TALIUS GROUP LIMITED - Annual Report 2008

Acn 111 823 762

2008 ANNUAL report

advance energy[ltd] for the yeAr ended 31 december 2008

proving the model

by successfuLLy restoring weLL productivity And undertAking AdditionAL driLLing to identify Any further cApAcity,

AdvAnce energy[Ltd] mAximizes potentiAL productivity And cAsh fLow, before divesting the Asset once it hAs returned its initiAL investment.

advance

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Section one/ Section SiX/
3 Minute Review 2. FinanCial RepORt 28.
Business Overview 3. Income Statements 29.
Chairman’s Letter 4. Balance Sheets 30.
Financial Highlights 5. Cash Flow Statements 31.
Review of Operations 6. Statements of Changes in Equity 32.
Notes to the
Section tWo /
Financial Statements 34.
industRy OutlOOk 8.
Section SeVen/
Section tHRee/
diReCtOR’s deClaRatiOn 74.
CORpORate GOveRnanCe
stateMent 12. Section eiGHt/
independent auditOR’s
Section FoUR/
RepORt tO the MeMbeRs 76.
diReCtORs’ RepORt 18.
Section nine/
Section FiVe/
shaRehOldeR
auditOR’s inFORMatiOn 78.
independenCe
deClaRatiOn 27.
diRectoRS PoStal addReSS
Chairman - Alex Bajada P.O. Box 1779, WEST PERTH WA 6872
Managing Director - Anthony Short
aUditoRS
Non Executive Director - Gordon Sklenka
BDO Kendalls Audit
comPany SecRetaRy & Assurance (WA) Pty Ltd
David Ballantyne 128 Hay Street, SUBIACO WA 6008
ReGiSteRed & PRinciPal oFFice SolicitoRS - PeRtH
16 Ord Street, WEST PERTH WA 6005 Hardy Bowen, 28 Ord Street
Telephone: + 618 9486 1122 WEST PERTH WA 6005
Facsimile: + 618 9486 1011
WebSite addReSS
www.advanceenergyltd.com.au
Stock eXcHanGe liStinGS
Advance Energy Ltd shares are listed
on the Australian Stock Exchange
under the code AVD
SHaRe ReGiStRy
Advanced Share Registry Services
150 Stirling Hwy, Nedlands WA 6009
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Section one/ 3 MINUTE REVIEW

2008 annUal RePoRt ADVANCE ENERGy[LTD ]

3 minute review/

FOr A QuiCK SnAP SHOt OF wHAt tOOK PLACe in YOur COmPAnY tHrOuGH 2008 PLeASe reAD tHe neXt 5 PAGeS tHiS COnDenSeD review SHOuLD Be reAD in COnJunCtiOn witH tHe entire rePOrt

Section one/ 3 MINUTE REVIEW 2008 annUal RePoRt ADVANCE ENERGy[LTD]

A SHOrt BuSineSS Overview On ADvAnCe enerGY

BUSINESS OVERVIEW

Exploration and Production Company Advance Energy Ltd (AVD) officially listed in June 2006, has a team with over 30 years’ combined experience in acquiring and optimising international oil and gas assets.

Focusing on established fields in Texas, USA that are close to existing infrastructure, AVD buys underperforming assets and re-evaluates existing data to identify untapped recoverable reserves.

By cutting costs, successfully restoring well productivity and undertaking additional drilling to identify further capacity, AVD maximises potential productivity and cash flow, before divesting the asset once it has returned its initial investment.

The company is strongly focused on maximising shareholder value, and minimising dilution by funding all proposed portfolio accumulation by a combination of equity, debt, the reinvestment of cash flow and the proceeds from the periodic divestment of properties.

The company undertakes all operations and holds all USA assets through their fully-owned US subsidiary, Advance Exploration & Production, Inc (“AEPI”). Advance Energy Ltd utilises local expertise that is strongly incentivised to achieve Advance’s goals.

AVD employs US based Hibernia Resources LLC to manage AVD’s US operations and act as independent operator and advisor.

On closing of such purchases Hibernia Resources supervises all operating activities and exploration activities, and provides accounting and administrative services to AVD’s fully owned subsidiary Advance Exploration & Production, Inc (“AEPL”).

Hibernia Resources may also act as the operator on projects in which AVD hold a Working Interest.

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As well as performing the above role Hibernia Resources also provides office facilities and technical personnel to identify, screen, evaluate, negotiate and transact all acquisitions of producing properties, prospective acreage and other exploration and production ventures for the Company.

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CHAirmAn’S Letter tO tHe SHAreHOLDerS

CHAIRMAN’S LETTER

Dear Shareholder

It partially funded its acquisitions of US$ 4.5 million from operating revenues and partially from debt finance in the US and Australia. A non renounceable rights issue was successfully completed in September 2008 raising $3.9 million before costs, ensuring that the A$ debt was reduced by a net amount of $100,000 during the year, while the Lone Camp sale also ensured that its US$ bank debt was reduced by a net US$740,000 over the 2008 year.

your Company has, in a volatile and difficult operating environment, enjoyed a year of very significant achievement.

I draw your attention to the financial summary on the attached page, from which you will note that there was a 39% increase in revenues, a 423% increase in EBITDA (earnings before interest, tax, depreciation/depletion and amortisation), a 224% increase in net tangible assets, and a 402% increase in operational cash inflows.

During the year the Company entered into a number of oil and gas hedge contracts, the benefits of which have been considerable. At 31 December 2008 your Company had a Mark to Market position of greater than US$900,000, and one of its oil hedges goes through to May 2010 covering 1,000 barrels of oil per month at a minimum price of US$95 per barrel.

During the year your Company made strategic acquisitions amounting to US$4.5 million to increase its interests in the Motherlode 1, Possum Kingdom and Lone Camp producing assets. It also disposed of its Lone Camp asset in December 2008 for US$2 million, which represented an IRR in excess of 58% and a return on investment of 112%, over a 35 month period.

All of the above gives us considerable optimism for the future. In particular your Company considers itself well placed to take advantage of both corporate and project opportunities that are likely to present themselves in the next 6-9 months, before the anticipated improvement in the oil and gas sector towards the end of this calendar year or early into 2010.

I would like to thank those who have contributed to the Company’s achievements this year, especially my fellow directors, staff and our highly capable partners in North America. In particular I would also like to thank you, our shareholders, for your continued support.

Alex Bajada Chairman 31st March 2009

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Section one/ 3 MINUTE REVIEW 2008 annUal RePoRt ADVANCE ENERGy[LTD]

FinAnCiAL HiGHLiGHtS

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year ended percentage
31 december Change up/down change
2008 2007
A$’000 A$’000
Revenues from
continuing operations 5,071 3,630 1,441 Up 39.7%
EBITDA 3,428 655 2,773 Up 423.4%
Net loss for the period attributable
to ordinary shareholders (835) (1,789) 954 Down 53.3%
Cash inflows/(outflows)
from operations 1,609 (532) 2,141 Up 402.4%
Net tangible assets 9,677 2,986 6,691 Up 224.1%
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12,000
10,000
8,000
6,000
4,000
2,000
0
-2,000
Revenues EBITDA Net loss for Cash Net
from the period inflows/ tangible
continuing attributable (outflows) assets
operations to ordinary from
shareholders operations
A$’000 2008
2008
2007 2008
2007
2008
2007
2008 2007 2007
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A COnCiSe review OF ADvAnCe enerGY LtD’S 2008 OPerAtiOnS

REVIEW OF OPERATIONS

1. COrPOrAte Overview AnD StrAteGY

Operational Overview

your attention is drawn to the Financial Highlights, immediately preceding this Review of Operations. In the year ended 31 December 2008 the group posted EBITDA of $3.428m (2007: $0.655m), revenues of $5.071m (2007: $3.63m) and a net loss attributable to ordinary shareholders of $0.835m (2007: 1.789m). Combined with positive operational cash flows of $1.609m (2007: outflows of $0.532m) and an increase in net tangible assets to $9.677m (2007: $2.986m) your Board of Directors is very pleased with the performance, especially in the light of volatile commodity and currency markets, and the considerable level of hardship being experienced in the wider business community.

Divestments

During the year the Group sold its Lone Camp project for US$2 million, representing a profit in the order of US$570,000. After taking account of operational net cash

inflows from the project since acquisition of more than US$900,000, this represents an IRR in excess of 58% and a return on investment of 112% over a 35 month period, an outstanding result in the current financial climate and a validation of the original business model.

Acquisitions

The Group made one major acquisition and one smaller consolidating acquisition during the year. These projects enhanced the existing asset base and production, enabled it to assume operatorship and contributed towards the marketability of the Lone Camp asset before divestment.

In April 2008, Advance increased its working interest in the Mother Lode 1 project from 22.5% to 90%. In August 2008, Advance made a number of minor acquisitions from North America Energy Inc including an additional 2.5% working interest on Mother Lode 1 and the remaining 10% working interests of the Lone Camp and Possum Kingdom projects bringing ownership of these two projects up to 100%.

Rights Issue

Enhancement Activities

The Group completed a 5 for 7 non-renounceable rights issue at 8 cents per share to raise $3.9 million before costs. The issue was fully underwritten, and was also sub-underwritten by several parties including director related companies. The underwriter is currently pursuing an amount of $260,000 from a non associated overseas subunderwriter. The Group now has issued capital of 118,798,222 fully paid ordinary shares.

Throughout the course of 2008, Advance Energy Ltd participated in:

a) The drilling of 3 new wells; and
b) The major workover of 8 of its existing wells.

The activity was designed to consolidate an incremental increase in daily production and consolidate proven reserves.

The following table summarises the major operational and production factors in play in the 2008 and 2007 years.

2008 versus 2007 Operational Comparison

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2007 2008
Net Gas Production 284,755 Mcf 213,311 Mcf
Net Oil Production 13,615 Bbls 21,230 Bbls
Revenue US$3,066,406 US$4,373,835
Wells Drilled 4 3
Workovers Performed 9 8
Acquisitions $1,400,000 $4,480,000
Sales - $2,000,000
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Section one/ 3 MINUTE REVIEW

2008 annUal RePoRt ADVANCE ENERGy[LTD]

Loan and Debt Facilities

In the US the debt facility with Sterling Bank of Texas was renegotiated in March 2008 with interest now payable at US Prime (currently 3.25%) plus 1.0%.

Advance is therefore currently paying interest at the rate of 4.25% per annum on the outstanding balance (or less than US$20,000 per month based on its current balance of US$5.4m). This balance has reduced by a net US$740,000 during the year.

Advance has also reduced the balance of its Australian dollar denominated debt by slightly over $100,000. The mix changed with the reduction of issued convertible notes by around $3.7m, largely as a result of the rights issue; and the addition of loan funds, largely secured, of $3.6m to assist with the strategic acquisition of assets in the US, referred to above.

The group’s overall debt therefore reduced, while at the same time making net acquisitions of US$2.5 million and participating in the drilling of 3 wells and 8 workovers.

THE GROUP’S OVERALL DEBT WAS REDUCED, WHILE AT THE SAME TIME MAKING NET ACqUISITIONS OF US$2.5 MILLION AND PARTICIPATING IN THE DRILLING OF 3 WELLS AND 8 WORKOVERS

Risk Management Activities

In 2008, Advance Energy entered the following risk management (hedging) activities achieved through costless collar contracts with MF Global Ltd:

1,000 barrels per month for 12 months from March 2008 at a floor price of US$90.00 per barrel and a ceiling price of US$100.75 per barrel;
1,000 barrels per month for 24 months from May 2008 at a floor price of US$95.00 per barrel and a ceiling price of US$105.00 per barrel. An additional call option at US$120 per barrel caps the hedging exposure at US$15 per barrel and provides the company with upside above this price; and
15,000 million British Thermal Units (MMBTU) per month hedged for 12 months from February 2008 at a floor price of US$7.75 per MMBTU and a ceiling price of US$10.50 per MMBTU.

In September 2008, in anticipation of the sale of the Lone Camp project, the company closed 10,000 MMBTU of its gas hedging commitment leaving it with a monthly hedged volume of 5,000 MMBTU.

As at 31 December 2008, Advance Energy’s mark to market gain on these contracts was in excess of US$900,000, demonstrating once again the benefits of a sound hedging position in volatile commodity markets.

Likely Developments

The Group will actively seek to take advantage of the corporate and project opportunities that are currently presenting themselves and will continue to do so for much of calendar 2009. Its strategic focus will predominantly be the Permian Basin in Texas with its long life, slow depletion wells, extensive operational history, high success rate in drilling and workover programmes, and ready access to technical and marketing infrastructure.

Environmental Issues

The Group’s operations are subject to various environmental regulations under the Federal and State Laws of the United States of America. The majority of the company’s activities involve low level disturbance associated with its production facilities and exploration drilling programs. As at the date of this report the group complies fully with all such regulations.

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Section tWo/ INDUSTRy OUTLOOK 2008 annUal RePoRt ADVANCE ENERGy[LTD]

enerGY mArKet YeAr in review AnD OutLOOK

INDUSTRY OUTLOOK

The Paris-based International Energy Agency (IEA) – energy adviser to 28 industrialised nationsprojects that the total world consumption for marketed energy will increase 50 percent through 2030. If this projection holds true, the world will use more energy over the next 50 years than in all of recorded history.

In the shorter term the IEA predicts that a further 7 million barrels of oil per day in additional capacity will need to be added to currently daily production to meet demand by 2015. However current oil prices are choking new exploration and drilling for oil. Production too is being effected evidenced by a recent IEA observation that upwards of 2 million barrels of new oil production capacity that was due on stream in the coming year has effectively been deferred for now.

enerGY mArKet Overview

As the Energy industry entered 2008 the outlook for the year across the sector was positive. Crude oil prices were rising boosted by constrained supply and increased energy demand among developed nations and emerging markets such as China and India. The annual price of West Texas Intermediate (WTI) crude oil averaged $100 per barrel in 2008, reaching a high of $147.27 a barrel in July before falling over 70% in just five months to the end of 2008, effectively giving up all the price gains it made in the previous four years. The Henry Hub natural gas price averaged $9.13 per thousand cubic feet (Mcf) in 2008, reaching a high in excess of $13.00 Mcf before falling below $5.00 Mcf by year end.

According to the IEA the longer term risk to the industry, particularly the oil market, is that rising demand plus lack of investment will result in a supply crunch. The global credit crisis and falling oil prices have squeezed oil companies’ finances and forced many to cut capital spending and postpone projects, which could have big implications for supply when the global recession ends and demand for energy recovers.

If this situation continues for the next year or two, the oil industry’s capability to keep ahead of the depletion from existing fields will be seriously harmed. As a result IEA predicts the average price for oil will be more than US$100 barrel from 2008 to 2015, rising above $200 a barrel by 2030 as demand continues to far outpace supply.

The world’s economy is no longer impacted by record high energy prices; in fact the economic downturn currently being experienced across the industrialised world is constraining the demand for energy and thus pushing energy prices down.

This is highlighted by the IEA who state that, despite the short-term pullback in oil demand, daily demand will rise from the current 85 million barrels to 106 million barrels in 2030.To meet that demand it is estimated that the world needs US$26.3 trillion in supply-side investments over the next 21 years.

This position is supported by Cambridge Energy Research Associates (CERA) who in a recent study suggest that the slowdown in investment in oil and gas production could reduce future oil supply growth by 8 million barrels a day, setting the stage for a another big spike in crude prices in the years to come.

Despite the recent slowdown in demand the world’s need for energy is increasing at an ever faster pace.

Fossil-based energy – oil, gas and coal – will remain a dominant source of energy through the predictable future; however supply is not keeping pace with demand. Oil and gas continues to get harder and more costly to find and produce, while restricted access to reserves due to either geographical or sovereign impediments, in conjunction with the ongoing threat of natural disasters and geopolitical risks, threaten supply levels. Additionally, unless there are enough companies with the financial capabilities to invest through the down cycle, there is a significant risk that supply growth may lag the eventual demand rebound.

These combinations of effects will likely lead to substantial energy price increases which, given the severity of the fall through the second half of 2008, could possibly be as early as this year.

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Section tWo/ INDUSTRy OUTLOOK 2008 annUal RePoRt ADVANCE ENERGy[LTD]

OiL mArKet review

Demand

The worsening global economy and a weak oil consumption outlook are keeping the world oil market well supplied despite two reductions in production by Organization of Petroleum Exporting Countries (OPEC). Near month oil prices are expected to be driven primarily by the global economy with GDP forecasts being reduced.

Although some of the reduction in US gasoline demand is a result of the reduced mileage driven, a significant proportion of this reduction comes from cutbacks by petrochemical companies. The fall in demand is largely associated with the decline in new home construction and automobile sales. Up to two million b/d of the decline in global oil demand may be from cutbacks in the chemical industry.

THE WORSENING GLOBAL ECONOMy AND A WEAK OIL CONSUMPTION OUTLOOK ARE KEEPING THE WORLD OIL MARKET WELL SUPPLIED DESPITE TWO REDUCTIONS IN PRODUCTION By ORGANIzATION OF PETROLEUM ExPORTING COUNTRIES (OPEC)

Inventories and Storage

Oil inventories in the US continue to build leading to a contango in the oil market. There is currently over-supply in the market and storage facilities are relatively full. Consequently, some producers and investors have started to rent tankers to take advantage of the contango as storage costs on average 90 cents a barrel per month. In the event that OPEC reduces production, inventories may be reduced and this contango may be eliminated, presumably, by an increase in current spot prices.

Supply

The market expects a decline in full-year demand for 2009 but that demand will improve in the second half of the year. Producers will attempt to rein in supply to boost oil prices as demonstrated by OPEC’s two recent production cuts.

Many countries are now experiencing oil production declines and it is likely that the most expensive new production, such as Canadian oil sands, will be the first projects to be cancelled or deferred.

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FOr OiL PriCeS tO imPrOve, DOmeStiC COnSumPtiOn muSt inCreASe AnD reFinerY OutPut wiLL neeD tO GrOw

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OPEC’s Secretary-General states that “oil prices have fallen so close to production costs that 35 of 150 upstream projects under development have been postponed with more expected to follow”.

Deepwater projects are unlikely to be curtailed as they have long lead times. The deepwater rig fleet is fully utilized, unlike its landbased variants.

However, the prospect of finding huge new petroleum sources (such as the Alaskan North Slopes and North Sea discoveries) that are economically viable is low. Most new discoveries, such as offshore Brazil and West Africa, will be expensive to produce.

Demand and Consumption

There is currently no shortage of oil – the principal factor affecting oil prices is demand and demand will be dependent on the overall economy. World oil consumption is projected to fall by 1.2 million barrels per day in 2009 but to rebound in 2010 growing by more than 1.2 million b/d. Most of this increase in consumption will come from non-OECD companies, particularly China, Middle East and Latin America.

Prices

The collapse of crude oil prices in December 2008 was due to the filling of storage facilities at Cushing Oklahoma. For oil prices to improve, domestic consumption must increase and refinery output will need to grow causing a draw on domestic oil inventories.

If world demand shows any strength in 2009, oil prices are likely to firm up quickly with commodity analysts suggesting that the year-end move in crude oil prices above $46 indicates the market will continue to test the $50 barrier. If it breaks through there, prices should settle into a new trading range of $50-60 a barrel and stay in this range throughout the year. The chart opposite from the Energy Information Administration (EIA), which is the official energy statistics bureau for the U.S. government, shows projected oil prices indicating a trend back above $50 bbl in the short term.

Crude Oil Prices

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180
160
140
120
100
80
60
40
20
0
Jan Jan Jan Jan Jan Jan
05 06 07 08 09 10
Short-Term Energy Outlook, February 2009
West Texas Intermediate (WTI)
Average Refiner Acquisition
Cost (RAC)
Dollars per barrel
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OPEC’s Influence on Oil Prices

OPEC produces approximately 40% of world oil. Saudi Arabian Oil Minister Ali Naimi has indicated that the “fair value” for oil is $75/bbl. This is even lower than the estimated oil price required to fund the government budgets of several key OPEC producers such as Iran and Venezuela. The cuts to date do not appear to have improved oil prices even though it would appear that the key OPEC oil producers are reducing their production in line with their agreed upon quotas.

Section tWo/ INDUSTRy OUTLOOK 2008 annUal RePoRt ADVANCE ENERGy[LTD]

nAturAL GAS mArKet review

Production

On 20 Feb 09, Bloomberg.com reported that US production of natural gas was likely to reduce through 2012 as low prices prompted producers to shut down drilling rigs - a process that is expected to halve the number of active rigs from 1,606 down to 800. As a result, gas output would probably decline by between 3-5% in 2009, gas discovery would slow and companies would be unable to offset output declines that average 30% from established wells. Idling rigs slow new discoveries and prevents companies from offsetting declines that average 30% a year from established wells. With such a steep decline and limited capacity, it will be very difficult to get back to the same level of production even if the rig count increases at 1015% per annum. So production may decrease for several years.

Storage

There is currently

approximately 2,000BCF of working natural gas in storageapproximately 9% higher than the 5-year working average at this time of year. Storage may be close to capacity and there is a risk that some storage volumes may need to be released to the market thereby pressuring gas prices.

Consumption

US natural gas consumption is expected to decline by 1.3% in 2009 before increasing by 0.6% in 2010. Consumption in the industrial and electric power sectors is expected to decline by 5.1% and 1.0% respectively.

Prices

Natural gas prices have been falling since April 2008 when the growth of production coupled with a warmer than anticipated winter left the gas industry with substantial supplies in storage. This surplus will depend on how much rig and drilling activity slows down. In the past year, gas production has increased by approximately 8% due to the start-up of many wells in the gas shale plays. The number of rigs drilling for gas in the US has fallen by over 40% from its peak, although the pace of this decline is lower for conventional wells. If this decline increases, the supply of new gas will reduce and prices will start to rise. The below graph from the EIA predicts gas prices to stabilise above $5 mcf in the shorter term.

Natural Gas Prices

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20
15
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5
0
Jan Jan Jan Jan Jan Jan
05 06 07 08 09 10
Dollars per thousand cubic feet
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Short-Term Energy Outlook, February 2009
Residential Price
Henry Hub Spot Price
Composite Wellhead Price
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enerGY mArKet in FOCuS - DriLLinG ServiCeS

Historically, activity levels have been constrained by global rig capacity. In August 2008, the global rig count had increased by approximately 40% over the previous five years. Although energy prices have experienced a dramatic fall, the global rig count has remained healthy with capacity constraints and long-term contracts preventing a material reduction in the short-term. North America is likely to bear the brunt of any rig declines in the current months.

E & P players may not expect the oil price to stay at current levels for long. With WTI crude in contango, the market clearly indicates higher oil prices going forward.

High cost projects are most at risk of cancellation including Canadian oil sands and offshore West Africa and Brazil. The oil sands require an oil price of US$80/bbl or more to be economic.

Expect further quota cuts from OPEC. Companies still need to spend, even in deepwater regions, because of the need to replace reserves.

Falling raw material costs (incl steel) are being passed on to customers by drilling operators. Their revenues are decreasing but their margins are being maintained. In the Middle East, there is some evidence of new project delays as customers wait for costs to fall, but contracts already underway are continuing.

Sources:

Information and data contained within this report has been sourced from several industry. media and government sources.

International Energy Agency (www.iea.org)

Energy Information Administration (www.eia.doe.gov )

Parks Paton Hoepfl & Brown LLC – Energy Investment Banking “Musings from the Oil Patch” (www.pphb.com)

tHe BOArD AnD mAnAGement Are COmmitteD tO COrPOrAte GOvernAnCe

CORPORATE GOVERNANCE

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To obtain a copy of these principles please go to the ASx website

COmPLiAnCe witH ASX COrPOrAte GOvernAnCe reCOmmenDAtiOnS

www.asx.com.au/supervision/ governance/index.htm

Introduction

Advance Energy Limited (“Company”) has adopted systems of control and accountability as the basis for the administration of corporate governance. Some of these policies and procedures are summarised in this section and additional information is provided on the Company’s website.

Whilst the Board has demonstrated, and continues to demonstrate, its commitment to best practice in corporate governance, it emphasises that good corporate governance is only one factor contributing to the success of the Company’s operations.

Additional information about the Company’s corporate governance practices is set out on the Company’s website at www.advanceenergyltd.com.au:

Corporate governance is the system by which companies are directed and managed. It influences how the objectives of the company are achieved, how risk is monitored and assessed and how performance is optimised.

The following table summarises the Company’s compliance with the Corporate Governance Council’s Recommendations:

The Board and management are committed to corporate governance and, to the extent they are applicable to the Company, have adopted the Eight Essential Corporate Governance Principles and each of the Best Practice Recommendations as published by ASx Corporate Governance Council.

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Section tHRee/ THE BOARD’S PRIMARy INCLUDING ITS STRATEGIC
CORPORATE GOVERNANCE ROLE IS THE PROTECTION DIRECTION, ESTABLISHING
(CONTINUED) AND ENHANCEMENT OF GOALS FOR MANAGEMENT
MEDIUM TO LONG TERM AND MONITORING
2008 annUal RePoRt
SHAREHOLDER VALUE THE ACHIEVEMENT OF
ADVANCE ENERGy [LTD]
THESE GOALS
TO FULFIL THIS ROLE, THE
BOARD IS RESPONSIBLE FOR
THE OVERALL CORPORATE
GOVERNANCE OF THE
CONSOLIDATED ENTITy
Principle ASx Corporate Governance Council Recommendations Comply
1 lay solid foundations for management and oversight
1.1 Establish the functions reserved to the board and those delegated to senior yes
executives and disclose those functions.
1.2 Disclose the process for evaluating the performance of senior executives. yes
1.3 Provide the information indicated in the Guide to reporting on principle 1. yes
2 structure the board to add value
2.1 A majority of the board should be independent directors. No
2.2 The chair should be an independent director. No
2.3 The roles of chair and chief executive officer should not be exercised by the yes
same individual.
2.4 The board should establish a nomination committee. No
2.5 Disclose the process for evaluating the performance of the board, its committees yes
and individual directors.
2.6 Provide the information indicated in the Guide to reporting on principle 2. yes
3 promote ethical and responsible decision-making
3.1 Establish a code of conduct and disclose the code or a summary as to: yes
•
the practices necessary to maintain confidence in the company’s integrity;
• the practices necessary to take into account the company’s legal obligations
and the reasonable expectations of its stakeholders; and
• the responsibility and accountability of individuals for reporting and investigating
reports of unethical practices.
3.2 Establish a policy concerning trading in company securities by directors, senior
executives and employees and disclose the policy or a summary. yes
3.3 Provide the information indicated in the Guide to reporting on principle 3. yes
4 safeguard integrity in financial reporting
4.1 The board should establish an audit committee. No
4.2 The audit committee should be structured so that it: No
• consists only of non-executive directors;
• consists of a majority of independent directors;
• is chaired by an independent chair, who is not chair of the board; and
• has at least three members.
13
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Section tHRee/ CORPORATE GOVERNANCE (CONTINUED)

2008 annUal RePoRt ADVANCE ENERGy[LTD]

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Principle ASx Corporate Governance Council Recommendations Comply
4.3 The audit committee should have a formal charter yes
4.4 Provide the information indicated in the Guide to reporting on principle 4. yes
5 Make timely and balanced disclosure
5.1 Establish written policies designed to ensure compliance with ASx
Listing Rule disclosure requirements and to ensure accountability at
senior executive level for that compliance and disclose those policies or
a summary of those policies. yes
5.2 Provide the information indicated in the Guide to reporting on principle 5. yes
6 Respect the rights of shareholders
6.1 Design a communications policy for promoting effective communication
with shareholders and encouraging their participation at general
meetings and disclose the policy or a summary of that policy. yes
6.2 Provide the information indicated in the Guide to reporting on principle 6. yes
7 Recognise and manage risk
7.1 Establish policies for the oversight and management of material business
risks and disclose a summary of those policies. yes
7.2 The board should require management to design and implement the
risk management and internal control system to manage the company’s
material business risks and report to it on whether those risks are being
managed effectively. The board should disclose that management has
reported to it as to the effectiveness of the company’s management of
its material business risks. yes
7.3 The board should disclose whether it had received assurance from the
chief executive officer and the chief financial officer that the declaration
provided in accordance with section 295A of the Corporations Act is
founded on a sound system of risk management and internal control and
that the system is operating effectively in all material respects in relation
to financial reporting risks. yes
7.4 Provide the information indicated in the Guide to reporting on principle 7. yes
8 Remunerate fairly and responsibly
8.1 The board should establish a remuneration committee. No
8.2 Clearly distinguish the structure on non-executive directors’ remuneration
from that of executive directors and senior executives. yes
8.3 Provide the information indicated in the Guide to reporting on principle 8. yes
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Section tHRee/ CORPORATE GOVERNANCE (CONTINUED)

2008 annUal RePoRt ADVANCE ENERGy[LTD]

Council Principle 1:

Lay solid foundations for management and oversight

Role of the Board

The Board’s primary role is the protection and enhancement of medium to long term shareholder value.

To fulfil this role, the Board is responsible for the overall Corporate Governance of the consolidated entity including its strategic direction, establishing goals for management and monitoring the achievement of these goals.

Responsibility of the Board

The Board is collectively responsible for promoting the success of the Company by:

supervising the Company’s framework of control and accountability systems to enable risk to be assessed and managed;
ensuring the Company is properly managed ;
approving and monitoring the progress of major capital expenditure, capital management, and acquisitions and divestitures;
approval of the annual budget;
monitoring the financial performance of the Company;
approving and monitoring financial and other reporting;

THE COMPANy HAS

DEVELOPED A FRAMEWORK FOR RISK MANAGEMENT AND INTERNAL COMPLIANCE AND CONTROL SySTEMS WHICH COVERS ORGANISATIONAL, FINANCIAL AND OPERATIONAL ASPECTS OF THE COMPANy’S AFFAIRS

overall corporate governance of the Company, including conducting regular reviews of the balance of responsibilities within the Company to ensure division of functions remain appropriate to the needs of the Company;
liaising with the Company’s external auditors as appropriate; and
monitoring, and ensuring compliance with, all of the Company’s legal obligations, in particular those obligations relating to the environment, native title, cultural heritage and occupational health and safety.

The Board must convene regular meetings with such frequency as is sufficient to appropriately discharge its responsibilities. Between regular meetings it will also ensure that important matters are addressed by way of circular resolutions.

The Board may, from time to time, delegate some of the responsibilities listed above to its senior management team.

Materiality threshold

The Board has agreed on both quantitative and qualitative guidelines for assessing the materiality of matters. qualitative indications of materiality would include if:

IT APPOINTS THE

MANAGING DIRECTOR AS BEING RESPONSIBLE FOR ENSURING THAT THE SySTEMS ARE MAINTAINED AND COMPLIED WITH

they impact on the reputation of the Company;
they involve a breach of legislation;
they are outside the ordinary course of business;
they could affect the Company’s rights to its assets; or
if accumulated they would trigger the quantitative tests.

The Chairman

The chairman is responsible for leadership of the Board, for the efficient organisation and conduct of the Board’s function and for the briefing of all directors in relation to issues arising at Board meetings. The chairman is also responsible for overall shareholder communication, chairing shareholder meetings, and arranging Board performance evaluation.

The Managing Director

The managing director is responsible for running the affairs of the Company under delegated authority from the Board and to implement the policies and strategy set by the Board. In carrying out his/her responsibilities the managing director must report to the Board in a timely manner and ensure all reports to the Board present a true and fair view of the Company’s financial condition and operational results.

Role and responsibility of management

The role of management is to support the managing director and implement the running of the general operations and financial business of the Company, in accordance with the delegated authority of the Board.

Management is responsible for reporting all matters which fall within the Materiality Threshold at first instance to the managing director or if the matter concerns the managing director then directly to the chairman or the lead independent director, as appropriate.

Relationship of Board with management

Management of the day-to-day business of the Company is to be conducted by or under the supervision of the Board, and by those other officers and employees to whom the management function is properly delegated by the Board.

The Board will adopt appropriate structures and procedures to ensure that the Board functions independently of management. Appropriate procedures may involve the Board meeting on a regular basis without management present, or may involve expressly assigning the responsibility for administering the Board’s relationship to management to a Committee of the Board.

Section tHRee/ CORPORATE GOVERNANCE (CONTINUED)

2008 annUal RePoRt ADVANCE ENERGy[LTD]

Information is formally presented to the Board at Board meetings by way of Board reports and review of performance to date. When directors are providing information about opportunities for the Company, this should always be through the Board.

Council Principle 2:

Structure the board to add value

The Company presently has one executive director, one non-executive director and one non-executive Chairman (Mr Alex Bajada), who is not independent in terms of the ASx Corporate Governance Council’s definition of an independent director, because of his relevant interest in the Company’s securities. The Board believes that the Chairman is able and does bring quality and independent judgment to all relevant issues falling within the scope of the role of a Chairman. Therefore no director is independent in accordance with Council Principle 2. However the Board considers that its structure has been and continues to be appropriate in the context of the company’s current projects and operations. The Company considers that each director possesses skills and experience suitable for building the Company. Furthermore, the Board considers that in the current phase of the Company’s growth,

the Company’s shareholders are better served by directors who have a vested interest in the Company. The Board intends to reconsider its composition as the Company’s operations evolve, and appoint independent directors as appropriate.

The Company has not established a nomination committee, believing that the Company is not currently of a size to justify its formation.

Council Principle 3:

Promote ethical and responsible decision-making.

The Company complies with this recommendation. The company has adopted a code of conduct incorporating all corporate executives. It requires all business affairs to be conducted legally, ethically and with integrity. The code provides for reporting of breach of the code by others. The code of conduct has been made available on the company’s website.

The Board has adopted a policy and procedure on dealing in the Company’s securities by directors, officers and employees which:

prohibits dealing in the Company’s securities whilst in possession of insider information;
prevents short term trading in the Company’s securities;
requires the company secretary or a director (other than the director trading, if applicable) to be notified upon a trade occurring; and
prevents dealing in the Company’s securities during specified blackout periods.

Council Principle 4:

Safeguard integrity in financial reporting.

The Company’s Managing Director and Chief Financial Officer report in writing to the Board that the consolidated financial statements of the Company and its controlled entities for each half and full year present a true and fair view, in all material aspects, of the Company’s financial condition and operational results and are in accordance with accounting standards.

The Company has not

established an audit committee believing that the Company is not of a size, nor are its financial affairs of such complexity to warrant its establishment. The Board as a whole fulfils the role of an audit committee by:

Monitoring the integrity of the financial statements of the Company, and reviewing significant financial reporting judgments.
Reviewing the Company’s internal financial control system and risk management systems.
Reviewing the appointment of the external auditor and approving the remuneration and terms of engagement.
Monitoring and reviewing the external auditor’s independence, objectivity and effectiveness, taking into consideration relevant professional and regulatory requirements.

Council Principle 5:

Make timely and balanced disclosure

Compliance procedures for ASx Listing Rule disclosure requirements have been adopted by the Company. It has appointed an officer of the Company to be responsible for compliance.

Council Principle 6:

Respect the rights of shareholders

Information will be communicated to shareholders as follows:

The annual report is distributed to all shareholders. The Board ensures that the annual report includes relevant information about the operations of the consolidated entity during the year, changes in the state of affairs of the consolidated entity and details of future developments, in addition to the other disclosures required by the Corporations Act.

Section tHRee/ CORPORATE GOVERNANCE (CONTINUED)

2008 annUal RePoRt ADVANCE ENERGy[LTD]

The annual report is made available on the Company’s website, and is provided in hard copy format to any shareholder who requests it.

The half-yearly report contains summarised financial information and a review of the operations of the consolidated entity during the period. The half-year reviewed financial report is prepared in accordance with the requirements of applicable Accounting Standards and the Corporations Act and is lodged with the Australian Securities Exchange. The half-yearly report is made available on the Company’s website, and is sent to any shareholder who requests it.
The quarterly report contains summarised cash flow financial information and details about the Company’s activities during the quarter. The quarterly report is made available on the Company’s website, and is sent to any shareholder who requests it.
Proposed major changes in the consolidated entity which may impact on share ownership rights are submitted to a general meeting of shareholders.
The Company’s website is well promoted to shareholders and shareholders may register to receive updates, either by email or in hard copy.

The Board encourages full participation of shareholders at the Annual General Meeting to ensure a high level of accountability and identification with the consolidated entity’s strategy and goals. Important issues are presented to the shareholders as resolutions.

The shareholders are requested to vote on the appointment and aggregate remuneration of directors, the granting of options and shares to directors and changes to the constitution. Copies of the constitution are available to any shareholder who requests it.

Company’s website

The Company maintains a website at: www.advanceenergyltd.com.au.

On its website, the Company makes the following information available on a regular and up to date basis:

company announcements;
latest information briefings;
notices of meetings and explanatory materials;
quarterly, half yearly and annual reports.

The website is being continuously updated with any information the directors and management may feel is material.

The Company also ensures that the audit director attends the Annual General Meeting.

Council Principle 7:

Recognise and manage risk

The Company has developed a framework for risk management and internal compliance and control systems which covers organisational, financial and operational aspects of the Company’s affairs. It appoints the managing director as being responsible for ensuring that the systems are maintained and complied with.

Council Principle 8:

Remunerate fairly and responsibly

The Board believes the Company is not currently of a size, nor are its affairs of such complexity to justify the formation of a remuneration committee. The Board as a whole is responsible for the remuneration arrangements for Directors and executives of the Company and considers it more appropriate to set time aside at board meetings to specifically address matters that would ordinarily fall to the remuneration committee.

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Section tHRee/ DIRECTORS’ REPORT 2008 annUal RePoRt ADVANCE ENERGy[LTD]

YOur DireCtOrS PreSent tHeir rePOrt On tHe COnSOLiDAteD entitY (GrOuP) FOr tHe YeAr enDeD 31 DeCemBer 2008

DIRECTORS’ REPORT

your Directors present their report on the consolidated entity (Group) for the year ended 31 December 2008.

directors

The names and details of the Group’s Directors in office at any time during the financial year and until the date of this report are detailed below.

A. Bajada A. Short G. Sklenka

principal activities

The principal continuing activities of the Group and Company during the financial period were the acquisition, production and exploration of petroleum and gas properties in Texas, United States of America.

There were no changes in the nature of the activities of the group during the year.

Operating results

The net operating loss of the Group for the period ended 31 December 2008 after income tax amounted to $835 million (2007: loss $1.789 million).

dividends paid or recommended

No dividend was paid or declared during the period and the Directors do not recommend the payment of a dividend.

Review of operations

A detailed review of the Group’s activities is contained in the Operations Review section of the Annual Report.

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2008 annUal RePoRt ADVANCE ENERGy[LTD]

Section tHRee/ DIRECTORS’ REPORT (CONTINUED)

Significant changes in the state of affairs

Significant changes in the state of affairs of the group during the year included (AUD $ 000):

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2008 2007
a) An increase in:
• Issued share capital 3,664 265
• Value of options issued at various prices - 44
b) An increase/(decrease) in the debt structure as follows:
• Convertible notes (3,773) 4,575
• Loans 3,658 -
• Bank finance 816 (1,144)
c) Acquisition of assets and development costs in Texas, USA net of
depletions and depreciation 8,624 115
d) An increase in Mark to Market position as follows:
• Derivative asset 1,310 -
• Mark to Market calls 1,213 -
• Derivative gain 943 -
e) Profit on sale of oil and gas properties 813 -
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Since 2006 the Company has had a revolving line of credit with Sterling bank in the U.S. Generally, the borrowing base of the line of credit as determined by the bank, relates to the Company’s investment in oil and gas properties, up to a current maximum of US$40 million. As at the end of the year the Company had drawn down an amount of US$5.4 million. This represents a net reduction in the year of US$740,000.

The vagaries of volatile Fx movements in the year result in the increase shown in A$ terms. The available bank borrowing limit is amended as and when the Company increases its portfolio through acquisition or value added activities.

Matters subsequent to the end of the financial year

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Section tHRee/ DIRECTORS’ REPORT (CONTINUED)

2008 annUal RePoRt ADVANCE ENERGy[LTD]

Any settlement amounts were paid on a monthly basis during the hedge term. The expired hedges accounted for approximately 20% of the derivative revenue. There remains one further oil hedge (1,000 Bbls per month at a minimum of US$95 Bbl) which expires in May 2010. For further information in relation to the hedges please review to the Review of Operations section in this Annual Report.

There were no other material events arising subsequent to 31 December 2008 to the date of this report, which significantly affected, or may significantly effect, the operations of the Group and Company or the results of those operations on the state of affairs of the Company.

Likely developments

The Company will actively seek to take advantage of the corporate and project opportunities that are currently presenting themselves and will continue to do so for much of calendar 2009. Its strategic focus will predominantly be the Permian Basin in Texas with its long life, slow depletion wells, extensive operational history, high success rate in drilling and workover programmes, and ready access to technical and marketing infrastructure.

THE COMPANy WILL ACTIVELy SEEK TO TAKE ADVANTAGE OF THE CORPORATE AND PROJECT OPPORTUNITIES THAT ARE CURRENTLy PRESENTING

Environmental Issues

inFOrmAtiOn On DireCtOrS AnD SeCretArY

Names, qualifications, experience and special responsibilities

Mr Alex Bajada B.Econ(UWA) – Non Executive Chairman

Mr Bajada is Executive Director of Spartan Nominees Pty Ltd, corporate consultants. He is a former stockbroker with many years experience in the corporate sector and has been involved in the management of public companies for many years fulfilling the roles of chairman and director.

Other Current directorships

Managing Director of

Excalibur Mining Corporation Limited, Chairman of AxG Limited, Chairman of Odin Energy Limited, Director of Hawkesbridge Limited and an independent Director of the WA Local Government Superannuation Plan.

THEMSELVES AND WILL CONTINUE TO DO SO FOR MUCH OF CALENDAR 2009

Other directorships within the last three years

Advance Healthcare Group Ltd, Chairman of Inovax Ltd.

Mr Anthony Short BPE, BCom, Grad Dip(Fin), MAICD - Managing Director

Mr Short has over 17 years experience in the administration and management of listed public companies. He has extensive experience at board level in the management and formation of public companies in the areas of gold mining, drilling, oil and gas in the USA. Mr Short has held the position of Chairman, CFO and Managing Director in a number of listed public companies and has also acted as corporate advisor to a number of public Company listings.

Other Current directorships

Regal Resources Ltd, Palace Resources Limited, Kilgore Oil and Gas Limited and Vector Resources Limited.

Other directorships within the last three years Odin Energy Limited

Mr Gordon Sklenka B.Com (UWA) - Non Executive Director

Mr Sklenka graduated from the University of Western Australia with a Bachelor of Commerce degree majoring in accounting and finance. He has over 16 years experience in corporate finance in the areas of capital raisings, IPOs, acquisitions and project finance in the resources and technology sectors.

Mr Sklenka has worked with a number of listed public companies in both Australia and Canada and developed extensive experience in Company formation, capital raising and project acquisition.

He is currently on the board of four other Australian ASx listed public companies in the resources sector.

Other Current directorships

Regal Resources Ltd, Tribune Resources NL, Rand Mining NL, AxG Mining Ltd, Kilgore Oil and Gas Limited and Vector Resources Limited.

Other directorships within the last three years None

David Ballantyne MA (Hons) University of Edinburgh, ACA - Company Secretary

Mr. Ballantyne is a Chartered Accountant with commercial experience in the exploration / mining, biotechnology and aquaculture sectors. He has previously worked for a former Big 4 accounting firm and second tier accounting firms in the areas of audit, corporate services and insolvency. Mr Ballantyne has also had extensive experience in the corporate management, and director/ company secretary roles of small mineral exploration and production companies and has completed listings on AIM and the ASx. He is currently Company Secretary of Kilgore Oil and Gas Limited, Red Sky Energy Limited and Odin Energy Limited.

Section tHRee/ DIRECTORS’ REPORT (CONTINUED)

2008 annUal RePoRt ADVANCE ENERGy[LTD]

Meetings of Directors

The number of meetings held by the company’s board of directors during the year ended 31 December 2008 and the number of meeting attended by each director were:

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Board meetings held Board meetings attended
A. Bajada 21 21
A. Short 21 21
G. Sklenka 21 21
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Securities held and controlled by Directors

As at the date of this report, the interests of the Directors in shares, Convertible Preference Shares (“CPS”) and options of the Company were:

Ordinary shares

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Held at beginning Converted Balance at
Holder of year Acquired Sold CPS end of year
Alex Bajada - Indirect 3,020,001 2,157,143 - - 5,177,144
- -
Anthony Short - Indirect 8,674,002 7,784,597 16,458,599
Gordon Sklenka - Indirect 3,000,000 3,805,357 - - 6,805,357
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Options

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Held at beginning Balance at
Holder of year Acquired Sold Exercised end of year
Alex Bajada - Indirect 2,000,000 - - - 2,000,000
- - -
Anthony Short - Indirect 4,000,000 4,000,000
Gordon Sklenka - Indirect 2,000,000 - - - 2,000,000
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Converting Preference shares (CPS)

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Held at beginning Converted Balance at
Holder of year Acquired Sold to Shares end of year
Alex Bajada - Indirect 1 - - - 1
Anthony Short - Indirect 3 - - - 3
Gordon Sklenka - Indirect 2 - - - 1
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Details of the conditions relating to conversion of the Converting Preference Shares are included in note 19.3.

tHiS rePOrt OutLineS tHe remunerAtiOn ArrAnGementS in PLACe FOr DireCtOrS AnD eXeCutiveS OF ADvAnCe enerGY LimiteD

Remuneration Report (Audited)

This report outlines the remuneration arrangements in place for directors and executives of Advance Energy Limited. This report has been set out under the following main headings:

A. Principles Used to Determine the Nature and Amount of Remuneration
B. Service Agreements
C. Details of Remuneration
D. Share-based Compensation
E. Additional Information

There is not a separately constituted Remuneration committee. The Board, as a whole, discharges responsibilities in relation to remuneration of the Company’s executives including any share and benefit plans, and aims to establish appropriate remuneration levels and incentive policies for all executives. Remuneration is not directly linked to performance as it is considered that all directors have material vested interests in the success of the business through their holdings of shares, options and converting preference shares.

The information in this remuneration report has been audited as required by section 308(3C) of the Corporations Act 2001.

A. PRINCIPLES USED TO DETERMINE THE NATURE AND AMOUNT OF REMUNERATION

The Board of Directors is responsible for determining and reviewing compensation arrangements for Directors and Executive Officers. It assesses the appropriateness of the nature and amount of emoluments of such officers on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality Board and executive team.

The objective of the Group’s executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with achievement of strategic objectives and the creation of value for shareholders, and conforms with market best practice for delivery of reward. The Board ensures that executive reward satisfies the following key criteria for good reward governance practices:

Competitiveness and reasonableness
Acceptability to shareholders
Transparency
Capital management

The board policy is to remunerate non executive directors at fair market rates for comparable companies for the relevant time, commitment and responsibilities. The Board determines payments to the non-executive directors and reviews their remuneration annually based on market practice, duties and accountability. The maximum amount of fees that can be paid to directors is subject to approval by shareholders at General Meetings. Fees for non-executive directors are not linked to the performance of the Group. However, to align director’s interests with shareholder interests, the directors are encouraged to hold shares in the company and may be issued with additional securities as deemed appropriate.

The Board believes that the remuneration policy is appropriate given the stage of development of the Company and the activities which it undertakes and is appropriate for aligning director and executive objectives with shareholder and business objectives. The Board will continue to develop new practices which are appropriate to the Company’s size and stage of development.

Executive Officers are those directly accountable for the operational management and strategic direction of the Company and the consolidated entity.

All contracts with directors and executives may be terminated by either party with three months notice, in most cases.

Fixed remuneration

Fixed remuneration consists of a base remuneration package, which includes directors’ fees (in the case of Directors), salaries, consulting fees and employer contributions to superannuation funds.

Fixed remuneration levels for Directors and executive officers will be reviewed annually by the Board through a process that considers the employee’s personal development, achievement of key performance objectives for the year, industry benchmarks wherever possible and CPI data.

Appropriate key performance indicators (KPIs) will be developed by the Board for each director and executive officer each year, and reflect an assessment of how that individual can fulfil their particular responsibilities in a way that best contributes to Company performance and shareholder wealth in that year.

Section tHRee/ DIRECTORS’ REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD]

Performance-linked remuneration

The Company currently has no performance based remuneration. As previously stated the Board, who are the key management, have material vested interests in the success of the business through their holdings of shares, options and converting preference shares.

B. SERVICE AGREEMENTS

Remuneration and other

terms of employment for the key management personnel are not formalised in service agreements. However it should be noted that remuneration levels have not increased since the Company listed in 2006 on ASx, and any future adjustments will be approved at Board level. The major provisions of the remuneration of key management personnel are set out below.

The directors and key management personnel during the year included:

Directors

Mr A Bajada, Chairman

Commenced 24 November 2004, no termination date;
Non Executive Chairman’s fees (paid as consulting fees), inclusive of superannuation, for the year ended 31 December 2008 of $54,500 to be reviewed annually by the Board; and
Payment of a termination benefit on early termination by the Company, other than for gross misconduct, equal to 3 months’ fees.

Mr A Short, Managing Director

Commenced 24 November 2004, no termination date;
Base salary (paid as consulting fees), inclusive of superannuation, for the year ended 31 December 2008 of $220,000, to be reviewed annually by the Board; and
Payment of a termination benefit on early termination by the Company, other than for gross misconduct, equal to 3 months’ fees.

Mr G Sklenka, Non-executive Director

Commenced 24 November 2004, no termination date;
Non executive director’s fees (paid as consulting fees), inclusive of superannuation, for the year ended 31 December 2008 of $38,148 to be reviewed annually by the Board;
Additional consulting fees, inclusive of superannuation, for the year ended 31 December 2008 of $62,580 to be reviewed annually by the Board; and
Payment of a termination benefit on early termination by the Company, other than for gross misconduct, equal to 3 months’ director’s and consulting fees.

Key Management Personnel

Mr D Ballantyne, Company Secretary

Commenced 5 February 2008, no termination datewith;
Consulting fee, based on time spent on Company business in the range of $2,000 to $10,000 per month to be reviewed annually by the Board; and
Payment of a termination benefit on early termination by the Company, other than for gross misconduct, equal to one (1) months’ consulting fee.

Mr L Camacho, former Company Secretary

Term of agreement commencing 1 July 2007, no termination date;
Consulting fee, of $7,267 per month to be reviewed annually by the Board; and
Payment of a termination benefit on early termination by the Company, other than for gross misconduct, equal to one (1) months’ consulting fee.

C DETAILS OF REMUNERATION

The key management personnel of Advance Energy Limited during the year ended 31 December 2008 includes all directors and executives mentioned above.

Names and positions of key management personnel at any time during the financial period are:

Mr A Bajada Non-Executive Chairman

Mr A Short

Managing Director

Mr G Sklenka

Non-Executive Director, Company Secretary (6 June 2008 to 4 July 2008)

Mr L Camacho

Company Secretary (Resigned 6 June 2008)

Mr D Ballantyne

Company Secretary (Appointed 4 July 2008)

Remuneration packages contain the following key elements:

a) Primary benefits salary/fees and bonuses;
b) Post-employment benefits including superannuation;
c) Equity share options and other equity securities; and
d) Other benefits.

Section tHRee/ DIRECTORS’ REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD]

Nature and amount of remuneration for the year ended 31 December 2008.

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Post-
Short-term employment
employee benefits benefits Equity
Remune-
Option Preference Remune- ration
Salary, Super- based share ration linked to
consulting annu- pay- based consisting perfor-
fees Bonus ation ments payments Total of equity mance
$ $ $ $ $ $ % %
executive
directors
A Short 2008 220,000 - - - - 220,000 - -
(Managing
Director) 2007 220,000 18,333 - - - 238,333 - 8.3
non-executive
directors
A Bajada 2008 54,500 - - - - 54,500 - -
2007 54,500 4,542 - - - 59,042 - 8.3
G Sklenka 2008 100,728 - - - - 100,728 -
2007 100,000 8,333 - - - 108,333 - 8.3
total directors’ 2008 375,228 - - - - 375,228 - -
remuneration 2007 374,500 31,208 - - - 405,708 - -
Other key
management
personnel
Lance Camacho 2008 36,335 - - - - 36,335 - -
(Resigned 6
June 2008) 2007 114,134 7,267 5,856 - - 127,257 - -
D Ballantyne 2008 62,950 - - - - 62,950 - -
(Appointed
January 2008) 2007 - - - - - - - -
total other key 2008 99,285 - - - - 99,285 - -
management
remuneration 2007 114,134 7,267 5,856 - - 127,257 - -
total 2008 474,513 - - - - 474,513 - -
Remuneration 2007 488,634 38,475 5,856 - - 532,965 - -
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Section tHRee/ DIRECTORS’ REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD]

D. SHARE-BASED REMUNERATION

Options

No options were granted to directors and other key management during the year ended 31 December 2008.

Convertible Preference Shares

No convertible preference shares were issued during the year ended 31 December 2008.

E. ADDITIONAL INFORMATION

Principles used to determine the nature and amount of remuneration: relationship between remuneration and company performance.

As stated elsewhere in this Remuneration Report, the Board, who are the key management, have material vested interests in the success of the business through their holdings of shares, options and converting preference shares. Currently these holdings are considered an adequate performance based incentive to key management. They also help to preserve the Company’s cash resources given that all efforts are currently being expended to build the business and establish self-sustaining revenue streams.

Indemnification and Insurance of Directors and Officers

During the financial period, the Company maintained an insurance policy which indemnifies the Directors and Officers of Advance Energy Limited in respect of any liability incurred in connection with the performance of their duties as Directors or Officers of the Company. The Directors made a personal contribution toward the premium to satisfy Section 199B of the Corporations Act 2001. The Company’s insurers have prohibited disclosure of the amount of the premium payable and the level of indemnification under the insurance contract.

Proceedings on behalf of the Company

No person has applied for Leave of the Court under section 237 of the Corporations Act 2001 to bring proceedings on behalf of the company or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for all or any part of those proceedings.

The company was not a party to any such proceedings during the period.

Share Options

At the date of this report the following unlisted options over unissued shares in Advance Energy Ltd were on issue:

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Number
Exer- of shares
Expiry cise under
Date Price option
31
December
2010 $0.25 13,850,000
15
December
2009 $0.60 5,000,000
29
December
2009 $0.65 250,000
31
December
2010 $0.40 250,000
TOTAL 19,350,000
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No person entitled to exercise an option had or has any right by virtue of the option to participate in any share issue of any other body corporate.

This is the end of the audited remuneration report.

Section tHRee/ DIRECTORS’ REPORT (CONTINUED)

2008 annUal RePoRt ADVANCE ENERGy[LTD]

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Convertible Preference Shares

At the date of this report the following unlisted Convertible Preference Shares in Advance Energy Ltd were on issue:

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|||
|---|---|
|Number CPS|
|in Issue|
|CPS B|5|
|CPS C|2|
|CPS D|2|
|TOTAL|9|

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Conditions relating to the outstanding Convertible Preference Shares are contained in note 19.3

Non-Audit Services

The following non-audit services were provided by the entity’s auditor, BDO Kendalls Audit and Assurance (WA) Pty Ltd or associated entities. The directors are satisfied that the provision of nonaudit services is compatible with the general standard of independence for auditors imposed by the Corporations Act. The directors are satisfied that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons:

All non-audit services have been reviewed by the audit committee to ensure they do not impact the impartiality and objectivity of the auditor;
None of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, including reviewing or auditing the auditor’s own work, acting in a management or a decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risk and rewards.

BDO received or are due to receive the following amounts for the provision of non-audit services:

BDO Taxation Services $ 13,424 ( 2007: $45,220)

BDO Corporate Compliance Services $ Nil ( 2007: $ 2,735)

Auditor’s Independence Declaration

The Auditor’s Independence Declaration, as required under Section 307c of the Corporations Act 2001, for the financial year ended 31 December 2008 has been received and can be found on page 27.

Rounding of Amounts

The company is of a kind referred in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the directors’ report. Amounts in the directors’ report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar.

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

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A. Bajada Chairman

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A. Short Managing Director West Perth, W.A. 31st March 2009

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bdO kendalls audit & assurance (wa) pty ltd 128 hay street, subiaCO wa 6008 po box 700, west peRth wa 6872 phone 61 8 9380 8400 Fax 61 8 9380 8499 [email protected] www.bdo.com.au abn 79 112 284 787

31 March 2009

Board of Directors Advance Energy Limited PO Box 1779 WEST PERTH WA 6872

Dear Sirs

deClaRatiOn OF independenCe by Glyn O’bRien tO the diReCtORs OF advanCe eneRGy ltd

As lead auditor of Advance Energy Ltd for the year ended 31 December 2008, I declare that, to the best of my knowledge and belief, there have been no contraventions of:

the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and
any applicable code of professional conduct in relation to the audit.

This declaration is in respect of Advance Energy Limited and the entities it controlled during the period.

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Glyn O’brien Director

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bdO kendalls audit & assurance (wa) pty ltd Perth, Western Australia

bdO kendalls is a national association of separate partnerships and entities

Section SiX/ FINANCIAL REPORT

2008 annUal RePoRt ADVANCE ENERGy[LTD ]

FinAnCiAL rePOrt /

tHiS GenerAL PurPOSe FinAnCiAL rePOrt HAS Been PrePAreD in ACCOrDAnCe witH AuStrALiAn eQuivALentS tO internAtiOnAL FinAnCiAL rePOrtinG StAnDArDS (AiFrSS), OtHer AutHOritAtive PrOnOunCementS OF tHe AuStrALiAn ACCOuntinG StAnDArDS BOArD, AuStrALiAn ACCOuntinG interPretAtiOnS AnD tHe COrPOrAtiOnS ACt 2001

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Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

income StatementS FOR THE yEAR ENDED 31 DECEMBER 2008

FOR THE yEAR ENDED

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Group parent entity
2008 2007 2008 2007
Notes $’000 $’000 $’000 $’000
Revenue from
continuing operations
Sale of goods 5 5,071 3,630 - -
Finance charges earned 3 56 650 830
Other income 5 1,154 266 211 266
6,228 3,952 861 1,096
Profit on sale of asset 6 812 - - -
expenses
Cost of Oil & Gas sold (1,348) (735) - -
Finance costs 7 (1,704) (1,266) (1,154) (581)
- -
Foreign exchange gains/(losses) 3,427 (1,069)
Other expenses from ordinary activities
Depreciation 7,12 (415) (319) (47) (59)
- -
Depletion of oil and gas properties 7,14 (2,107) (793)
Exploration expenditure written off 7 - (292) - -
Accounting and audit (67) (102) (67) (102)
Consultancy (757) (772) (757) (772)
Travel (209) (231) (209) (231)
- -
Research reports and maps (6) (6)
Rent (39) (55) (39) (55)
Legal fees (155) (12) (155) (12)
Marketing and advertising (49) (77) (49) (77)
Regulatory (53) (41) (53) (41)
Staff costs (157) (629) (157) (629)
Administrative expenses (846) (351) (383) (13)
profit/(loss) before tax from continuing
operations (872) (1,723) 1,212 (2,545)
Income tax(expense)/benefit 8 37 (66) - -
net profit/ (loss) for the year (835) (1,789) 1,212 (2,545)
loss per share
Basic and diluted (cents per share) 22 (0.97) (2.61) - -
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The Income Statements should be read in conjunction with the accompanying notes to the financial statements.

Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

balance SHeetS

AS AT 31 DECEMBER 2008

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Group parent entity
2008 2007 2008 2007
Notes $’000 $’000 $’000 $’000
Current assets
Cash and cash equivalents 9 2,421 1,936 342 1,671
Trade and other receivables 10 926 740 648 56
Other financial assets 11 - - 16,005 9,674
Derivative financial instrument 13 1,056 - - -
total current assets 4,403 2,676 16,995 11,402
non-current assets
Property, plant and equipment 12 1,472 1,327 - 213
Oil and gas properties 14 22,963 14,484 - -
Deferred tax assets 24 - - - -
Other financial assets 15 17 - 1 1
Derivative financial instrument 13 254 - - -
total non-current assets 24,706 15,811 1 214
total assets 29,109 18,487 16,995 11,615
Current liabilities
Trade and other payables 16 2,255 418 822 278
Provisions 17 245 28 104 28
Interest bearing liabilities 18 5,985 12,718 5,985 5,800
Other financial liabilities 13 1,213 - - -
total current liabilities 9,698 13,164 6,911 6,106
non-current liabilities
Deferred tax liability 25 - 37 - -
Interest bearing liabilities 18 9,734 2,300 2,000 2,300
total non-current liabilities 9,734 2,337 2,000 2,300
total liabilities 19,432 15,501 8,911 8,406
net assets 9,677 2,986 8,084 3,209
equity
issued share capital 19 12,692 9,029 12,692 9,029
Reserves 20 4,444 581 1,972 1,972
Accumulated losses 21 (7,459) (6,624) (6,580) (7,792)
total equity 9,677 2,986 8,084 3,209
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The Balance Sheets should be read in conjunction with the accompanying notes to the financial statements.

Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

caSH FloW StatementS

FOR THE yEAR ENDED 31 DECEMBER 2008

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Group parent entity
2008 2007 2008 2007
Notes $’000 $’000 $’000 $’000
Cash flows from operating activities
- -
Receipts from customers 5,666 3,267
Payments to suppliers and staff (2,533) (2,711) (1,492) (1,491)
Interest received 3 56 211 51
Interest and borrowing costs (1,376) (1,259) (918) (626)
Derivative instruments (151) - - -
Other income - 115 - 115
Net cash inflow/(outflow)
from operating activities 23 1,609 (532) (2,199) (1,951)
Cash flows from investing activities
- -
Purchase of oil and gas properties (5,415) (2,643)
- - -
Sale of oil and gas properties 2,850
-
Purchase of plant and equipment (481) (348) (133)
Sale of plant and equipment - - 165 -
Net cash inflow/(outflow)
from investing activities (3,046) (2,991) 165 (133)
Cash flows from financing activities
Proceeds from issues of shares 3,190 400 3,190 400
Capital raising costs (95) (135) (95) (135)
Proceeds from borrowings 3,474 5,285 3,474 4,575
Repayments of borrowings (4,449) (1,818) (3,589) (800)
- -
Advances to subsidiary (2,276) (1,727)
- - -
Hedging contracts 1,213
Net cash inflows from financing activities 3,333 3,732 704 2,313
Net increase in cash and cash equivalents 1,896 209 (1,330) 229
Cash and cash equivalents at the beginning
of the financial period 1,936 1,727 1,672 1,442
- - -
Exchange rate changes on cash (1,411)
Cash and cash equivalents at the end of the
financial period 9 2,421 1,936 342 1,671
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The Cash Flow Statements should be read in conjunction with the accompanying notes to the financial statements.

Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

StatementS oF cHanGeS in eQUity FOR THE yEAR ENDED 31 DECEMBER 2008

COnSOLiDAteD

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Foreign
year ended
Currency
31 December 2008 Issued Equity Option Translation Accumu-
$’000 Capital Reserve Reserve Reserve lated losses TOTAL
Balance at beginning of period 9,029 150 1,822 (1,391) (6,624) 2,986
- - - -
Currency translation difference 3,863 3,863
- - - -
Net income recognised directly in equity 3,863 3,863
- - - -
Loss for the year (835) (835)
Total recognised income and expense
- - -
for the year 3,863 (835) 3,028
Transactions with equity holders in
their capacity as equity holders
Issues of share capital, net of
transaction costs 3,663 - - - - 3,663
12,692 150 1,822 2,472 (7,459) 9,677
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Foreign
year ended Currency
31 December 2007 Issued Equity Option Translation Accumu-
$’000 Capital Reserve Reserve Reserve lated losses TOTAL
Balance at beginning of period 8,764 150 1,778 (414) (4,835) 5,443
- - - -
Currency translation difference (977) (977)
Net income recognised
directly in equity
- - - -
Loss for the year (1,789) (1,789)
Total recognised income and expense
- - -
for the year (977) (1,789) (2,766)
Transactions with equity holders in
their capacity as equity holders
Share based payments - - 44 - - 44
Issues of share capital, net of
transaction costs 265 - - - - 265
9,029 150 1,822 (1,391) (6,624) 2,986
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The above Consolidated Statements of Changes in Equity should be read in conjunction with the accompanying notes to the financial statements.

Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

StatementS oF cHanGeS in eQUity (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

PArent entitY

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year ended
31 December 2008 Issued Equity Option Accumulated
$’000 Capital Reserve Reserve losses TOTAL
Balance at beginning of period 9,029 150 1,822 (7,792) 3,209
Net income recognised directly in equity - - - - -
- - -
Loss for the year 1,212 1,212
Total recognised income and expense
- - -
for the year 1,212 1,212
Transactions with equity holders in their
capacity as equity holders
Issues of share capital, net of
transaction costs 3,663 - - - 3,663
12,692 150 1,822 (6,580) 8,084
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----- Start of picture text -----

year ended
31 December 2007 Issued Equity Option Accumulated
$’000 Capital Reserve Reserve losses TOTAL
Balance at beginning of period 8,764 150 1,778 (5,247) 5,445
- - -
Loss for the year (2,545) (2,545)
Total recognised income and expense
- - -
for the year (2,545) (2,545)
Transactions with equity holders in their
capacity as equity holders
Share based payments - - 44 - 44
Issues of share capital, net of
transaction costs 265 - - - 265
9,029 150 1,822 (7,792) 3,209
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The above Statements of Changes in Equity should be read in conjunction with the accompanying notes to the financial statements.

tHe GrOuP iS COnFiDent tHAt it wiLL SuCCeSSFuLLY rAiSe ADDitiOnAL FunDS tO meet itS FinAnCiAL OBLiGAtiOnS in tHe FOreSeeABLe Future

NOTES TO THE FINANCIAL STATEMENTS

FOR the yeaR ended 31 deCeMbeR 2008

1 SummArY OF SiGniFiCAnt ACCOuntinG POLiCieS

The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial report includes separate financial statements for Advance Energy Limited as an individual entity and the consolidated entity consisting of Advance Energy Limited and its subsidiaries.

Basis of Preparation

This general purpose financial report has been prepared in accordance with Australian equivalents to International Financial Reporting Standards (AIFRSs), other authoritative pronouncements of the Australian Accounting Standards Board, Australian Accounting Interpretations and the Corporations Act 2001.

i) Going concern

This report has been prepared on the going concern basis, which contemplates the continuity of normal business activity and the realisation of assets and the settlement of liabilities in the normal course of business.

The Group has incurred a net loss after tax for the year ended 31 December 2008 of $0.835 mil (2007: $1.789 mil). However it did experience net cash inflows from operating activities of $1.609 mil (2007: net cash outflows of $0.532 mil). As at 31 December 2008, the Group had net current liabilities of $5,295 mil (31 December 2007: net current liabilities of $10.488 mil).

The Directors believe that there are sufficient funding strategies and alternatives to meet the Group’s working capital requirements and are confident the Group will be able to raise the required funds in the future. However, the Directors recognise that the ability of the Group to continue as a going concern and to pay its debts as and when they fall due is dependent on its ability to secure additional funding through either the issue of further shares and or options, convertible notes or entering into negotiations with third parties regarding the sale and/or farm out of assets of the Company; or a combination thereof.

During the year ended 31 December 2008, the Group successfully raised $3.9 million (before costs) by way of a non renounceable underwritten rights issue at 8 cents per share, which was completed in September 2008. It was also able to raise additional secured debt capital from Sterling Bank in the US and from Australian based lenders to assist with funding a total of US$4.5 million in strategic acquisitions. The Group also sold its Lone Camp project in December 2008 for US$2 million (at a significant profit). At the end of the year, in spite of a net acquisition base in the year of US$2.5 million it had still been able to reduce its US bank debt by US$740,000 and its Australian denominated debt by more than A$100,000.

Of the total deficit of $5,295 mil in net current liabilities, almost $2.4 mil relates mainly to the maturity of convertible notes as reflected in note 18. In relation to these convertible notes the directors believe that the holder will agree to the reissue of new notes to the same value, amended for the market conditions prevailing at the time. This belief is based upon the fact that the same holder did this for $2 million in notes during the year ended 31 December 2008.

Furthermore the Group is at an advanced stage of negotiation with a number of parties for additional convertible note funding, which will give it a high degree of flexibility, and the ability to move forward on a number of keenly priced corporate and project opportunities in the coming months, before the anticipated improvement in oil and gas prices later this year and into 2010.

The balance of net current liabilities of approximately $2.8 mil is comprised of secured debt. The Company believes that it will be able to renegotiate terms for much of this debt beyond calendar 2009, should this be necessary.

Based on the above, the Group is confident that it will successfully raise additional funds to meet its financial obligations in the foreseeable future.

Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

The directors have reviewed the business outlook and are of the opinion that the use of the going concern basis of accounting is appropriate. As such, the directors believe that they will continue to be successful in securing additional funds through debt or equity issues, or asset sales as and when the need to raise working capital arises.

Should any of the assumptions and strategies above not eventuate, there is uncertainty whether the Group will be able to continue as a going concern.

Should the Group be unable to continue as a going concern, it may be required to realise its assets and extinguish its liabilities other than in the normal course of business and at amounts different from those stated in the financial report.

The financial report does not include any adjustments relating to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities that may be necessary should the Company be unable to continue as a going concern.

ii) Compliance with IFRSs

Australian Accounting Standards include AIFRSs. Compliance with AIFRSs ensures that the consolidated and parent financial statements and notes of Advance Energy Ltd comply with International Financial Reporting Standards (IFRSs).

iii) Early adoption of standards The Group has not elected to apply any pronouncements early.

iv) Historical cost convention

These financial statements have been prepared under the historical cost convention as modified by the revaluation of certain financial assets and liabilities (derivatives).

v) Critical accounting estimates

The preparation of financial statements in conformity with AIFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. See note 3 for further details.

Principles of Consolidation

(i) Subsidiaries

The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Advance Energy Limited (“company” or “parent entity”) as at 31 December 2008 and the results of all subsidiaries for the year then ended. Advance Energy Limited and its subsidiaries together are referred to in this financial report as the Group or the consolidated entity.

Subsidiaries are all those entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.

Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

Investments in subsidiaries are accounted for at cost in the individual financial statements of Advance Energy Limited.

Section SiX/ FINANCIAL REPORT (CONTINUED)

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

2008 annUal RePoRt ADVANCE ENERGy[LTD ]

(ii) Jointly controlled assets and operations

The majority of operations are carried out subject to joint venture arrangements. The proportionate interests in the assets, liabilities, income and expenditure of a jointly controlled activity have been incorporated in the financial statements under the appropriate headings

Segment reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different to those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment and is subject to risks and returns that are different from those of segments operating in other economic environments.

Foreign currency translation

(i) Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Australian dollars, which is Advance Energy Limited’s functional and presentation currency. The functional currency of the overseas subsidiaries is US$.

(ii) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.

On consolidation, exchange differences arising from the translation of any net investment in foreign entities, are taken to equity. When a foreign operation is sold a proportionate share of such exchange differences are recognised in the income statement as part of the gain or loss on sale where applicable.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entities and translated at the closing rate.

Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured.

Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances and amounts collected on behalf of third parties. Revenue is recognised as follows:

(i) Interest income

Interest income is recognised on a time proportion basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income.

(ii) Oil and Gas revenue

Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Property, Plant and Equipment

i) Plant and equipment

Plant and equipment is stated at cost less accumulated depreciation and any accumulated losses for impairment.

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

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

ii) Depreciation

Depreciation is calculated on a straight-line basis over the estimated useful life of the asset which is estimated to vary between 3 and 5 years for office equipment and 5 to 15 years for plant and equipment.

Financial Instruments

Recognition and Derecognition Regular purchases and sales of financial assets are recognised on trade-date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the income statement. Financial assets are derecognised when the rights to receive cash flows from the financial assets has expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership.

Section SiX/ FINANCIAL REPORT (CONTINUED)

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

2008 annUal RePoRt ADVANCE ENERGy[LTD ]

(i) Investments in subsidiaries

Investments in subsidiaries are carried at cost less any impairment losses.

(ii) Borrowings and convertible notes

Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the income statement over the period of the borrowings using the effective interest method.

The fair value of the liability portion of a convertible note is determined using a market interest rate for an equivalent non-convertible bond. This amount is recorded as a liability on an amortised cost basis until extinguished on conversion or maturity of the notes. The remainder of the proceeds is allocated to the conversion option. This is recognised and included in shareholder’s equity, net of income tax effects.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

(iii) Trade and other payables

These amounts represent liabilities for goods and services provided to the group prior to the end of the financial year, which remain unpaid at year end. The amounts are unsecured and are usually paid within 60 days of recognition. They are recognised at fair value on initial recognition and subsequently at amortised cost.

(iv) Cash and cash equivalents

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

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

(v) Trade and other receivables

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Trade receivables are generally due for settlement within 30 days.

Collectability of trade

receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. An allowance account (provision for impairment of trade receivables) is used when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial.

The amount of the

impairment loss is recognised in the income statement within other expenses. When a trade receivable for which an impairment allowance had been recognised becomes uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against other expenses in the income statement.

(vi) Fair Value estimation

The fair value of financial assets and financial liabilities must be estimated for initial recognition or for disclosure purposes.

The fair value of financial instruments that are not traded in an active market (for example convertible notes, receivables and payables) is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance date. quoted market prices or dealer quotes for similar instruments are used for long-term debt instruments held.

Other techniques such as estimated discounted cash flows, are used to determine fair value for remaining financial instruments.

The nominal value less

estimated credit adjustments of trade receivables and payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments.

Section SiX/ FINANCIAL REPORT (CONTINUED)

FOR THE yEAR ENDED 31 DECEMBER 2008

noteS to tHe Financial StatementS (continUed)

2008 annUal RePoRt ADVANCE ENERGy[LTD ]

Derivatives and hedging activities

Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The accounting for subsequent changes in fair value is recognised in the income statement:

hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedges)
hedges of the cash flows of recognised assets and liabilities and highly probable forecast transactions (cash flow hedges), or
hedges of a net investment in a foreign operation (net investment hedges).

The Group documents at the inception of the hedging transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items.

(i) Derivatives that do not qualify for hedge accounting

Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in the income statement and are included in other income or other expenses.

Exploration, evaluation and development expenditure

Exploration, evaluation and development expenditure incurred is either written off as incurred or accumulated in respect of each identifiable area of interest. Costs are only carried forward to the extent that they are expected to be recouped through the successful development of the area or where activities in the area have not yet reached a stage which permits reasonable assessment of the existence of economically recoverable reserves.

Accumulated costs in relation to an abandoned area are written off in full against profit in the period in which the decision to abandon the area is made.

A regular review is undertaken of each area of interest to determine the appropriateness of continuing to carry forward costs in relation to that area of interest.

Restoration, rehabilitation and environmental costs necessitated by exploration and evaluation activities are expensed as incurred and treated as exploration and evaluation expenditure.

Oil and gas properties

Following commencement of production activities all acquisition, exploration, evaluation and development expenditure in relation to an area of interest is accumulated into an oil and gas property.

When further development expenditure is incurred in respect of a property after the commencement of production, such expenditure is carried forward as part of the cost of that property only when substantial economic benefits are established, otherwise such expenditure is classified as part of the cost of production.

Amortisation of the cost of oil and gas properties is provided on the unit-ofproduction basis over the proved developed reserves of the field concerned with separate calculations being made for each resource. The unit-of-production basis results in an amortisation charge proportional to the depletion of the economically recoverable reserves. Amortisation is charged from the commencement of production.

The net carrying value of each property is reviewed regularly for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If the asset does not generate largely independent cash flows, the recoverable amount is determined for the cash generating unit to which the asset belongs. If such indication exists and where the carrying value exceeds the estimated recoverable amount, the assets are written down to their recoverable amount.

Impairment of assets

Assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cashgenerating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.

Section SiX/ noteS to tHe FINANCIAL REPORT Financial StatementS (CONTINUED) (continUed) 2008 annUal RePoRt FOR THE yEAR ENDED ADVANCE ENERGy[LTD ] 31 DECEMBER 2008

Provisions

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

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

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

Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.

Provision is made for employee entitlement benefits as a result of employees rendering services up to balance date. These benefits include salary and wages, annual leave and long service leave. Liabilities in respect of salary and wages and annual leave expected to be settled within 12 months of the reporting date are measured at their nominal value. The liability for long service leave is measured at the present value of expected future outflows to be made in respect of services provided by employees up to the reporting date.

Employee benefits

(i) Wages and salaries, annual leave and sick leave

Liabilities for wages and salaries, including nonmonetary benefits, annual leave and accumulating sick leave expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled.

Share Based Payments

The Group provides benefits to employees (including directors) of the Group in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares (‘equity-settled transactions’).

The cost of these equitysettled transactions with employees is measured by reference to the fair value at the date at which they are granted. The fair value is determined by an external valuer using the Black & Scholes method.

In valuing equity-settled transactions, no account is taken of any performance conditions, other than those specified in the Terms and Conditions of the Convertible Preference Shares.

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

The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects (i) the extent to which the vesting period has expired and (ii) the number of awards that, in the opinion of the directors of the Group, will ultimately vest.

This opinion is formed based on the best available information at balance date. No adjustment is made for the likelihood of market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date.

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

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

Section SiX/ FINANCIAL REPORT (CONTINUED)

2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

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

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

Borrowing Costs

Borrowing costs are recognised as an expense when incurred except if costs were incurred for the construction of any qualifying asset, where the costs are capitalised over the period that is required to complete and prepare the asset for its intended use or sale.

Income Tax

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date.

Deferred tax is provided on all temporary differences at the balance sheet date arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements and are recognised for all taxable temporary differences:

Except where the deferred tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognised for all deductible temporary differences, carryforward of unused tax assets and unused tax losses can be utilised:

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

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

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

Deferred and income taxes relating to items recognised directly in equity are recognised directly in equity.

Goods and Services Tax (GST)

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

Where the GST incurred on a purchase of goods and services is not recoverable from the taxation authorities, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense item as applicable; and
Receivables and payables are stated with the amount of GST included.

Section SiX/ FINANCIAL REPORT (CONTINUED)

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

2008 annUal RePoRt ADVANCE ENERGy[LTD ]

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

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

Commitments and

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

Contributed Equity

Issued and paid up capital is recognised at the fair value of the consideration received by the company. Any transaction costs arising on the issue of ordinary shares are recognised directly in equity as a reduction, net of tax, of the share proceeds received.

Earnings per share

(i) Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year.

(ii) Diluted earnings per share

Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary share and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares.

Rounding of amounts

New accounting standards and interpretations

In the current year, the Group has adopted all of the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (the AASB) that are relevant to its operations and effective for annual reporting periods beginning on 1 June 2008. The adoption of these new and revised Standards and Interpretations did not have any effect on the financial position or performance of the Group.

Australian Accounting

Standards and Interpretations that have recently been issued or amended but are not yet effective have not been adopted by the Group for the annual reporting period ending 31 December 2008. These are outlined on the following page.

The Company is of a kind referred to in Class order 98/0100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the financial report. Amounts in the financial report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar.

Section SiX/ noteS to tHe FINANCIAL REPORT Financial StatementS (CONTINUED) (continUed) 2008 annUal RePoRt FOR THE yEAR ENDED ADVANCE ENERGy[LTD ] 31 DECEMBER 2008

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Application Application
Reference Title Summary date of standard Impact on Group financial report date for Group
AASB 8 Operating Segments New standard replacing AASB 1 January 2009 AASB 8 is a disclosure standard 1 July 2009
and AASB and consequential 114 Segment Reporting, which so will have no direct impact
2007-3 amendments to other adopts a management reporting on the amounts included in the
Australian Accounting approach to segment reporting. Group's financial statements. In
Standards addition, the amendments may
have an impact on the Group’s
segment disclosures.
AASB 123 Borrowing Costs The amendments to AASB 123 1 January 2009 Not applicable to the Group, 1 July 2009
(Revised) and consequential require that all borrowing costs therefore no impact.
and AASB amendments to other associated with a qualifying asset
2007-6 Australian Accounting be capitalised.
Standards
AASB 101 Presentation of Introduces a statement of 1 January 2009 These amendments are 1 July 2009
(Revised) Financial Statements comprehensive income. only expected to affect the
and AASB and consequential presentation of the Group’s
2007-8 amendments to other Other revisions include impacts financial report and will not
on the presentation of items
Australian Accounting have a direct impact on the
Standards in the statement of changes measurement and recognition of
in equity, new presentation amounts disclosed in the financial
requirements for restatements or
report. The Group has not
reclassifications of items in the
determined at this stage whether
financial statements, changes in
to present a single statement of
the presentation requirements
comprehensive income or two
for dividends and changes to the
separate statements.
titles of the financial statements.
AASB Amendments to The amendments clarify the 1 January 2009 The Group has share-based 1 July 2009
2008-1 Australian Accounting definition of 'vesting conditions', payment arrangements that
Standard – Share- introducing the term 'non-vesting may be affected by these
based Payments: conditions' for conditions other amendments. However, it is not
Vesting Conditions than vesting conditions as expected that any material change
and Cancellations specifically defined and prescribe will arise from this amendment
the accounting treatment of an based on current circumstances.
award that is effectively cancelled
because a non-vesting condition
is not satisfied.
AASB 3 Business The revised standard introduces 1 July 2009 Unless the Group enters into 1 July 2009
(Revised) Combinations a number of significant changes Business Combinations in the future,
to the accounting for business this standard is not applicable and
combinations. will therefore have no impact.
AASB 127 Consolidated and Under the revised standard, 1 July 2009 If the Group changes its 1 July 2009
(Revised) Separate Financial a change in the ownership ownership interest in existing
Statements interest of a subsidiary (that subsidiaries in the future, the
does not result in loss of change will be accounted for as
control) will be accounted for as an equity transaction. This will
an equity transaction. have no impact on goodwill, nor
will it give rise to a gain or a loss
in the Group’s income statement.
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Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

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Application Application
Reference Title Summary date of standard Impact on Group financial report date for Group
AASB Amendments Amending standard issued as a 1 July 2009 Unless the Group enters into 1 July 2009
2008-3 to Australian consequence of revisions to AASB 3 Business Combinations in the
Accounting and AASB 127. future, this standard is not
Standards arising applicable and will therefore
from AASB 3 and have no impact.
AASB 127
Amendments Cost of an The main amendments of relevance to 1 January 2009 Unless the Group enters into 1 July 2009
to Investment in a Australian entities are those made to Business Combinations in the
International Subsidiary, Jointly IAS 27 deleting the ‘cost method’ and future, this standard is not
Financial Controlled Entity requiring all dividends from a subsidiary, applicable and will therefore
Reporting or Associate jointly controlled entity or associate to be have no impact.
Standards recognised in profit or loss in an entity's
separate financial statements (i.e., parent
company accounts). The distinction
between pre- and post-acquisition
profits is no longer required. However,
the payment of such dividends requires
the entity to consider whether there is an
indicator of impairment.
AASB 127 has also been amended
to effectively allow the cost of an
investment in a subsidiary, in limited
reorganisations, to be based on the
previous carrying amount of the
subsidiary (that is, share of equity)
rather than its fair value.
Amendments Improvements The improvements project is an annual 1 January 2009 The Group has not yet 1 July 2009
to to IFRSs project that provides a mechanism for except for determined the extent of the
International making non-urgent, but necessary, amendments to impact of the amendments,
Financial amendments to IFRSs. The IASB has IFRS 5, which if any.
Reporting separated the amendments into two are effective
Standards parts: Part 1 deals with changes the IASB from 1 July
identified resulting in accounting changes; 2009.
Part II deals with either terminology or
editorial amendments that the IASB
believes will have minimal impact.
IFRIC 16 Hedges of a Net This interpretation proposes that 1 January 2009 Not applicable to the Group, 1 July 2009
Investment in a the hedged risk in a hedge of a net therefore no impact.
Foreign Operation investment in a foreign operation is the
foreign currency risk arising between
the functional currency of the net
investment and the functional currency
of any parent entity. This also applies to
foreign operations in the form of joint
ventures, associates or branches.
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designates the beginning of the applicable annual reporting period unless otherwise stated.

Section SiX/ FINANCIAL REPORT (CONTINUED)

noteS to tHe Financial StatementS (continUed)

2008 annUal RePoRt ADVANCE ENERGy[LTD ]

FOR THE yEAR ENDED 31 DECEMBER 2008

2. FinAnCiAL riSK mAnAGement

The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. Derivatives are exclusively used for hedging purposes, (i.e. not as trading or other speculative instruments). The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate, foreign exchange and other price risks, and aging analysis for credit risk.

Risk management is carried out by the Board of Directors.

(a) Market risk

(i) Foreign exchange risk

Foreign exchange risk arises from commercial transactions and recognised assets and liabilities denominated in a currency that is not the entity’s functional currency. The Group seeks to mitigate the effect of its foreign currency exposure by borrowing in USD for US operations.

The Group’s exposure to foreign exchange risk at the reporting date is limited to the transfer of funding from the Australian head office to fund the US operations.

The American subsidiary is not exposed to foreign exchange risk as all transactions are denominated in its functional currency being US dollars. The parent entity is exposed to foreign exchange risk through its intercompany loan to the American subsidiary as it is denominated in US dollars.

The Parent’s exposure to foreign currency risk at the reporting date was as follows:

(ii) Parent entity sensitivity

The parent entity’s post-tax profit for the year and equity would have been $1,778,000 lower/$1,455,000 higher (2007 (loss) –$1,080,000 lower/$/$884,000 higher) had the Australian dollar weakened/strengthened by 10% against the US dollar, mainly as a result of foreign exchange gains/losses on the translation of US dollar denominated loans to the subsidiary. These borrowings are designated as a hedge of the entity’s net investment in the US subsidiary and hence any foreign exchange gains or losses are taken to the foreign currency translation reserve on consolidation.

Foreign Assets

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parent entity
2008 2007
US$’000 US$’000
Financial assets
Intercompany loan 11,231 8,630
total assets 11,231 8,630
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(iii) Price risk

(iv) Group sensitivity

The Group and the parent entity are exposed to oil and gas price risk. The price the company achieves for its product is closely linked to various indices relevant to its area of operations. As with most commodities, this fluctuates both in line with seasonal demand and overall market conditions. The company has a hedging policy which will hedge up to 50% of expected production up to 24 months in advance. Additional hedging over and above the 50 % base may be applied as the directors feel necessary. At 31 December 2008 the Group had three hedging contracts in place, one being a costless collar contract for 5,000 MMbtu of natural gas per month, one being a costless collar contract for 1,000 barrels of oil per month and one being a costless call spread collar for 1,000 barrels of oil per month.

For the Group, At 31 December 2008, if prices had changed by -/+ 10 % with all other variables held constant, post-tax loss and equity for the year would have been $570,100 lower/higher (2007 – $363,000 lower/ higher), mainly as a result of higher/lower revenue from oil and gas sales.

(v) Parent entity sensitivity

There would have been no change to the results of the Company as the derivatives are all recognised in the subsidiaries.

(vi) Cash flow and fair value interest rate risk

Interest rate risk arises from both short and long-term borrowings. Borrowings issued at variable rates expose the Group and Parent Entity to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group and Parent Entity to fair value interest rate risk. During 2007 and 2008, the Group’s borrowings at variable rate were denominated in US Dollars.

Section SiX/ FINANCIAL REPORT (CONTINUED)

noteS to tHe Financial StatementS (continUed)

2008 annUal RePoRt ADVANCE ENERGy[LTD ]

FOR THE yEAR ENDED 31 DECEMBER 2008

The Parent Entity’s borrowings were a mixture of external loans and convertible notes largely at fixed rates and denominated in Australian Dollars, and its loan to subsidiary which is at variable rate and denominated in US Dollars. Generally speaking the Group and Parent Entity’s variable rate risks have a degree of correlation to oil and gas prices. The Group also reviews its arrangements on a regular basis. The Parent Entity’s fixed rate risk is managed by limiting borrowings of this nature to periods of no more than two years, or if larger, to interest rate reviews every two years.

(vii) Group sensitivity

At 31 December 2008, if interest rates had changed by -/+ 10% from the year-end rates with all other variables held constant, post-tax loss for the year would have been $107,000 lower/higher (2007 -: $154,000 lower/higher), mainly as a result of lower/higher interest expense on the US overdraft facility and convertible notes.

(viii) Parent entity sensitivity

The parent entity’s main interest rate risk arises from cash equivalents with both fixed and variable interest rates. At 31 December 2008, if interest rates had changed by or are renewed with rates -/+ 10% from the year-end rates with all other variables held constant, post-tax profit would have been $47,000 lower/higher (2007 -: $89,000 lower/higher) as a result of interest income and expenses on these financial assets.

(b) Credit risk

The Group has some credit risk through its hedging programme. This is managed by ensuring we use the leading broker of exchangelisted futures and options in the world, MF Global Ltd who are A3/BBB+/BBB+ rated by Moody’s, S&P an d Fitch respectively. In addition the group makes cash calls upon MF Global whenever the Mark to Market exceeds US$300,000.

The Parent Entity has credit risk through its inter company loans to its US subsidiary, Advance Exploration and Production, Inc; and manages this by ensuring it always has an adequate level of asset cover, through its high quality oil and gas production assets in long life stable producing areas.

(c) Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Group aims at maintaining flexibility in funding by keeping committed credit lines available with a variety of counterparties. Refer to note 1(a) for further information on working capital arrangements.

(i) Financing arrangements

The parent entity had no access to undrawn borrowing facilities and the Group had access to the following undrawn borrowing facilities at the reporting date:

Consolidated

The Group has entered into a revolving line of credit with a Stirling bank in the U.S. Generally, the borrowing base of the line of credit as determined by the bank approximates the company’s investment in oil and gas properties, up to a maximum of US$ 40 million. The loan bears interest at US prime plus 1.0% and is secured against the company’s oil and gas properties. As at the end of the financial period the available credit was US$5.8 million of which US$5.4 million had been drawn. The loan facility matures on 31 March 2011.

(ii) Maturities of financial liabilities

The tables below analyses the Group’s and the parent entity’s financial liabilities based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows as at 31 December 2008.

Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

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2008 2007
Group $’000 $’000 $’000 $’000 $’000 $’000
Within 6 6 Months Between 1 Within 6 6 Months Between 1
months to 1 year and 2 years months to 1 year and 2 years
Financial assets
Cash 2,421 - - 1,936 - -
Receivables 926 - - 740 - -
Commodity
- - - - -
financial instruments 1,056
total Financial assets 4,403 - - 2,676 - -
Financial liabilities
Trade Creditors
and accruals 2,500 556 - 436 37 -
Convertible Note - 2,300 2,000 5,800 - 2,300
Interest bearing
- - - -
borrowings 13,719 6,918
total Financial liabilities 16,219 2,856 2,000 13,154 37 2,300
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2008 2007
Company $’000 $’000 $’000 $’000 $’000 $’000
Within 6 6 Months Between 1 Within 6 6 Months Between 1
months to 1 year and 2 years months to 1 year and 2 years
Financial assets
Cash 342 - - 1,671 - -
Receivables 648 16,005 - 56 - 9,674
total Financial assets 990 16,005 - 1,727 - 9,674
Financial liabilities
Trade Creditors
and accruals 926 - - 306 - -
Convertible Note - 2,300 2,000 5,800 - 2,300
Interest bearing
borrowings - - - - - -
total Financial liabilities 926 2,300 2,000 6,106 - 2,300
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Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed)

FOR THE yEAR ENDED 31 DECEMBER 2008

(d) Fair value estimation

The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes.

The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance date. quoted market prices or dealer quotes for similar instruments are used for long-term debt instruments held. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. The fair value of forward exchange contracts is determined using forward exchange market rates at the reporting date.

The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values due to their short-term nature. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments.

(e) Capital risk management

The Group’s and the parent entity’s objectives when managing capital are to safeguard their ability to continue as a going concern. Where possible they seek to maximise longer term debt and to minimise additional equity capital, to avoid unnecessary shareholder dilution. Refer to note 1(a) for further information on working capital arrangements.

3. CritiCAL ACCOuntinG eStimAteS AnD ASSumPtiOnS

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

(i) Estimated recoverable

amount of oil and gas properties

The Group tests annually whether oil and gas properties have suffered any impairment, in accordance with the accounting policy stated in note 1. The recoverable amounts of cash generating units have been determined based on value-in-use calculations. These calculations require the use of assumptions.

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Group parent entity
2008 2007 2008 2007
Notes $’000 $’000 $’000 $’000
Total borrowings 16,18 17,974 15,436 8,807 8,378
Less: Cash and
cash equivalents 9 (2,421) (1,936) (342) (1,671)
Net debt 15,553 13,500 8,465 6,707
Total equity 9,677 2,986 8,084 3,209
Total capital 25,230 16,486 16,549 9,916
Gearing ratio 62% 82% 52% 68%
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(iii) Fair Value of Securities

Some of these assumptions may be amended in the future and this may lead to the subsequent impairment of the assets concerned. The assumptions used for impairment testing can be found in Note 2.

Options

The total estimated value of options expenses during the period was $NIL (2007: $43,275).The assessed fair value at grant date of options granted during the period was expensed to the Income Statement. The fair value at grant date is independently determined using a BlackScholes option pricing model that takes into account the exercise price, the term of the option, the vesting and performance criteria, the impact of dilution, the nontradeable nature of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. Further details of the valuation basis are included in note 20. Should these options not be exercised by the expiring dates, these amortised amounts will be written back to the income statement in full.

(ii) Income taxes

The Group is subject to income taxes in Australia and jurisdictions where it has foreign operations. Significant judgement is required in determining the worldwide provision for income taxes. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Group recognises liabilities for anticipated tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred tax provisions in the period in which such determination is made.

Section SiX/ FINANCIAL REPORT (CONTINUED)

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

2008 annUal RePoRt ADVANCE ENERGy[LTD ]

(iii) Fair Value of Derivatives

Hedging Instruments

The group has an unrealised derivative instrument asset recorded at 31 December 2008 of $1.31 million (US$0.92 million) (2007: Nil) in relation to oil and gas commodity hedges, which expire partly in February 2009, partly in March 2009 and partly in May 2010. This asset effectively represents the amount that would have been paid to the group as at 31 December 2008 if it had terminated all of its hedging contracts on that day. This number is a combination of the time still to expire on the contracts, and oil and gas prices, and has no impact on the group’s cash flow unless contracts are terminated. Furthermore it should be noted that this Mark to Market position changes based upon daily settlement prices.

(iv) Convertible Notes

Convertible notes issued during the year included an option to convert into ordinary shares. This option is exercisable at the option of the holder before expiration of the eighteen month period.

Under AASB 132, all classes of convertible notes are classified as compound financial instruments in that they have both a liability and equity component. AVD is required to classify the liability and equity components separately in its financial statements. AASB 139 ‘Financial Instruments: Recognition and Measurement’ deals with the measurement of financial assets and liabilities. Equity instruments are instruments that evidence a residual interest in the assets of an entity after deducting all of its liabilities. Therefore, when the initial carrying amount of a compound financial instrument is allocated to its equity and liability components, the equity component is assigned the residual amount after deducting from the fair value of the instruments as a whole the amount first determined for the liability component.

The directors have considered an appropriate discount rate that would apply to a comparable note without a conversion option to be between 8.9% and 9.5%. As the liability component exceeds the face value of the Notes, no value exists for the equity component of the notes. Further information is contained in note 16 . Should these notes not be converted, they will have no effect on equity as they will be repaid.

(v) Converting Preference Shares

The assessed fair value at grant date of CPS’s granted during the 2005 period was independently determined using a Black-Scholes pricing model that takes into account the exercise price, the term of the CPS, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of the CPS, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option.

Since issue the estimated full value of CPS is amortised to the Income Statement by assuming the probability of conversion equal to the percentage production achieved. Should conversion quotas not be achieved however, these amounts will be written back to the Income Statement.

4. SeGment rePOrtinG

Business Segment

The consolidated entity operates solely in the exploration for oil and gas and development of the properties into producing assets. Therefore only geographical segment information is provided.

Geographical Segments

All operational activities are located in Texas in the USA. The head office is based in Perth, Australia.

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noteS to tHe Financial StatementS (continUed)

FOR THE yEAR ENDED 31 DECEMBER 2008

2008

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USA Australia Eliminations Consolidated
Geographical segment $’000 $’000 $’000 $’000
Revenues from continuing operations 5,071 - - 5,071
Segment result (loss) 824 1,210 (3,426) (1,392)
Segment assets 28,120 16,996 (16,006) 29,110
Segment liabilities 27,082 8,911 (16,005) 19,988
Acquisition of plant & equipment, exploration &
evaluation and other non-current assets 5,831 - - 5,831
Depreciation and amortisation 1,661 48 - 1,709
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2007
USA Australia Eliminations Consolidated
Geographical segment $’000 $’000 $’000 $’000
Revenues from continuing operations 3,630 - - 3,630
Segment result (loss) (21) (2,545) 777 (1,789)
Segment assets 16,839 11,615 (9,967) 18,487
Segment liabilities 16,819 8,406 (9,724) 15,501
Acquisition of plant & equipment, exploration &
evaluation and other non-current assets 2,858 133 - 2,991
Depreciation and amortisation 1,053 59 291 1,112
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5. revenue FrOm COntinuinG OPerAtiOnS

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Group parent entity
2008 2007 2008 2007
$’000 $’000 $’000 $’000
- -
Oil and gas sales 5,071 3,630
- -
5,071 3,630
Other income - - -
Derivative income 943 - - -
Other income 211 266 211 266
1,154 266 211 266
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Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

6. PrOFit On SALe OF ASSetS

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Group parent entity
2008 2007 2008 2007
$’000 $’000 $’000 $’000
Cost of assets 1,650 - - -
- - -
Depletion (41)
Proceeds from sale (2,421) - - -
- - -
Profit on sale of assets (812)
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7. eXPenSeS

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Group parent entity
2008 2007 2008 2007
$’000 $’000 $’000 $’000
Loss from continuing operations before income
tax has been determined after
(a) Depreciation and depletion
Depreciation of plant and equipment 415 319 47 59
Depletion of oil and gas properties 2,107 793 - -
Total depreciation and depletion 2,522 1,112
(b) Lease payments 47 59
Minimum lease payments - -
- operating lease
(c) Employee/consultant benefit expense
Directors/key management expense 417 533 417 533
Share/option based payments - 44 - 44
(d) Finance costs
Interest on borrowings 1,704 1,238 1,154 555
Borrowing costs - 28 - 26
Total Finance costs 1,704 1,266 1,154 581
(e) Exploration costs written off - 292 - -
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Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

8. inCOme tAX

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Group parent entity
2008 2007 2008 2007
$’000 $’000 $’000 $’000
a) Income tax (benefit)/expense
- - - -
Current tax charge
Deferred tax relating to origination and reversal
of temporary differences (37) 66 - -
Income tax expense/(benefit) reported in the
Income Statement (37) 66 - -
b) Deferred tax (benefit)/expense
Decrease/( increase) in deferred tax asset - 110 - -
- -
(Decrease)/increase in deferred tax liability (37) (44)
(37) 66 - -
c) Numerical reconciliation of income tax
expense to prima facie tax payable
Accounting loss before tax (872) (1,723) 1,212 (2,545)
At statutory income tax rate of 30% (262) (517) 364 (763)
Expenditure not allowable for tax purposes (73) 18 (73) 18
Deferred Tax Assets not brought to account (291) 492 (291) 800
Foreign exchange movements 589 73 - (55)
Income tax expense/(benefit) (37) 66 - -
d) Deferred tax assets not brought to account
Parent tax loss for the year 1,818 1,038 1,818 1,038
Australian timing differences:
Capital raising expenses 169 193 169 193
Depreciable assets - 16 - 16
Accrued expenses 8 16 8 16
Borrowing costs 36 28 36 28
Unrealised forex losses (683) 308 (720) 308
Deductible employee entitlements - 3
Total unrecognised 1,274 1,602 1,311 16
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The franking balance as at the end of the year was nil (2007:nil)

Advance Energy Ltd has tax losses arising in Australia of $6,060,476 (2007: $2,428,351) that are available indefinitely to offset against future profits of the Company providing the tests for deductibility against future profits are met.

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noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

9. CASH AnD CASH eQuivALentS

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Group parent entity
2008 2007 2008 2007
$’000 $’000 $’000 $’000
Cash at bank 2,421 1,936 342 1,671
Cash at bank earned a floating rate of interest
of between 6.5% and 8.5% (2007: 6.5%).
Reconciliation to cash at end of year
The above figures are reconciled to cash at the
end of the financial year as shown in the cash
flow statements as follows:
Balances as above 2,421 1,936 342 1,671
Balance as per cash flow statements 2,421 1.936 342 1,671
Interest rate risk exposure
The Group’s and the parent entity’s exposure to
interest rate risk is disclosed in Note 2
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10. trADe AnD OtHer reCeivABLeS

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Group parent entity
2008 2007 2008 2007
$’000 $’000 $’000 $’000
Current
Trade receivables 278 282 - 32
Loans to subsidiaries - - 16,004 9,674
Other receivables 648 458 648 24
926 740 16,652 9,730
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a) Impaired trade receivables

As at 31 December 2008 there were no impaired trade receivables for the Group or the parent entity. This was the same as at 31 December 2007.

b) Past due but not impaired

As of 31 December 2008 there were no trade receivables considered to be past due. (31 December 2007: Nil)

c) Other receivables

These amounts generally arise from transactions outside the usual operating activities of the Group. Interest may be charged at commercial rates where the terms of the repayment exceed six months. Collateral is not normally obtained.

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noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

d) Foreign exchange and interest rate risk
Information about the Group’s and the parent entity’s exposure to foreign currency risk and interest rate risk in relation to trade and other receivables in provided in Note 2.
e) Fair value and credit risk
Due to the short term nature of these receivables, their carrying amount is assumed to approximate their fair value.
The maximum exposure to credit risk at the reporting date is the carrying amount of each class of receivables mentioned above. (The fair value of securities held for certain trade receivables is insignificant as is the fair value of any collateral sold or repledged.) Refer to Note 2 for more information on the risk management policy of the Group and the credit quality of the entity’s trade receivables.
f) Loans to subsidiaries are repayable at reasonable call with an interest rate of US prime plus 1.0%, capitalised annually. There is no immediate intention to recall the loan.
(i) These financial assets are carried at amortised cost.
(ii) None of the loans to subsidiaries are impaired or past due. The fair value of loans to subsidiaries approximates their carrying value.

11. eXPLOrAtiOn & evALuAtiOn COStS

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Group parent entity
2008 2007 2008 2007
$’000 $’000 $’000 $’000
Non-Current
Exploration, evaluation and development costs
carried forward in respect of areas of interest in
exploration and evaluation phases - - - -
Reconciled as follows:
Opening balance - 292 - -
Exploration assets written off during the period - (292) - -
- - - -
Closing Balance
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There were no exploration and evaluation costs capitalised during the year. All previously capitalised expenses have been impaired.

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noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

12. PrOPertY, PLAnt AnD eQuiPment

Group

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Plant and Office
equipment equipment Total
$’000 $’000 $’000
at 1 January 2007
Cost 1,338 203 1,541
Accumulated depreciation (77) (37) (114)
Net book value 1,261 166 1,427
year ended 31 december 2007
Opening net book value 1,261 166 1,427
Exchange differences (126) (3) (129)
Additions 209 139 348
Disposals - - -
Depreciation (252) (67) (319)
Closing net book value 1,092 235 1,327
at 31 december 2007
Cost 1,405 334 1,739
Accumulated depreciation (313) (99) (412)
Net book value 1,092 235 1,327
year ended 31 december 2008
Opening net book value 1,092 235 1,327
Exchange differences 155 12 167
Additions 616 120 736
Disposals (57) (286) (343)
Depreciation (356) (59) (415)
Closing net book value 1,450 22 1,472
at 31 december 2008
Cost 2,243 46 2,289
Accumulated depreciation (793) (24) (817)
Net book value 1,450 22 1,472
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Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

12. PrOPertY, PLAnt AnD eQuiPment (COntinueD)

parent

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Plant and Office
equipment equipment Total
$’000 $’000 $’000
at 1 January 2007
Cost - 168 168
Accumulated depreciation - (30) (30)
Net book value - 138 138
year ended 31 december 2007
Opening net book value - 138 138
- - -
Exchange differences
Additions - 133 133
Disposals - - -
Depreciation - (58) (58)
Closing net book value - 213 213
at 31 december 2007
Cost - 302 302
Accumulated depreciation - (89) (89)
Net book value - 213 213
year ended 31 december 2008
Opening net book value - 213 213
- - -
Exchange differences
Additions - 120 120
-
Disposals (168) (168)
Depreciation - (165) (165)
- - -
Closing net book value
at 31 december 2008
Cost - - -
Accumulated depreciation - - -
Net book value - - -
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Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

13 DerivAtive FinAnCiAL inStrumentS

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Group parent entity
2008 2007 2008 2007
$’000 $’000 $’000 $’000
Current assets
- - -
Oil & Gas Hedging 1,056
Total current derivative assets 1,056 - - -
non-current assets
Oil & Gas Hedging 254 - - -
Total non-current assets 254 - - -
Current liabilities
Mark to market escrowed funds 1,213 - - -
Total current derivative financial instrument
liabilities 1,213 - - -
97 - - -
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Forward exchange contracts – held for trading

The Group has entered into forward exchange contracts which are economic hedges but do not satisfy the requirements for hedge accounting. These contracts are subject to the same risk management policies as all other derivative contracts, see note 2 for details. However, they are accounted for as held for trading.

14. OiL AnD GAS PrOPertieS

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Group parent entity
2008 2007 2008 2007
$’000 $’000 $’000 $’000
- -
Oil and gas properties – cost 25,808 15,460
Less accumulated depletion (2,885) (976) - -
- -
22,963 14,484
Movements in carrying amounts are
reconciled as follows:
- -
Opening balance 14,484 14,269
- -
Acquired during period 5,552 2,643
- - -
Sold during period (1,425)
- -
Depletion charge (1,294) (793)
- -
Foreign exchange difference 5,646 (1,635)
- -
22,963 14,484
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Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

15. OtHer FinAnCiAL ASSetS

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Group parent entity
2008 2007 2008 2007
$’000 $’000 $’000 $’000
non-Current
Shares in subsidiaries (Note 26) - - 1 1
Prepayments 17 - - -
17 - 1 1
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16. trADe AnD OtHer PAYABLeS

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Group parent entity
2008 2007 2008 2007
$’000 $’000 $’000 $’000
Trade payables 1,589 368 155 228
Other payables 666 50 667 50
2,255 418 822 278
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Refer to Note 2 for foreign currency exposure and disclosures on fair values.

17. PrOviSiOnS

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Group parent entity
2008 2007 2008 2007
$’000 $’000 $’000 $’000
Other Payables 245 28 104 28
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On 1 July 2008 AAG Management Pty Ltd assumed the responsibility for all facilities and personnel at the Company’s registered office. As part of the arrangement all employees were transferred to AAG Management Pty Ltd.

Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

18. intereSt BeArinG LOAnS AnD BOrrOwinGS

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Group parent entity
2008 2007 2008 2007
$’000 $’000 $’000 $’000
Current
Convertible Note – unsecured [1]
Face value of the note 2,300 5,725 2,300 5,725
Accrued interest 27 75 27 75
2,327 5,800 2,327 5,800
Short term loans
Secured 2,900 - 2,900 -
Unsecured 574 - 574 -
Accrued interest 184 - 184 -
- -
3,658 3,658
Bank loan – secured [2] - 6,918 - -
5,985 12,718 5,985 5,800
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Group parent entity
2008 2007 2008 2007
$’000 $’000 $’000 $’000
non-current
Convertible Notes – unsecured [1]
Face value of the note 2,000 2,300 2,000 2,300
Interest accrued - - - -
2,000 2,300 2,000 2,300
Bank loan – secured [2] 7,734 - - -
9,734 2,300 2,000 2,300
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1) During the year the Company repaid convertible notes to the value of $3,225,000. Convertible notes to the value of $2,000,000 were redeemed simultaneously with the issue of new notes to the same value. The total face value of convertible notes on issue is $4,300,000. In aggregate these may be converted at the option of the holder into a maximum of 24,600,000 shares before the expiry date, at prices ranging between $0.10 and $0.50. The terms of the notes are eighteen (18) months with coupon rates of 11% and 12% per annum.

Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

2) During February 2006, Advance Exploration and Petroleum, Inc, (AEPI) the Company’s wholly owned US subsidiary, entered into a revolving line of credit with Sterling Bank in the U.S. Generally, the borrowing base of the line of credit as determined by the bank approximates the company’s investment in oil and gas properties, up to a maximum of US$ 40 million. The loan bears interest at US prime plus 1.0% and is secured against the company’s oil and gas properties. As at the end of the financial period the Company had drawn down US$5.4 million . This balance has been disclosed under non-current liabilities as the facility mature date is March 2011. This facility is secured against oil and gas properties owned by AEPI.

Refer to Note 2 for fair value interest rate risk.

The carrying amounts of assets pledged as security for the current and non-current borrowings are:

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Group parent entity
2008 2007 2008 2007
Notes $’000 $’000 $’000 $’000
Current Floating charge
Cash and cash equivalents 9 2,421 1,936 342 1,671
Trade and other receivables 10 926 740 16,652 9,730
- - -
Derivative financial instrument 1,056
total current assets pledged as security 4,403 2,676 16,995 11,402
non-current Floating charge
Property, plant and equipment 12 1,472 1,327 - 213
Oil and gas properties 14 22,963 14,484 - -
Deferred tax assets 24 - - - -
Other financial assets 15 17 - 1 1
Derivative financial instrument 254 - - -
total non-current assets pledged as security 24,706 15,811 1 214
total assets pledged as security 29,109 18,487 16,995 11,615
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Fair value

The carrying amounts of borrowings are considered to be materially the same as their fair values.

Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

19. iSSueD CAPitAL

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Group parent entity
2008 2007 2008 2007
19.1 Ordinary shares $’000 $’000 $’000 $’000
118,798,222 fully paid ordinary shares
(2007: 69,299,099) 12,694 9,029 12,694 9,029
Movements in shares on issue
Beginning of period 9,029 9,961 9,029 9,961
- -
Shares issued during the period
Convertible note conversion 100,000 @ $0.50 - 50 - 50
1,000,000 shares issued @ $0.35 - 350 - 350
- -
49,499,123 shares issued @ $0.08¢ 3,960 3,960
12,989 10,361 12,989 10,361
Less capital raising costs (295) (1,332) (295) (1,332)
End of year 12,694 9,029 12,694 9,029
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(a) Effective 1 July 1998 the Corporations Legislation in place abolished the concepts of authorised capital and par value of shares. Accordingly the Parent does not have authorised capital or par value in respect of issued shares.

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

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

19.2 Options

The movements in options over ordinary shares during the year were as follows:

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2008
Number at Number at
Expiry Date Exercise Price beginning of period Issued Exercised end of period
31 December 2010 $0.25 13,850,000 - - 13,850,000
15 December 2009 $0.60 5,000,000 - - 5,000,000
29 December 2009 $0.65 250,000 - - 250,000
31 December 2010 $0.40 250,000 - 250,000
- -
19,350,000 19,350,000
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Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed)

FOR THE yEAR ENDED 31 DECEMBER 2008

19. iSSueD CAPitAL (COntinueD)

2007

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Number at Number at
Expiry Date Exercise Price beginning of period Issued Exercised end of period
31 December 2010 $0.25 13,850,000 - - 13,850,000
15 December 2009 $0.60 5,000,000 - - 5,000,000
29 December 2009 $0.65 250,000 - - 250,000
31 December 2010 $0.40 - 250,000 250,000
-
19,100,000 250,000 19,350,000
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No options have expired or have been cancelled since incorporation.

19.3 Converting Preference Shares

All convertible preference shares were issued during the period ended 31 December 2005. The movement in Converting Preference Shares during the year were as follows:

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2008 No. at beginning Converted No. at end
Class of period Issued into ords of period
CPS – B 5 - - 5
CPS – C 2 - - 2
CPS – D 2 - - 2
9 - - 9
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2007 No. at beginning Converted No. at end
Class of period Issued into ords of period
CPS – B 5 - - 5
CPS – C 2 - - 2
CPS – D 2 - - 2
9 - - 9
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Each Converting Preference Share (CPS) converts into 1,000,000 ordinary shares as follows: CPS-B – upon the Company achieving production of 500 barrels of oil equivalent per day (BOEPD) CPS-C – upon the Company achieving production of 1,000 BOEPD CPS-D – upon the Company achieving production of 1,500 BOEPD

Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed)

FOR THE yEAR ENDED 31 DECEMBER 2008

20. reServeS

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Group parent entity
2008 2007 2008 2007
19.1 Ordinary shares $’000 $’000 $’000 $’000
Option reserve [(1)] 1,822 1,822 1,822 1,822
- -
Foreign currency translation reserve [ (2)] 2,472 (1,391)
Equity reserve [(3)] 150 150 150 150
4,444 581 1,972 1,972
(1) Option reserve
Opening balance 1,822 1,778 1,822 1,778
Issue of options during period - 44 - 44
1,822 1,822 1,822 1,822
(2) Foreign currency translation
Opening balance (1,391) (414) - -
Currency translation differences
- -
arising during the year 3,863 (977)
- -
2,472 (1,391)
(3) Equity reserve
Opening balance 150 150 150 150
150 150 150 150
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Nature and purpose of reserves

(1) Option reserve

The option reserve is used to recognise the fair value of options issued but not exercised.

Fair value of options granted

The assessed fair value at grant date of options granted for consulting fees during the period is 17.3 cents per option (2007: 17.3 cents per option). The fair value at grant date is determined using a Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option.

The model inputs for options granted during the period included:

(a) options are granted for no consideration

(b) expected price volatility of the company’s shares of 70%

(d) risk-free interest rate of 7.5%

The expected price volatility is based on the historic volatility of an average of comparable companies.

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noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

(2) Foreign currency translation reserve

Exchange differences arising on translation of the foreign controlled entity are taken to the foreign currency translation reserve as described in note 1. The reserve is recognised in profit and loss when the net investment is disposed of.

(3) Equity reserve

The equity reserve is used to recognise the amortised portion of the fair value of CPS’s issued and the equity component of the convertible note issued during the period.

Fair Value of CPS granted

The amount disclosed as contributed equity represents the amount paid per CPS of $0.0001 each plus the amortised value as prescribed by AASB139. The following assumptions were utilised in calculating fair value of the shares.

(a) underlying security spot price at grant: $0.15

(b) expected price volatility of the company’s shares: 50.23%

(c) expected dividend yield: 0%

(d) risk-free interest rate: 5.70%

The expected price volatility is based on the historic volatility of an average of comparable companies. The total value of the CPS at date of issue was assessed at $1,258,100. The total value is being amortised to the income statement in line with attainment of targets such as production. At the end of the year $1,108,100 (2007: $1,108,100) in aggregate had been reflected through the income statement.

21. ACCumuLAteD LOSSeS

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Group parent entity
2008 2007 2008 2007
$’000 $’000 $’000 $’000
Accumulated losses at the beginning of the year (6,624) (4,835) (7,792) (5,247)
Net loss attributable to the members of the
parent entity (835) (1,789) 1,212 (2,545)
Accumulated losses at the end of the financial year (7,459) (6,624) 6,580 (7,792)
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22. eArninGS Per SHAre

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Group
2008 2007
$’000 $’000
Basic earnings per share
Reconciliation of earnings to net loss (835) (1,789)
Net loss
Earnings/(loss) used in the calculation of basic and dilutive EPS (835) (1,789)
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Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

22. eArninGS Per SHAre (COntinueD)

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Number Number
Weighted average number of ordinary shares outstanding during the period
used in calculation of basic and dilutive EPS 85,829,120 68,506,496
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Details of the shares issued are included under note 19. Dilutive EPS is not reflected as it would result in the reduction of the loss per share.

23. CASH FLOw inFOrmAtiOn

Reconciliation of cash flow from operations with loss from continuing operations after income tax.

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Group parent entity
2008 2007 2008 2007
$’000 $’000 $’000 $’000
Profit (loss) after income tax (835) (1,789) 1,273 (2,545)
Non cash flows in profit (loss)
from continuing operations
Depreciation 415 319 48 59
Depletion 2,107 793 - -
Exploration assets written off - 292 - -
- -
Increase/(decrease) in provisions (16) (16)
Option cost expensed - 44 - 44
- -
Profit on sale of assets (813) (213)
Loss on sale of asset 1 - - -
Interest income not received - - 650 (778)
- - -
Derivative financial instrument (1,310)
Interest accrued not paid - - - 51
Foreign exchange difference 155 (2) (3,422) 1,069
Changes in assets and liabilities
Increase/(decrease) in trade creditors and accruals 1,542 36 (807) 136
Increase)/decrease in trade and other receivables 384 (275) 272 29
(Increase)/decrease in deferred tax assets - 110 - -
- -
Increase/(decrease) in deferred tax liabilities (37) (44)
Cash flows from (used in) operations 1,609 (532) (2,199) (1,951)
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Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

24. DeFerreD tAX ASSetS

The balance comprises temporary differences attributable to:

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Group parent entity
2008 2007 2008 2007
$’000 $’000 $’000 $’000
- - - -
Organisation costs
Book depletion - - - -
Net operating loss - - - -
Net deferred tax asset - - - -
Movements:
Opening balance - 110 - -
- - -
Amount brought to account (110)
- - - -
Foreign exchange difference
- - - -
Closing balance
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25. DeFerreD tAX LiABiLitieS

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Production
Costs Total
$’000 $’000
Movements - Group
At 1 January 2007 85 85
Charged/(credited) to the income statement (48) (48)
As at 31 December 2007 37 37
Charged/(credited) to the income statement (37) (37)
- -
Foreign exchange difference
As at 31 December 2008 - -
Movements – Parent Entity
- -
At 1 January 2007
- -
Charged/(credited) to the income statement
As at 31 December 2007 - -
- -
Charged/(credited) to the income statement
As at 31 December 2008 - -
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Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

26. SuBSiDiArieS

The Company has the following Subsidiaries at all times during the year.

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Name of Subsidiary Place of Incorporation Percentage held 2008 Percentage held 2007
Advance Exploration
and Production, Inc Texas USA 100% 100%
AEPI Midstream, Inc Texas USA 100% 100%
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Advance Exploration and Production, Inc was incorporated on 1 July 2005 with initial issued capital of US$1,000 (A$1,282).

AEPI Midstream was incorporated on 20 September 2006 to hold the Group’s midstream assets, with initial issued capital of US$1,000. (A$1,282).

There were no movements in subsidiaries during the current year.

27. reLAteD PArtY trAnSACtiOnS

(a) Transactions with related parties

Directors and officers, or their personally-related entities, hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. A number of these entities transacted with the Company in the reporting period. The terms and conditions of these transactions, which involved primarily the Company recharging the related entities for office and secretarial services and some related entities recharging the Company for travel and accommodation costs, were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to unrelated entities on an arm’s length basis. No amounts were recharged in the prior year. The amounts charged during the year to related entities are detailed on the next page:

Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

27. reLAteD PArtY trAnSACtiOnS (COntinueD)

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Charged Charged Amount Amount Charged Charged Amount Amount
to to owing by owing by by by owing to owing to
related related related related related related related related
entity entity entity entity entity entity entity entity
2008 2007 2008 2007 2008 2007 2008 2007
Related entity $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000
AAG Management Pty Ltd - - - - 307 - 29 -
AxG Mining Limited 44 61 - 7 11 14 3 -
Excalibur Mining Corporation
Limited 51 220 - 5 - 5 - -
Greencode Pty Ltd - - - - 169 - 169 -
Kilgore Oil & Gas Limited 200 12 - - - - 24 -
Nile Resources Limited 28 17 - 3 - - - -
Odin Energy Limited 80 145 - 5 - - - -
Palace Resources Limited 27 17 - 1 - 1 3 -
Pure Dawn Pty Ltd - - - - 126 - 126 -
Regal Resources Limited 27 12 - 1 - - 6 -
Vector Resources Limited 41 13 12 5 - - - -
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During the financial year ended 31 December 2007 Odin Energy Limited prepaid the Company $250,000 for US consulting services that it intends to use during 2009 from the Company’s wholly owned subsidiary, Advance Exploration and Production, Inc. As at 31 December 2008 this has been disclosed as a customer deposit and is included in Trade and Other Payables (refer note 16 to the Financial Statements)

At 31 December 2008 the parent had outstanding loans with related parties. The table below represents the outstanding principle amounts with any outstanding fees or interest shown in the table above.

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2008 2007
Related Entity $’000 $’000
Greencode Pty Ltd 900 -
Kilgore Oil & Gas Limited 350 -
-
Odin Energy Limited 2,000
Palace Resources Limited 200 -
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On 1 July 2008 AAG Management Pty Ltd took over the management of the leased premises and the day to day running of the administrative aspect for the Group and related parties located at the same premises. At the same time AAG Management purchased all furniture, fittings, computer and software assets at their carrying value. They also assumed all payroll and other staffing liabilities. The amount received was $307,401.

Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

27. reLAteD PArtY trAnSACtiOnS (COntinueD)

The aggregate amounts recognised during the year relating to specified directors/officers and their personally-related entities are included in the primary benefits component of remuneration of directors by the consolidated entity in the remuneration report (refer page 21 of this Annual Report). Details of the transactions including amounts accrued but unpaid at the end of the period are as follows:

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Specified Director/ 2008 2007
Officer Transaction Note $’000 $’000
Alex Bajada Consulting fees (i) 60 59
Anthony Short Consulting fees (ii) 220 238
Gordon Sklenka Consulting fees (iii) 101 108
Lance Camacho Consulting fees (iv) 36 127
David Ballantyne Consulting fees (v) 63 -
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(i) The Company used the management consulting services of Spartan Nominees Pty Ltd, a company of which Mr Alex Bajada is a director.

(ii) The Company used the consulting services of Cumberland Investments (WA) Pty Ltd, a company of which Mr Anthony Short is a director.

(iii) The Company used the consulting services of Formaine Pty Ltd, a company of which Mr Gordon Sklenka is a related party.

(iv) The Company used the consulting services of Mr Lance Camacho.

(v) The Company used the consultancy services of Sandgroper Pty Ltd, a company which Mr David Ballantyne is a director.

Amounts were billed based on normal market rates for such services and were due and payable under normal payment terms.

Spartan Nominees Pty Ltd, a company of whom Mr Alex Bajada is a director, provided administration personnel to the Company which was reimbursed at cost. The amount reimbursed totalled $5,161 (2006: $20,111).

(b) Wholly owned group transactions

Details of interests in wholly owned controlled entities are set out in Note 26. Details of inter company loans are:

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Group parent entity
2008 2007 2008 2007
$’000 $’000 $’000 $’000
Balances with entities in the wholly-owned group
receivable – non-current - - 16,005 9,674
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Loans between entities in the wholly owned group are denominated in US$, bear interest at market rates, are unsecured and are repayable upon reasonable notice having regard to the financial stability of the Company. During the year advances of $2,255,914 (2007: $1,685,117) were made, and interest of $650,377 (2007: $776,807) was charged. In 2008 there were no repayments (2007: Nil).

Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed)

FOR THE yEAR ENDED 31 DECEMBER 2008

28. KeY mAnAGement PerSOnneL DiSCLOSureS

(a) Parent Entity Key Management Personnel Remuneration

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Group parent entity
2008 2007 2008 2007
$’000 $’000 $’000 $’000
Short - term employee benefits 474,513 527,109 474,513 527,109
- -
Post - employment benefits 5,856 5,856
- - - -
Long - term employee benefits
Share - based payment - - - -
474,513 532,965 474,513 532,965
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Share and Option holdings

The interests of the Directors in shares, Convertible Preference Shares (“CPS”) and options of the Company as the year end were:

Shares Indirectly Held – year Ended 2008

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Balance at Acquired Sold Balance at
Director start of year during year during year end of year
-
Alex Bajada 3,020,001 2,157,143 5,177,144
-
Anthony Short 8,674,002 7,784,597 16,458,599
Gordon Sklenka 3,000,000 3,805,357 - 6,805,357
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Shares Indirectly Held – year Ended 2007

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Balance at Acquired Sold Balance at
Director start of year during year during year end of year
-
Alex Bajada 2,000,001 1,020,000 3,020,001
-
Anthony Short 7,650,002 1,024,000 8,674,002
Gordon Sklenka 2,000,000 1,000,000 - 3,000,000
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Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

Options Indirectly Held – year Ended 2008

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Balance at
end of year
Balance at Acquired Sold (vested and
Director start of year during year during year exercisable)
- -
Alex Bajada 2,000,000 2,000,000
- -
Anthony Short 4,000,000 4,000,000
Gordon Sklenka 2,000,000 - - 2,000,000
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Options Indirectly Held – year Ended 2007

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CPS Indirectly Held – year Ended 2008

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Balance at Acquired Sold Balance at
Director start of year during year during year end of year
Alex Bajada 1 - - 1
Anthony Short 3 - - 3
Gordon Sklenka 1 - - 1
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CPS Indirectly Held – year Ended 2007

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Refer to page 21 of the Directors’ Report for further information. No shares or options were issued to directors during the current or previous financial year.

Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

29. remunerAtiOn OF tHe AuDitOrS

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Group parent entity
2008 2007 2008 2007
$ $ $ $
Amounts received or due and receivable by BDO
Kendalls Audit and Assurance (WA) Pty Ltd for:
Audit and audit review services of
the financial reports 53,933 53,000 53,933 53,000
Other services - Taxation 13,424 45,220 13,424 45,220
- Other - 2,735 - 2,735
67,357 100,955 67,357 100,955
Amounts received or due and receivable
by FCP CPA in relation to the US based
subsidiary companies for:
Audit and audit review services of
- -
the financial reports 50,175 39,455
Other services - Taxation 15,377 7,813 - -
- Other - - - -
- -
65,552 47,268
132,909 148,223 67,357 100,955
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30. COmmitmentS

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Group parent entity
2008 2007 2008 2007
$’000 $’000 $’000 $’000
Operating lease
The Group leases an office under a non-cancellable
operating lease expiring within one year. On
renewal the lease will be transferred to AAG
Management Pty Ltd. Commitments for minimum
lease payments in relation to non cancellable
operating leases are payable as follows:
Within one (1) year 154 - 154 -
Between 1 and 5 years 20 10 20 10
Longer than 5 years - - - -
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noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

31. JOint OPerAtiOnS

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Group
2008 2007
$’000 $’000
The Group holds interests in the assets of a number of unincorporated
joint ventures, in Texas, USA.
Other joint venture information
Oil and gas revenues 5,071 3,630
- -
Contingent liabilities
Capital commitments - -
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The principal activities of these joint operations are oil and gas exploration, development and production.

The assets and liabilities of the group include the following items which represent the group’s interest in the assets and liabilities employed in unincorporated joint operations, recorded in accordance with the accounting policies described in note 1 to these financial statements. Income and expenditure is brought to account based on Operator Manager monthly statements of production and sales.

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Group
2008 2007
$’000 $’000
Current assets
Trade and other receivables 278 684
non-current assets
Property, plant and equipment 1,450 1,092
Oil and gas properties 22,963 14,776
Exploration and evaluation costs - -
24,414 15,868
24,692 16,552
Current liabilities
Payables 1,433 31
net investment in joint venture operations 23,259 16,521
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noteS to tHe Financial StatementS (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

Section SiX/ FINANCIAL REPORT (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

31. JOint OPerAtiOnS (COntinueD)

The assets on the previous page cover the following areas of interest:

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No. of Producing Wells Net Revenue Net Working
Project at end 2008 interest interest
Motherlode Phase I 5 68%-75% 100%
Motherlode Phase II 12 7.75%-10% 12.5%
Motherlode Phase III Development leases 38.25% 50%
Palo Pinto – Possum Kingdom 9 77%-79% 100%
Total 26
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32. eventS SuBSeQuent tO BALAnCe SHeet DAte

In February the Company’s gas hedge for 5,000 MMbtu per month of natural gas at a minimum price of US$7.75 expired, and in March one of the oil hedges (1,000 Bbls per month at a minimum of US$90 Bbl) also expired. There were no settlement amounts paid or received on expiry of these hedges. Any settlement amounts were paid on a monthly basis during the hedge term. The expired hedges accounted for approximately 20% of the derivative revenue. There remains one further oil hedge (1,000 Bbls per month at a minimum of US$95 Bbl) which expires in May 2010. For further information in relation to the hedges please review to the Review of Operations section in this Annual Report.

There were no other material events arising subsequent to 31 December 2008 to the date of this report, which significantly effected, or may significantly effect, the operations of the Group and Company or the results of those operations on the state of affairs of the Company.

33. COntinGenCieS

There were no known contingencies at year end.

34. SHAre BASeD PAYmentS

There were no share based payments made during the financial year.

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Group parent entity
2008 2007 2008 2007
$’000 $’000 $’000 $’000
Expenses arising from share-based transactions
Options issued to employees/consultants - 44 - 44
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Input parameters for the fair value of the options issued in the current and prior years are detailed in note 18-Reserves.

35. DiviDenDS

There were no dividends paid or payable in respect of the current or previous financial period.

Section SeVen/ DIRECTORS’ DECLARATION

2008 annUal RePoRt ADVANCE ENERGy[LTD]

DireCtOrS’ DeCLArAtiOn / 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

Section SeVen/ DIRECTORS’ DECLARATION 2008 annUal RePoRt ADVANCE ENERGy[LTD]

DIRECTORS’ DECLARATION

The directors of the Company declare that:

1 The financial statements and notes, as set out on pages 24 to 65, are in accordance with the Corporations Act 2001 and:
a) comply with Accounting Standards and the Corporations Regulations 2001; and
b) give a true and fair view of the financial position as at 31 December 2008 and of the performance for the period ended on that date of the company and Group;
2 The Chief Executive Officer and Chief Finance Officer have given the declarations required by s295A.
3 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; and
The audited remuneration disclosures set out on pages 22 to 25 of the Directors’ Report comply with Section 300A of the Corporations Act 2001.

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

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A. Bajada Chairman

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A. Short Managing Director West Perth, W.A. 31st March 2009

bdO kendalls audit & assurance (wa) pty ltd 128 hay street, subiaCO wa 6008 po box 700, west peRth wa 6872 phone 61 8 9380 8400 Fax 61 8 9380 8499 [email protected] www.bdo.com.au abn 79 112 284 787

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independent auditOR’s RepORt tO the MeMbeRs OF advanCe eneRGy liMited

We have audited the accompanying financial report of Advance Energy Limited, which comprises the balance sheet as at 31 December 2008, and the income statement, statement of changes in equity and cash flow statement for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration of the consolidated entity comprising the company and the entities it controlled at the year’s end or from time to time during the financial year.

Directors’ Responsibility for the Financial Report

The directors of the company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal controls relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that compliance with the Australian equivalents to International Financial Reporting Standards ensures that the financial report, comprising the financial statements and notes, complies with International Financial Reporting Standards.

Auditor’s Responsibility

Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.

Independence

In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001.

bdO kendalls is a national association of separate partnerships and entities

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bdO kendalls audit & assurance (wa) pty ltd 128 hay street, subiaCO wa 6008 po box 700, west peRth wa 6872 phone 61 8 9380 8400 Fax 61 8 9380 8499 [email protected] www.bdo.com.au abn 79 112 284 787

Auditor’s Opinion

(a) In our opinion the financial report of Advance Energy Limited is in accordance with the Corporations Act 2001 , including:
(i) giving a true and fair view of the company’s and consolidated entity’s financial position as at 31 December 2008 and of their performance for the year ended on that date; and
(ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001 ; and
(b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 1.

Material Uncertainty Regarding Continuation as a Going Concern

Without qualifying our opinion, we draw attention to Note 1 (i) in the consolidated financial report which indicates that Advance Energy Limited incurred a net loss of $835,000 during the year ended 31 December 2008. The company will be required to seek additional funding through debt, equity or other means to continue its oil and gas production. These conditions, along with other matters as set forth in Note 1(i), indicate the existence of a material uncertainty which may cast significant doubt about the consolidated entity’s ability to continue as a going concern and therefore whether it will be able to realise its assets and liabilities in the normal course of business at the values carried in the balance sheet.

Report on the Remuneration Report

We have audited the Remuneration Report included within the Directors’ Report for the year ended 31 December 2008. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards.

Auditor’s Opinion

In our opinion, the Remuneration Report of Advance Energy Limited for the year ended 31 December 2008, complies with section 300A of the Corporations Act 2001.

BDO Kendalls Audit & Assurance (WA) Pty Ltd

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Glyn O’Brien

Director

Perth, Western Australia and 31 March 2009

bdO kendalls is a national association of separate partnerships and entities

Section nine/ SHAREHOLDER INFORMATION 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

tWenty laRGeSt SHaReHoldeRS FOR THE yEAR ENDED 31 DECEMBER 2008

twentY LArGeSt SHAreHOLDerS

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Shareholders Number of
(Fully Paid Ordinary) as at 30 March 2009 Shares %
Fay Holdings Pty Ltd 13,476,740 11.344
Bardev Pty Ltd 7,167,187 6.033
Sealblue Investments Pty Ltd 6,880,000 5.791
Formaine Pty Ltd 5,767,857 4.855
Accord Investment Corporation Pty Ltd 5,320,885 4.479
Spartan Nominees Pty Ltd 4,202,144 3.537
Jet Strike Pty Ltd 3,250,000 2.736
Pinewood Holdings Pty Ltd 3,125,000 2.631
Dalveen Pty Ltd 3,083,333 2.595
Beachcraft Pty Ltd 3,010,000 2.534
Short Nominees Pty Ltd 2,946,428 2.480
Always Holdings Pty Ltd 1,790,000 1.507
Robert Paul Martin & Susan Pamela Martin 1,659,489 1.397
Spartan Nominees Pty Ltd 1,600,000 1.347
Mr Roland Holger Berzins & Carol Maree Berzins 1,575,000 1.326
MDM Thie Tjie Hoa 1,482,121 1.248
Citicorp Nominees Pty Ltd 1,407,428 1.185
Auro Pty Ltd 1,391,210 1.171
John Wardman & Associates Pty Ltd 1,302,857 1.097
RPM Super Pty Ltd 1,285,714 1.082
TOP 20 SHAREHOLDERS 71,723,393 60.374
TOTAL ISSUED SHARES 118,798,222 100
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Distribution schedule of the number of holders in each class of equity security.

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Holder of Number of
By Class Ordinary shares Ordinary shares %
1 – 1,000 10 3,802 0.003
1,001 - 5,000 42 148,082 0.125
5,001 – 10,000 136 1,108,673 0.933
10,001 – 100,000 240 9,474,868 7.976
100,001 and over 122 108,062,797 90.963
Totals 550 118,798,222 100.000
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Section nine/ additional SHaReHoldeR SHAREHOLDER INFORMATION inFoRmation (CONTINUED) FOR THE yEAR ENDED 2008 annUal RePoRt 31 DECEMBER 2008 ADVANCE ENERGy[LTD ]

A. COrPOrAte GOvernAnCe

A statement disclosing the extent to which the Company has followed the best practice recommendations set by the ASx Corporate Governance Council during the reporting period is previously contained in this document as item 4.

B. SHAreHOLDinG

1. Substantial Shareholders

The following substantial Shareholders were listed on the Company’s register as at 30 March 2009:

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Number
Shareholder of Shares Percentage
Bardev Pty Ltd 10,156,165 8.55%
A N Short/Fay Holdings Pty Ltd 16,458,599 13.85%
R P Martin 9,318,211 7.84%
G A Sklenka/Formaine Pty Ltd 6,805,357 5.73%
A J Carew-Reid 7,527,172 6.34%
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2. Unquoted Securities

Names of persons holding greater than 20% of a class of unquoted securities:

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Holder Class of Equity Security Number of Shares
Fay Holdings Pty Ltd Options 4,000,000
Anndev Pty Ltd Options 3,000,000
Fay Holdings Pty Ltd Convertible preference shares 3
North American Energy, Inc Convertible preference shares 3
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3. Number of holders in each class of equity securities and the voting rights attached.

There are 550 holders of ordinary shares. Each Shareholder is entitled to one vote per share held. On a show of hands every Shareholder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote.

There are 19 holders of unlisted options. There are no voting rights attached to these options.

There are 5 holders of convertible preference shares. There are no voting rights attached to these convertible preference shares.

Section nine/ SHAREHOLDER INFORMATION (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

FOR THE yEAR ENDED 31 DECEMBER 2008

additional SHaReHoldeR inFoRmation (continUed)

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Holders of Number of
By Class Options Options %
- - -
1 – 1,000
- - -
1,001 - 5,000
- - -
5,001 – 10,000
10,001 – 100,000 6 200,000 1.03
100,001 and over 13 19,150,000 98.97
Totals 19 19,100,000 100.00
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Holders of Number of
Convertible Convertible
By Class Notes Notes %
1 – 1,000 5 9 100.00
- - -
1,001 - 5,000
- - -
5,001 – 10,000
- - -
10,001 – 100,000
- - -
100,001 and over
Totals 5 9 100.00
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5. Marketable parcel

There are 217 Shareholders with less than a marketable parcel as at 30 March 2009.

C. OtHer DetAiLS

1. Company Secretary

David Ballantyne.

2. Address and telephone details of the entity’s registered and administrative office

The address and telephone details of the registered and administrative office:

Suite 4, 16 Ord Street, WEST PERTH Western Australia 6005 Telephone: +(61) 08 9486 1122 Facsimile: +(61) 08 9486 1011

Section nine/ SHAREHOLDER INFORMATION (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

additional SHaReHoldeR inFoRmation (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

3. Address and telephone details of the office at which a register of securities is kept

The address and telephone number of the office at which a registry of securities is kept:

Advanced Share Registry Services

150 Stirling Highway, NEDLANDS Western Australia 6009 Telephone: +(61) 08 9389 8033 Facsimile: +(61) 08 9389 7871

Stock exchange on which the Company’s securities are quoted

The Company’s listed equity securities are quoted on the Australian Stock Exchange.

5. Review of operations

A review of operations is included in the Directors’ Report.

6. Consistency with business objectives

The company has used its cash and assets in a form readily convertible to cash that it had at the time of listing in a way consistent with its stated business objectives.

7. Lease descriptions

All leases and operations are located in the state of Texas in the USA, as at the end of March 2009. A complete list of operating leases follows on the next page.

Martin County

The Company has working leases over approximately 2,720 gross acres and now operates 19 wells in this area. The company maintains a working interest of 100% in Mother Lode 1, 12.5% in Mother Lode 2 and 50% in Mother Lode 3. It has net revenue interests of between 7.75% and 74%, further details of which are supplied on the following master list. Mother Lode 1 operated by Hibernia Resources, LLC, Mother Lode 2 by Endeavour Energy Resources LP, and Mother Lode 3 by Hibernia Resources, LLC and North America Energy, Inc.

Palo Pinto County

The Company has working leases over approximately 1,015 gross acres and now operates 9 wells in this area. The Company maintains a working interest of 100% in these assets, and has net revenue interests of between 75% and 80%. These wells are operated by Hibernia Resources, LLC.

Section nine/ SHAREHOLDER INFORMATION (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

additional SHaReHoldeR inFoRmation (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

Martin County

1 Mother Lode Phase I

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Acreage
API# Operator Lease Well# Field Name RRC # AEPI WI AEPI NRI Held
42-317-34317 Hibernia Resources, LLC Cazares 1 Rk (Strawn) 36627 1.00000 0.72037 40
42-317-34362 Hibernia Resources, LLC Cazares 2 Rk (Strawn) 36627 1.00000 0.72076 40
42-317-34369 Hibernia Resources, LLC Hull 1 Rk (Strawn) 36774 1.00000 0.68165 40
42-317-34392 Hibernia Resources, LLC Hull 2 Rk (Strawn) 36774 1.00000 0.68289 40
42-317-34598 Hibernia Resources, LLC Graham 1 Spraberry (trend area) 37865 1.00000 0.74137 160
320
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2 Mother Lode Phase II-Totem Prospect

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Acreage
API# Operator Lease Well# Field Name RRC # AEPI WI AEPI NRI Held
42-317-34520 Endeavor Energy Resources L.P. Strain "16" 1 Spraberry (trend area) 37892 0.12500 0.07875 160
42-317-34687 Endeavor Energy Resources L.P. Strain "16" 2 Spraberry (trend area) 37892 0.12500 0.07875 160
42-317-34764 Endeavor Energy Resources L.P. Strain "16" 3 Spraberry (trend area) 37892 0.12500 0.07875 160
42-317-34893 Endeavor Energy Resources L.P. Strain "16" 4 Spraberry (trend area) 37892 0.12500 0.07875 160
640
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3 Mother Lode Phase II-Key East Prospect

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Acreage
API# Operator Lease Well# Field Name RRC # AEPI WI AEPI NRI Held
42-317-34711 Endeavor Energy Resources L.P. Brown, Prudie 1 Spraberry (trend area) 38045 0.12500 0.08584 160
"10"
42-317-34749 Endeavor Energy Resources L.P. Brown, Prudie 2 Spraberry (trend area) 38611 0.12500 0.09894 160
"10-A"
42-317-34519 Endeavor Energy Resources L.P. Thomas "4" 1 Spraberry (trend area) 37590 0.12500 0.09875 160
42-317-34863 Endeavor Energy Resources L.P. Thomas "5" 1 Spraberry (trend area) 38289 0.12500 0.09875 160
42-317-34683 Endeavor Energy Resources L.P. Thomas "9" 1 Spraberry (trend area) 38118 0.12500 0.08574 80
42-317-35188 Endeavor Energy Resources L.P. Thomas "9" 2 Spraberry (trend area) 38118 0.12500 0.08574 80
42-317-35097 Endeavor Energy Resources L.P. Williams "9" 1 Spraberry (trend area) 38882 0.12500 0.08339 80
42-317-35291 Endeavor Energy Resources L.P. Williams "9" 2 Spraberry (trend area) 38882 0.12500 0.08339 80
960
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Section nine/ SHAREHOLDER INFORMATION (CONTINUED) 2008 annUal RePoRt ADVANCE ENERGy[LTD ]

additional SHaReHoldeR inFoRmation (continUed) FOR THE yEAR ENDED 31 DECEMBER 2008

Martin County

4 Mother Lode Phase III-Greene and North Hampton Prospect

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Acreage
API# Operator Lease Well# Field Name RRC # AEPI WI AEPI NRI Held
TBD Hibernia/NAE Greene 1 TBD TBD 0.5 0.3825 160
TBD Hibernia/NAE North Hampton 1 TBD TBD 0.5 0.3825 640
800
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5 Possum Kingdom

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Acreage
API# Operator Lease Well# Field Name RRC # AEPI WI AEPI NRI Held
42-363-35293 Hibernia Resources, Llc Coleman 1 B.R.A. (CONGL.) 206019 1.00000 0.77709 80
42-363-35482 Hibernia Resources, Llc Coleman 2 Set Ranch (CONGL) 214908 1.00000 0.77709 80
42-363-35361 Hibernia Resources, Llc Dabney 1 Set Ranch (Congl) 211444 1.00000 0.77709 80
42-363-35483 Hibernia Resources, Llc Dabney 2 Possum Kingdom, 214846 1.00000 0.77709 80
West (CONGL.)
42-363-35219 Hibernia Resources, Llc Deno-Gragg 1 B.R.A. (CONGL.) 199917 1.00000 0.78660 160
42-363-35385 Hibernia Resources, Llc Deno-Gragg 2 B.R.A. (CONGL.) 214151 1.00000 0.78660 80
42-363-35526 Hibernia Resources, Llc Deno-Gragg 3 Pickwick 221245 1.00000 0.78660 80
(CONGLOMERATE)
42-363-35295 Hibernia Resources, Llc Francis 1 B.R.A. (CONGL.) 206021 1.00000 0.78660 175
42-363-35369 Hibernia Resources, Llc Gragg, P. K. 1 B.R.A. (CONGL.) 212130 1.00000 0.78660 200
1015
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noteS:

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advance

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AI assistant

TALIUS GROUP LIMITED — Annual Report 2008

65893_rns_2009-04-28_01370f52-4151-4a27-8925-050b064253fe.pdf

2008 ANNUAL report

proving the model

A SHOrt BuSineSS Overview On ADvAnCe enerGY

BUSINESS OVERVIEW

CHAirmAn’S Letter tO tHe SHAreHOLDerS

CHAIRMAN’S LETTER

Dear Shareholder

FinAnCiAL HiGHLiGHtS

A COnCiSe review OF ADvAnCe enerGY LtD’S 2008 OPerAtiOnS

REVIEW OF OPERATIONS

1. COrPOrAte Overview AnD StrAteGY

Operational Overview

Divestments

Acquisitions

Rights Issue

Enhancement Activities

2008 versus 2007 Operational Comparison

Loan and Debt Facilities

Risk Management Activities

Likely Developments

Environmental Issues

enerGY mArKet YeAr in review AnD OutLOOK

INDUSTRY OUTLOOK

enerGY mArKet Overview

OiL mArKet review

Demand

Inventories and Storage

Supply

FOr OiL PriCeS tO imPrOve, DOmeStiC COnSumPtiOn muSt inCreASe AnD reFinerY OutPut wiLL neeD tO GrOw

Demand and Consumption

Prices

Crude Oil Prices

OPEC’s Influence on Oil Prices

nAturAL GAS mArKet review

Production

Storage

There is currently

Consumption

Prices

Natural Gas Prices

enerGY mArKet in FOCuS - DriLLinG ServiCeS

Sources:

tHe BOArD AnD mAnAGement Are COmmitteD tO COrPOrAte GOvernAnCe

CORPORATE GOVERNANCE

COmPLiAnCe witH ASX COrPOrAte GOvernAnCe reCOmmenDAtiOnS

Introduction

Council Principle 1:

Role of the Board

Responsibility of the Board

THE COMPANy HAS

Materiality threshold

IT APPOINTS THE

The Chairman

The Managing Director

Role and responsibility of management

Relationship of Board with management

Council Principle 2:

Structure the board to add value

Council Principle 3:

Promote ethical and responsible decision-making.

Council Principle 4:

Safeguard integrity in financial reporting.

The Company has not

Council Principle 5:

Make timely and balanced disclosure

Council Principle 6:

Respect the rights of shareholders

Information will be communicated to shareholders as follows:

Company’s website

Council Principle 7:

Council Principle 8:

DIRECTORS’ REPORT

directors

principal activities

Operating results

dividends paid or recommended

Review of operations

TALIUS GROUP LIMITED Annual Report 2008