production partner Beijing Sanyuan Foods Co Ltd, and Montec’s own sales team and the niche channels on which this team is focused.

In addition to its liquid milk business, the Company was successful in lodging patent applications for

monounsaturated ice-cream. This patent application can be extended to worldwide protection of the technology should Montec determine commercial opportunity for the patented process on this scale. The current intention is for patents to be sought in each country where commercial activity is pursued including China.

To progress the Company’s China expansion a capital raising program was undertaken during the financial year. This comprised a limited private placement to sophisticated investors, raising approximately $0.6 million before costs, in November 2006, and a combined placement and renounceable rights issue raising approximately $3.9 million before costs in May 2007. These capital raisings have addressed the Company’s immediate funding needs, based on the near term objectives that have been set.

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The Company was successful in achieving a negotiated settlement to the litigation which surrounds the ownership of European patents for monounsaturated dairy during the financial year. The settlement, which results in the European patents not being pursued, was considered to be in the best interests of the Company’s shareholders as it allows management to focus more appropriately on the Company’s core business in China. This chapter in the Company’s development has been frustrating for the current board and management.

From a financial perspective the year ended 30 June 2007 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 consolidated entity during the financial year.

After Balance Date Events

There are no matters or circumstances that have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in future financial years.

Future Developments

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

• The recognition of royalties and/or profit margins 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.

Environmental Issues

The consolidated 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.

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ANNUAL REPORT 2007

DIRECTORS’ REPORT - continued 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., S2 Net Limited and My Net Fone Limited and a director of Healthzone 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

20,000 ordinary shares of Montec International Limited, and 5,010,000 options over ordinary shares in Montec International Limited.

Special Responsibilities

Mr Cuthbertson is the Company’s Chairman and Chairman of the Audit Committee and member of the Nomination and Remuneration Committee

Listed Entity Directorships

Peter Herd

Director (Non-executive) and Acting 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

20,000 ordinary shares of Montec International Limited directly, and an additional 128,920 Montec International Limited shares held indirectly. 5,010,000 options over ordinary shares of Montec International Limited held directly, and an additional 84,460 options over Montec International Limited shares held indirectly.

Special Responsibilities

Mr Herd is Acting Managing Director of the Company and a member of the Audit Committee.

Listed Entity Directorships

None.

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

40,000 ordinary shares and 3,820,000 options over ordinary shares of Montec International Limited

Special Responsibilities

Technical review and development of all product extensions

Listed Entity Directorships

None.

Mr Cuthbertson is Chairman of Austpac Resources N.L, S2 Net Limited, My Net Fone Limited and a director of Healthzone Limited.

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MONTEC INTERNATIONAL LIMITED

Mei Zhan Yan

Director (Non-executive) (appointed 20 June 2007)

Qualifications

Master Degree of Chemistry from Beijing Science and Technology University of China.

Experience

Managing Director of BAIC Australia Pty Ltd, which is the Australia subsidiary of Beijing Sanyuan Group Co., Ltd.(“Sanyuan Group”). Sanyuan Group is the largest food, beverage and dairy company in China and is listed on the Shanghai Stock Exchange.

Mr. Yan also is Managing Director of Beijing Holdings BAIC Limited (Hong Kong) and Managing Director of BAIC Scriven Limited (Hong Kong), which are the subsidiaries of Sanyuan Group in Hong Kong, Director of Beijing Allied Faxi Food Co., Ltd., Director of Beijing Sunflower Building Co.,Ltd. and Director of Beijing Dong Yuan Estate Co., Ltd.

Interest in Shares and Options

7,692,308 ordinary shares and 3,846,154 options over ordinary shares held indirectly 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

Lin Yuansheng

Director (Non-executive) (resigned 20 June 2007)

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

7,692,308 ordinary shares and 3,846,154 options over ordinary shares held indirectly as a consequence of his directorship of BAIC Australia Pty Limited, and 1,600,000 options over ordinary shares of Montec International Limited held directly.

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.

Listed Entity Directorships

None.

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ANNUAL REPORT 2007

DIRECTORS’ REPORT - CONTINUED

James Manny

Director (Non-executive) (appointed 26 October 2006)

Qualifications

Bachelor of Business

Experience

Managing Director of Credit New Holland Group Limited and International Concert Attractions Limited

Interest in Shares and Options 477,825 ordinary shares of Montec International Limited and 1,838,000 options over ordinary shares of Montec International Limited

Special Responsibilities

Chairman of the Nomination and Remuneration Committee

Listed Entity Directorships International Concert Attractions Limited

Roger McGrath

Alternate Director representing Lin Yuansheng (resigned 13 March 2007)

Qualifications

Wool Classing Certificate

Experience

Previously a director of KPMG and brought 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

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.

Interest in Shares and Options

5,349,379 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

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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;

• 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 Managing Director/ 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.

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 non executive 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.

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ANNUAL REPORT 2007

DIRECTORS’ REPORT - continued

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 2007 is detailed in Note 5b 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.

Employment contracts are entered into with the Managing Director/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.

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Variable Remuneration - Long Term Incentive

Objective

The objective 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 or Binomial option valuation models. 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

Acting Managing Director and Chief Executive Officer

Pursuant to an executive service agreement between Montec and Peter Herd commencing on Mr Herd’s appointment to the role of Acting Managing Director on 28 July 2006, Mr Herd was paid a combined director’s fee

and salary of $168,950 during the year ended 30 June 2007. This comprised director’s fees for the 12 months to 30 June 2007 of $49,050 and salary for Acting Managing Director responsibilities for the 11 months to 30 June 2007 of $119,900. Mr. Herd was contracted monthly four days per week through the period to 30 June 2007. Mr Herd received options over ordinary shares, details of which are set out in Note 5c.

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 5c.

Technical Director

Pursuant to an executive service agreement between Montec and Xueqin 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 earned a China salary equivalent to $12,000 per annum.

Details of Remuneration for the year ended 30 June 2007

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

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13

ANNUAL REPORT 2007

DIRECTORS’ REPORT - continued

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----- Start of picture text -----

Salary & Superannuation Cash Non-Cash Performance
Fees Contribution Benefit Benefits Options Total Related
Directors $ $ $ $ $ $ %
- - -
Terry Cuthbertson 75,000 6,750 91,239 172,989
Peter Herd 168,950 - - - 91,239 260,189 -
-
Xueqin Du 105,000 9,450 12,000 54,952 181,402
Mei Zhan Yan [ (i)] - - - - - - -
- - -
Lin Yuansheng 43,750 3,938 29,863 77,551
- - -
James Manny 30,726 2,765 29,863 63,354
- -
Malcolm Campbell [ (ii)] 167,742 1,350 4,263 1,283 174,638
Specified Executives
Ian Maltman 157,500 14,175 - - 54,952 226,627 -
----- End of picture text -----

(i) Mei Zhan Yan’s director’s fees for the period 20 June 2007 to 30 June 2007 are being paid to BAIC Australia Pty Ltd. Details are set out in note 27ii.

(ii) Malcolm Campbell was paid for the period 1 July 2006 to the contracted end of his employment on 11 November 2006, under severance arrangements effective 28 July 2006.

Options issued as Part of Remuneration for the year ended 30 June 2007

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.

Options Granted As Remuneration

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Directors Granted No. Options Total Options Options Total
Granted as Remuneration Exercised Lapsed
Part of Represented
Remuneration by Options
$ % $ ($) $
Terry Cuthbertson 5,000,000 91,239 52.7 - - 91,239
Peter Herd 5,000,000 91,239 35.1 - - 91,239
Xueqin Du 3,000,000 54,952 30.3 - - 54,952
Lin Yuansheng 1,600,000 29,863 38.5 - - 29,863
James Manny 1,600,000 29,863 47.1 - - 29,863
Ian Maltman 3,000,000 54,952 24.2 - - 54,952
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14

MONTEC INTERNATIONAL LIMITED

Meetings of Directors

During the financial year, 14 meetings of directors (including committees) were held. Attendances by each director during the year were as follows:

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COMMITTEE MEETINGS
DIRECTORS’ MEETINGS
AUDIT NOMINATION AND
COMMITTEE REMUNERATION COMMITTEE
Number Number Number Number Number Number
eligible to Attended eligible to Attended eligible to Attended
attend attend attend
Terry Cuthbertson 12 12 2 2 - -
Peter Herd 12 12 2 2 - -
Xueqin Du 12 7 - - - -
Mei Zhan Yan 1 1 - - - -
Lin Yuansheng 11 4 - - - -
James Manny 10 10 - - - -
Roger McGrath 2 2 - - - -
Malcolm Campbell 1 0 - - - -
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Indemnifying Officers or Auditor

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

• The Company has paid premiums to insure each of the following directors and executives against liabilities for costs and expenses incurred by them in defending any legal proceedings arising out of their conduct while acting in the capacity of director or executive of the Company, other than conduct involving a willful breach of duty in relation to the Company. The amount of the premium was $45,500 for the below directors and executives.

Terry Cuthbertson

Peter Herd Xueqin Du Mei Zhan Yan Lin Yuansheng James Manny Ian Maltman Roger McGrath Malcolm Campbell

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:

• 5,000,000 options granted to Terry Cuthbertson exercisable on or before 31 December 2010 comprising 1,500,000 options

exercisable at $0.12, 1,500,000 options exercisable at $0.18 and 2,000,000 exercisable at $0.25 each.

• 5,000,000 options granted to Peter Herd exercisable on or before 31 December 2010 comprising 1,500,000 options exercisable at $0.12, 1,500,000 options exercisable at $0.18 and 2,000,000 exercisable at $0.25 each.

• 3,000,000 options granted to Xueqin Du exercisable on or before 31 December 2010 with three tranches of 1,000,000 options exercisable at $0.12, $0.18 and $0.25 each.

• 1,600,000 options granted to Lin Yuansheng exercisable on or before 31 December 2010, comprising two tranches of 800,000 options exercisable at $0.12 and $0.18 each.

15

ANNUAL REPORT 2007

DIRECTORS’ REPORT - continued

• 1,600,000 options granted to James Manny exercisable on or before 31 December 2010, comprising two tranches of 800,000 options exercisable at $0.12 and $0.18 each.

• 3,000,000 options granted to Ian Maltman exercisable on or before 31 December 2010, comprising three tranches of 1,000,000 options exercisable at $0.12, $0.18 and $0.25 each.

During the year ended 30 June 2007, 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:

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 in all cases been discontinued during the course of the financial year with no contingent asset or liability existing as at 30 June 2007 to Montec International Limited. A summary of the matters is as follows:

• European Patents

The company reached agreement with all parties to resolve the dispute involving European Patents for the manufacture and marketing of

certain monounsaturated dairy products. The implications of the settlement is that the Company will no longer pursue the European Patents that were the subject of the litigation.

• Charles Stuart Baxter

This matter was settled between the primary parties to the litigation, which did not involve Montec International Limited. Montec is being reimbursed for certain legal expenses incurred in defending the matter.

• Malcolm Campbell

A legal dispute over certain expenses for which the former Managing Director sought reimbursement as part of his severance has been resolved. Montec International Limited was the defendant in the matter.

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----- Start of picture text -----

Grant Date Date of Expiry Exercise Price Number Under Option
21 October 2003 01/07/07 $0.50 (i) 100,000
19 August 2004 01/07/07 $0.56 (i) 24,000
16 September 2004 01/07/07 $0.50 (i) 505,000
28 July 2005 30/06/08 $0.50 (i) 1,400,000
28 July 2005 30/06/08 $0.50 (i) 24,000
18 November 2005 30/06/08 $0.50 (i) 30,000
1 May 2007 30/06/08 $0.10 (ii) 71,262,362
1 May 2007 31/12/10 $0.12 (i) 7,400,000
1 May 2007 31/12/10 $0.18 (i) 7,400,000
1 May 2007 31/12/10 $0.25 (i) 6,000,000
21 May 2007 30/06/08 $0.10 (ii) 5,786,154
99,931,516
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i These options were issued under the Company’s Employee Option Plan.

ii. ASX listed options issued under prospectus dated 20 March 2007

16

MONTEC INTERNATIONAL LIMITED

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 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 independence in accordance with APES 110: Code of Ethics for Professional Accountants set by the Accounting Professional and Ethical Standards Board.

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Auditor’s Independence Declaration

The lead auditor’s independence declaration for the year ended 30 June 2007 has been received and can be found on page 55 which forms part of this report.

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

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Terry Cuthbertson Chairman

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Peter Herd Managing Director

Dated this 19th day of September 2007

There were no non-audit services provided for which fees were paid/ payable to the external auditors during the year ended 30 June 2007.

17

ANNUAL REPORT 2007

INCOME STATEMENT

FOR THE YEAR ENDED 30 JUNE 2007

Note	Consolidated Entity Parent Entity 2007 $ 2006 $ 2007 $ 2006 $
Revenue 2 Other income Change in inventories of finished goods Raw materials sold/used Compliance and professional fees Advertising and marketing expenses Employee benefits expenses Administrative expenses Travel expenses Insurance expenses Finance costs Depreciation and amortisation expense Write off of certain acquired rights Impairment write down of patents Other expenses Loss before income tax expense 3 Income tax expense 4 Loss after related income tax expense Net loss attributable to outside equity interests Net loss attributable to members of the parent entity Earning per share: Basic earnings per share (cents per share) 8b Diluted earnings per share (cents per share) 8b	528,518 797,373 528,518 797,373 - 9,870 3,545 - 27,482 - 27,482 - (237,688) (479,661) (237,688) (479,661) (769,838) (784,151) (767,485) (783,597) (461,257) (632,137) (461,257) (632,137) (1,581,822) (1,470,647) (1,581,822) (1,485,166) (431,542) (546,582) (431,542) (519,298) (123,485) (232,034) (123,485) (231,941) (60,966) (104,459) (60,966) (104,459) (648) - (648) - (202,387) (441,922) (202,387) (439,484) (18,104) - (18,104) - (24,990) (1,369,356) (24,990) (1,369,356) (32,443) - (500) -
	(3,389,170) (5,253,706) (3,351,329) (5,247,726) - - - -
	(3,389,170) (5,253,706) (3,351,329) (5,247,726) - - - -
	(3,389,170) (5,253,706) (3,351,329) (5,247,726)
	(0.040) (0.080) (0.040) (0.080)

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

18

MONTEC INTERNATIONAL LIMITED

BALANCE SHEET

FOR THE YEAR ENDED 30 JUNE 2007

Note	Consolidated Entity Parent Entity 2007 $ 2006 $ 2007 $ 2006 $
CURRENT ASSETS Cash and cash equivalents 9 Trade and other receivables 10 Inventories 11 Other current assets 12 TOTAL CURRENT ASSETS NON-CURRENT ASSETS Financial assets 13 Property, plant and equipment 15 Intangible assets 16 TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables 17 Short-term provisions 18 TOTAL CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Issued capital 19 Reserves Accumulated losses TOTAL EQUITY	3,509,454 2,271,951 3,509,453 2,270,123 111,233 67,002 113,585 67,002 122,985 175,740 122,985 175,740 160,279 127,127 160,279 127,127
	3,903,951 2,641,820 3,906,302 2,639,992
	- - 1 1 83,224 128,057 83,224 128,057 816,123 1,027,733 816,123 1,027,733
	899,347 1,155,790 899,348 1,155,791
	4,803,298 3,797,610 4,805,650 3,795,783
	275,233 258,200 275,233 261,598 71,546 222,360 71,546 222,360
	346,779 480,560 346,779 483,958
	346,779 480,560 346,779 483,958
	4,456,519 3,317,050 4,458,871 3,311,825
	19,524,082 15,407,680 19,524,082 15,407,680 541,166 128,929 541,166 159,193 (15,608,729) (12,219,559) (15,606,377) (12,255,048)
	4,456,519 3,317,050 4,458,871 3,311,825

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

19

ANNUAL REPORT 2007

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 30 JUNE 2007

Consolidated Entity Note	Reserves Share Capital Ordinary Accumulated Losses Share Options Foreign Exchange Total $ $ $ $ $
Balance at 1 July 2005 Adjustment arising from the translation of foreign controlled entities’ financial statements Net income recognised directly in equity Loss for the period Total recognised income and expenses for the period Equity remuneration reserve on recognition of employee share options expenses Balance at 30 June 2006 Adjustment arising from the translation of foreign controlled entities’ financial statements Net income recognised directly in equity Loss for the period Total recognised income and expenses for the period Equity remuneration reserve on recognition of employee share options expenses 20a Shares issued during the year Transaction costs Balance at 30 June 2007	15,407,680 (6,965,853) 101,094 (24,539) 8,518,382 - - - (5,725) (5,725)
	- - - (5,725) (5,725) - (5,253,706) - - (5,253,706)
	- (5,253,706) - (5,725) (5,259,431)
	- - 58,099 - 58,099
	15,407,680 (12,219,559) 159,193 (30,264) 3,317,050 - - - 30,264 30,264
	- - - 30,264 30,264 - (3,389,170) - - (3,389,170)
	- (3,389,170) - 30,264 (3,358,906)
	- - 381,973 - 381,973 4,440,426 - - - 4,440,426 (324,024) - - - (324,024)
	19,524,082 (15,608,729) 541,166 - 4,456,519

20

MONTEC INTERNATIONAL LIMITED

Parent Entity Note	Reserves Share Capital Ordinary Accumulated Losses Share Options Foreign Exchange Total $ $ $ $ $
Balance at 1 July 2005 Net income recognised directly in equity Loss for the period Total recognised income and expenses for the period Equity remuneration reserve on recognition of employee share options expenses Balance at 30 June 2006 Net income recognised directly in equity Loss for the period Total recognised income and expenses for the period Equity remuneration reserve on recognition of employee share options expenses 20a Shares issued during the year Transaction costs Balance at 30 June 2007	15,407,680 (7,007,322) 101,094 - 8,501,452 - - - - - - (5,247,726) - - (5,247,726)
	- (5,247,726) - - (5,247,726)
	- - 58,099 - 58,099
	15,407,680 (12,255,048) 159,193 - 3,311,825 - - - - - - (3,351,329) - - (3,351,329)
	- (3,351,329) - - (3,351,329)
	- - 381,973 - 381,973 4,440,426 - - - 4,440,426 (324,024) - - - (324,024)
	19,524,082 (15,606,377) 541,166 - 4,458,871

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

21

ANNUAL REPORT 2007

CASH FLOW STATEMENT

FOR THE YEAR ENDED 30 JUNE 2007

Note	Consolidated Entity Parent Entity 2007 $ 2006 $ 2007 $ 2006 $
CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers Payments to suppliers and employees Interest received Finance costs Net cash used in operating activities 24a CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment Purchase of Intellectual property Payment for subsidiary, net of cash acquired 24b Other Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of shares Cost of share issues Payment for borrowing Net cash provided by financing activities Net increase/(decrease) in cash held Cash at start of year Cash at end of year 9	239,779 621,573 239,779 621,573 (3,180,132) (3,716,200) (3,178,305) (3,716,585) 71,641 191,910 71,641 191,910 (648) - (648) -
	(2,869,360) (2,902,717) (2,867,533) (2,903,102)
	(9,539) (23,638) (9,539) (23,638) - - - - - (1) - (1) - - - -
	(9,539) (23,639) (9,539) (23,639)
	4,440,426 - 4,440,426 - (324,024) - (324,024) - - - - -
	4,116,402 - 4,116,402 -
	1,237,503 (2,926,356) 1,239,330 (2,926,741) 2,271,951 5,198,307 2,270,123 5,196,864
	3,509,454 2,271,951 3,509,453 2,270,123

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

22

MONTEC INTERNATIONAL LIMITED

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

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, including Australian Accounting Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001.

The financial report covers the consolidated 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 consolidated entity in the preparation of the financial report. The accounting policies have been consistently applied, unless otherwise stated.

Basis of Preparation

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.

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

All inter-company balances and transactions between entities in the consolidated entity, including any unrealised profits or losses, have been eliminated on consolidation. Where controlled entities have entered the consolidated 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 non-assessable 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 consolidated 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.

23

ANNUAL REPORT 2007

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

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 consolidated entity commencing from the time the asset is held ready for use.

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

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|||
|---|---|
|Class of Fixed Asset|Depreciation Rate|
|Plant and equipment|10% - 37.5%|

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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 categorised as held for trading unless they are designated as hedges. Realised and unrealised 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.

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 is no held-to-maturity investments during the financial year ended 30 June 2007.

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. Unrealised 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.

24

MONTEC INTERNATIONAL LIMITED

NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Derivative instruments

There are no derivative instruments during the financial year ended 30 June 2007.

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.

h. Financial assets

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.

25

ANNUAL REPORT 2007

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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.

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.

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. Employee Benefits

Provision is made for the consolidated 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 consolidated entity to employee superannuation funds and are charged as expenses when incurred.

The consolidated entity operates an ownership-based remuneration scheme through the employee option plan, details of which are provided in Note 25 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.

n. Revenue

Revenue in the form of royalties from the utilisation of technology is recognised upon the sale raw materials supplied as part of the contractual agreement with customers. Revenue is also derived from the sale of finished goods milk products into wholesales and retail channels.

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

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

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

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

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.

26

MONTEC INTERNATIONAL LIMITED

NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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 to changes in presentation for the current financial year.

q. Going concern

Notwithstanding the net loss for the year and the accumulated losses for the company and the consolidated entity, the directors have performed a review of the cash flow forecasts and have considered the cash flow needs of the company and consolidated entity, including their ability to reduce the level of cash expenditure if required to do so. Based on this review, the directors are satisfied that there are no material uncertainties that could cast doubt on the company’s and consolidated entity’s ability to meet their debts as and when they fall due or payable for a period of at least twelve months from the date of this report and hence the going concern basis of accounting is appropriate and has been used in the preparation of this financial report.

r. 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.

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 indicates that the net book value of these two patents after impairment is fairly stated. This amount was assessed after discounting the currently anticipated future cash flows associated with these patents and comparing it with the net book value.

Employee Share Option Valuation

The company has used the Black-Scholes or Binomial valuation model to estimate the fair value of options granted to employees, which is in accordance with AASB 2.

Key Judgments

Stock Obsolescence Provision

Included in inventory as at 30 June 2007 is a provision for stock obsolescence relating to certain forms of packaging printed for use in China, and a quantity of monounsaturated oil and premix showing signs of deterioration. The carrying value of these raw materials is unlikely to be recovered and an obsolescence provision has been made in the accounts. The amount of the provision is $117,559.

s. Disclosure of new standards not yet operative

A number of new or revised accounting standards will require adoption in future reporting periods. Below is a summary of the standards which are considered relevant to the Consolidated Entity.

AASB 8 Operating Segments - operative date 1 January 2009

AASB 8 will result in a change in the segment disclosures presented in the financial report such that the segments presented will not be based on primary and secondary segments but reflect those segments and amounts regularly reviewed by the entity’s chief operating decision maker. While the amounts presented in the financial statements will not change, the amounts presented in the segment reporting note may differ to those currently presented as a result of AASB 8 requiring the amounts presented to be based on those seen by the entity’s chief operating decision maker.

27

ANNUAL REPORT 2007

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)

AASB 101 Presentation of Financial Statements (Amended) - operative date 1 January 2007

An entity shall disclose information that enables users of its financial report to evaluate the entity’s objectives, policies and processes for managing capital.

The entity discloses the following:

• a description of what it manages as capital;

• when an entity is subject to externally imposed capital requirements:

• the nature of those requirements

• how those requirements are incorporated into the management of capital

• how it is meeting its objectives for managing capital

• summary quantitative data about what it manages as capital

• any changes from the previous period

• whether during the period it complied with any externally imposed capital requirement to which it is subject

• when the entity has not complied with such externally imposed capital requirements, the consequences of such non-compliance

Adoption of these amendments is likely to result in increased disclosures particularly those regarding the entity’s objectives, policies and processes for managing capital but will not impact on amounts presented in the financial statements.

AASB 2007-4 Amendments to Australian Accounting Standards arising from Exposure Drafts - operative date 1 July 2007

These amendments arise as a result of the AASB decision that, in principle, all options that currently exist under IFRSs should be included in the Australian equivalents to IFRSs and additional Australian disclosures should be eliminated, other than those now considered particularly relevant in the Australian reporting environment.

Adoption of AASB 2007-4 will result in reduced disclosures within the financial report of the entity in particular those relating to interim financial reporting. AASB 2007-4 also provides the entity with additional recognition, measurement and presentation alternatives. The entity has not decided on the possible adoption of these alternatives and has therefore been unable to assess the financial impact of this change on the entity’s financial report in the period of initial application.

AASB Interpretation 4 - Determining whether an Arrangement contains a Lease (revised) - operative date 1 January 2008

This interpretation specifies criteria for determining whether an arrangement is, or contains a lease. The determination is based on an assessment of whether fulfillment of the arrangement is dependent on the use of a specific asset and whether the arrangement conveys a right to use the asset. Further, reassessment of whether an arrangement is, or contains, a lease is based on whether there is a change in the contractual terms of the arrangement, exercise of a renewal option, an extension of the arrangement, a change in the determination of whether fulfillment is dependent on a specified asset or a substantial change to the asset.

If an arrangement contains a lease, the parties to the arrangement apply the requirements of AASB 117 Leases to the lease element of the arrangement, unless exempted from those requirements by the Standard. Accordingly, if an arrangement contains a lease, that lease is classified as a finance lease or an operating lease. Other elements of the arrangement not within the scope of AASB 117 are accounted for in accordance with other Standards.

Adoption of Interpretation 4 (revised) is unlikely to have a material impact on the entity’s financial report as the entity has no current or expected arrangements which would fall within the scope of this interpretation.

28

MONTEC INTERNATIONAL LIMITED

NOTE 1: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued)

AASB Interpretation 10 - Interim Financial Reporting and Impairment - operative date 1 November 2006

AASB 134 Interim Financial Reporting requires an entity to apply the same accounting policies in its interim financial report as are applied in its annual financial report. It also states that measurements for interim reporting purposes are made on a year-to-date basis so that the frequency of reporting does not affect an entity’s annual results.

However, this Interpretation clarifies that an entity cannot reverse an impairment loss recognised in a previous interim period in relation to goodwill or an investment in an equity instrument or in a financial asset carried at cost. This approach is consistent with the impairment reversal prohibitions in AASB 136 Impairment of Assets and AASB 139.

Adoption of Interpretation 10 is unlikely to have a material impact on the entity’s financial report as the entity has not experienced any impairments of the type described in interpretation 10 during any interim financial period.

AASB Interpretation 11 – AASB 2 - Group and Treasury Share Transactions - operative date 1 March 2007

This Interpretation addresses whether certain types of share-based payment transactions with employees (or other suppliers of good and services) should be accounted for as equity-settled or as cash-settled transactions under AASB 2. For example, the Interpretation clarifies that when an entity’s employees are granted rights to the entity’s equity instruments either by the entity or its shareholders, the transactions are accounted for as equity-settled transactions. This is so whether the entity chooses to, or is required to buy, the equity instruments from another party or the shareholders provide the necessary equity instruments. Adoption of Interpretation 11 is unlikely to have a material impact on the entity’s financial report.

29

ANNUAL REPORT 2007

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

==> picture [507 x 180] intentionally omitted <==

----- Start of picture text -----

||||||
|---|---|---|---|---|
|Consolidated Entity|Parent Entity|
|2007|2006|2007|2006|
|$|$|$|$|
|NOTE 2: REVENUE|
|Operating activities:|
|— royalties|239,754|335,054|239,754|335,054|
|— milk sales|124,959|-|124,959|-|
|— cream sales|18,346|20,795|18,346|20,795|
|— sales of goods|73,793|237,549|73,793|237,549|
|— interest income – other persons|71,641|191,910|71,641|191,910|
|— other revenue|25|12,065|25|12,065|
|Total Revenue|528,518|797,373|528,518|797,373|

----- End of picture text -----

NOTE 3: LOSS BEFORE TAX

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----- Start of picture text -----

||||||
|---|---|---|---|---|
|Loss before income tax has been determined after:|
|Depreciation of non-current assets:|
|— plant and equipment|(33,870)|(45,179)|(33,870)|(42,741)|
|Amortisation of non-current assets:|
|— patents and acquired rights|(168,517)|(396,743)|(168,517)|(396,743)|
|Rental expense on property|(98,722)|(160,087)|(98,722)|(160, 087)|
|Foreign currency translation (losses)/gains|(49,779)|845|(49,779)|845|
|Write off of certain acquired rights|(18,103)|-|(18,103)|-|
|Provision for stock obsolescence|(117,559)|(71,519)|(117,559)|(67,637)|
|Impairment write down:|
|— patents|(24,990)|(1,369,356)|(24,990)|(1,369,356)|
|— net assets of subsidiary|-|9,870|-|-|
|Other expenses:|
|— Legal fees|(560,129)|(518,392)|(560,129)|(518,392)|

----- End of picture text -----

30

MONTEC INTERNATIONAL LIMITED

	Consolidated Entity Parent Entity 2007 $ 2006 $ 2007 $ 2006 $
NOTE 4: INCOME TAX EXPENSE 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% (2006: 30%) Add: Tax effect of: — non-deductible amortisation — other non-allowable items Less: Tax effect of: — foreign currency exchange profit not subject to income tax — other allowable items Tax effect of deferred tax assets not brought to account Income tax expense attributable to entity The applicable weighted average effective tax rates are as follows:	(1,016,751) (1,576,112) (1,016,045) (1,574,318) 3,530 3,530 3,530 3,530 161,286 440,913 161,286 440,913 (12,828) 2,964 (12,828) 2,964 339,101 (22,409) 339,101 (22,409) 1,178,208 1,112,224 1,177,502 1,110,430
	- - - -
	-% -% -% -%

The directors estimate that the Parent Entity and its controlled entities have carry-forward income tax losses of $6,247,766 (2006: $5,069,558) 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.

31

ANNUAL REPORT 2007

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

NOTE 5: KEY MANAGEMENT PERSONNEL COMPENSATION

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

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----- Start of picture text -----

Key Management Personnel
Terry Cuthbertson Chairman — Non-Executive
Peter Herd Acting Managing Director — Executive (appointed acting MD 28 July 2006)
Xueqin Du Director — Executive
Lin Yuansheng Director — Non-Executive (resigned 20 June 2007)
Mei Zhan Yan Director — Non-Executive (appointed 20 June 2007)
James Manny Director — Non-Executive (appointed 26 October 2006)
Ian Maltman Chief Financial Officer
Roger McGrath Alternate Director (alternate for Lin Yuansheng, resigned 13 March 2007)
Malcolm Campbell Managing Director — Executive (resigned 28 July 2006)
----- End of picture text -----

b. Key Management Personnel

==> picture [504 x 213] intentionally omitted <==

----- Start of picture text -----

2007 Primary Post Equity Total
Employment
Salary & Superannuation Cash Benefit Non-Cash Superannuation Shares Options
Fees Contribution Benefits
$ $ $ $ $ $ $ $
- - - -
Terry Cuthbertson 75,000 6,750 91,239 172,989
Peter Herd 168,950 - - - - - 91,239 260,189
- - -
Xueqin Du 105,000 9,450 12,000 54,952 181,402
- - - -
Lin Yuansheng [ (i)] 43,750 3,938 29,863 77,551
Mei Zhan Yan (ii) - - - - - - - -
(iii) - - - -
James Manny 30,726 2,765 29,863 63,354
Ian Maltman 157,500 14,175 - - - - 54,952 226,627
- - -
Malcolm Campbell [ (iv)] 167,742 1,350 4,263 1,283 174,638
- -
748,668 38,428 16,263 1,283 352,108 1,156,750
----- End of picture text -----

(i) Compensation paid for the period 1 July 2006 to 20 June 2007.

(ii) Mei Zhan Yan’s director’s fees for the period 20 June 2007 to 30 June 2007 are being paid to BAIC Australia Pty Ltd. Details are set out in Note 27.

(iii) Compensation paid for the period 26 October 2006 to 30 June 2007.

(iv) Compensation paid for the period 1 July 2006 to the contracted end of Mr. Campbell’s employment on 11 November 2006 under severance arrangements effective 28 July 2006.

32

MONTEC INTERNATIONAL LIMITED

NOTE 5: KEY MANAGEMENT PERSONNEL COMPENSATION (continued) b. Key Management Personnel (continued)

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----- Start of picture text -----

2006 Primary Post Equity Total
Employment
Salary & Superannuation Cash Benefit Non-Cash Superannuation Shares Options
Fees Contribution Benefits
$ $ $ $ $ $ $ $
- - - - -
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
- -
Xueqin Du 105,000 9,450 25,867 13,059 28,591 181,967
- - - -
Lin Yuansheng 45,000 4,050 8,000 57,050
Ian 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
----- End of picture text -----

c. Compensation Options

Options Granted As Compensation

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----- Start of picture text -----

Terms & Conditions for Each Grant
Key Management Vested No. Granted Grant Date Average Value First Exercise Exercise Date Last Exercise
Personnel Number per Option at Price Date
Grant Date
Terry Cuthbertson 5,000,000 5,000,000 1 May 2007 0.0182 $0.12, $0.18 Current 31/12/10
and $0.25
Peter Herd 5,000,000 5,000,000 1 May 2007 0.0182 $0.12, $0.18 Current 31/12/10
and $0.25
Xueqin Du 3,000,000 3,000,000 1 May 2007 0.0183 $0.12, $0.18 Current 31/12/10
and $0.25
Lin Yuansheng 1,600,000 1,600,000 1 May 2007 0.0187 $0.12 and $0.18 Current 31/12/10
James Manny 1,600,000 1,600,000 1 May 2007 0.0187 $0.12 and $0.18 Current 31/12/10
Ian Maltman 3,000,000 3,000,000 1 May 2007 0.0183 $0.12, $0.18 Current 31/12/10
and $0.25
19,200,000 19,200,000
----- End of picture text -----

All options granted to the above key management personnel have vested. The options are exercisable at the exercise prices noted and will expire following the last date for exercise listed above. The service and performance criteria set to determine compensation are included per Note 5g below.

33

ANNUAL REPORT 2007

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

NOTE 5: KEY MANAGEMENT PERSONNEL COMPENSATION (continued)

d. Shares Issued on Exercise of Compensation Options

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----- Start of picture text -----

|||||
|---|---|---|---|
|No. of ordinary|Amount paid|Amount unpaid|
|shares issued|per share|per share|
|Key Management Personnel|
|-|-|-|
|Terry Cuthbertson|
|Peter Herd|-|-|-|
|-|-|-|
|Xueqin Du|
|-|-|-|
|James Manny|
|-|-|-|
|Lin Yuansheng|
|Ian Maltman|-|-|-|
|-|

----- End of picture text -----

e. Options and Rights Holdings

Number of options held by Key Management Personnel

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----- Start of picture text -----

||||||||||
|---|---|---|---|---|---|---|---|---|
|Key Management|Balance|Granted as|Options|Net Change|Balance|Total Vested|Total|Total|
|Personnel|01/07/06|Compensation|Exercised|Other|30/06/07|30/06/07|Exercisable|Unexercisable|
|-|-|-|
|Terry Cuthbertson|5,000,000|10,000|5,010,000|5,010,000|5,010,000|
|Peter Herd|-|5,000,000|-|94,460|5,094,460|5,094,460|5,094,460|-|
|-|-|
|Xueqin Du|800,000|3,000,000|20,000|3,820,000|3,820,000|3,820,000|
|-|-|-|
|Lin Yuansheng|[i]|1,600,000|3,846,154|5,446,154|5,446,154|5,446,154|
|-|-|-|
|James Manny|1,600,000|238,000|1,838,000|1,838,000|1,838,000|
|Ian Maltman|1,710,000|3,000,000|-|(505,000)|4,205,000|4,205,000|4,205,000|-|
|Total|2,510,000|19,200,000|3,703,614|25,413,614|25,413,614|25,413,614|-|

----- End of picture text -----

i. Note that Mei Zhan Yan as at 20 June 2007 holds the 3,846,154 options indirectly through BAIC Australia Pty Ltd, with Mr Lin Yuansheng having retired.

f. Shareholdings

Number of shares held by Key Management Personnel

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----- Start of picture text -----

|||||||
|---|---|---|---|---|---|
|Balance|Received as|Options|Net Change|Balance|
|1/7/06|Compensation|Exercised|Other*|30/6/07|
|Key Management Personnel|
|-|-|
|Terry Cuthbertson|10,000|10,000|20,000|
|Peter Herd|14,460|-|-|134,460|148,920|
|-|-|
|Xueqin Du|10,000|30,000|40,000|
|-|-|
|Lin Yuansheng|[ i.]|3,846,154|3,846,154|7,692,308|
|-|-|
|James Manny|239,825|238,000|477,825|
|-|-|
|4,120,439|4,258,614|8,379,053|

----- End of picture text -----

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

i. Note that Mei Zhan Yan as at 20 June 2007 holds the 7,692,308 ordinary shares indirectly through BAIC Australia Pty Ltd, with Mr Lin Yuansheng having retired.

34

MONTEC INTERNATIONAL LIMITED

NOTE 5: KEY MANAGEMENT PERSONNEL COMPENSATION (continued)

g. 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 emphasize 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 previous Managing Director. The previous Managing Director was on a three year 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 5, table (c) above and Note 25 below.

NOTE 6: AUDITORS’ REMUNERATION

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||||||
|---|---|---|---|---|
|Consolidated Entity|Parent Entity|
|2007|2006|2007|2006|
|$|$|$|$|
|Remuneration of the auditor of the parent entity for:|
|— auditing and reviewing the financial reports|62,350|67,400|62,350|67,400|
|— other services|-|-|-|-|
|Remuneration of other auditors of subsidiaries for:|
|— auditing and reviewing the financial reports of subsidiaries|-|-|-|-|

----- End of picture text -----

35

ANNUAL REPORT 2007

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

NOTE 7: DIVIDENDS

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

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

• No final dividend was paid in the previous financial year.

	Consolidated Entity Parent Entity 2007 $ 2006 $ 2007 $ 2006 $
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 years Impact of any proposed dividends not recognised as a liability.	- - - - - - - -
	- - - -

NOTE 8: EARNINGS PER SHARE

	Consolidated Entity Consolidated Entity 2007 $ 2006 $
a. Reconciliation of earnings to net loss Net loss Net loss attributable to outside equity interest	(3,389,170) (5,253,706) - -
Earnings used in the calculation of basic and diluted EPS	(3,389,170) (5,253,706)
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	85,043,326 65,916,002 21,953,882 10,572,712 85,043,326 65,916,002

NOTE 9: CASH AND CASH EQUIVALENTS

	Consolidated Entity Parent Entity 2007 $ 2006 $ 2007 $ 2006 $
Cash at bank and in hand	3,509,454 2,271,951 3,509,453 2,270,123
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	3,509,454 2,271,951 3,509,453 2,270,123 3,509,454 2,271,951 3,509,453 2,270,123

36

MONTEC INTERNATIONAL LIMITED

NOTE 10: TRADE AND OTHER RECEIVABLES

	Consolidated Entity Parent Entity 2007 $ 2006 $ 2007 $ 2006 $
CURRENT Trade receivables Provision for doubtful debts Term receivables Other receivables Amount receivable from: — Wholly-owned subsidiaries NOTE 11: INVENTORIES CURRENT At cost Raw materials and consumables Provision for Stock Obsolescence NOTE 12: OTHER CURRENT ASSETS Prepayments	86,091 41,618 86,091 29,969 - (11,649) - -
	86,091 29,969 86,091 29,969 8,016 37,033 8,016 37,033 17,126 - 17,126 - - - 2,352 -
	111,233 67,002 113,585 67,002 240,544 247,259 240,544 243,377 (117,559) (71,519) (117,559) (67,637)
	122,985 175,740 122,985 175,740 160,279 127,127 160,279 127,127
	160,279 127,127 160,279 127,127

37

ANNUAL REPORT 2007

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

NOTE 13: FINANCIAL ASSETS

NOTE 13: FINANCIAL ASSETS
Note	Consolidated Entity Parent Entity 2007 $ 2006 $ 2007 $ 2006 $
NON-CURRENT Unlisted investments, at cost — Shares in controlled entities 13a,14 — Provision for write down to recoverable amount a. Unlisted investments movement during the year Balance at beginning of the financial year — Additional investment Balance at the end of the financial year NOTE 14: CONTROLLED ENTITIES	- - 1 285,801 - - - (285,800)
	- - 1 1 - - 1 - - - - 1
	- - 1 1 Country of Incorporation Percentage Owned 2007 $ 2006 $
a. Controlled Entities Parent Entity: Montec International Limited Subsidiaries of Montec International Limited: — Chongqing Montec Co Limited — Montec International (HK) Limited b. Controlled Entities Acquired Chongqing Montec Co Limited was liquidated in September 2006 having been fully w	China - 100% Hong Kong 100% 100% ritten down in the financial year ended 30 June 2006.
	Consolidated Entity Parent Entity 2007 $ 2006 $ 2007 $ 2006 $
PLANT AND EQUIPMENT Plant and equipment At cost Provision for write off plant and equipment Accumulated depreciation Total Property, Plant and Equipment	177,379 228,702 177,379 216,612 - (2,938) - - (94,155) (97,707) (94,155) (88,555)
	83,224 128,057 83,224 128,057

NOTE 15: PROPERTY, PLANT AND EQUIPMENT

	Consolidated Entity Parent Entity 2007 $ 2006 $ 2007 $ 2006 $
PLANT AND EQUIPMENT Plant and equipment At cost Provision for write off plant and equipment Accumulated depreciation	177,379 228,702 177,379 216,612 - (2,938) - - (94,155) (97,707) (94,155) (88,555)
Total Property, Plant and Equipment	83,224 128,057 83,224 128,057

38

MONTEC INTERNATIONAL LIMITED

NOTE 15: 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.

2007	Plant and Equipment $ Leased Plant and Equipment $ Total $
Consolidated Entity: Balance at 1 July 2005 Additions Transfer asset in or out Movement on exchange Movement on provision for disposal of assets Depreciation expense Balance at 30 June 2006 Additions Disposals Transfer asset in or out Depreciation expense Balance at 30 June 2007 Parent Entity: Balance at 1 July 2005 Additions Transfer asset in or out Depreciation expense Balance at 30 June 2006 Additions Disposals Transfer asset in or out Depreciation expense Carrying amount at the end of year	147,160 - 147,160 23,638 - 23,638 - - - (361) - (361) 2,799 - 2,799 (45,179) - (45,179)
	128,057 - 128,057 9,539 - 9,539 (20,502) - (20,502) - - - (33,870) - (33,870)
	83,224 - 83,224 147,160 - 147,160 23,638 - 23,638 - - - (42,741) - (42,741)
	128,057 - 128,057 9,539 - 9,539 (20,502) - (20,502) - - - (33,870) - (33,870)
	83,224 - 83,224

39

ANNUAL REPORT 2007

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

NOTE 16: INTANGIBLE ASSETS

	Consolidated Entity Parent Entity 2007 $ 2006 $ 2007 $ 2006 $	Consolidated Entity Parent Entity 2007 $ 2006 $ 2007 $ 2006 $
Goodwill, at deemed cost Impairment write down of goodwill Patents and acquired rights, at cost Accumulated amortisation Impairment write down of patents Total Intangible Assets Consolidated Group	- -	250,594 - - (250,594) - -
	- 3,423,601 (1,213,132) (1,394,346)	- - - 3,441,704 3,423,601 3,441,704 (1,044,615) (1,213,132) (1,044,615) (1,369,356) (1,394,346) (1,369,356)
	816,123	1,027,733 816,123 1,027,733 Patent $ Acquired Rights $
Year ended 30 June 2006 Balance at the beginning of year Additions Disposals Amortisation charge Impairment losses Year ended 30 June 2007 Balance at the beginning of year Additions Disposals Amortisation charge Impairment losses Closing value at 30 June 2007		2,694,846 98,987 - - - - (384,979) (11,765) (1,369,356) -
		940,511 87,222
		940,511 87,222 - - - (18,103) (156,752) (11,765) (24,990) -
		758,769 57,354

Intangible assets, other than goodwill, have finite useful lives. The current amortisation charges for intangible assets are included under depreciation and amortisation expense per the income statement.

40

MONTEC INTERNATIONAL LIMITED

NOTE 16: 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 5 year period. The cash flows are discounted using the yield 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-in-use calculations:

==> picture [269 x 26] intentionally omitted <==

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||||
|---|---|---|
|Discount Rate|Growth Rate|
|Acquired patents|17.1%|0%|

----- End of picture text -----

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 cash flow after 5 years has been factored into the calculations as the Patents expire at that future point in time.

NOTE 17: TRADE AND OTHER PAYABLES

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||||||
|---|---|---|---|---|
|Consolidated Entity|Parent Entity|
|2007|2006|2007|2006|
|$|$|$|$|
|CURRENT|
|Unsecured liabilities|
|Trade creditors|98,737|98,195|98,737|98,195|
|Sundry creditors and accrued expenses|176,496|160,005|176,496|160,005|
|Amount payable to :|
|- wholly-owned subsidiaries|-|-|-|3,398|
|275,233|258,200|275,233|261,598|
|NOTE 18: SHORT-TERM PROVISIONS|
|CURRENT|
|Employee benefits|71,546|110,506|71,546|110,506|
|Provision for management restructure|-|111,854|-|111,854|
|71,546|222,360|71,546|222,360|
|a. Number of employees at year-end|8|9|8|8|

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41

ANNUAL REPORT 2007

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

NOTE 18: SHORT-TERM PROVISIONS (continued)

b. Movement in provisions

	Employee Benefits Management Restructure $ $
Consolidated Group Opening balance at 1 July 2006 Additional provisions Amount used Unused amounts reversed	110,506 111,854 38,641 - (77,601) (111,854) - -
Balance at 30 June 2007	71,546 -

NOTE 19: CONTRIBUTED EQUITY

Note	Consolidated Entity Parent Entity 2007 $ 2006 $ 2007 $ 2006 $
151,364,518 (2006: 65,916,002) fully paid ordinary shares 19a	19,524,082 15,407,680 19,524,082 15,407,680
a. Ordinary shares At the beginning of the reporting period Share movements during the year: - Share placement of 8,400,000 ordinary shares at $0.07 per share on 17/11/2006 - Share placement of 11,500,000 ordinary shares at $0.05 per share on 24/4/07 - 59,762,362 shares issued through renounceable rights issue ordinary shares at $0.05 per share on 24/4/07 -Share placement of 5,786,154 ordinary shares under rights issue prospectus at $0.05 per share on 21/5/07 Transaction costs relating to share issues	15,407,680 15,407,680 15,407,680 15,407,680 588,000 - 588,000 - 575,000 - 575,000 - 2,988,118 - 2,988,118 - 289,308 - 289,308 - (324,024) - (324,024) -
At reporting date	19,524,082 15,407,680 19,524,082 15,407,680

42

MONTEC INTERNATIONAL LIMITED

NOTE 19: CONTRIBUTED EQUITY (continued)

b. Number of ordinary shares

	No. No. No. No.
At the beginning of reporting period Shares issued during the year: - Share placement of 8,400,000 ordinary shares at $0.07 per share on 17/11/2006 - Share placement of 11,500,0007 ordinary shares at $0.05 per share on 24/4/07 - 59,762,362 shares issued through renounceable rights issueordinary shares at $0.05 per share on 24/4/07 -Share placement of 5,786,154 ordinary shares under rights issue prospectus at $0.05 per share on 21/5/07 Options converted to ordinary shares during the year: At reporting date	65,916,002 65,916,002 65,916,002 65,916,002 8,400,000 - 8,400,000 - 11,500,000 - 11,500,000 - 59,762,362 - 59,762,362 - 5,786,154 - 5,786,154 - - - - -
	151,364,518 65,916,002 151,364,518 65,916,002

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 year and the options outstanding at year end refer to Note 25.

ii. For information relating to share options issued to directors and executives during the financial year refer to Note 25.

At 30 June 2007, there were 99,931,516 (30 June 2006:10,807,326) unissued ordinary shares for which options were outstanding.

NOTE 20: RESERVES

a. Option Reserve

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

b. Foreign Currency Translation Reserve

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

43

ANNUAL REPORT 2007

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

NOTE 21: CAPITAL AND LEASING COMMITMENTS

	Consolidated Entity Parent Entity 2007 $ 2006 $ 2007 $ 2006 $
Operating Lease Commitments Non-cancelable operating leases contracted for but not capitalised in the financial statements Payable - not later than 1 year	- - - -
	- - - -

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

NOTE 22: CONTINGENT ASSETS AND LIABILITIES

There are no contingent assets or contingent liabilities of a material nature identified as at the date of this report. All legal matters identified as potential assets or liabilities as at 30 June 2006 have been resolved, as outlined in the Directors’ Report.

NOTE 23: SEGMENT REPORTING

Primary reporting — Geographic segments 2007	Australia $ China $ Eliminations $	Consolidated Entity $
REVENUE External sales Other segments Total sales revenue Unallocated revenue Total revenue SEGMENT RESULT Expenses Loss before income tax expense Income tax expense Loss after income tax expense ASSETS Segment assets Total assets LIABILITIES Segment liabilities Total liabilities OTHER Acquisitions of non current segment assets Depreciation and amortisation of segment assets	239,779 217,098 - - - -	456,877 -
	239,779 217,098 - (2,619,002) (1,298,686) -	456,877 71,641
		528,518 (3,917,688)
	4,068,073 737,577 (2,352)	(3,389,170) -
		(3,389,170)
		4,803,298
	4,068,073 737,577 (2,352)	4,803,298
	349,131 - (2,352)	346,779
	349,131 - (2,352)	346,779
	- 9,539 - 100,660 101,727 -	9,539 202,387

44

MONTEC INTERNATIONAL LIMITED

NOTE 23: SEGMENT REPORTING (continued)

Primary reporting — Geographic segments 2006	Australia $ China $ Eliminations $	Consolidated Entity $
REVENUE External sales Other segments Total sales revenue Unallocated revenue Total revenue SEGMENT RESULT Expenses Loss before income tax expense Income tax expense Loss after income tax expense ASSETS Segment assets Total assets LIABILITIES Segment liabilities Total liabilities OTHER Acquisitions of non current segment assets Depreciation and amortisation of segment assets	278,190 327,273 - - - -	605,463 -
	278,190 327,273 - (3,556,254) (2,504,695) -	605,463 201,780
		807,243 (6,060,949)
	2,920,143 880,865 (3,398)	(5,253,706) -
		(5,253,706)
		3,797,610
	2,920,143 880,865 (3,398)	3,797,610
	483,958 - (3,398)	480,560
	483,958 - (3,398)	480,560
	317 23,321 - 226,027 215,895 -	23,638 441,922

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.

45

ANNUAL REPORT 2007

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

NOTE 23: SEGMENT REPORTING (continued)

Inter-segment Transfers

Segment revenues, expenses and result include transfers between segments. The prices charged on inter-segment transactions are the same as those charged for similar goods to parties outside of the consolidated 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 and products.

NOTE 24: CASH FLOW INFORMATION

	Consolidated Entity Parent Entity 2007 $ 2006 $ 2007 $ 2006 $
a. Reconciliation of Cash Flow from Operations with loss after Income Tax Loss after income tax Non-cash flows in loss Amortisation Depreciation Write-off of certain Acquired Rights Impairment write down patents Staff share option expenses Impairment write down net asset of subsidiary Other non cash items Changes in assets and liabilities, net of the effects of purchase and disposal of subsidiaries Decrease/(increase) in trade and other receivables Decrease/(increase) in prepayments Decrease/(increase) in inventories Increase/(decrease) in trade creditors and accruals Increase/(decrease) in provisions Cash flow used in operations	(3,389,170) (5,253,706) (3,351,329) (5,247,726) 168,517 396,743 168,517 396,743 33,870 45,179 33,870 42,741 18,103 - 18,103 - 24,990 1,369,356 24,990 1,369,356 381,973 58,099 381,973 58,099 - (9,870) - - 53,421 3,058 20,502 1 (48,507) 23,409 (51,505) (3,311) (33,170) (16,080) (33,152) (16,896) 52,870 280,733 52,755 280,971 (93,297) 39,541 (93,297) 56,099 (38,960) 160,821 (38,960) 160,821
	(2,869,360) (2,902,717) (2,867,533) (2,903,102)

46

MONTEC INTERNATIONAL LIMITED

NOTE 24: CASH FLOW INFORMATION (continued)

	Consolidated Entity Parent Entity 2007 $ 2006 $ 2007 $ 2006 $
b. Acquisition of Entities There were no acquisitions of entities in the year ended 30 June 2007. During the prior year 100% of the controlled entity Montec International (HK) Limited was acquired. Details of this transaction are: Purchase consideration Cash consideration Cash (outflow)/inflow Assets and liabilities held at acquisition date: Cash Receivables Inventories Property, plant and equipment Creditors Goodwill/(Discount) on consolidation Minority interests in acquisitions During the prior year the remaining 15% of the controlled entity Chongqing Montec Co Limited was acquired.	- 1 - 1 - 1 - 1 - (1) - (1) - 1 - 1 - - - - - - - - - - - - - - - -
	- - - - - - - -
	- 1 - 1

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 2007.

47

ANNUAL REPORT 2007

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

NOTE 25: EMPLOYEE BENEFITS

Employee Share Option Arrangements

• 5,000,000 options granted on 1 May 2007 to Terry Cuthbertson exercisable on or before 31 December 2010 comprising 1,500,000 options exercisable at $0.12, 1,500,000 options exercisable at $0.18 and 2,000,000 exercisable at $0.25 each.

• 5,000,000 options granted on 1 May 2007 to Peter Herd exercisable on or before 31 December 2010 comprising 1,500,000 options exercisable at $0.12, 1,500,000 options exercisable at $0.18 and 2,000,000 exercisable at $0.25 each.

• 3,000,000 options granted on 1 May 2007 to Xueqin Du exercisable on or before 31 December 2010 with three tranches of 1,000,000 options exercisable at $0.12, $0.18 and $0.25 each.

• 1,600,000 options granted on 1 May 2007 to Lin Yuansheng exercisable on or before 31 December 2010, comprising two tranches of 800,000 options exercisable at $0.12 and $0.18 each.

• 1,600,000 options granted on 1 May 2007 to James Manny exercisable on or before 31 December 2010, comprising two tranches of 800,000 options exercisable at $0.12 and $0.18 each.

• 3,000,000 options granted on 1 May 2007 to Ian Maltman exercisable on or before 31 December 2010, comprising three tranches of 1,000,000 options exercisable at $0.12, $0.18 and $0.25 each.

• 800,000 options granted on 1 May 2007 to employees exercisable on or before 31 December 2010 at $0.12 each.

• 800,000 options granted on 1 May 2007 to employees exercisable on or before 31 December 2010 at $0.18 each.

The closing share market price of an ordinary share of Montec International Limited on the Australian Stock Exchange at 30 June 2007 was $0.043 (30 June 2006: $0.22).

	Consolidated Entity Parent Entity 2007 $ 2006 $ 2007 $ 2006 $
a. Movement in the number of share options held by employees are as follows: Opening balance Granted during the year Exercised during the year Lapsed during the year Closing Balance Exercisable at year end	2,588,000 1,134,000 2,588,000 1,134,000 20,800,000 1,454,000 20,800,000 1,454,000 - - - - (505,000) - (505,000) -
	22,883,000 2,588,000 22,883,000 2,588,000 22,883,000 2,588,000 22,883,000 2,588,000

48

MONTEC INTERNATIONAL LIMITED

NOTE 25: EMPLOYEE BENEFITS (continued)

There were no options exercised during the year ended 30 June 2007.

The options outstanding at 30 June 2007 had a weighted average exercise price of $0.208 and a weighted average remaining contractual life of 3.25 years. Exercise prices range from $0.12 to $0.56 in respect of options outstanding at 30 June 2007. The weighted average fair value of the options granted during the year was $0.0184.

This price was calculated by using a binomial option pricing model applying the following inputs:

==> picture [218 x 72] intentionally omitted <==

----- Start of picture text -----

|||
|---|---|
|- Exercise prices|$0.12, $0.18 and $0.25|
|- Average life of the options|3.67 years|
|- Underlying share price|$0.044|
|- Expected share price volatility|160%|
|- Risk free interest rate|5.98%|

----- End of picture text -----

Historical volatility has been the basis for determining expected share price volatility as it is assumed that this is indicative of the future, which may not eventuate.

The life of the options is based on the historical exercise patterns, which may not eventuate in the future.

Included under employee benefits expenses in the income statement is $381,973 (2006: $58,099), and relates, in full, to equity-settled share-based payment transactions.

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||||||||
|---|---|---|---|---|---|---|
|b. Details of share options outstanding as at end of year:|Consolidated Entity|Parent Entity|
|Grant Date|Expiry and|Exercise Price|2007|2006|2007|2006|
|Exercise Date|$|$|$|$|
|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|
|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|
|23/7/2005|1/7/08|$0.50|24,000|24,000|24,000|24,000|
|28/7/2005|1/7/08|$0.50|1,400,000|1,400,000|1,400,000|1,400,000|
|18/11/2005|1/7/08|$0.50|30,000|30,000|30,000|30,000|
|1 May 2007|31/12/10|$0.12|7,400,000|-|7,400,000|-|
|1 May 2007|31/12/10|$0.18|7,400,000|-|7,400,000|-|
|1 May 2007|31/12/10|$0.25|6,000,000|-|6,000,000|-|
|22,883,000|2,588,000|22,883,000|2,588,000|

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49

ANNUAL REPORT 2007

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

NOTE 25: EMPLOYEE BENEFITS (continued)

c. Details of Shares Granted

• There were no shares granted to employees as remuneration in the financial year ended 30 June 2007 (2006: nil granted).

NOTE 26: EVENTS SUBSEQUENT TO REPORTING DATE

There were no material events subsequent to reporting date.

NOTE 27: RELATED PARTY TRANSACTIONS

==> picture [506 x 390] intentionally omitted <==

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||||||
|---|---|---|---|---|
|Consolidated Entity|Parent Entity|
|2007|2006|2007|2006|
|$|$|$|$|
|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|
|The outstanding loan has been eliminated on consolidation.|
|The inter-company position with Montec International (HK) Limited|
|is as follows:|
|- inter-company receivable|-|-|2,352|-|
|ii. Director-related Entities|
|Director’s fee payable to BAIC Australia Pty Ltd in relation to|
|Mr. Mei Zhan Yan as a director of Montec International Limited|
|during the financial year ended 30 June 2007.|1,363|-|1,363|-|
|iii. Directors|
|No related party transactions with directors of Montec International|
|Limited or controlled entities occurred during the financial year|
|ended 30 June 2007.|
|The following related party transactions with directors of Montec|
|International Limited or controlled entities 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|

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50

MONTEC INTERNATIONAL LIMITED

NOTE 27: RELATED PARTY TRANSACTIONS (continued)

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||||||
|---|---|---|---|---|
|Consolidated Entity|Parent Entity|
|2007|2006|2007|2006|
|$|$|$|$|
|iv. Share Transactions of Directors|
|Share transactions of directors during the financial year|
|ended 30 June 2007 were:|
|-Terry Cuthbertson subscribed for 10,000 shares with|
|attaching options through the rights issue.|500|-|500|-|
|- Peter Herd through Byre Pty Ltd subscribed for 84,460|
|shares and attaching options through the rights issue, and|
|bought 40,000 shares on market on 7th December 2006.|8,823|-|8,823|-|
|- Peter Herd subscribed for 10,000 shares and attaching|
|options through the rights issue.|500|-|500|-|
|- Xueqin Du subscribed for 20,000 shares and attaching|
|options through the rights issue.|1,000|-|1,000|-|
|- James Manny subscribed for 238,000 shares and attaching|
|options through the rights issue in the name of A&P Comestibles|
|Pty Ltd.|11,900|-|11,900|-|

----- End of picture text -----

No share transactions of directors occurred during the financial year ended 30 June 2006.

NOTE 28: FINANCIAL INSTRUMENTS

a. Interest Rate Risk

The consolidated 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:

==> picture [506 x 196] intentionally omitted <==

----- Start of picture text -----

Fixed Interest Rate Maturing
Weighted Floating Within Year 1 To 5 Years Over 5 Years Non-interest Total
Average Interest Bearing
Effective Rate
Interest Rate
$000 $000 $000 $000 $000 $000
2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006
Financial
Assets:
Cash 6.15% 5.65% 3,509 2,272 - - - - - - - - 3,509 2,272
Financial
Liabilities:
Lease liabilities - - - - - - - - - - - - - -
----- End of picture text -----

All other assets and liabilities are non-interest bearing.

51

ANNUAL REPORT 2007

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2007

NOTE 28: 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 counter¬parties 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 consolidated entity does not have any material credit risk exposure to any single debtor or group of debtors under financial instruments entered into by the consolidated 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 consolidated entity has not participated in the use of any derivative financial instruments during the year.

52

MONTEC INTERNATIONAL LIMITED

NOTE 29: 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

Beijing, China

Room 2603, Building No.5, WanDa Plaza 93 Jianguolu Road, Chaoyang District Beijing PRC 100022

Shanghai, China

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

Qingdao, China

Room F, 25 Floor, Shum Yip Centre A, No.9 Shandong Road Qingdao PRC 266071

Montec International (HK) Limited

C/O KCS Limited 8th Floor, Gloucester Tower, The Landmark 15 Queen’s Road, Central Hong Kong

53

ANNUAL REPORT 2007

DIRECTORS’ DECLARATION

FOR THE YEAR ENDED 30 JUNE 2007

The directors of the Company declare that:

1. The financial statements and notes, as set out on pages 18 to 53 are in accordance with the Corporations Act 2001 and:

2. a. comply with Accounting Standards and the Corporations Regulations 2001; and

3. b. give a true and fair view of the financial position as at 30 June 2007 and of the performance for the year ended on that date of the Company and consolidated entity;

4. The Chief Executive Officer and Chief Financial Officer have each declared that:

5. a. the financial records of the company for the financial year have been properly maintained in accordance with section 286 of the Corporations Act 2001;

6. b. the financial statements and notes for the financial year comply with the Accounting Standards; and

7. c. the financial statements and notes for the financial year give a true and fair view.

8. 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.

==> picture [136 x 43] intentionally omitted <==

==> picture [147 x 29] intentionally omitted <==

Terry Cuthbertson Chairman

Peter Herd Managing Director

Dated this 19th day of September 2007

54

MONTEC INTERNATIONAL LIMITED

AUDITOR’S INDEPENDENCE DECLARATION

Chartered Accountants Business Advisers and Consultants

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 2007, 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

• (b) no contraventions of any applicable code of professional conduct in relation to the audit.

GRANT THORNTON NSW Chartered Accountants

N J BRADLEY Partner Sydney 19 September 2007

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 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 International and used under licence by independent firms and entities throughout the world.

54

55

ANNUAL REPORT 2007

INDEPENDENT AUDIT REPORT

FOR THE YEAR ENDED 30 JUNE 2007

Chartered Accountants Business Advisers and Consultants

INDEPENDENT AUDIT REPORT TO THE MEMBERS OF MONTEC INTERNATIONAL LIMITED

Scope

The financial report and directors’ responsibility

The financial report comprises the 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 2007. 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.

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 Thornton NSW ABN 25 034 787 757

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.

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 International and used under licence by independent firms and entities throughout the world.

55

56

MONTEC INTERNATIONAL LIMITED

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 2007 and of their performance for the year ended on that date; and

• (ii) 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

N J BRADLEY Partner Sydney 19 September 2007

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56
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57

ANNUAL REPORT 2007

ADDITIONAL INFORMATION

The following additional information is required by the Australian Stock Exchange Ltd in respect of listed public companies.

1. Shareholding

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|||
|---|---|
|a.|Distribution of Shareholders Number as at 26 September 2007|
|Category (size of Holding)|Ordinary|
|1 – 1,000|25|
|1,001 – 5,000|146|
|5,001 – 10,000|164|
|10,001 – 100,000|434|
|100,001 – and over|230|
|999|

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b. The number of shareholdings held in less than marketable parcels is 509.

c. The names of the substantial shareholders listed in the Company’s register as at 26 September 2007 are:

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|||
|---|---|
|Number|
|Shareholder|Ordinary|
|BAIC Australia Pty Limited|7,692,308|

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d. Voting Rights

The voting rights attached to each class of equity security are as follows:

Ordinary shares

The right to vote at a general meeting of shareholders (whether present in person or by any representative, proxy or attorney) on a show of hands (one vote per shareholder) and on a poll (one vote per share).

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MONTEC INTERNATIONAL LIMITED

e. 20 Largest Shareholders as at 26 September 2007 — Ordinary Shares

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Name Number of Ordinary % Held of
Fully Paid Shares Held Issued Ordinary
Capital
1 BAIC AUSTRALIA PTY LIMITED 7,692,308 5.08
2 RBC DEXIA INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED 6,540,251 4.32
3 INVIA CUSTODIAN PTY LIMITED 4,400,000 2.91
4 MR MALCOLM CAMPBELL 4,247,111 2.81
5 MR PHILLIP ANTHONY RIOLO 3,200,000 2.11
6 PERPETUAL TRUSTEE COMPANY LIMITED 3,078,306 2.03
7 MRS KERRI ANN HENDRY 2,590,000 1.71
8 UBS WEALTH MANAGEMENT AUSTRALIA NOMINEES PTY LTD 2,574,465 1.70
9 MR HENRY HERRON 2,531,400 1.67
10 MRS JANICE MARGARET HOCKING 2,468,314 1.63
11 SHERGOLD PTY LTD 2,400,000 1.59
12 FELTRIM PASTORAL CO PTY LTD 2,000,488 1.32
13 MR GARY DAVID MARES 2,000,000 1.32
14 GE COMMERCIAL CORPORATION (AUSTRALIA) PTY LIMITED 1,897,437 1.25
15 AWESOME NOMINEES PTY LTD 1,850,000 1.22
16 MR GARY DAVID MARES & MRS SUE MAREE MARES 1,750,000 1.16
17 MR CHRISTOPHER BRYCKI 1,700,000 1.12
18 MRS PRUDENCE ANN LOWTHER 1,600,000 1.06
19 MR STEPHEN THOMAS PIRRIE 1,521,900 1.01
20 MR BORIS JANSEN 1,482,800 0.98
57,524,780 38.00
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2. The name of the Company Secretary is Mr Nick Geddes. Mr Geddes qualifications are:

• Fellow -The Institute of Chartered Accountants in England and Wales (FCA)

Fellow- The Institute of Chartered Accountants in Australia

Fellow- Chartered Secretaries Australia

Fellow- Chartered Institute of Chartered Secretaries

3. The address of the registered office in Australia is:

Level 5, 255 George St Sydney NSW 2000 Telephone: 02 9252 1933

The address of the Company’s Australian Head Office is:

Level 6, 55 York St Sydney NSW 2000 Telephone: 02 9299 0011

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ANNUAL REPORT 2007

ADDITIONAL INFORMATION - continued

4. Registers of securities are held at the following address

New South Wales Registries Limited 28 Margaret St Sydney NSW 2000

5. Stock Exchange Listing

Quotation has been granted for all the ordinary shares of the Company on all Member Exchanges of the Australian Stock Exchange Limited.

6. Difference in Results Reported to Australian Stock Exchange

The results reported on 30 August 2007 to the Australian Stock Exchange in the preliminary final report do not differ from the results reported in these accounts.

7. Unquoted Securities

Options over Unissued Shares

A total of 99,931,516 options were on issue as at 30 June 2007 to 443 holders of ordinary securities. Of the 99,931,516 options on issue as at 30 June 2007, 77,048,516 were listed. Un-listed options on issue to directors under the Montec International Limited employee option plan totaled 17,000,000.

8. Restricted Securities

Ordinary Shares

Of the 151,364,518 ordinary shares on issue as at 30 June 2007, all were quoted on the Australian Stock Exchange. Escrow restrictions applied as follows:

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Ordinary Shares Escrow release Period
4,200,000 12/11/07 48 months (voluntary)
4,200,000
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Options

No options are subject to escrow restrictions.

9. Cash Utilisation

Montec International Limited has applied the cash, and assets readily convertible to cash, held at the time of admission to the official list of the Australian Stock Exchange on a basis entirely consistent with its business objectives, as outlined in the company’s listing prospectus dated 22 September 2003.

60

MONTEC INTERNATIONAL LIMITED

Corporate DireCtory

Principal Registered Office

Level 5, 255 George Street Sydney NSW 2000 Phone: 02 9252 1933 Facsimile: 02 9252 0188

Auditors

Grant Thornton NSW Level 17, 383 Kent Street Sydney NSW 2000

Solicitors

Australian Head Office

Level 6, 55 York Street Sydney NSW 2000 Phone: 02 9299 0011 Facsimile: 02 9299 1499

Deacons 1 Alfred Street Circular Quay Sydney NSW 2000

Share Registry

Investor Relations

Phone: 02 9299 0011 Facsimile: 02 9299 1499 Email: investors@montec-international.com.au

Registries Limited Level 2, 28 Margaret Street Sydney NSW 2000 Phone: 02 9290 9600 Facsimile: 02 9279 0664

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