MAGONTEC LIMITED - Annual Report 2008

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ANNUAL REPORT

2008

commercialising advanced materials solutions

EXECUTIVE CHAIRMAN’S MESSAGE

The year 2008 will, I believe, turn out to be a pivotal one for your company. It was the year in which a clear direction was defined that will build Advanced Magnesium Limited (AML) into a successful, highly profitable company. We have significantly reduced operating costs, simplified the organisational structure and broadened our marketing strategy.

At the beginning of the 2008 financial year, the focus was on achieving market breakthrough with AM-lite while further developing and commencing industrial trials of AM-HP2plus. Today, while the success of AM-lite remains very important we are looking to other sources of revenue in the immediate future. In particular, AM-cover and AM-converter will be our major cash generators in 2009.

It is expected that during the third quarter of financial 2009 we will also be generating cash flows from AM-Ex1. We are anticipating that in the second half of 2009, we should generate a cash flow in excess of our cash ‘burn’ or cash outflow and will in all probability be profitable.

My confidence in the potential profitability of your company is based on the successful refocussing of our business. Shortly after last year’s annual general meeting in which our shareholders supported the company’s board and management in pursuing its strategy of survival, your board determined that in order to ensure survival and long term viability we had to broaden our thinking. It was determined that we should accelerate the further development of AM-Ex1 and AM-cover and to increase our marketing effort for both AMcover and AM-converter. Our thinking was based on the view that your company is ideally positioned to pursue two critical themes that are in many ways governing our future:

The rise of emerging markets
The need for environmental solutions

The rise of emerging markets

The acronym BRIC is commonly used to define the emerging industrial economies, Brazil, Russia India and China. Your company with its limited resources is only focussing on one of those markets, China. We have built a strong presence in China over the past year. We have opened an office in Shanghai which is headed up by a Chinese national and who is supported by an assistant and a magnesium die casting and electroplating expert who also both speak English as well as Mandarin. The drive, energy and enthusiasm in that office is infectious and in 2009 I expect that the China office will be responsible for the large part of our operating revenue. We have broadened the focus in China from AM-lite die casting and electroplating ‘only’ to producing and marketing our full suite alloys and products in China.

Our understanding of China and how to do business there is a competitive advantage and a strong feature of our business model. We have over the past few years in China developed strong links with the subsidiaries of a number of Taiwanese die casters and electroplaters. In recent months we have broadened our relationship focus to include Chinese owned primary magnesium producers, billet casters, magnesium extrusion companies and die casters and electroplaters servicing the Chinese domestic market. The broadening of our marketing strategy has taken us away from the coast of China – Shanghai, Shanjing and Shenzhen – to magnesium territory in places such as Shanxi, Ningxia, Henan, Shaanxi and Inner Mongolia. One outstanding business opportunity has resulted from these more distant travels – the re-melting by AM-converter of magnesium crowns which result from the pidgeon process that produces primary magnesium from dolomite. We believe that the primary magnesium producer market for AM-converter could be in excess of 250 units with a probable 25 plus sales in this financial year. We are also

confident that both cold chamber and hot chamber die casters in not only China but also Japan will boost the likely sales of AM-converter for 2009 to over 40 units in total. To meet this forecast growth in demand; we are presently negotiating a manufacturing licence agreement with a Chinese engineering company.

The need for environmental solutions

Magnesium is a metal for the 21[st] century. It is light weight, recyclable and versatile. The diversity of your company’s suite of alloys and production process technologies means that we are well positioned to take advantage of opportunities in industries as diverse as 3C’s (cameras, cell phones, computers) with AM-lite and the automobile industry with AMHP2 plus and AM-Ex1.

However, it is with AM-cover and AM-converter that we expect to make the biggest immediate financial and environmental impacts.

The growing global concern over climate change has lead to an interest within the magnesium industry to find an alternative to the SF6 based protective atmosphere that has been used for the past 35 years. The greenhouse effect or Global Warming Potential (GWP) of SF6 is 23,900 times that of C02. The emergence of mechanisms, under the direction of the UN, to quantify reductions of greenhouse gas emissions, and the establishment of markets to trade carbon credits generated from these reductions has resulted in significant financial incentive to implement technologies such as AM-cover, which reduces greenhouse emissions by over 97%.

AM-cover is one of three alternatives approved by the UN in their methodology to replace SF6 in the magnesium industry. AM-cover offers excellent protection of magnesium and compared to the other alternatives there are significant advantages in safety and implementation. Companies specialising in carbon credit trading and facilitating the complex process for approval of emission reduction projects have taken notice of the potential offered in switching from SF6 to AM-cover. Aggressive marketing by these firms is expected to result in significant opportunities for growth in the licensing of AM-cover during the next year. For the magnesium industry the carbon credit revenue resulting from switching to AM-cover removes financial barriers to making the change. For your company, the availability of carbon credit revenue opens the possibility of negotiating a share of this revenue and structuring a more flexible licensing arrangement for the use of AM-cover. The revenue from just a small share of the potential carbon credits can be two to four times that available from the expected AM-cover licensing fee.

AM-converter is being successfully used for in cell recycling by cold chamber die casters in Europe and North America. Its potential market has been broadened to include hot chamber die casters and Chinese primary producers and in the past few months it’s environmental credentials have been recognised. In addition to enabling users to reduce operating costs and increase productivity, AM-converter operators are able to lower the use of cover gas, decrease energy use and emissions and substantially reduce waste that would go to landfill.

2008 was a year in which we reshaped your company by focussing more on the fast growth areas – China and the environment – rather than on marketing specific products. In essence, we brought solutions to our customer base that resulted in AM-cover and AM-converter becoming our key products as we moved into financial year 2009.

We are confident that our strategy is right for today’s magnesium industry challenges and as we move forward we will continue to adapt the strategy to the changing

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 1

EXECUTIVE CHAIRMAN’S MESSAGE

environment. Key initiatives in 2009 will include:

AM-converter : further engineering and process optimisation work to be done to perfectly adapt it to the needs of hot chamber die casting and primary magnesium crowns remelting. Goal of unit sales of 40 in 2009.
Am-cover : aggressive marketing in tandem with carbon credit scheme partners in the developing country markets. Goal of 10 new customers in 2009
AM-lite : electroplating process now proven in a volume production environment. Now that the price of magnesium has fallen back to first half of 2007 levels, a reinvigorated marketing plan is now being executed. Goal of achieving sales revenue of over $700,000 in 2009.
AM-Ex1 : The ‘bolter’ in our suite of alloys. We accelerated the AM-Ex1 development program with CAST during 2008 with the goal of producing an alloy possessing extrusion properties equal to those of the AA 6063 aluminium extrusion alloy. Key to the success of AM-Ex1 will be its extrusion speed and a number of trials and properties tests will be performed over the next few months. Assuming that the extrusion speed and other properties seen in the development phase are exhibited in volume industrial production trials, we expect that along with our billet casting and extrusion partners we will be running further trials with OEM’s. We already have interest in trialling AM-Ex1 with a major US automotive company as well as interest from diverse companies in Japan and Europe. Goal: complete successful billet casting and extrusion trials and implement a selective marketing program.

particularly when compared to an operating cash outflow of just over $7million or $585,000 per month in 2007. This represents a reduction in cash outflow of $267,000 per month which in the context of our long term survival will prove to be vital. By this I mean that your company is now well positioned to become financially viable in 2009. As at the date of this report we had approximately $2.35million in cash. We are forecasting cash expenditures of $2.3million to end June 2009. Moving into the 2010 financial year the revenue generating momentum will build such that I expect your company to be both profitable and cash flow positive for the full year.

Your company needed to change and change quickly. We were “burning” cash at an unacceptably high rate while our strategic initiatives were making little or no progress in the market place. We now have the right team and the right strategies for today and more importantly for tomorrow’s challenges.

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STUART FITTON

EXECUTIVE CHAIRMAN

AM-HP2 plus – we continue to run trials with leading European die casters. In 2009 we will commence trials with Japanese and Chinese die casters which serve the automobile sector’s in those countries. We remain confident that AM-HP2 plus possesses the properties and die castability to become the referred engine and drive transmission magnesium alloy post 2010. We will continue to develop the alloy with the intention of having two grades of AM-HP2 plus – one for high temperatures, high creep resistant engine and transmission castings and a reduced specification, lower cost alloy for less demanding uses.

As well as reshaping your company during 2008 we have always been mindful of the need to remain very disciplined in our capital allocation. We have again reduced our cost base while meeting all our financial commitments. In 2008, we had an operating cash outflow (spend) of over $3.8million or $317,000 per month. There were additional one off cash spend items of $464,000, largely relating to redundancy payments and relocation expenses.

The cash management performance in 2008 was excellent

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CORPORATE GOVERNANCE STATEMENT

A summary of the Company’s main corporate governance practices, as well as any disclosures required by the Australian Stock Exchange’s “Principles of Good Corporate Governance and Best Practice Recommendations”, is set out below.

Composition of the board

The Board reviews the mix of experience, expertise and other qualities of the Directors. If a vacancy occurs on the Board, or if the Board is to be increased, the Board will identify the experience, expertise and other qualities sought and identify appropriate candidates. The Remuneration and Appointments (REM) Committee considers these matters in concert with the Board.

Directors retiring by rotation do not seek re-election at an Annual General Meeting if they have reached 69 years of age on or before the date of that meeting. In any event, Directors retire from the Board on reaching 70 years of age.

Board responsibilities

The Directors are responsible for protecting the rights and interests of the Shareholders through the development of sound strategies, ensuring their implementation, and by the development of an integrated framework of controls over the Company’s resources, functions and assets.

The Board’s responsibilities include:

Steering strategic directions and establishing goals for management;
Monitoring performance against these goals and objectives;
Ensuring there are adequate business controls and ethical standards of behaviour;
Appointing the Chief Executive Officer or equivalent, evaluating performance and determining the remuneration of the Chief Executive Officer and senior executives;
Ensuring the significant risks facing the business have been identified and the appropriate and adequate control monitoring and reporting mechanisms are in place; and
Ensuring there are policies and procedures for recruitment, training, remuneration and succession planning.

Committees of the board

The Board of AML has established and continues to operate the following committees:

Finance, Audit and Compliance Committee; and
• Remuneration and Appointments Committee.

Each Committee is chaired by a Non-Executive Director and is comprised of a majority of Non-Executive members. The committee terms of reference outline committee responsibilities and are available on request.

Membership and attendance at Board Committees is detailed in the Directors’ Report.

Independence of directors

It is important to have a Board of an effective composition, size and commitment to adequately discharge its responsibilities and duties. On 9 July 2007 with the resignation of the Managing Director, Mr Fitton was requested and agreed to become the Executive Chairman. From 9 July 2007 to 30 June 2008, the Board comprised the Executive Chairman, and three Non-Executive Directors. Mr Greg Ralph resigned as a Non-Executive Director on 25 August 2008.

The Directors met whenever necessary.

Internal controls framework and risk management

The Board is responsible for the overall business control framework, but recognises that cost-effective control systems will not necessarily preclude all errors and irregularities. To assist in discharging this responsibility, the Board has instigated a Business Control Framework designed to safeguard the Group’s assets and interests and to ensure the integrity of reporting. In addition, the Board constantly monitors the operational and financial aspects of the Company’s activities. Through the audit committee, the Board considers the recommendations and advice of external auditors and other external advisors on the operational and financial risks that face the Company.

The Business Control Framework identifies risk management as a key area which is subject to regular reporting to the Board. In addition, the Board investigates ways of enhancing existing risk management strategies, including appropriate segregation of duties, and the employment and training of suitably qualified and experienced personnel.

ASX First Edition Principles of Good Corporate Governance

The following recommendations are made under the above guidelines.

Recommendation 2.2 – “The chairperson should be an independent director.”

Recommendation 2.3 – “The roles of chairperson and chief executive officer should not be exercised by the same individual.”

Recommendation 4.3 – “Structure the audit committee so that it consists of only non executive directors……”

Recommendation 6.2 – “Request the external auditor to attend the annual general meeting……..”

Recommendation 7.2 – Statement in writing to the board by CEO and CFO as to certain risk management practices.

The board is highly cognisant of its fiduciary and corporate governance responsibilities to shareholders. AML is a company in the development stage of its products and markets and as such generates limited revenue relying on equity capital raisings for cash flow. There is great pressure to satisfy the goals of successful commercialisation of its proprietary alloy and magnesium production technologies within the constraint of limited

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 3

CORPORATE GOVERNANCE STATEMENT

funding. It is a management challenge quite different to the challenges confronting an established business. The act of judiciously allocating funding to the commercialisation tasks and management practices is one that requires careful balance.

The current corporate governance practices have been undertaken only after due consideration of this balance.

Remuneration

The overall role of the REM Committee is to ensure that Company remuneration policies and practices are consistent with the Company’s goals and objectives. Written detailed terms of reference have been completed.

All directors, managers and staff are expected to act with the utmost integrity and objectivity, in their dealings with each other, competitors, suppliers, customers and the community, striving at all times to enhance the reputation and performance of the business. Every employee has a nominated supervisor to whom they may refer any issues arising from their employment.

The requirement to comply with these ethical standards is taken as a matter of course and is emphasised to all employees.

Continuous disclosure and shareholder communication

The Company has a written continuous disclosure policy.

Directors’ and executives’ remuneration is presented in the Directors’ Report and in Note 4 to the financial statements.

Independent professional advice

When Board members require advice, it is sought as advice for the full Board and each member has unrestricted access to that advice and may suggest issues on which such advice should be sought.

However, if an individual Director requires separate advice then, with the prior approval of the Chairman, which must not be unreasonably withheld, that Director may seek that advice at the Company’s expense.

Performance assessment

The Board reviews Key Performance Indicators (KPIs) for the Managing Director/Executive Chairman and the Management Team set on an annual basis. These annual KPIs are mutually agreed by the employee and his/her supervisor. The KPIs reflect the employee’s ability to add value to the entity by ensuring productive gains such as increasing efficiencies, reduction in costs and increased profitability by maximising sales volumes and margins on sale revenues. Variable and long term incentives will only be paid if set objectives are achieved.

Non-Executive Directors do not receive any performance incentive payments.

External auditor

The appointment of the external auditor, the audit fee, and any questions of resignation or dismissal are considered first by the FAC Committee. The FAC Committee then conveys its recommendation to the full Board. Our current external auditor, Deloitte, was first appointed in late 1999. It is Deloitte’s policy to rotate audit engagement partners on listed companies at least every five years. In practice, however, our audit engagement partner was changed for the 2001, 2004 financial year audit and again in December 2006.

The Company Secretary is responsible for communications with the Australian Stock Exchange (ASX), including compliance with the ASX continuous disclosure requirements. These responsibilities are specified in the Company Secretary’s written position description. The charter of the Finance, Audit and Compliance Committee also specifically includes the review of compliance with ASX and legal requirements.

Through regular shareholder communications such as the Annual Report, Quarterly Reports, and periodic Stock Exchange Reports, the Board informs shareholders of significant developments affecting the Company. All company announcements are immediately posted on the company website. Shareholders are explicitly encouraged to attend general meetings in notices of meeting.

Dealing in shares

The Company has a formal share dealing policy for all employees. This policy reinforces the restrictions in the Corporations Act 2001 with respect to insider trading and use of price sensitive information.

Under the terms of the policy applicable to company staff, AML securities may only be sold or purchased outside the restricted period. The restricted period occurs during the following times:

Two weeks prior to a Board Meeting.
One month prior to the release of the half yearly results or the annual results.
One week prior to the release of the quarterly reports.

If a special need arises for employees to deal outside the window period they are required to contact the Company Secretary prior to entering into the transaction so that Management can determine whether the dealing would be prohibited under the Corporations Act 2001.

Ethical standards

AML has adopted the following Statement of General Principles that applies to all of AML’s business affairs and describes the behaviour expected of every employee. The principles are founded in the core values of honesty, integrity and respect for people.

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DIRECTORS’ REPORT

The Directors of Advanced Magnesium Limited submit herewith the Annual Financial Report of the Company for the financial year ended 30 June 2008. In order to comply with the provisions of the Corporations Act 2001, the Directors report as follows:

The names and particulars of the Directors of the Company at the date of signing this Report are:

Board of Directors

MR STUART FITTON Non-Executive Chairman (appointed 2 May 2007) B. Ec. Executive Chairman (from 9 July 2007)

Member of Finance, Audit & Compliance (FAC) Committee Member of Remuneration & Appointments (REM) Committee

Mr Fitton (61) has had experience in global finance and corporate advisory roles in Australia, the UK and the United States. Stuart has been employed as a senior executive with Barclays Bank, Citibank, Bain and Co and GE Capital. He is also a former finance director of MIM Holdings. Stuart brings to Advanced Magnesium an understanding of global capital markets and a wealth of management experience.

MR NICHOLAS ANDREWS

BEc., MSDIA, MAICD.

Non-executive Director (appointed 10 May 2007)

Chairman of the Remuneration & Appointments Committee

Mr Andrews (51) has held a variety of positions in the Australian financial sector over the last 25 years. Nick has spent 10 years with a global investment bank in management and sales in London and Sydney, and 11 years as an institutional equities investor in large and small cap securities in Australia before co-founding Pegasus Corporate Advisory in 2005.

MR MICHAEL BROWN Non-executive Director (appointed 10 May 2007) LLB, MAICD, MSDIA Member of Finance, Audit & Compliance Committee Member of Remuneration & Appointments Committee

Mr Brown (40) has held leadership and senior research positions with global investment bank terms over 17 years in Sydney, London, Hong Kong and New York before co-founding Pegasus Corporate Advisory in 2005.

The name and particulars of the Directors of Mr G Ralph a director who resigned on 25 August 2008 (before the date of this report) are:

MR GREGORY RALPH

B. Com., M. Com., FCA.

Non-executive Director (appointed 2 May 2007) (resigned 25 August 2008) Chairman of the Finance, Audit & Compliance Committee

Mr Ralph (52) is the Managing Partner of Gould Ralph & Company, Chartered Accountants and has been engaged in professional practice for over thirty years. Greg commenced his career with Peat Marwick Mitchell (now KPMG) in Sydney before founding Gould Ralph & Company in 1982. His professional practice largely involves listed companies and other public interest entities where he has audited and consulted across a broad range of industries. Additionally, Greg has assisted a number of companies achieve quotation on the ASX and SGX and brings significant experience in the commercialisation of technologies through his involvement with venture capitalists, including CVC.

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DIRECTORS’ REPORT

Directors who held office during and since the end of the financial year were:

Mr Stuart Fitton – appointed 2 May 2007
Mr Gregory Ralph – appointed 2 May 2007 (resigned 25 August 2008)
Mr Nick Andrews – appointed 10 May 2007
Mr Michael Brown – appointed 10 May 2007
Mr Ian Hartnell * – resigned 9 July 2007
Particulars of this Director are included in the 2006 Annual Report.

Directorships of other listed companies

Directorships of other listed companies held by current directors in the three years immediately before the end of the financial year are as follows:

Director and Company	Period of Directorship
Mr S Fitton
Emeco Holdings Limited	Since April 2006
PR Finance Group Limited	Since March 2007

During the financial year Mr Fitton resigned from both of these non executive directorships.

Company Secretary

MR JD TALBOT

B Bus (Acctg), CPA

Mr Talbot (62) joined AML in February 2008. Prior to 2000 he was a senior executive in the Commonwealth Bank of Australia. Since that date he has been engaged as a financial consultant in the corporate finance field.

Principal activities

The principal activities of the consolidated entity during the course of the financial year consisted of:

Researching and developing new proprietary magnesium alloys and technologies which will be required to support the future needs of automotive and other downstream users;
Creating markets for these new alloys and technologies by supporting in-house demonstration trials and programs for developing new applications in alliance with these customers; and
Manufacturing and selling these new alloys and technologies to its customers for a profit.

Directors meetings

	Board	Meetings	Committee
			Meetings*
Director	Attended	Held	FAC	REM
Mr S Fitton	9	9	_
Mr G Ralph	9	9	_	2
Mr N Andrews	9	9	_	2
Mr M Brown	9	9	_	2
Mr ID
Hartnell	_	_	_	_

Directors’ shareholdings

The following table sets out each director’s relevant interest in shares, debentures, and rights or options in shares or debentures of the Company or a related body corporate as at the date of this report.

Director	Security Type	Amount of
		shares
Mr S Fitton	Ordinary	1,585,589
Mr G Ralph	Ordinary	583,333
Mr N Andrews	Ordinary	1,100,000
Mr M Brown	Ordinary	1,072,222

Director	Options	Amount of
		Options
Mr N Andrews	25 cent options	400,000*
Mr M Brown	25 cent options	400,000*

* A total of 400,000 options are held in the name of Pegasus Corporate Advisory with an expiry in October 2008. Messrs Andrews and Brown are the sole Directors of this entity.

The following table sets out the number of directors meetings (including meetings of committees of directors) held during the financial year and the number of meetings attended by each director (while they were a director or committee member).

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DIRECTORS’ REPORT

Remuneration report

(a) Key management personnel - unaudited

The key management personnel of Advanced Magnesium Limited during the year were:

Mr S Fitton – Chairman of the Board
Mr G Ralph – Non-Executive Director and Chairman of FAC committee (resigned 25 August 2008)
Mr N Andrews – Non-Executive Director and Chairman of REM Committee
Mr M Brown – Non-Executive Director
Mr ID Hartnell – Managing Director (resigned 9 July 07)
Prof. G Dunlop – General Manager - Technology Development (resigned 11 July 2008)
Mr T Abbott – General Manager – Alloy Development & R & D
Dr C Kettler – General Manager - Europe
Mr PK Nair – General Manager – Corporate (resigned 7 February 2008)
Mr JD Talbot – Chief Financial Officer (appointed 12 February 2008)
Mr T Sweder – General Manager - North America (resigned 6 June 2008)

(b) Key management personnel compensation policy - audited

The aggregate amount of Non-Executive Directors’ fees is approved by Shareholders and is currently limited to $600,000 per annum. Any increase must be approved by Shareholders. The Board decides how that aggregate or a lesser amount is divided between the Directors.

For 2007-08, the directorship fees for Non-Executive Directors remain at $40,000 per year. Fees for the Chairman of the FAC Committee are $12,500 per annum and fees paid to each Non-Executive member are $5,000. Mercer HR Consulting have advised that the Non-Executive Directors and Committee fees reflect current market practice for comparable companies.

Fees payable to members of the REM Committee are equivalent to the FAC Committee.

In consideration for Non-Executive Directors agreeing to waive any entitlement to Director or Committee fees to 30 June 2008, a motion was approved by shareholders at the 2007 AGM on 28 September 2007 for the receipt of shares in lieu of cash for services from 1 July 2007.

During the financial year 583,333 shares were issued to each of Messrs Ralph and Andrews and 555,556 shares issued to Mr Brown. Superannuation contributions of $2,363 were paid to each of Messrs Ralph and Andrews and $2,250 to Mr Brown. This reflected 50% of the superannuation contribution due on foregone fees with the remaining contribution to be paid in 2008/09.

Remuneration and other terms of employment are formalised in employment agreements. Each agreement provides the ability to salary sacrifice benefits and an eligible bonus scheme and are open ended. Personnel are entitled to annual, long service and sick leave as prescribed by local or Queensland legislation. Entitlements under foreign jurisdiction laws in relation to pensions are also reflected in the specified remuneration details, where applicable. Termination of the employment may be effected by either the company or the executive at any time with either four weeks or one month written notice.

A standard redundancy termination benefit of three weeks for each year of service applies to all specified personnel. In addition, specified personnel over 45 years of age receive four weeks and over 55 years of age receive eight weeks on redundancy.

Employees are subject to annual salary reviews. AML group employee salaries are also adjusted to average market rate if appropriate.

(c) Elements of remuneration related to performance - audited

The Board of Directors’ policy on remuneration is as follows:

Each Executive or employee has an individual written contract outlining the terms and conditions under which that person is engaged;
When an executive or an employee is recruited, the Group’s aim is to reward its staff at market rates within the manufacturing technology industry as determined and in consultation with the employment agency;
The individual’s package is flexible and can incorporate salary sacrifice components making the individual’s package tax effective;
The aim of the remuneration policy is to retain key employees and to align employee interests with Company performance and Shareholders’ interests; and
An Employee Share Option Plan (ESOP) has been established comprised of two components:
(i) An initial issue of options was made in October 2005 which was approved by shareholders and amongst other things was based on the position held by the employee, their length of service and the contribution made by the employee to the Company; and
(ii) Subsequent issues of options will be based on the achievement of specific performance criteria to be approved by the Board on an annual basis. Non-Executive Directors are not entitled to participate in the ESOP. The ESOP is designed to provide personnel with options, which links their rewards to the future success of the Company and to shareholders objectives. In the current year there were no issue of options under this form.
Staff remuneration has three components: (i) Base or fixed remuneration;
(ii) Variable (at risk) performance (there were no bonuses awarded under this criterion during the year); and
(iii) A long-term incentive in the form of options.
• Each employee has a set of key performance indicators (KPIs) mutually agreed by the employee and his/her supervisor established on an annual basis. The KPIs reflect the employee’s ability to add value to the entity and increase shareholder wealth by ensuring productive gains such as increasing efficiencies, reduction in costs and increased profitability by maximising sales volumes and margins on sale revenues. Variable and long term incentives will only be paid if set objectives are achieved.

This Board Policy will be reviewed by the Remuneration and Appointments Committee as required, and where appropriate make recommendations to the Board if any amendment is required.

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DIRECTORS’ REPORT

Remuneration report (continued)

(d) Key management personnel – unaudited

The following tables disclose the remuneration of the key management personnel of the Company for the financial year with comparatives for the prior year:

Financial Year ended 30 June 2008:

	Short-term employee benefits	Post-employment benefits	Share based payments	Total
	Salary & fees Bonus Non- monetary	Super- annuation Other
	$ $ $	$ $	$	$
Mr ID Hartnell_(1) Mr S Fitton Mr G Ralph(2) Mr N Andrews Mr M Brown Prof. G Dunlop(3) Mr T Abbott Dr C Kettler Mr PK Nair(4) Mr T Sweder(5) Mr J Talbot(6)_ Total	181,612 -	6,885 -	0	188,497
	117,692 -	10,592 -	193,982	322,267
	0 -	2,363 -	81,667	84,029
	0 -	2,363 -	81,667	84,029
	0 -	2,250 -	77,778	80,028
	183,420 -	91,580 -	0	275,000
	142,819	37,181	0	180,000
	181,770 -	0 -	0	181,770
	292,639 -	38,750 -	45,000	376,388
	108,510 -	0 -	0	108,510
	39,083 -	0 -	0	39,083
	1,247,545 0 0	191,964 0	480,094	1,919,602

(1) Mr Hartnell retired from the Board on 9 July 2007.

(2) Mr Ralph resigned from the Board on 28 August 2008.

(3) Mr Dunlop retired on 11 July 2008

(4) Mr PK Nair resigned 7 February 2008

(5) Mr Sweder resigned 6 June 2008

(6) Mr Talbot appointed 12 February 2008

Financial Year ended 30 June 2007:

	Short-term employee benefits	Post-employment benefits	Share based payments	Total
	Salary & fees Bonus Non- monetary	Super- annuation Other
	$ $ $	$ $	$	$
Dr CD Rawlings_(1) Mr ID Hartnell(4) Mr DM Byrne(1) Mr KG Williams(1) Mr S Fitton(2) Mr G Ralph(2) Mr N Andrews(3) Mr M Brown(3)_ Prof. G Dunlop Mr G Fotheringham (5) Dr C Kettler Mr PK Nair Mr T Sweder Total	54,166 - -	4,875 -	-	59,041
	212,320 - 1,702	105,112 -	-	319,134
	10,000 - -	30,875 -	-	40,875
	39,875 - -	7,812 -	-	47,687
	- - -	- -	-	-
	- - -	- -	-	-
	- - -	- -	-	-
	- - -	- -	-	-
	163,535 - 1,702	101,046 -	-	266,283
	132,097 - -	41,892 -	-	173,989
	203,198 - 25,000	- -	-	228,198
	146,110 - 1,702	72,003 -	-	219,815
	206,000 - -	- -	-	206,000
	1,167,301 - 30,106	363,615 -	-	1,561,022

(1) Mr Rawlings, Mr Byrne and Mr Williams retired from the Board on 2 May 2007.

(2) Mr Fitton and Mr Ralph were appointed to the Board on 2 May 2007.

(3) Mr Andrews and Mr Brown were appointed to the Board on 10 May 2007.

(4) Mr Hartnell retired from the Board subsequent to year end on 9 July 2007.

(5) Mr Fotheringham’s position was made redundant in July 2007.

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DIRECTORS’ REPORT

Remuneration report (continued)

(e) Value of options issued to key management personnel

The Key Management Personnel of Advanced Magnesium Limited were not granted any options and did not exercise any options during the financial year. Options previously issued to Mr ID Hartnell (656,000), Mr G Fotheringham (164,375), Mr P Nair (373,775) and Mr T Sweder (150,000) expired upon their departure from the company. Additionally, 320,000 unreconciled options were also treated as expired.

(f) Value of options – basis of calculation

Under the Employee Share Option Plan approved on 4 October 2005, options allowing subscription of up to 5% of the issued share capital of AML are available for issue to employees, with options over a further 5% of the issued share capital in the future based on performance.

For the options granted to employees in October 2005, these are unlisted options and exercisable at any time upon payment of the exercise price of $0.31 and expire 5 years from issue on 13 October 2010. A Black and Scholes model was used to value these options at a theoretical value of 3.1 cents each based on a volatility of 188% (as quoted by Bloombergs). The unexpired options under the Employee Share Option Plan as at 30 June 2008 (676,500) have been revalued to $20,972 (refer Note 17).

Review of Income Statement and operations

Sales revenue Cost of sales Gross profit Other income Expenses Loss before income tax expense Income tax expense Loss from continuing operations Profit from discontinued operations Loss attributable to members of the parent entity	S UMMA RY C ON S OLIDA TE D
	30 June 30 June
	2008 2007
	$ $
	170,423 478,673
	(93,630) (266,133)
	76,793 212,540

	500,563 552,980
	(4,399,483) (6,675,118)
	(3,822,126) (5,909,598)
	0 (40,117)
	(3,822,126) (5,949,715)
	0 49,351
	(3,822,126) (5,900,364)

Principal sales revenue for the financial year ended 30 June 2008 comprised $44,183 in respect of AM-converter royalties and $52,928 AM-lite revenues from trials and testing. Other income mainly comprised interest revenue of $283,219.

Management has focused on reducing operating expenditure during the year, resulting in reductions in all expense captions with the exception of recoverable amount write downs.

Discussion on the entity’s business strategies and its prospects for future financial years are covered in the Executive Chairman’s Message.

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 9

DIRECTORS’ REPORT

Review of Balance Sheet

*Assets* Cash Receivables Inventories Property, plant & equipment Prepayments and other Total *Liabilities* Payables and Other Liabilities Provisions Other Total Net Assets	CO N S OLIDA TED
	30 June 30 June
	2008 2007
	$ $

	2,996,128 6,564,759
	64,082 111,760
	204,081 272,018
	33,301 268,615
	34,462 101,526
	3,332,054 7,318,678


	58,913 230,733
	71,602 317,915
	0 63,200
	130,514 611,848
	3,201,540 6,706,830

The financial position of the AML Group is largely reflected in the cash balance of $2.99m. This reflects the nature of the business as one reliant mainly on intangible assets, namely its human resource capital and intellectual property, neither of which are recognised in the balance sheet. The significant reduction in Provisions in 2008 largely reflects reduced liabilities for staff benefits (annual leave and long service leave) following the departure of various staff.

Review of Cashflow

*Opening Cash Balance* Inflows Receipts from customers Sale of plant and equipment Share options exercised Interest received Outflows Operating activity outflows and other (net) Purchase of plant and equipment Net Cash Inflows/ (Outflows) *Closing Cash Balance*	CO N SO LIDA TED
	30 June 30 June
	2008 2007
	$ $
	6,564,759 12,109,140

	196,130 588,297
	278,213 200,221
	23,250
	250,253 696,197


	(4,277,566) (7,033,344)
	(15,661) (19,002)
	(3,568,631) (5,544,381)
	2,996,128 6,564,759

The AML Group had a closing cash balance of $2.99m, a reduction in cash of $3.56m from the previous year end. Underlying net operating cash expenditure of $4.27m was offset by interest receipts and certain non-recurring inflows from sales to customers and equipment disposals.

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 10

DIRECTORS’ REPORT

Dividends

The Directors have not recommended payment of a dividend and no dividends have been paid or declared since the end of the previous financial year.

Changes in state of affairs

There were no significant changes in the state of affairs of the consolidated entity during the financial year.

Subsequent events

There has not been any matter or circumstance that has arisen since the end of the financial year (other than those disclosed in Note 29 of the Financial Statements) that has 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.

Share options on issue at the date of this report or exercised during the year

Details of unissued shares or interests under option are:

Issuing	Number	Class of	Exercise	Expiry
entity	of shares	shares	price of	date of
	under		option	options
	option
AML	1,520,275	ORD	$0.31	13 Oct 10
AML	400,000	ORD	$0.25	7 Oct 08

The holders of such options do not have the right, by virtue of the option, to participate in any share issue or interest issue of any other body corporate or registered scheme.

Indemnification of officers and auditors

The Company paid a premium to insure certain officers of the Company and related bodies corporate in relation to performance of their duties as officers of the Company. The officers of the Company covered by the insurance policy include directors or secretaries of controlled entities who are not also directors of the Company. A confidentiality clause in the insurance contract does not permit further details to be disclosed.

The Company has not otherwise, during or since the financial year except to the extent permitted by law, indemnified or agreed to indemnify an officer or auditor of the Company or of any related body corporate against a liability incurred as such an officer or auditor.

On behalf of the Directors

==> picture [117 x 44] intentionally omitted <==

==> picture [100 x 43] intentionally omitted <==

MR S FITTON MR N ANDREWS EXECUTIVE CHAIRMAN NON-EXECUTIVE DIRECTOR

Signed on the 29 August 2008 in accordance with a resolution of the Directors made pursuant to Section 298(2) of the Corporations Act 2001.

Future developments

Disclosure of information regarding likely developments in the operations of the consolidated entity in future financial years and the expected results of those operations are likely to result in unreasonable prejudice to the consolidated entity. Accordingly, this information has not been disclosed in this report.

Audit of Accounts

Deloitte Touche Tohmatsu is proceeding with the audit and results will be lodged with the final accounts.

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 11

INDEPENDENT AUDIT DECLARATION

Deloitte Touche Tohmatsu A.C.N. 74 490 121 060

Riverside Centre Level 26 123 Eagle Street Brisbane QLD 4000 GPO Box 1463 Brisbane QLD 4001 Australia

The Board of Directors Advanced Magnesium Limited Level 5, 350 George St Sydney 2000 NSW

DX 115 Tel: +61 (0) 7 3308 7000 Fax: +61 (0) 7 3308 7001 www.deloitte.com.au

THIS PAGE IS TO BE COMPLETED WITH LODGEMENT OF THE FINAL REPORT

Liability limited by a scheme approved under Professional Standards Legislation.

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 12

FINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE 2008

FINANCIAL REPORT GLOSSARY

INCOME STATEMENT / STATEMENT OF RECOGNISED INCOME AND EXPENSE

BALANCE SHEET

CASHFLOW STATEMENT

NOTES TO THE FINANCIAL STATEMENTS

Note Contents

Note	Contents	Note	Contents
1	Summary of accounting policies	16	Other non-current liabilities
2	Results from operations	17	Share capital
3	Income taxes	18	Reserves
4	Key management personnel remuneration	19	Accumulated losses
5	Share-based payment schemes	20	Earnings/(Loss) per share
6	Remuneration of auditors	21	Contingent liabilities and contingent assets
7	Current trade and other receivables	22	Leases
8	Current inventories	23	Subsidiaries
9	Other current assets	24	Executive Chairman/CFO Statement re Risk
			Management Practices
10	Other non-current financial assets	25	Discontinued operations
11	Plant and equipment	26	Related party disclosures
12	Current trade and other payables	27	Notes to the cashflow statement
13	Current provisions	28	Financial instruments
14	Other current liabilities	29	Subsequent events
15	Non-current provisions	30	Additional Company information

DIRECTORS’ DECLARATION

AUDIT REPORT

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 13

INCOME STATEMENT

FOR THE FINANCIAL YEAR ENDED 30 JUNE 2008

C O N SO	LIDA TE D	PA R E N T E N TI TY
30 June	30 June	30 June 30 June
2008	2007	2008 2007
$	$	$ $

$170,423	$478,673	$0 —
($93,630)	($266,133)	$0 —
$76,793	$212,540	$0 —

$500,563	$552,980	$221,288 $403,520
($86,216)	($119,054)	$0 ($5,624,482)
	($21,788)	$0 —
($1,653,797)	($851,069)	$0 —
($531,813)	($1,341,709)	($59,300) —
($1,491,723)	($2,867,759)	($555,698) —
($635,934)	($1,473,739)	($4,823) ($1,107,367)
($3,822,126)	($5,909,598)	($398,533) ($6,328,329)
$0	($40,117)	$0 —
($3,822,126)	($5,949,715)	($398,533) ($6,328,329)
$0	$49,351	$0 —
($3,822,126)	($5,900,364)	($398,533) ($6,328,329)


(4.380)	(6.897)
(4.380)	(6.897)

(4.380)	(6.955)
(4.380)	(6.955)

STATEMENT OF RECOGNISED INCOME AND EXPENSE FOR THE FINANCIAL YEAR ENDED 30 JUNE 2008

C O N SO	LIDA TE D	PA R E N T E N TI TY
30 June	30 June	30 June 30 June
2008	2007	2008 2007
$	$	$ $
(5,400)	(47,820)	—
(5,400)	(47,820)	0 —
(3,822,126)	(5,900,364)	(398,533) (6,328,329)
(3,827,526)	(5,948,184)	(398,533) (6,328,329)

(3,827,526)	(5,948,184)	(398,533) (6,328,329)

The above Income Statement and Statement of Recognised Income and Expense should be read in conjunction with the accompanying notes on pages 17 to 41.

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 14

BALANCE SHEET AS AT 30 JUNE 2008

C O N SO	LIDA TE D	PA R E N T E N TI TY
30 June	30 June	30 June 30 June
2008	2007	2008 2007
$	$	$ $

2,996,128	6,564,759	2,270,357 4,233,348
64,082	111,760	31,536 41,772
204,081	272,018	—
34,462	101,526	— —
3,298,753	7,050,063	2,301,893 4,275,120


—	—	3,548,648 1,900,000
33,301	268,615	0 62,080
33,301	268,615	3,548,648 1,962,080
3,332,054	7,318,678	5,850,541 6,237,200


58,913	230,733	0 76,980
71,602	256,451	0 171,716
	15,800	— —
130,514	502,984	0 248,696


0	61,464	0 61,464
0	47,400	— —
0	108,864	0 61,464
130,514	611,848	0 310,160
3,201,540	6,706,830	5,850,541 5,927,040


18,357,278	18,598,195	18,357,278 18,598,195
4,119,773	3,562,222	1,392,693 829,742
(19,275,511)	(15,453,587)	(13,899,430) (13,500,897)
3,201,540	6,706,830	5,850,541 5,927,040

The above Balance Sheet should be read in conjunction with the accompanying notes on pages 17 to 41.

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 15

CASHFLOW STATEMENT FOR THE FINANCIAL YEAR ENDED 30 JUNE 2008

N O TE Cashflows from operating activities Receipts from customers Payments to suppliers and employees Interest received Borrowing costs Other receipts Net cash used in operating activities 27(d) Cashflows from investing activities New funding of Subsidiaries Share purchase in Advanced Magnesium Technologies Pty Ltd Intragroup sale of AMT Europe GmbH from AML to AMT Pty Ltd Payment for plant & equipment & leasehold improvements Proceeds from sale of plant & equipment and project assets Net cash provided by/(used in) investing activities Cashflows from financing activities Proceeds from exercise of Employee Share Options Net cash provided by financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year 27(a)	C O N SO LIDA TE D	PA R E N T E N TI TY
	30 June 30 June	30 June 30 June
	2008 2007	2008 2007
	$ $	$ $
	Inflows/ Inflows/	Inflows/ Inflows/
	(Outflows) (Outflows)	(Outflows) (Outflows)

	196,130 588,297	0 —
	(4,277,566) (7,033,789)	(546,302) (1,079,192)
	250,253 696,197	189,802 548,769
	0 —	0 —
	0 445	(2,585) —
	(3,831,183) (5,748,850)	(359,085) (530,423)


	— —	(1,648,648) —
	— —	— (4,672,860)
	— —	— 40,468
	(15,661) (19,002)	0 —
	278,213 200,221	44,741 —
	262,552 181,219	(1,603,907) (4,632,392)


	23,250	23,250
	0 23,250	0 23,250
	(3,568,631) (5,544,381)	(1,962,992) (5,139,565)
	6,564,759 12,109,140	4,233,348 9,372,913
	2,996,128 6,564,759	2,270,356 4,233,348

The above Cashflow Statement should be read in conjunction with the accompanying notes on pages 17 to 41.

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 16

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF ACCOUNTING POLICIES

Statement of Compliance

The financial report is a general purpose financial report which has been prepared in accordance with the Corporations Act 2001, Accounting Standards and Interpretations, and complies with other requirements of the law. Accounting Standards include Australian equivalents to International Financial Reporting Standards (‘A-IFRS’). Compliance with the A-IFRS ensures that the consolidated financial statements and notes of the consolidated entity comply with International Financial Reporting Standards (‘IFRS’). The parent entity financial statements and notes also comply with IFRS except for the disclosure requirements in IAS 32 ‘Financial Instruments: Disclosure and Presentation’ as the Australian equivalent Accounting Standard, AASB 132 ‘Financial Instruments: Disclosure and Presentation’ does not require such disclosures to be presented by the parent entity where its separate financial statements are presented together with the consolidated financial statements of the consolidated entity.

The financial statements were authorised for issue by the Directors on 29 August 2008.

Adoption of new and revised Accounting Standards

In the current year, The Group has adopted all of the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) that are relevant to its operations and effective for the current annual reporting period.

Basis of Preparation

The financial report has been prepared on the basis of historical cost. Cost is based on the fair values of the consideration given in exchange for assets. All amounts are presented in Australian dollars, unless otherwise noted.

Going Concern

The financial report has been prepared on a going concern basis as the Directors do not believe there is any intention or necessity to close the current operations or cease trading within twelve months from the reporting date.

The factors considered by the Directors in making this assessment, included:

As at 30 June 2008, the consolidated entity had cash reserves of almost $3m.
The forecast operating gross cash spend over the next financial year has been further reduced to $2.8m.
Interest earnings and expected sales revenue are expected to bridge the gap.
Residual staff termination costs are estimated not to exceed $0.25 million in January 09.
The Directors are satisfied the Company has the necessary business potential to maintain liquidity in the ensuing year.

Notwithstanding, the Directors and other management are cognisant that the Company needs to achieve commercial sales and/or raise further capital in the next 12 months in order to continue operations. Inherently, this requires the group to have products ready to meet the commercial needs of customers for the production of their end products. The Directors and management are unable to predict the Company’s achievement of these future outcomes with any certainty. Moreover, as with the commercialisation of any new technology in international markets, there are a number of factors outside the Company’s control that render a degree, arguably a high degree, of uncertainty as to the prospects for success.

The financial report does not include any adjustments in relation to the classification of assets or liabilities that might be necessary if the Company does not continue as a going concern. The Directors estimate that if the existing operations were to be closed down on a “sudden death” basis on 31 August 2008 closure costs of $0.44 million might be incurred (staff termination costs of $0.28m and $0.16m contractual termination costs). This will reduce through the effluxion of time and if closure occurs on an orderly wind down basis.

Significant Accounting Policies

The following significant accounting policies have been adopted in the preparation and presentation of the financial report:

(a) Cash and cash equivalents

Cash and cash equivalents comprise cash on hand, cash in banks at call and on deposit.

(b) Employee benefits

Provision is made for benefits accruing to employees in respect of wages and salaries, annual leave and long service leave when it is probable that settlement will be required and they are capable of being measured reliably.

Provisions made in respect of employee benefits expected to be settled within 12 months, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement.

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 17

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF ACCOUNTING POLICIES (cont…)

Provisions made in respect of employee benefits which are not expected to be settled within 12 months are measured as the present value of the estimated future cash outflows to be made by the consolidated entity in respect of services provided by employees up to reporting date.

Contributions to defined contribution superannuation plans are expensed when incurred.

(c) Financial assets Subsequent to initial recognition, investments in subsidiaries are measured at cost less any allowance for impairment

Other financial assets are classified into the following specified categories: financial assets ‘at fair value through profit or loss’, ‘held-to-maturity’ investments, ‘available-for-sale’ financial assets, and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Receivables

Trade receivables and other receivables are recognised initially at their fair values and subsequently at amortised cost less impairment.

(d) Financial instruments issued by the Company Debt and equity instruments

Debt and equity instruments are classified as either liabilities or as equity in accordance with the substance of the contractual arrangement.

Transaction costs on the issue of equity instruments

Transaction costs arising on the issue of equity instruments are recognised directly in equity as a reduction of the proceeds of the equity instruments to which the costs relate. Transaction costs are the costs that are incurred directly in connection with the issue of those equity instruments and which would not have been incurred had those instruments not been issued.

(e) Foreign currency Foreign Currency Transactions

All foreign currency transactions during the financial year are brought to account using the exchange rate in effect at the date of the transaction. Foreign currency monetary items at reporting date are translated at the exchange rate existing at reporting date. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined.

Exchange differences are recognised in profit or loss in the period in which they arise except that exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned or likely to occur, which form part of the net investment in a foreign operation, are recognised in the foreign currency translation reserve and recognised in profit or loss on disposal of the net investment.

Foreign Operations

On consolidation, the assets and liabilities of the consolidated entity’s overseas operations are translated at exchange rates prevailing at the reporting date. Income and expense items are translated at the average exchange rates for the period unless exchange rates fluctuate significantly. Exchange differences arising, if any, are recognised in the foreign currency translation reserve, and recognised in profit or loss on disposal of the foreign operation.

(f) Goods and Services Tax and Value Added Tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST) or value added tax (VAT) for certain foreign jurisdictions, except for receivables and payables which are recognised inclusive of GST or VAT.

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

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

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 18

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF ACCOUNTING POLICIES (cont…)

(g) Impairment of assets

At each reporting date, the consolidated entity reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the consolidated entity estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised in profit or loss immediately, unless the relevant asset is carried at fair value, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised in profit or loss immediately, unless the relevant asset is carried at fair value, in which case the reversal of the impairment loss is treated as a revaluation increase.

(h) Income tax

Current Tax

Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by reporting date. Current tax for current and prior periods is recognised as a liability to the extent that it is unpaid.

Deferred Tax

Deferred tax is accounted for using the comprehensive balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base of those items.

In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities (other than as a result of a business combination) which affects neither taxable income nor accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, branches, associates and joint ventures except where the consolidated entity is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with these investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s) when the asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the consolidated entity expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the company/consolidated entity intends to settle its current tax assets and liabilities on a net basis.

Current and Deferred Tax for the Period

Current and deferred tax is recognised as an expense or income in the income statement, except when it relates to items credited or debited directly to equity, in which case the deferred tax is also recognised directly in equity, or where it arises from the initial accounting for a business combination, in which case it is taken into account in the determination of goodwill or excess.

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 19

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF ACCOUNTING POLICIES (cont…)

Tax Consolidation

The Company and all its wholly-owned Australian resident entities are part of a tax-consolidated group under Australian taxation law. Advanced Magnesium Limited is the head entity in the tax-consolidated group. Tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are recognised in the separate financial statements of the members of the taxconsolidated group using the ‘stand-alone taxpayer’ approach. Current tax liabilities and assets and deferred tax assets arising from unused tax losses and tax credits of the members of the tax-consolidated group are recognised by the company (as head entity in the tax-consolidated group).

Due to the existence of a tax funding arrangement between the entities in the tax-consolidated group, amounts are recognised as payable to or receivable by the company and each member of the group in relation to the tax contribution amounts paid or payable between the parent entity and the other members of the tax-consolidated group in accordance with the arrangement. Further information about the tax funding arrangement is detailed in Note 3 to the financial statements. Where the tax contribution amount recognised by each member of the taxconsolidated group for a particular period is different to the aggregate of the current tax liability or asset and any deferred tax asset arising from unused tax losses and tax credits in respect of that period, the difference is recognised as a contribution from (or distribution to) equity participants.

(i) Intangible assets

Patents, Trademarks and Licences

Patents, trademarks and licences are recorded at cost less accumulated amortisation and any allowance for impairment. Such intangibles are also subject to the impairment tests as outlined in (g) above.

Research and Development Costs

Expenditure on research activities is recognised as an expense in the period in which it is incurred. Development expenditure is recognised as an expense in the period as incurred, unless an internally generated intangible asset can be recognised.

(j) Inventories

Inventories are valued at the lower of cost and net realisable value. Costs are assigned to inventory on hand by the method most appropriate to each particular class of inventory, being valued on a first in first out basis. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.

(k) Leased assets

Leases are classified as finance leases where the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred.

Lease incentives

In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefits of incentives are recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

(l) Non-current assets held for sale

Non-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.

Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. The sale of the asset (or disposal group) is expected to be completed within one year from the date of classification.

(m) Payables

Trade payables and other accounts payable are recognised when the consolidated entity becomes obliged to make future payments resulting from the purchase of goods and services.

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 20

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF ACCOUNTING POLICIES (cont…)

(n) Presentation currency

The presentation and functional currency of the AML Group is Australian dollars.

(o) Principles of consolidation and investments in subsidiaries

The consolidated financial statements are prepared by combining the financial statements of all the entities that comprise the consolidated entity, being the company (the parent entity) and its subsidiaries as defined in Accounting Standard AASB 127 ‘Consolidated and Separate Financial Statements’. A list of subsidiaries appears in Note 23 to the financial statements. Consistent accounting policies are employed in the preparation and presentation of the consolidated financial statements.

On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. If, after reassessment, the fair values of the identifiable net assets acquired exceeds the cost of acquisition, the deficiency is credited to profit and loss in the period of acquisition.

The consolidated financial statements include the information and results of each subsidiary from the date on which the company obtains control and until such time as the company ceases to control such entity.

In preparing the consolidated financial statements, all intercompany balances and transactions, and unrealised profits arising within the consolidated entity are eliminated in full.

(p) Plant and equipment

Plant and equipment are stated at cost less accumulated depreciation and impairment. Cost includes expenditure that is directly attributable to the acquisition of the item. In the event that settlement of all or part of the purchase consideration is deferred, cost is determined by discounting the amounts payable in the future to their present value as at the date of acquisition.

Depreciation is provided on plant and equipment and is calculated on a straight line basis so as to write off the net cost or other revalued amount of each asset over its expected useful life to its estimated residual value. Leasehold improvements are depreciated over the period of the lease or estimated useful life, whichever is the shorter, using the straight line method. The estimated useful lives, residual values and depreciation method is reviewed at the end of each annual reporting period.

The following estimated useful lives are used in the calculation of depreciation:

• Plant and equipment 2.5 – 9.0 years

(q) Provisions

Provisions are recognised when the consolidated entity has a present obligation, the future sacrifice of economic benefits is probable, and the amount of the provision can be measured reliably.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cashflows estimated to settle the present obligation, its carrying amount is the present value of those cashflows.

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognised as an asset if it is virtually certain that recovery will be received and the amount of the receivable can be measured reliably.

(r) Revenue recognition

Sale of goods

Revenue from the sale of goods is recognised when the consolidated entity has transferred to the buyer the significant risks and rewards of ownership of the goods.

Rendering of services

Revenue from a contract to provide services is recognised by reference to the stage of completion of the contract.

Interest revenue

Interest revenue is recognised on a time proportionate basis that takes into account the effective yield on the financial asset.

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 21

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF ACCOUNTING POLICIES (cont…)

(s) Share-based payments

Equity-settled share-based payments granted after 7 November 2002 that were unvested as of 1 July 2005, are measured at fair value at the date of grant. Fair value is measured by use of a binomial model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.

The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straightline basis over the vesting period, based on the consolidated entity’s estimate of shares that will eventually vest.

For cash-settled share-based payments, a liability equal to the portion of the goods or services received is recognised at the current fair value determined at each reporting date.

(t) Critical accounting judgements and key sources of estimation uncertainty

In the application of the Group’s accounting policies, which are described in this note, management is required to make judgements, estimates and assumptions about carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

The following are the critical judgements (apart from those involving estimations, which are dealt with below), that management has made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements:

Useful lives of property, plant and equipment

As described in (p) above, the Group reviews the estimated useful lives of property, plant and equipment at the end of each annual reporting period. During the financial year, management determined that the useful life of certain items of equipment (mainly useful but ageing computer equipment) should be shortened.

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 22

NOTES TO THE FINANCIAL STATEMENTS

NOTE 2 RESULTS FROM OPERATIONS

(a) Sales Revenue – continuing operations: Sale of goods and royalty income Rendering of services
(b) Other income – continuing operations: Interest revenue Foreign exchange gain Gain on sale of assets Other
Other income – discontinuing operations: Gain on sale of assets

Total other income

C ON S OLIDA TE D	P A RE N T E N TITY
30 June 30 June	30 June 30 June
2008 2007	2008 2007
$ $	$ $

170,423 462,962	— —
15,711	— —
170,423 478,673	— —


283,219 542,913	221,288 401,974
(3,252) —	(3,252) 1,546
88,403 9,622	—
132,194 445	3,252 —
500,563 552,980	221,288 403,520


0 49,351	0 —
0 49,351	0 —
500,563 602,331	221,288 403,520

==> picture [215 x 35] intentionally omitted <==

(c) Loss before income tax Loss before income tax has been arrived at after crediting/(charging) the following gains and losses from continuing and discontinued operations: Net gain on disposal of property, plant and equipment


Net gain on disposal of property, plant and equipment Net foreign exchange gains/(losses) Gains attributable to: Continuing operations Discontinued operations Losses attributable to: Continuing operations Discontinued operations Loss before income tax has been arrived at after charging the following expenses. The line items below combine amounts attributable to both continuing and discontinued operations: Cost of sales Write-down of inventory to net realisable value Impairment of trade receivables Interest on payables Impairment of non-current asset charge Depreciation of non-current assets Operating lease rental minimum lease payments(1) Employee benefit expense: Post employee benefits – defined contribution Equity settled share-based payments Retrenchments and termination benefits Wages and salaries	88,403	37,185	0	—

	(21,295)	(62,710)	0	1,546
	67,108	(25,525)	0	1,546

	88,403	9,622	0	1,546
		49,351		—
	88,403	58,973	0	1,546

	(21,295)	(84,498)	0	—
		—		—
	(21,295)	(84,498)	0	—
	67,108	(25,525)	0	1,546


	(93,630)	(266,133)	0	—
	(125,982)	(92,954)	0	—
	(6,931)	(26,100)	0	—

	—	—	—	—
	—	—	—	—
	(72,363)	(108,374)		(24,119)
	(72,363)	(108,374)	0	(24,119)

	(172,015)	(155,986)	0	—


	(120,561)	(415,452)	(7,989)	(321,723)
		—		—
	(597,639)	(4,294)	(375,000)	—
	(1,352,174)	(1,905,041)	(100,520)	(213,824)
	(2,070,374)	(2,324,787)	(483,510)	(535,547)

	(2,324,787)	(2,893,254)	(535,547)	(1,028,398)

Note 1 Aggregate of gross lease payments on office premises in Australia and Germany

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 23

NOTES TO THE FINANCIAL STATEMENTS

NOTE 3 INCOME TAXES

The aggregate amount of income tax attributable to the financial year differs from the amount calculated on the profit.

CO N S OLIDA TED	CO N S OLIDA TED	PA R EN T E NTI TY
30-Jun	30-Jun	30-Jun 30-Jun
2008	2007	2008 2007
$	$	$ $


0	—	0 —
0	40,117	0 —
	40,117	—

0	40,117	0 —
0	—	0 —
0	40,117	0 —

(3,822,126)	(5,909,598)	(398,533) (6,328,329)
0	49,351	0 —
(3,822,126)	(5,860,247)	(398,533) (6,328,329)
1,146,638	1,758,074	119,560 1,898,499

(457,449)	(512)	0 (1,687,344)
(689,189)	(1,717,445)	(119,560) (211,155)
0	40,117	0 —

The tax rate used in the above reconciliation is the corporate tax rate of 30% payable by Australian corporate entities on taxable profits under Australian tax law. There has been no change in the corporate tax rate when compared with the previous reporting period.

(b) Current Tax Assets & Liabilities Income tax payable by foreign entities	CO N S OLIDA TED	PA R EN T E NTI TY
	30-Jun 30-Jun	30-Jun 30-Jun
	2008 2007	2008 2007
	$ $	$ $

	0 243	— —

These amounts are included in Note 12 “Current Trade and Other Payables”.

Tax Consolidation

Relevance of tax consolidation to the consolidated entity

The Company and its wholly-owned Australian resident entities have formed a tax-consolidated group with effect from 1 February 2003 and are therefore taxed as a single entity from that date. The head entity within the tax-consolidated group is Advanced Magnesium Limited. The members of the tax-consolidated group are identified at Note 23.

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 24

NOTES TO THE FINANCIAL STATEMENTS

NOTE 3 INCOME TAXES (cont…)

Nature of tax funding arrangements and tax sharing agreements

Entities within the tax-consolidated group have entered into a tax funding arrangement and a tax-sharing agreement with the head entity. Under the terms of the tax funding arrangement, Advanced Magnesium Limited and each of the entities in the tax-consolidated group has agreed to pay a tax equivalent payment to or from the head entity, based on the current tax liability or current tax asset of the entity. Such amounts are reflected in amounts receivable from or payable to other entities in the tax-consolidated group.

The tax sharing agreement entered into between members of the tax-consolidated group provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement as payment of any amounts under the tax sharing agreement is considered remote.

Non-recognition of deferred tax assets

Unrecognised deferred tax balances The following deferred tax assets have not been brought to account as assets: DTA on pre-tax consolidation revenue losses DTA on post-tax consolidation revenue losses DTA on capital losses These are based on the following tax losses: Tax losses – revenue pre-tax consolidation Tax losses – revenue post-tax consolidation Tax losses – capital	C ON S OLIDA TE D/PA RE N T EN TI TY
	30 June 30 June
	2008 2007
	$ $


	81,580,882 81,580,882
	33,113,737 32,089,528
	28,868,289 28,868,289
	143,562,907 142,538,699

	271,936,272 271,936,272
	110,379,122 107,014,443
	96,227,630 96,227,630
	478,543,024 475,178,345

The benefit from the deferred tax asset in respect of unused tax losses will only be obtained if:

(a) The tax consolidated group derives future assessable income of a nature and amount sufficient to enable the benefits to be realised;

(b) the consolidated group continues to comply with the conditions for deductibility imposed by the tax law; and

(c) no changes in tax legislation adversely affect the consolidated group in realising the benefit of the losses.

No deferred tax asset has been brought to account as an asset because it is not probable that taxable profit will be available against which such an asset could be utilised.

Unused tax losses incurred after the formation of the AML consolidated group ($107,014,443) will be fully available to offset future taxable income to the extent AML continues to satisfy the loss integrity rules (i.e. Continuity of Ownership Test and Same Business Test). Based on testing performed by AML and its advisors, these losses should satisfy the loss integrity rules as at 30 June 2008.

Unused tax losses incurred prior to the formation of the AML consolidated group ($271,936,272) will be subject to restricted use (Available Fraction rules). These restrictions on use are in addition to the loss integrity rules. Broadly, the Available Fraction rules limit the amount of losses that can be used each year by applying the following formula:

Available Fraction x Taxable income for year = Pre consolidation losses available for use for year

Based on testing performed by AML and its advisors, AML’s pre consolidation losses should satisfy the loss integrity rules at 30 June 2008 subject to further testing and continued compliance with loss integrity rules. No detailed Available Fraction calculations have been performed as at 30 June 2008, however it is unlikely that the Available Fraction applying to pre-consolidation tax losses will be greater than 0.2.

The Australian tax consolidated entity has not paid income tax up to 30 June 2008 and no income tax is expected to be paid prior to 30 June 2009. Accordingly, there are no franking credits available for distribution in the year ending 30 June 2008.

Tax outside of Australian tax consolidation regime

The Group has several overseas entities which are not subject to Australian tax consolidation and are therefore not sheltered by Australian tax losses. Those entities may incur income tax based on local corporate tax law and are subject to local jurisdiction.

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 25

NOTES TO THE FINANCIAL STATEMENTS

NOTE 4 KEY MANAGEMENT PERSONNEL REMUNERATION

The key management personnel of Advanced Magnesium Limited during the year were:

S Fitton (Executive Chairman)
G Ralph (Non-Executive Director) (resigned 25 August 2008)
N Andrews (Non-Executive Director)
M Brown (Non-Executive Director)
ID Hartnell (Managing Director) (resigned 9 July 2007)
G Dunlop (General Manager - Technology Development)
T Abbott (General Manager – Alloy Development & R & D)
C Kettler (General Manager - Europe)
PK Nair (General Manager - Corporate)
T Sweder (General Manager - North America) (resigned 26 June 2008)
J Talbot (Chief Financial Officer) (appointed 12 February 2008)

(a) Key management personnel remuneration

The aggregate compensation of the key management personnel of the consolidated entity and the Company is set out below:

Short term employee benefits Post-employment benefits Share based payment	CO N SO LIDA TED	PA R EN T E N TITY
	30 June 30 June	30 June 30 June
	2008 2007	2008 2007
	$ $	$ $
	1,247,545 1,197,407	360,444 465,875
	191,964 363,615	59,602 220,677
	480,094 -	480,094 -
	1,919,602 1,561,022	900,139 686,552

In accordance with Corporations Regulations 2001 – Schedule 5B (regulation 2M.6.04), the disclosures required by paragraphs Aus 25.4 to Aus 25.6 of AASB 124 “Related Party Disclosures” have been set out in the Remuneration Report and the disclosures required by paragraph Aus 25.7 to Aus 25.7.2 of AASB 124 have been set out in Note 26.

NOTE 5 SHARE-BASED PAYMENT SCHEMES

5.1 Employee Share Option Plan

On 4 October 2005 an Employee Share Option Plan was approved. Options allowing subscription of up to 5% of the issued share capital of AML are available for issue to employees, with options over a further 5% of the issued share capital in the future based on performance. No options were issued under the Employee Share Option Plan for the financial year ended 30 June 2008. The options have been revalued in terms of note f in the Directors’ Report.

5.2 Option Compensation to Pegasus

Pegasus Corporate Advisory Pty Ltd (Pegasus) provided advice and assistance to the Company for the capital raising exercise. Pursuant to this arrangement, Pegasus is entitled to 400,000 options. The exercise price of each option is $0.25 and has a term of 36 months from the date of issue. These unlisted options are exercisable at any time from the first to the third anniversary of their issue on 7 October 2005.

Using a Black and Scholes model, the options have been valued at a theoretical value of 0.34 cents each based on a volatility of 188% (as quoted by Bloombergs) . The accounts reflect the revaluation of the options at $1,360 (refer Note 17).

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 26

NOTES TO THE FINANCIAL STATEMENTS

NOTE 5 SHARE-BASED PAYMENT SCHEMES (cont…)

The following share-based payment arrangements were in existence during the period:

					Fair value per
				Exercise	option at
				price	grant date
Options series	Number	Grant date	Expiry date	$	$
Employee Share Option Plan	676,500	13-Oct-05	13-Oct-10	$0.31	$0.19
Pegasus Corporate Advisory	400,000	7-Oct-05	7-Oct-08	$0.25	$0.16

The weighted average fair value of the share options granted during the financial year is $nil (2007: Nil).

Inputs used to calculate fair value per option at grant date for the prior year are as follows:

	2007
	Option series	Option series
Inputs into the model	ESOP	Pegasus
Grant date share price	$0.31	$0.30
Exercise price	$0.31	$0.25
Expected volatility	67.48%	67.48%
Date Granted	4 October 2005	7 October 2005
Option life	5 years	3 years
Dividend yield	Nil	Nil
Risk-free interest rate	5.25%	5.25%

The following table reconciles the outstanding share options granted under the share-based payment schemes at the beginning and end of the financial year (on a post-consolidated adjusted basis).

2008	2008	2007
Number of options	Weighted average exercise price $	Number of options Weighted average exercise price $
6,198,923	$0.664	6,508,923 $0.664
—	—	— —
(1,809,150)	$0.310	(85,000) $0.310
—	$0.310	(75,000) $0.310
(3,313,273)	$12.000	(150,000) $12.000
1,076,500	$0.288	6,198,923 $0.515
1,076,500	$0.288	6,198,923 $0.515

(i) Forfeited during the financial year

Under the terms of the ESOP, employees leaving the AML Group have 30 days from the date of termination to exercise their options holding (if any), or they are forfeited.

(ii)

Exercised during the financial year

The following share options granted under the employee share option plan were exercised during the financial year:

	2007
Option Series	Number	Exercise Date	Share price at
	Exercised		exercise date
			$
ESOP	Nil
ESOP	Nil
ESOP	Nil

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 27

NOTES TO THE FINANCIAL STATEMENTS

NOTE 5 SHARE-BASED PAYMENT SCHEMES (cont…)

(iii) Expired during the financial year Resource Capital Funds held 3,313,274 options which expired on 29 November 2007 unexercised.
(iv) Balance at end of the financial year
The share options outstanding at the end of the financial year had a weighted average exercise price of $0.287, and a weighted average remaining contractual life of 1,590 days (2007: weighted average exercise price of $0.515 and weighted average remaining contractual life of 1,388 days).
(v) Exercisable at end of the financial year

The Pegasus Corporate Advisory options outstanding at the end of the previous financial year, totalling 400,000, did not vest until the first anniversary of the grant date, which was 7 October 2006. As at 30 June 2008, all outstanding options are exercisable.

NOTE 6 REMUNERATION OF AUDITORS

Auditor of the parent entity - Audit or review of the financial report - Accounting services	C O N SO LIDA TE D	PA R EN T E NTITY
	30 June 30 June	30 June 30 June
	2008 2007	2008 2007
	$ $	$ $
	72,650 71,822	0 35,911
	0 5,000	0 5,000
	72,650 76,822	0 40,911
	72,650 71,822	0 35,911

The auditor of Advanced Magnesium Limited is Deloitte Touche Tohmatsu.

NOTE 7 CURRENT TRADE AND OTHER RECEIVABLES

Trade receivables (i) Allowance for doubtful debts (ii) Goods and services tax (GST) recoverable Security deposits CAST CRC R&D receivable Project asset sales receivable Interest receivable Other Total receivables	CO N SO LIDATED	PA R EN T E N TITY
	30 June 30 June	30 June 30 June
	2008 2007	2008 2007
	$ $	$ $
	6,931 30,820	0
	(6,931) (26,100)	0
	0 4,720	0

	9,663 16,734	1,592
	17,884 17,567	50 50
	—	—
	—	—
	32,966 50,967	31,486 40,130
	3,569 21,772	—
	64,082 107,040	31,536 41,772
	64,082 111,760	31,536 41,772

(i) The average credit period on sales is 30 days. No interest is charged on trade receivables for the first 30 days of invoice. Thereafter, the entity may charge a market rate of interest.

(ii) An allowance has been made for potentially irrecoverable trade receivable amounts arising from past sales.

NOTE 8 CURRENT INVENTORIES

Metal alloy at Cost Metal alloy at Net Realisable Value TE 9 OTHER CURRENT ASSETS Prepayments	CO N SO LIDATED	PA R EN T E N TITY
	30 June 30 June	30 June 30 June
	2008 2007	2008 2007
	$ $	$ $
	330,063 217,301	— —
	(125,982) 54,717	— —
	204,081 272,018	— —

	CO N SO LIDATED	PA R EN T E N TITY
	30 June 30 June	30 June 30 June
	2008 2007	2008 2007
	$ $	$ $
	34,462 101,526	— —

NOTE 9 OTHER CURRENT ASSETS

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 28

NOTES TO THE FINANCIAL STATEMENTS

NOTE 10 OTHER NON-CURRENT FINANCIAL ASSETS

Shares in controlled entities – unlisted, at cost Write down to recoverable amount	CO N SO LIDATED	PA R EN T E N TITY
	30 June 30 June	30 June 30 June
	2008 2007	2008 2007
	$ $	$ $
	— —	78,048,760 76,400,112
	— —	(74,500,112) (74,500,112)
	— —	3,548,648 1,900,000

NOTE 11 PLANT & EQUIPMENT

Gross carrying amount Balance at 1 July 2006 Additions Disposals Net foreign currency exchange differences Balance at 1 July 2007 Additions Disposals Net foreign currency exchange differences Balance at 30 June 2008 Accumulated depreciation/ amortisation and impairment Balance at 1 July 2006 Disposals Impairment losses charged to Income Statement Depreciation expense (ii) Net foreign currency exchange differences Balance at 1 July 2007 Disposals Depreciation expense (i) (ii) Net foreign currency exchange differences Balance at 30 June 2008 Net book value As at 30 June 2007 As at 30 June 2008	C ON S OLIDA TED P A RE N T E N TITY
	Plant and equipment Plant and equipment
	$ $

	812,097 236,005
	7,684 —
	(156,012) (28,997)
	(4,014) —
	659,755 207,008
	30,950 0
	(585,574) (199,176)
	(9,115)
	96,017 7,832


	432,322 148,064
	(147,708) (27,255)

	108,374 24,119
	(1,848) —
	391,140 144,928
	(393,640) (154,435)
	75,190 17,339

	72,690 7,832

	268,615 62,030
	33,301 0

(i) During the period, management re-assessed the useful life of certain plant and equipment. See Note 1(t) for further detail.

(ii) This is the aggregate depreciation allocated, whether recognised as an expense or capitalised as part of the carrying amount of other assets during the year.

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 29

NOTES TO THE FINANCIAL STATEMENTS

NOTE 12 CURRENT TRADE AND OTHER PAYABLES

Trade payables and accruals Other	CO N SO LIDATED	PA R EN T E N TITY
	30 June 30 June	30 June 30 June
	2008 2007	2008 2007
	$ $	$ $
	58,913 212,345	76,980
	18,388	—
	58,913 230,733	76,980

NOTE 13 CURRENT PROVISIONS

Employee benefits - Annual Leave Employee benefits - Long Service Leave	CO N SO LIDATED	PA R EN T E N TITY
	30 June 30 June	30 June 30 June
	2008 2007	2008 2007
	$ $	$ $
	71,602 209,353	124,618
	47,098	47,098
	71,602 256,451	171,716

NOTE 14 OTHER CURRENT LIABILITIES

Unamortised fitout incentive TE 15NON-CURRENT PROVISIONS Employee benefits - Long Service Leave TE 16OTHER NON-CURRENT LIABILITIES Unamortised fitout incentive	CO N SO LIDATED	PA R EN T E N TITY
	30 June 30 June	30 June 30 June
	2008 2007	2008 2007
	$ $	$ $
	— 15,800 — —

	CO N SO LIDATED	PA R EN T E N TITY
	30 June 30 June	30 June 30 June
	2008 2007	2008 2007
	$ $	$ $
	61,464	61,464

	CO N SO LIDATED	PA R EN T E N TITY
	30 June 30 June	30 June 30 June
	2008 2007	2008 2007
	$ $	$ $

	47,400	— —

NOTE 15 NON-CURRENT PROVISIONS

NOTE 16 OTHER NON-CURRENT LIABILITIES

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 30

NOTES TO THE FINANCIAL STATEMENTS

NOTE 17 SHARE CAPITAL

89,239,103 (2007: 85,581,292) Fully paid ordinary shares RCF options expire 29 Nov 2007 Pegasus options expire 7 Oct 2008 (i) ESOP options expire 12 Oct 2010 (i)	C ON S OLIDA TE D	P A RE N T E N TI TY
	30 June 30 June	30 June 30 June
	2008 2007	2008 2007
	$ $	$ $
	18,334,947 17,845,854	18,334,947 17,845,854
	227,896	227,896
	1,360 64,050	1,360 64,050
	20,972 460,396	20,972 460,396
	18,357,278 18,598,195	18,357,278 18,598,196

(i) Details of these options are located at Note 5.

A reconciliation of the movement in fully paid ordinary shares is set out below:

N OTE Fully paid ordinary shares Balance at beginning of financial year Share consolidation Ordinary shares issued as compensation to Directors Issue of shares under ESOP Transaction costs on issue of shares Exercise of options under ESOP S258F reduction 19 Balance at end of financial year	C ON S OLIDA TE D / PA RE N T EN TI TY	C ON S OLIDA TE D / PA RE N T EN TI TY
	2008	2007
	No. $	No. $

	85,581,292 17,845,854	85,506,292 892,648,210
		— —
	3,107,811 435,094	— —
	550,000 54,000	—
		— —
		75,000 37,140
		— (874,839,496)
	89,239,103 18,334,947	85,581,292 17,845,854

Fully paid ordinary shares carry one vote per share and carry the right to dividends.

Share options

All share options carry no rights to dividends and no voting rights until paid for conversion into ordinary shares. Further details of the share-based payment schemes are contained in Note 5 to the financial statements.

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 31

NOTES TO THE FINANCIAL STATEMENTS

NOTE 18 RESERVES

Capital reserve Foreign currency translation reserve Balance at beginning of financial year Translation of foreign operations Balance at end of financial year Expired Options Reserve Balance at beginning of financial year RCF options expiry Nottacar options expiry ESOP options expiry Balance at end of financial year Total reserves	C ON S OLIDA TE D	P A RE N T E N TI TY
	30 June 30 June	30 June 30 June
	2008 2007	2008 2007
	$ $	$ $
	2,749,980 2,749,980	—

	(17,500) 30,320	—
	(5,400) (47,820)	—
	(22,900) (17,500)	0 —

	829,742 —	829,742 —
	227,896	227,896
	814,000	— 814,000
	335,055 15,742	335,055 15,742
	1,392,693 829,742	1,392,693 829,742
	4,119,773 3,562,222	1,392,693 829,742

The capital reserve is a historical reserve from 2002 that arose after calculation of the outside equity interest in the (as it then was) Australian Magnesium Investments Pty Ltd consolidated entity.

The foreign currency translation reserve is a result of translating overseas subsidiaries from their functional currency to the presentation currency of Australian dollars.

The expired options reserve captures the balance of unexercised options on their expiry date from the appropriate share capital account.

NOTE 19 ACCUMULATED LOSSES

Balance at beginning of financial year Loss attributable to members of the parent entity Reduction due to losses not represented by assets under s258F of the Corporations Act 2001 Balance at end of financial year	C ON S OLIDA TE D	P A RE N T E N TI TY
	30 June 30 June	30 June 30 June
	2008 2007	2008 2007
	$ $	$ $
	(15,453,385) (884,392,719)	(13,500,897) (882,012,064)
	(3,822,126) (5,900,364)	(398,533) (6,328,329)
	— 874,839,496	— 874,839,496
	(19,275,511) (15,453,587)	(13,899,430) (13,500,897)

The balance of accumulated losses at 30 June 2007 included paid up ordinary share capital that had been lost (ie. shareholder equity not represented by available assets). In accordance with Section 258F of the Corporations Act 2001, the Company reduced its paid up ordinary Share Capital balance by $874,839,496 (see Note 17) with an equal reduction of the Accumulated Losses balance, being the total of accumulated losses at 30 June 2007 resulting from the following discontinued operations:

Stanwell Magnesium Project (terminated 13 June 2003, ratified at AGM on 24 November 2003)
Icelandic Magnesium Company Limited (disposed 31 August 2004)
QMAG Joint Venture operations (disposed 1 December 2004)

The Directors do not expect any further gains or losses from these discontinued operations in subsequent financial years.

There is no impact on shareholders from the capital reduction as no shares have been cancelled or rights varied. Similarly, creditors are not affected as there has been no change in available assets. There is also no impact on the availability of the Company’s tax losses from this capital reduction.

With the strategy of the Group to pursue the Advanced Magnesium Technologies business from November 2004, the Directors believe that the capital reduction has enabled a clearer presentation of the results of the Group. The balance of Accumulated Losses at 30 June 2007 represents accounting losses relating solely to the Advanced Magnesium Technologies business.

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 32

NOTES TO THE FINANCIAL STATEMENTS

NOTE 20 EARNINGS/(LOSS) PER SHARE

Basic earnings/(loss) per share: From continuing operations From discontinued operations Total basic loss per share Diluted earnings/(loss) per share: From continuing operations From discontinued operations Total diluted loss per share	C O N SO LIDA TE D
	2008 2007
	cents per cents per
	share Share
	(4.38) (6.95)
	0.00 0.06
	(4.38) (6.90)


	(4.38) (6.95)
	0.00 0.06
	(4.38) (6.90)
	(4.38) (6.95)

As EPS is a loss per share for 2008 and 2007, any potential ordinary shares would be anti-dilutive. As a result, loss per share is identical for basic and diluted EPS calculations.

Basic and diluted loss per share

The earnings and weighted average number of ordinary shares used in the calculation of basic and diluted loss per share are as follows:

	N OTE	CO N S OLIDA TED	CO N S OLIDA TED
		2008	2007
		$	$
Losses	(a)	(3,822,126)	(5,900,364)
Losses from continuing operations	(a)	(3,822,126)	(5,949,715)
Weighted average number of ordinary shares for the purposes of
basic loss per share.		87,272,698	85,551,758

(a) Losses used in the calculation of total basic and diluted losses per share and basic losses per share from continuing operations reconciles to net loss in the income statement as follows:

Net loss Losses used in the calculation of basic EPS Adjustments to exclude profit for the period from discontinued operations Losses used in the calculation of basic EPS from continuing operations	CO N S OLIDA TED
	30 June 30 June
	2008 2007
	$ $
	(3,822,126) (5,900,364)
	(3,822,126) (5,900,364)
	0 (49,351)
	(3,822,126) (5,949,715)

NOTE 21 CONTINGENT LIABILITIES AND CONTINGENT ASSETS

(i) The company has commenced legal proceedings against Volkswagen for breach of AML’s AM-Cover patent.

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 33

NOTES TO THE FINANCIAL STATEMENTS

NOTE 22 LEASES

Operating Lease Arrangements

Per Month Office Premises – Heidelberg, Germany (five year lease from March 2006 with an option to extend for another $5,100 approx three years) $3,000.00 Office Premises – Sydney, Australia - month to month license to occupy cancellable with a month's notice

$995.00 Internet – Sydney, Australia (one year lease from March 2008 for internet services).

CO N S OLIDA TED	CO N S OLIDA TED	P A RE N T E N TI TY
30 June	30 June	30 June 30 June
2008	2007	2008 2007
$	$	$ $

28,964	204,795	0 124,922
160,015	205,230	0 10,444
	—	0 —
188,979	410,025	0 135,366

0	15,800	0 —
0	47,400	0 —
0	63,200	0 —

NOTE 23 SUBSIDIARIES

	Name of entity Country of Incorporation Ownership interest Ownership interest
	2007 2006
	% %
	Parent entity Advanced Magnesium Limited(a) Australia Subsidiaries Advanced Magnesium Technologies Pty Ltd(a) Australia 100% 100% AMT North America, Inc USA 100% 100% AMT Europe GmbH Germany 100% 100%

(a) Entities included in the Australian tax consolidated Group.

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 34

NOTES TO THE FINANCIAL STATEMENTS

NOTE 24 EXECUTIVE CHAIRMAN/CFO STATEMENT RE RISK MANAGEMENT

AML has implemented a business wide Risk Management framework. While AML is only a small company at this time, it operates in several and varying jurisdictions and its risk management policies are designed to ensure that the Executive Chairman and CFO and through them, the Audit Committee and Board have effective control over substantive risks.

Financial Risk has a number of elements which are managed jointly by the Executive Chairman and CFO.

Firstly, we have a process of ensuring that all financial information is reliable and that it reflects the true state of the company’s operating performance and financial condition.

Secondly, we monitor all financial and operating systems. Critical to AML at this stage of its development is capital allocation and daily cash flow reports. All known cash commitments are advised to the Executive Chairman. Further, the CFO monitors daily our internal control over financial reporting.

Thirdly, the Board and Executive Chairman continually emphasise the need for total integrity in everything that we do. This includes our own employees as well as only doing business with those companies and partners that we believe to be of the highest integrity.

Operational Risk requires us to understand the markets in which we operate and the processes and inputs involved in all our operating relationships.

Reputational Risk and the effective governance of our good name and reputation for straight dealing are vital when largely operating in overseas markets. There is a zero tolerance of any behaviour, other than that of the highest integrity, by our employees and those that we do business with. The Executive Chairman oversees and approves all business relationships entered into and the policy is to walk away from a business opportunity than risk our reputation for honesty and transparency in everything that we do.

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 35

NOTES TO THE FINANCIAL STATEMENTS

NOTE 24 DISCONTINUED OPERATIONS

Stanwell Magnesium Plant

The Magnesium Primary Production business was being pursued through the Stanwell Magnesium Project (SMP) and involved the development and construction of a 97,000 tonne per annum magnesium metal and alloy plant at Stanwell in Central Queensland. The Annual Report for the year ended 6 July 2004 outlined in Note 5 the shareholders’ decision to terminate the Stanwell Magnesium Project.

Current financial year transactions in relation to the termination of the SMP are as follows:

Financial performance information Gain on sale of assets Expenses on writedown of assets Credit on grant of Engineering Technology licence related to settlement of licensing payable Profit before income tax Income tax expense Profit after income tax Carrying amount of assets and liabilities Total Assets Total Liabilities Net Assets Cashflow information Net cash inflow from investing activities Total cash inflow	C ON S OLIDA TE D
	30 June 30 June
	2008 2007
	$ $

	49,351

	—
	—
	49,351
	—
	49,351


	—
	—
	—


	49,351
	49,351

NB: cash balances subsumed within group and not shown separately as Stanwell Magnesium Project cash.

In the previous financial year on 29 September 2005, the Advanced Magnesium Limited Group agreed to grant Alcan International Limited an exclusive licence to use and to sub-licence the Engineering Technology which AML developed for the Stanwell Magnesium Project. This transaction extinguished the last remaining liability related to the SMP. The Group retains access to the technology it has developed over many years.

The Directors do not believe there will be any further material transactions from this discontinued operations in subsequent financial periods.

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2007 | 36

NOTES TO THE FINANCIAL STATEMENTS

NOTE 26 RELATED PARTY DISCLOSURES

(a) Equity interests in related parties Equity interest in subsidiaries Details of the percentage of ordinary shares held in subsidiaries are disclosed in Note 23 to the financial statements.

(b) Key Management Personnel Remuneration

Details of key management personnel remuneration are disclosed in Note 4 to the financial statements.

(c) Key Management Personnel Equity Holdings

Fully paid ordinary shares of Advanced Magnesium Limited - 2008

	Balance @ 1/7/07 Granted as remuneration Received on exercise of options Net other change(1) Balance @ 30/6/08 Balance held nominally
	No. No. No. No. No. No.
Mr S Fitton Mr G Ralph Mr N Andrews Mr M Brown Prof. G Dunlop Mr PK Nair	— 1,385,589 200,000 1,585,589 —
	— 583,333 583,333 —
	516,667 583,333 1,100,000 —
	516,666 555,556 1,072,222 —
	320 320 —
	1,100 500,000 501,100 —
	1,034,753 3,607,811 0 200,000 4,842,564 —

(1) Acquired on market during year

Fully paid ordinary shares of Advanced Magnesium Limited - 2007	Fully paid ordinary shares of Advanced Magnesium Limited - 2007
	Balance @ 1/7/06 Granted as remuneration Received on exercise of options Net other change Balance @ 30/6/07 Balance held nominally
	No. No. No. No. No. No.
Mr S Fitton (appointed 2 May 07) Mr G Ralph (appointed 2 May 07) Mr N Andrews (appointed 10 May 07) Mr M Brown (appointed 10 May 07) Dr CD Rawlings (resigned 2 May 07) Mr ID Hartnell Mr DM Byrne (resigned 2 May 07) Mr KG Williams ** (resigned 2 May 07) Prof. G Dunlop Mr G Fotheringham Dr C Kettler Mr PK Nair Mr T Sweder	— — — — — —
	— — — — — —
	— — — 516,667 516,667 —
	— — — 516,666 516,666 —
	5,000 — — (5,000) — —
	15,900 — — — 15,900 —
	100,000 — — (100,000) — —
	15,000 — — (15,000) — —
	320 — — — 320 —
	256 — — — 256 —
	— — — — — —
	1,100 — — — 1,100 —
	— — — — — —
	137,576 — — 913,333 1,035,009 —

“Net other change” is balance at date of appointment to Board of Directors

** “Net other change” is balance at date of resignation

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 37

NOTES TO THE FINANCIAL STATEMENTS

NOTE 26 RELATED PARTY DISCLOSURES (cont…)

Share options of Advanced Magnesium Limited - 2008

	Bal vested @ 1/07/07 Granted as remu- eration Exer- cised Net other change Bal @ 30/06/08 Bal vested @ 30/06/08 Vested but not exerci- sable Vested and exerci- sable Options vested during year
	No. No. No. No. No. No. No. No. No.
Mr ID Hartnell Prof. G Dunlop Dr C Kettler Mr G Fotheringham Mr PK Nair Mr T Sweder	656,000 — — (656,000) 0 0 — 0 —
	394,625 — — — 394,625 394,625 — 394,625 —
	164,375 — — (164,375) 0 0 — 0 —
	281,875 — — — 281,875 281,875 — 281,875 —
	373,775 — — (373,775) 0 0 — 0 —
	150,000 — — (150,000) 0 0 — 0 —
	2,020,650 676,500 676,500 676,500

In addition to the above, Mr N Andrews and Mr M Brown are the sole co-Directors of Pegasus Corporate Advisory Pty Ltd (“Pegasus”), which holds 400,000 options over ordinary shares in Advanced Magnesium Limited. These were granted to Pegasus prior to Mr N Andrews and Mr M Brown becoming Directors of Advanced Magnesium Limited on 10 May 2007. These options are vested and were exercisable at any time during this period. See Note 5.2 for further details.

Share options of Advanced Magnesium Limited - 2007

	Bal @ 1/7/06 Granted as remu- eration Exer- cised Net other change Bal @ 30/06/07 Bal vested @ 30/06/07 Vested but not exerci- sable Vested and exerci- sable Options vested during year
	No. No. No. No. No. No. No. No. No.
Mr ID Hartnell Prof. G Dunlop Mr G Fotheringham Dr C Kettler Mr PK Nair Mr T Sweder	656,000 — — — 656,000 656,000 — 656,000 —
	394,625 — — — 394,625 394,625 — 394,625 —
	164,375 — — — 164,375 164,375 — 164,375 —
	281,875 — — — 281,875 281,875 — 281,875 —
	373,775 — — — 373,775 373,775 — 373,775 —
	150,000 — — — 150,000 150,000 — 150,000 —
	2,020,650 — — — 2,020,650 2,020,650 — 2,020,650 —

During the current financial year, no options were exercised by key management personnel (2007: nil).

Further details of the Employee Share Option Plan and of share options granted during the financial year is contained in Notes 4 and 5 to the financial statements.

(d) Wholly owned group

The parent entity in the wholly-owned group is Advanced Magnesium Limited. Members of the wholly-owned group are set out in Note 23.

Transactions during the financial year between the parent entity and other entities in the wholly-owned group included:

Investment in controlled entities;
Repayment of interest free funds from controlled entitles to the parent entity;
Incurring expenditure on behalf of other entities for office rental and related costs, travel costs, seconded employees and other sundry costs. (The entity is fully reimbursed for these costs on an actual cost basis); and
Overseas entities acting as agent for the Australian entity and charging an agency fee of 107.5% for its services.

Transactions involving the parent entity

During the financial year, Advanced Magnesium Limited provided accounting and administration services to its subsidiaries for no consideration (2007: nil).

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 38

NOTES TO THE FINANCIAL STATEMENTS

NOTE 27 NOTES TO THE CASH FLOW STATEMENT

C O N SO	LID ATE D	P A RE N T EN TI TY
30 June 2008	30 June 2007	30 June 2008 30 June 2007
$	$	$ $


2,996,128	6,564,759	2,270,357 4,233,348








(3,822,126)	(5,900,364)	(398,533) (6,328,329)
75,190	108,374	17,339 24,119
(88,403)	(37,186)	1,740
	—	—
489,094	—	489,094 —
(5,400)	(47,820)	0 —

	(141,248)
	—	5,624,482
(180,883)
47,678	768,473	10,236 146,147
67,937	19,987	—
67,064	18,036	— —
		(167,060)
(171,820)	(528,714)	(76,980) (19,232)
	—	—
(184,849)	119,486	(171,716) 129,715
(61,464)	(112,074)	(61,464) (109,065)
(15,800)		— —
(47,400)	(15,800)	— —
(3,831,183)	(5,748,850)	(359,085) (530,423)

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 39

NOTES TO THE FINANCIAL STATEMENTS

NOTE 28 FINANCIAL INSTRUMENTS

(a) Financial risk management objectives

The consolidated entity does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes.

(b) Significant accounting policies

Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in Note 1 to the financial statements.

(c) Interest rate risk management

The consolidated entity is not exposed to interest rate risk as it has nil borrowings.

(d) Maturity profile of financial instruments

The following table details the consolidated entity’s exposure to interest rate risk as at 30 June 2008.

2008	Weighted average effective interest rate	Variable interest rate	Fixed maturity dates	Non interest bearing	Total
			Less than 1 year
	%	$		$	$
Financial assets: Cash and cash equivalents Trade receivables Other receivables Financial liabilities: Trade payables Other payables Employee benefits
	6.20%	746,127 2,250,000 2,996,127
		6,931 6,931
		64,082 64,082
	6.06%	746,127 2,250,000 71,013 3,067,140

	Nil	58,913 58,913
	Nil	0 0
	Nil	71,602 71,602
	Nil	0 0 130,514 130,514

The following table details the consolidated entity’s exposure to interest risk as at 30 June 2007.

2007	Weighted average effective interest rate	Variable interest rate	Fixed maturity dates	Non interest bearing	Total
			Less than 1 year
	%	$		$	$
Financial assets: Cash and cash equivalents Trade receivables Other receivables Financial liabilities: Trade payables Other payables Employee benefits
	5.786%	2,704,901 3,858,352 1,506 6,564,759
	nil	— — 4,720 4,720
	nil	— — 107,040 107,040
	5.689%	2,704,901 3,858,352 113,266 6,676,519

	nil	— — 215,993 215,993
	nil	— — 6,604 6,604
	nil	— — 314,267 314,267
	nil	— — 536,864 536,864

(e) Fair value of financial instruments

The Directors consider that the carrying amount of financial assets and financial liabilities recorded in the financial statements approximates their fair values (2007: fair value).

(f) Liquidity risk management

The consolidated entity manages liquidity risk by maintaining adequate cash reserves and banking facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 40

NOTES TO THE FINANCIAL STATEMENTS

NOTE 29 SUBSEQUENT EVENTS

On 11 July 2008, Mr G Dunlop resigned. On that date (ie in the 2009 financial year) his options 394,625 options lapsed.

The Employee Share Options Plan is to be reviewed by the Board in 2009.

NOTE 30 ADDITIONAL COMPANY INFORMATION

Advanced Magnesium Limited (AML) is a listed public company and is incorporated in Australia. The AML Group operates globally with subsidiaries in Australia, North America and Europe.

Registered Office and Principal place of business

Suite 5 Level 4 350 George St Sydney, NSW 2000 Tel: +61 2 9221 3279 +61 2 9221 3278 +61 2 9221 3275 +61 2 9221 3274

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 41

DIRECTORS’ DECLARATION

The Directors declare that the financial statements and notes thereto, set out on pages 14 to 41:

(a) 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;
(b) in the Directors’ opinion, the attached financial statements and notes thereto are in accordance with the Corporations Act 2001, including compliance with accounting standards and giving a true and fair view of the financial position and performance of the Company and consolidated entity; and
(c) the Directors have been given the declarations required by s.295A of the Corporations Act 2001.

Signed in accordance with a resolution of the Directors made pursuant to s.295(5) of the Corporations Act 2001.

On behalf of the Directors

==> picture [113 x 49] intentionally omitted <==

MR STUART FITTON EXECUTIVE CHAIRMAN

==> picture [151 x 57] intentionally omitted <==

MR NICHOLAS ANDREWS

NON-EXECUTIVE DIRECTOR

29 August 2008

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 42

INDEPENDENT AUDIT REPORT

Deloitte Touche Tohmatsu A.C.N. 74 490 121 060

Independent Auditor’s Report to the members of Advanced Magnesium Limited

Riverside Centre Level 26 123 Eagle Street Brisbane QLD 4000 GPO Box 1463 Brisbane QLD 4001 Australia DX 115 Tel: +61 (0) 7 3308 7000 Fax: +61 (0) 7 3308 7001 www.deloitte.com.au

Report on the Financial Report and AASB 124 Compensation Disclosures in the Directors’ Report

THIS PAGE IS TO BE COMPLETED WITH LODGEMENT OF THE FINAL REPORT

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 43

INDEPENDENT AUDIT REPORT

THIS PAGE IS TO BE COMPLETED WITH LODGEMENT OF THE FINAL REPORT

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2007 | 44

SHAREHOLDER INFORMATION ORDINARY SHARES FULLY PAID

Class: Ordinary share fully paid ASX Code: ANM Voting Rights: Voting rights of members are governed by the Company’s constitution. In summary, every member present in person or by proxy, attorney or representative has one vote on a show of hands and one vote for each share on a poll.

THIS PAGE IS TO BE COMPLETED WITH LODGEMENT OF THE FINAL REPORT

ADVANCED MAGNESIUM LIMITED | ANNUAL REPORT 2008 | 45

==> picture [159 x 76] intentionally omitted <==

CORPORATE OFFICE

ADVANCED MAGNESIUM LIMITED ABN 51 010 441 666

Suite 5 Level 4, 350 George St Sydney, NSW 2000, Australia Postal: Suite 5 Level 4, 350 George St Sydney, NSW 2000, Australia Phone: +61 2 9221 3279 +61 2 9221 3278 +61 2 9221 3275 +61 2 9221 3274 Fax: +61 2 9233 7265 Email: [email protected]

AI assistant

MAGONTEC LIMITED — Annual Report 2008

65327_rns_2008-08-28_22368d36-c5bb-45db-afa6-10a74830ad2b.pdf

ANNUAL REPORT

EXECUTIVE CHAIRMAN’S MESSAGE

The rise of emerging markets

The need for environmental solutions

STUART FITTON

CORPORATE GOVERNANCE STATEMENT

Composition of the board

Board responsibilities

Committees of the board

Independence of directors

Internal controls framework and risk management

ASX First Edition Principles of Good Corporate Governance

CORPORATE GOVERNANCE STATEMENT

Remuneration

Continuous disclosure and shareholder communication

Independent professional advice

Performance assessment

External auditor

Dealing in shares

Ethical standards

Board of Directors

Member of Finance, Audit & Compliance (FAC) Committee Member of Remuneration & Appointments (REM) Committee

MR NICHOLAS ANDREWS

Chairman of the Remuneration & Appointments Committee

MR MICHAEL BROWN Non-executive Director (appointed 10 May 2007) LLB, MAICD, MSDIA Member of Finance, Audit & Compliance Committee Member of Remuneration & Appointments Committee

MR GREGORY RALPH

Directorships of other listed companies

Company Secretary

MR JD TALBOT

Principal activities

Directors meetings

Directors’ shareholdings

Remuneration report

(a) Key management personnel - unaudited

(b) Key management personnel compensation policy - audited

(c) Elements of remuneration related to performance - audited

Remuneration report (continued)

(d) Key management personnel – unaudited

Financial Year ended 30 June 2008:

Financial Year ended 30 June 2007:

Remuneration report (continued)

(e) Value of options issued to key management personnel

(f) Value of options – basis of calculation

Review of Income Statement and operations

Review of Balance Sheet

Review of Cashflow

Dividends

Changes in state of affairs

Subsequent events

Share options on issue at the date of this report or exercised during the year

Indemnification of officers and auditors

Future developments

Audit of Accounts

THIS PAGE IS TO BE COMPLETED WITH LODGEMENT OF THE FINAL REPORT

FINANCIAL REPORT GLOSSARY

BALANCE SHEET

CASHFLOW STATEMENT

Note Contents

Note Contents

INCOME STATEMENT

FOR THE FINANCIAL YEAR ENDED 30 JUNE 2008

CASHFLOW STATEMENT FOR THE FINANCIAL YEAR ENDED 30 JUNE 2008

NOTE 1 SUMMARY OF ACCOUNTING POLICIES

Statement of Compliance

Adoption of new and revised Accounting Standards

Basis of Preparation

Going Concern

Significant Accounting Policies

(a) Cash and cash equivalents

(b) Employee benefits

NOTE 1 SUMMARY OF ACCOUNTING POLICIES (cont…)

Receivables

(d) Financial instruments issued by the Company Debt and equity instruments

Transaction costs on the issue of equity instruments

(e) Foreign currency Foreign Currency Transactions

Foreign Operations

NOTE 1 SUMMARY OF ACCOUNTING POLICIES (cont…)

MAGONTEC LIMITED Annual Report 2008