TALIUS GROUP LIMITED - Annual Report 2010

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A D VANCE EN E RG Y LI M ITE D ACN 111 823 762

AN N UA L RE P ORT FOR TH E YEAR ENDE D 31 DECEM B ER 2010

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

		Page No.
1.	Corporate Directory	2
2.	Chairman’s Letter	3
3.	Review of Operations	4
4.	Corporate Governance Statement	6
5.	Directors’ Report	12
6.	Auditor’s Independence Declaration	22
7.	Financial Report	23
8.	Director’s Declaration	61
9.	Independent Auditor’s Report to the Members	62
10.	Shareholders Information	64

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

CORPORATE DIRECTORY

Directors: Chairman Gordon Sklenka Managing Director Anthony Short Gordon Sklenka Non Executive Directors Kip Plankinton Company Secretary David Ballantyne Registered & Principal Office 16 Ord Street WEST PERTH WA 6005 Telephone: + 618 9486 1122 Facsimile: + 618 9486 1011 Postal Address P.O. Box 1779 WEST PERTH WA 6872 Auditors BDO Audit (WA) Pty Ltd 38 Station Street SUBIACO WA 6008 Solicitors - Perth Hardy Bowen 28 Ord Street WEST PERTH WA 6005 Website Address www.advanceenergyltd.com.au Advance Energy Ltd shares are listed on Stock Exchange Listings the Australian Stock Exchange under the code AVD Advanced Share Registry Services Share Registry 150 Stirling Hwy Nedlands WA 6009

ADVANCE ENERGY LI M ITED ANNUAL REPORT – 31 DECEMB E R 2010

CHAIRMAN’S LETTER

Dear Shareholder,

During the current y ear your C o mpany u n dertook a thorough p roject revi e w, and re s olved to commence an ass e t divestm e nt progra m me with t he aim of significantl y reducing its debt levels. This divestme n t program m e was co m pleted in December 2010 with t h e sale of i t s Mother Lode 1, Possum King d om and M artin West a ssets for U S $11.3 milli o n.

Part of t h e sale fun d s were used to red e em all unsecured list e d notes w ith a face value of A$5.25 million (there b y saving i n excess of A $600,000 i n interest a n nually) an d to pay o u t Sterling Bank in T exas. It is w orth notin g that the Company has retain e d its US$4 0 million fa c ility with Sterling B ank, for p o tential fut u re drawd o wn for th e acquisiti o n and/or d evelopm e nt of US assets.

The Co m pany retained more than A$2 . 5 million i n cash, on a consolidated basis, at 31 Decemb e r and the significant majority o f its remai n ing debt is in its list e d notes w hich are redeem a ble in Dec e mber 2014.

The Mot h er Lode 3 a sset in Tex a s has also b een retai n ed. Current accounti n g standar d s do not allow us t o revalue this asset t o reflect its reserves a n d produc t ion status. However t h e Board consider it, as discussed elsewhere in this r e port, to b e worth significantly in e xcess of its carrying value. The Compa n y currently intends to participat e in further developm e nts on th e Greene prospect , as they ar e proposed by the op e rator.

Your Co m pany is a lso activ e ly reviewi n g new e n ergy proj e cts, both within the US and elsewher e .

I would li k e to than k all stakeh o lders in th e Company for their p a tience du r ing this restructuring process. W e look forward to t h e coming f inancial y e ar, and the opportu n ities we h o pe it will bring.

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Gordon Sklenka Chairm a n 31st March 2011

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

REVIEW OF OPERATIONS

Operational Overview

In the year ending 31 December 2010, the company posted an unaudited loss after tax of AUD $8,988,355 of which almost $6 million arose from the book loss on the sale of oil and gas assets during the year.

Acquisitions

During the year the Company acquired minor overriding royalty interests increasing its net revenue interest in the Martin West project from 55.5% to 62%.

Divestments

In the first half of 2010, the Company undertook a review of its projects and determined to reduce its debt levels by divesting part or all of its mature assets. Advance entered a marketing agreement with PLS Inc for the development of a divestment process. In December 2010, the Company sold its interests in the Mother Lode 1, Martin West and Possum Kingdom projects for USD $11.3 million enabling it to retire its bank debt of USD $ 3.1 million and its unlisted notes of AUD $ 5.3 million. At 31 December 2010 it retained cash reserves of AUD $ 2.5 million.

Development

Advance undertook behind pipe workovers of the Cazares#2 well (Mother Lode 1), Holt#5 and Holt#6 wells (both Martin West).

2010 versus 2009 Operational Comparison

2010 versus 2009 Operational	Comparison
	2009	2010
Net Gas Production (MCF)	112,169	87,245
Net Oil Production (Barrels)	20,906	18,286
Revenue USD	$1,911,611	$2,077,158
Workovers Performed	3	3
Acquisitions USD	$2,816,000	$330,000
Divestments USD	$2,015,000	$11,300,000

Placement of Shares and Rights Issue

During the year, Advance undertook a placement of 23,000,000 shares at one cent per share raising $230,000 before costs. It then undertook a 1 for 1 rights issue of shares at the same price issuing a further 38,309,173 shares to raise an additional $383,092 before costs.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

Options Issue

In November 2010, Advance undertook a renounceable rights issue of options on the basis of 14 options for every 15 shares held at an issue price of 0.1 cents per option. The options are exercisable at 3 cents per share on or before 31 August 2012. The rights issue was fully subscribed and resulted in the issue of 202,931,768 options raising an additional $202,932 before costs.

Unlisted Convertible Notes

As a result of the sale of assets, Advance redeemed its outstanding unlisted convertible notes early thereby reducing its annual interest expense by over $600,000.

Sterling Bank

On settlement of the sale of its interests in Martin West, Possum Kingdom and Mother Lode 1, Advance repaid the balance of its loan facility. However, it has retained its USD $ 40 million line of credit.

Director Movements

Mr Alex Bajada, Chairman of the Company since prior to listing in 2006, retired as a Director of the Company on 21 June 2010. Mr Paul Berresford, who was appointed as a Non-Executive Director on 14 September 2009, was not re-appointed at the Annual General Meeting in May 2010.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

CORPORATE GOVERNANCE

COMPLIANCE WITH ASX CORPORATE GOVERNANCE RECOMMENDATIONS

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.

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 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.

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

http://asx.ice4.interactiveinvestor.com.au/ASX0701/Corporate%20Governance%20Principles/EN/

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

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

Principle	ASX Corporate Governance Council Recommendations	Comply
1	Lay solid foundations for management and oversight
1.1	Establishthefunctionsreserved to the board and those delegated to seniorexecutives and disclose thosefunctions.	Yes
1.2	Disclose the processforevaluating the performance ofseniorexecutives.	Yes
1.3	Provide theinformation indicatedinthe Guide toreporting onprinciple1.	Yes
2	Structure the Board to add value
2.1	A majority ofthe board should beindependentDirectors.	No
2.2	The chairshould be an independent director.	Yes
2.3	Theroles ofchairand chiefexecutive officershouldnot be exercised by the sameindividual.	Yes
2.4	The board should establishanominationcommittee.	Yes
2.5	Disclose the processforevaluating the performance ofthe board,its committees andindividual Directors.	Yes
2.6	Provide theinformation indicatedinthe Guide toreporting onprinciple2.	Yes
3	Promote ethical and responsible decision-making
3.1	Establisha code ofconduct and disclose the code ora summary as to:	Yes
	 the practicesnecessary tomaintainconfidenceinthe Company’sintegrity;
	 the practices necessary to take into account the Company’s legal obligations and the reasonable expectations of its stakeholders; and
	 theresponsibility and accountability of individualsfor reporting andinvestigatingreports ofunethicalpractices.
3.2	Establish a policy concerning diversity and disclose the policy or a summary of that policy which includes requirements for the board to establish measurable objectives for achieving gender diversity and for the board to assess annually the objectives and progressinachieving them.	No
3.3	Disclose annually themeasurable objectives setforachieving genderdiversity and progress towards achieving them.	No
3.4	Disclose annually the proportion of woman employees in the whole organization, women in senior executive positions andwomenonthe board.	No
3.5	Provide theinformation indicatedinthe Guide toreporting onprinciple 3.	Yes
4	Safeguard integrity in financial reporting
4.1	The board should establishanaudit committee.	Yes
4.2	The audit committee should be structured so thatit:

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

	 consists only of non-executiveDirectors;	No
	 consists ofamajority of independentDirectors;	Yes
	 is chaired by an independent chair,whoisnot chairofthe board; and	Yes
	 has atleast threemembers.	Yes
4.3	The audit committee shouldhave aformalcharter	Yes
4.4	Provide theinformation indicatedinthe Guide toreporting onprinciple4.	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 seniorexecutivelevel forthat compliance and disclose those policies ora summary ofthose policies.	Yes
5.2	Provide theinformation indicatedinthe Guide toreporting onprinciple 5.	Yes
6	Respect the rights of shareholders
6.1	Design a communications policy for promoting effective communication with shareholders and encouraging their participationat general meetings and disclose the policy ora summary ofthat policy.	Yes
6.2	Provide theinformation indicatedinthe Guide toreporting onprinciple 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 itsmaterialbusinessrisks.	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 relationtofinancial reportingrisks.	Yes
7.4	Provide theinformation indicatedinthe Guide toreporting onprinciple7.	Yes
8	Remunerate fairly and responsibly
8.1	The board should establisharemunerationcommittee.	Yes
8.2	The remuneration committee should be structured so that : - it consists of a majority of independent directors; - it is chaired by an independent director; - has atleast threemembers.	Yes Yes No
8.3	Clearly distinguish the structure on non-executive Directors’ remuneration from that of executive Directors and senior executives.	Yes
8.4	Provide theinformation indicatedinthe Guide toreporting onprinciple 8.	Yes

Council Principle 1: Lay solid foundations for management and oversight

1.1 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.

1.2 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;
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

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

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.

1.3 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:

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.

1.4 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 chairing shareholder meetings, and arranging Board performance evaluation.

1.5 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.

1.6 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.

1.7 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.

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.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

Council Principle 2: Structure the board to add value

The Company presently has two non-executive directors and one executive director. Two directors are independent in accordance with the terms of the ASX Corporate Governance Council’s definition of an independent director. The Chairman (Mr Gordon Sklenka) is a nonexecutive and independent director in terms of the ASX Corporate Governance Council’s definition of an independent director. 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 full board of directors performs the role of the nomination committee.

Council Principle 3: Promote ethical and responsible decision-making

The Company complies with this recommendation other than with regard to the adoption of a diversity policy. 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 prepared a draft diversity policy and currently is still taking advice with regard to a diversity policy prior to its adoption. The draft policy contemplates the recommendations of the Corporate Governance Council on diversity, which includes :

requirements for the board to establish objectives for achieving gender diversity;
the annual assessment and measurement of the company against these objectives;
the annual disclosure of the measurement and progress in achieving the set objectives; and
the disclosure of the proportion of women employed in the whole organisation, women in senior executive positions and women on the board.

Currently there are no women in the organisation at any level. Other than the board members, there are no employees within the Company. The Company has a broad policy of “outsourcing” immediately. The formulation of a final policy will also contemplate these issues and how they affect the Company.

Council Principle 4: Safeguard integrity in financial reporting

The Company’s Managing Director and Chief Financial Officer (or equivalent) 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 established an audit committee and the committee fulfils its role 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.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

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. 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 year. The half-year audited 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; and
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 partner attends the Annual General Meeting.

Council Principle 7: Recognise and manage risk

The Company has developed an initial framework for risk management and internal compliance and control systems which covers organisational, financial and operational aspects of the Company's affairs. The framework is the subject of ongoing review and yet to be

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

finalised. It appoints the Managing Director and Company Secretary as being responsible for ensuring that the systems are maintained and complied with.

Council Principle 8: Remunerate fairly and responsibly

The Board has established a remuneration committee. The remuneration committee is responsible for administering the remuneration policy adopted by the Company and the remuneration arrangements for non executive Directors, executive Directors and executives of the Company.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

DIRECTORS’ REPORT

Your Directors present their report on the consolidated entity (Group) for the year ended 31 December 2010.

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 (Resigned – 21 June 2010)

A. Short

G. Sklenka
P. Berresford (Appointed 22 September 2009- not re-elected on 31 May 2010)
K. Plankinton

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 2010 after income tax amounted to $8.988 million(2009: loss $3.926 million). Almost $6 million of the loss arose from the book loss on the sale of oil and gas assets.

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

Significant changes in the state of affairs

There were no changes in the state of affairs.

Matters subsequent to the end of the financial year

There were no matters subsequent to the end of the financial year.

Likely developments

Advance retains its interests in the Mother Lode III project on which the Roman 27-1 well was drilled and completed as a producer in 2010 by the operator, Endeavor Energy Resources. Advance currently intends to participate in further developments on the Greene prospect as they are proposed by Endeavor. The drilling of the Roman 27-1 well has further enhanced the value of the Mother Lode III asset, situated in the long life, slow decline Permian Basin area of Texas. The group’s interest is only carried at a cost of US$730,000 in the consolidated balance sheet, which doesn’t reflect its value, and proved and probable reserves.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

DIRECTORS’ REPORT (Cont)

In addition the Board is actively reviewing new projects in the energy sphere, both within the US and elsewhere.

Environmental Issues

The Group’s operations are subject to various environmental regulations under the Federal and State Laws of 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.

The Group is subject to the reporting requirements of both the Energy Efficiency Opportunities Act 2006 and the National Greenhouse and Energy Reporting Act 2007.

The Energy Efficiency Opportunities Act 2006 requires the Group to assess its energy usage, including the identification, investigation and evaluation of energy saving opportunities, and to report publicly on the assessments undertaken, including what action the Group intends to take as a result.

The National Greenhouse and Energy Reporting Act 2007 require the Group to report its annual greenhouse gas emissions and energy use. The Group intends to implement system and process for the collection and calculation of the data required in financial year 2011.

INFORMATION ON DIRECTORS AND SECRETARY

Names, qualifications, experience and special responsibilities

Mr Alex Bajada B.Econ (UWA) – Non Executive Chairman (Resigned – 21 June 2010)

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

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

Other directorships within the last three years

Victoria Petroleum NL.

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

Mr Short has over 19 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 and 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

Kilgore Oil and Gas Ltd, GBU Capital Pty Ltd and AAG Management Pty Ltd.

Other directorships within the last three years

Odin Energy Ltd, Victoria Petroleum NL, Regal Resources Ltd, Palace Resources Ltd and Vector Resources Ltd

Mr Gordon Sklenka B.Com (UWA) –Non Executive Director (Appointed chairman – 21 June 2010) Mr Sklenka graduated from the University of Western Australia with a Bachelor of Commerce degree majoring in accounting and finance. He has over 19 years experience in corporate finance in the areas of capital raisings, IPOs, acquisitions and project finance in the resources

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

DIRECTORS’ REPORT (Cont)

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 five other Australian ASX listed public companies in the resources sector.

Other Current directorships

Tribune Resources NL, Rand Mining NL, AXG Mining Ltd andKilgore Oil and Gas Limited .

Other directorships within the last three years

Regal Resources Ltd and Vector Resources Ltd.

Mr Paul Berresford –Non Executive Director CA FTIA SSA (Not re-elected as at 31 May 2010)

Mr Paul Berresford was appointed a Director of Advance Energy Ltd in September 2009. Mr Berresford has over 25 years experience in Public Practice and the Financial Services Industry, and previous Director/Company Secretarial roles for ASX listed companies. Mr Berresford is currently a Director of Optimus Financial Group Pty Ltd (“Optimus”).

Other Current directorships

NorthWest Properties Limited & Paynes Find Gold Limited

Other directorships within the last three years

None

Mr Kip Plankinton –Non Executive Director

Mr Kip Plankinton was appointed a Director in April 2009. Mr Plankinton is an oil and gas attorney with over 20 years experience in the oil and gas industry. He focuses on energy and natural resource matters with an emphasis on international and domestic oil and gas acquisitions and divestments, oil and gas operational and regulatory issues, oil and gas royalty matters and administrative adjudication. Prior to establishing his own practice in 2006, he served as in-house legal counsel for ExxonMobil, Colorado Interstate Gas Company, Texaco and Marathon Oil Company.

Other Current directorships

None

Other directorships within the last three years

None

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

Mr. Ballantyne is a Chartered Accountant with commercial experience in the exploration / mining, biotechnology and aquaculture sectors. He previously worked for a 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 director and company secretary of Odin Energy Ltd. He is also currently Company Secretary of Kilgore Oil and Gas Limited.

Meetings of Directors

The number of meetings held by the Company’s Board of Directors during the year ended 31 December 2010 and the number of meeting attended by each director were:

A. Bajada A. Short G. Sklenka P. Berresford K. Plankinton	Board meetings held Board meetings attended
	10 10 16 16 16 14 8 7 16 8

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

DIRECTORS’ REPORT (Cont)

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
Holder	Held at beginning of	Acquired	Dispose	Converted	Balance at end of
	year			CPS	year
Alex Bajada
 Indirect	5,802,144	2,320,857	-	-	8,123,001
Anthony Short
 Indirect	16,458,599	9,383,437	49,598	-	25,792,438
Gordon Sklenka
 Indirect	6,805,357	4,122,142	-	-	10,927,499
Paul Berresford
 Indirect	5,000,000	-	-	-	5,000,000
Kip Plankinton
 Indirect	-	-	-	-	-

Options- Unlisted

Options- Unlisted
Holder	Held at beginning of	Acquired	Expired	Exercised	Balance at end of
	year				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	-	-
Paul Berresford
 Indirect	-	-	-	-	-
Kip Plankinton
 Indirect	-	-	-	-	-
Options - Listed
Holder	Held at beginning of	Acquired	Dispose	Exercised	Balance at end of
	year				year
Alex Bajada
 Indirect	-	7,581,466	-	-	7,581,466
Anthony Short
 Indirect	-	24,072,937	-	-	24,072,937
Gordon Sklenka
 Indirect	-	10,198,997	-	-	10,198,997
Paul Berresford
 Indirect	-	-	-	-	-
Kip Plankinton
 Indirect	-	-	-	-	-

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

DIRECTORS’ REPORT (Cont)

Converting Preference shares (CPS)

Holder	Held at beginning of	Acquired		Converted to shares	Balance at end of
	year				year
Alex Bajada
 Indirect	1	-	-	-	1
Anthony Short
 Indirect	3	-	-	-	3
Gordon Sklenka
 Indirect	1	-	-	-	1
Paul Berresford
 Indirect	-	-	-	-	-
Kip Plankinton
 Indirect	-	-	-	-	-

Details of the conditions relating to conversion of the Converting Preference Shares are included in note 18.3.

Retirements and Re-elections of directors

Mr Paul Berresford was not re-elected to the Board at the Annual General Meeting on 31 May 2010. Mr Alex Bajada resigned as a Director of the Company on 21 June 2010.

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 Remuneration E. Additional Information

As noted in the corporate governance section of this Annual Report, under council principle 8, the Company is not currently of a size, nor are its affairs of such complexity to justify the formation of a separate remuneration committee. The board manages the remuneration policy, setting the terms and conditions for executive directors and other senior executives.

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

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

DIRECTORS’ REPORT (Cont)

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.

Performance-linked remuneration

The Company currently has no performance based remuneration. As previously stated two Board members including the Managing Director, 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 during the 2010 year was reduced significantly, 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 (Resigned – 21 June 2010)  Commenced 24 November 2004, terminated on 21 June 2010;

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

DIRECTORS’ REPORT (Cont)

Non Executive Chairman’s fees (paid as consulting fees), inclusive of superannuation, for the year ended 31 December 2010 of A$14,363.

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 2010 of A$121,000, 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 2010 of A$55,000 to be reviewed annually by the Board;
Payment of a termination benefit on early termination by the Company, other than for gross misconduct, equal to 3 months’ directors and consulting fees.

Mr K Plankinton, Non-executive Director

Commenced 9 April 2009, no termination date;
Non Executive Chairman’s fees (paid as consulting fees), inclusive of superannuation, for the year ended 31 December 2010 of US$20,000 to be reviewed annually by the Board;

Mr P Berresford, Non-executive Director

Commenced 14 September 2009, not re elected at annual general meeting on 31 May 2010;
Non Executive Chairman’s fees (paid as consulting fees), inclusive of superannuation, for the year ended 31 December 2010 of A$13,750.

Key Management Personnel

Mr D Ballantyne, Company Secretary

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

C. Details of Remuneration

The key management personnel of Advance Energy Limited during the year ended 31 December 2010 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 (Resigned 21 June 2010) Mr A Short - Managing Director Mr G Sklenka - Non-Executive Chairman Mr K Plankinton - Non-Executive Director (Appointed 9 April 2009) Mr P Berresford Non-Executive Director (not re appointed at 31 May 2010) Mr D Ballantyne - Company Secretary

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.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

DIRECTORS’ REPORT (Cont)

Nature and amount of remuneration for the year ended 31 December 2010.

Executive directors A Short (Managing Director) Non-executive directors A Bajada G Sklenka K Plankinton P Berresford Total directors’ remuneration Other key management personnel D Ballantyne Total other key management remuneration TOTAL REMUNERATION	Short-term employee benefits Post - employ ment benefits Equity Salary, consulting fees $ Bonus $ Superan nuation $ Option based payments $ Preference share based payments $ Total $ Remuner- ation consisting of equity % Remuneration linked to performance %
	2010 2009 121,000 220,000 - - - - - - - - 121,000 220,000 - - - - 2010 2009 14,363 54,500 - - - - - - - - 14,363 54,500 - - - - 2010 2009 55,000 100,728 - - - - - - - - 55,000 100,728 - - - - 2010 2009 21,122 49,904 - - - - - - - - 21,122 49,904 - - - - 2010 2009 13,750 8,667 - - - - - - - - 13,750 8,667 - - - -
	2010 2009 225,235 433,799 - - - - - - - - 225,235 433,799 - - - -
	2010 2009 27,225 36,875 - - - - - - - - 27,225 36,875 - - - -
	2010 2009 27,225 36,875 - - - - - - - - 27,225 36,875 - - - -
	2010 2009 252,460 470,674 - - - - - - - - 252,460 470,674 - - - -

D. Share-based Remuneration

Options

No options were granted to directors and other key management during the year ended 31 December 2010. (2009: Nil)

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

DIRECTORS’ REPORT (Cont)

Convertible Preference Shares

No convertible preference shares were issued during the year ended 31 December 2010. (2009: Nil)

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, including the Managing Director 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 restructure and to build the business and establish self-sustaining revenue streams.

This is the end of the audited remuneration report.

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

During the year following options were expired:

ExpiryDate Exercise Price (A$)	Number of shares under option
31 December 2010 $0.25 31 December 2010 $0.40 TOTAL	13,850,000 250,000
	14,100,000

CONVERTIBLE PREFERENCE SHARES

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

CPS B CPS C CPS D Total	Number CPS in Issue 5 2 2
	9

Conditions relating to the outstanding Convertible Preference Shares are contained in note 18.3.

ADVANCE ENERGY LI M ITED ANNUAL REPORT – 31 DECEMB E R 2010

DIRECT O RS’ REP O RT (Con t

NON-AUDIT SERVICES

The follo w ing non-a u dit services were pro v ided by the entity’s auditor, BD O Audit (W A ) Pty Ltd or associated entiti e s. The di r ectors are satisfied t h at the pr o vision of n on-audit s e rvices is compati b le with t h e general standard of indep e ndence f or auditor s imposed by the Corporations Act. T he direct o rs are sati s fied that t h e provisio n of non-a u dit servic e s by the auditor, a s set out b elow, did n ot compr o mise the auditor inde p endence requireme n ts of the Corporations Act 20 0 1 for the f o llowing re a sons:

A l l non-audit services h a ve been r e viewed b y the boar d to ensure they do n o t impact t h e impartial i ty and obj e ctivity of t h e auditor; a nd
N o ne of the s ervices un d ermine th e general principles rel a ting to au d itor indep e ndence a s set out in APES 110 C ode of Et h ics for Prof e ssional Accountants, including r e viewing o r auditing t he auditor’s own work, acting i n a management or a decisio n -making c a pacity for the Com p any, acting as advocate for t h e Compa n y or jointl y sharing e c onomic risk and rewards.

BDO rec e ived or ar e due to r e ceive the following a mounts fo r the provi s ion of audit and/or non-audi t services:

Other as surance se rvices	Group
BDO Aud - - T Total Rem it (WA) Pty Audit anda ax and oth uneration Ltd ssurance s er advices ervices	2010 $ 52,363 - 2009 $ 55,33 6,500 4
	52,363 61,83 4

Auditor’s I n dependence Declaration The Audi t or’s Indep e ndence D e claration, a s required under Section 307c of the Corpo r ations Act 2001, for the fin a ncial year e nded 31 D ecember 2 010 has been receive d and can b e found on page 22.

Signed in accordan c e with a r e solution of t he Board o f Directors.

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G.Sklenka Chairman

A. Short Managing Director

West Per t h, W.A. 31[st] March 2010

38 Station Street Subiaco, WA 6008 PO Box 700 West Perth WA 6872 Australia

Tel: +8 6382 4600 Fax: +8 6382 4601 www.bdo.com.au

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31 March 2011

Advance Energy Ltd PO Box 1779 WEST PERTH WA 6872

Dear Sirs,

DECLARATION OF INDEPENDENCE BY GLYN O’BRIEN TO THE DIRECTORS OF ADVANCE ENERGY LIMITED

As lead auditor of Advance Energy Limited for the year ended 31 December 2010, 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 Audit (WA) Pty Ltd Perth, Western Australia

BDO Audit (WA) Pty Ltd ABN 79 112 284 787 is a member of a national association of independent entities which are all members of BDO (Australia) Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit (WA) Pty Ltd and BDO (Australia) Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards

Legislation (other than for the acts or omissions of financial services licensees) in each State or Territory other than Tasmania.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

Consolidated Statement of Comprehensive Income For The Year Ended 31 December 2010

Continuing operations Revenue Other income Administrative expenses Finance costs Loss before income tax Income tax expense Loss from continuing operations Loss from discontinued operation Loss for the year before tax Income tax expense Loss for the year after tax Other comprehensive income Exchange differences on translation of foreign operations Other comprehensive loss for the year, net of tax Total comprehensive loss for the year Loss is attributable to Owners of Advance Energy Ltd Total comprehensive loss for the year is attributable to Owners of Advance Energy Ltd Loss per share Basic loss (cents per share)- from continuing operations Basic loss (cents per share)- from overall operations	Notes	Group 2010 2009 Restated
	7 8 8 21 21	- - 43,425 57,609 (1,690,003) (2,580,495) (1,426,454) (1,104,322)
		(3,073,032) (3,627,208) - -
		(3,073,032) (3,627,208)
		(5,915,323) (299,477)
		(8,988,355) (3,926,685)
		- -
		(8,988,355) (3,926,685)
		(1,159,491) (4,110,617)
		(1,159,491) (4,110,617)
		(10,147,846) (8,037,302)
		(8,988,355) (3,926,685)
		(10,147,846) (8,037,302) (1.67) (4.87) (2.70) (2.90)

The above Statement of Comprehensive Income should be read in conjunction with the accompanying notes.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

Consolidated Statement of Financial Position

As at 31 December 2010

Current assets Cash and cash equivalents Trade and other receivables Derivative financial instrument Total current assets Non-current assets Property, plant and equipment Oil and gas properties Other financial assets Total non-current assets Total Assets Current liabilities Trade and other payables Provisions Interest bearing liabilities Total current liabilities Non-current liabilities Interest bearing liabilities Total non-current liabilities Total Liabilities Net Assets (deficiency)/surplus Equity Issued share capital Reserves Accumulated losses Total Equity	Notes	Group 2010 2009
	9 10 12 11 13 14 15 16 17 17 18 19 20	2,545,539 1,254,791 71,454 433,834 - 77,014
		2,616,993 1,765,639
		11,054 442,767 699,262 18,372,726 44,746 988,017
		755,062 19,803,511
		3,372,055 21,569,150
		763,123 382,890 - 232,830 784,991 686,390
		1,548,114 1,302,110
		6,675,500 15,772,514
		6,675,500 15,772,514
		8,223,614 17,074,624
		(4,851,559) 4,494,526
		16,144,258 15,546,888 (621,388) 333,713 (20,374,429) (11,386,074)
		(4,851,559) 4,494,526

The above Statement of Financial Position should be read in conjunction with the notes to the financial statements.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

Consolidated Statement of Cash flows For The Year Ended 31 December 2010

Cash flows from operating activities Receipts from customers Payments to suppliers and staff Interest received Derivative instruments Interest and borrowing costs Income tax paid Net cash provided by/ (used in) operating activities Cash flows from investing activities Purchase of oil and gas assets/properties Sale of oil and gas properties Receipts from joint venture (Blaze assets) Net cash inflow/(outflow) from investing activities Cash flows from financing activities Proceeds from issues of shares Capital raising costs Proceeds from borrowings Repayments of borrowings Repayment of convertible notes Net cash inflows from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Exchange rate changes on cash Cash and cash equivalents at the end of the financial year	Notes	Group 2010 2009
	9	2,468,386 2,853,260 (1,807,402) (6,043,985) 10,683 57,769 - (206,178) (1,385,577) (1,250,042) (39,075) -
		(752,985) (4,589,175)
		(1,247,163) (3,511,162) 10,933,626 2,297,883 155,081 -
		9,841,544 (1,213,279)
		816,394 2,500,000 (13,545) (153,313) 98,137 5,465,000 (3,401,201) (2,803,220) (5,290,556) -
		(7,790,771) 5,008,467
		1,297,788 (793,987) 1,254,791 2,420,913 (7,040) (372,135)
		2,545,539 1,254,791

The above Statement of Cash Flows should be read in conjunction with the notes to the financial statements.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

Consolidated Statement of Changes in Equity

For The Year Ended 31 December 2010

CONSOLIDATED

Year ended 31 December 2010 Balance at beginning of year Loss for the year Currency translation on foreign operations Total comprehensive loss for the year Transactions with equity holders in their capacity as equity holders Issues of share capital, net of transaction costs Balance at 31 December 2010 Year ended 31 December 2009 Balance at beginning of year Loss for the year Currency translation on foreign operations Total comprehensive loss for year Transactions with equity holders in their capacity as equity holders Issues of share capital, net of transaction costs Balance at 31 December 2009	Issued Capital Equity Reserve Option Reserve Foreign Currency Translation Reserve Accumulated losses TOTAL
	15,546,888 151,072 1,821,455 (1,638,814) (11,386,074) 4,494,527 - - - - (8,988,355) (8,988,355) - - - (1,159,491) - (1,159,491)
	- - - (1,159,491) (8,988,355) (10,147,846) 597,370 - 204,390 - - 801,760
	16,144,258 151,072 2,025,845 (2,798,305) (20,374,429) (4,851,559)

	Issued Capital Equity Reserve Option Reserve Foreign Currency Translation Reserve Accumulated losses TOTAL
	12,693,552 151,072 1,821,455 2,471,803 (7,459,389) 9,121,739 - - - - (3,926,685) (3,926,685) - - - (4,110,617) - (4,110,617)
	- - - (4,110,617) (3,926,685) (8,037,302) 2,853,336 - - - - 2,853,336
	15,546,888 151,072 1,821,455 (1,638,814) (11,386,074) 4,494,527

The Statement of Changes in Equity should be read in conjunction with the notes to the financial statements.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

NOTES TO THE FINANCIAL STATEMENTS

For The Year Ended 31 December 2010

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements include 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 statements 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

These financial statements have 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.

As at 31 December 2010, the Group had net current assets of A$1.069million (2009: A$0.464 million) and net asset deficiency of A$4.851 million (2009: net assets A$4.495 million).

The Group has incurred a net loss after tax for the year ended 31 December 2010 of A$8.988 million, (2009: A$3.926 million) and net cash outflow from operating activities of A$753 thousands (2009: A$4.589 million). Approximately $6 million of the current year result relates to a book loss on sale of oil and gas assets.

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 funds in the future, as and when required.

During the current year the Company has engaged in a significant rationalisation process, resulting in the sale of mature production assets for US$11.3 million and the retirement of around $8.5 million in debt. The only non current liabilities retained on the Company’s balance sheet at 31 December 2010 are listed convertible notes with a redemption date of December 2014; and the Company is in a secure net current asset position, in excess of $1 million.

The Company raised more than $800,000 during the year from the issue of shares and options.

In addition, and as stated elsewhere in this financial report, the Company has retained its 50% interest in the Mother Lode 3 development and production asset on which there are proven, probable and possible reserves. In June 2009 the Company released an unrisked PV10 valuation of this asset, based upon an independent assessment of the reserves, which was in excess of the current carrying cost of US$730,000. Subsequent to this and during the current financial year the first well (Roman 27-1) was drilled and completed as a producer. The Company will consider participation in the further drilling programmes on this project in the current financial year.

The Company is also currently reviewing energy projects internationally and will make market announcements as and when appropriate. It envisages that any new project acquisition will also see a recapitalisation to raise the necessary funds both for future exploration and development of any acquisition, and possibly to participate in the Mother Lode 3 drilling programme.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

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 develop cash flow from its current assets, acquire new projects and to secure additional funding through the raising of further equity capital and/or support from its financiers.

Based on the above, the Group is confident that it will successfully meet its financial obligations into the foreseeable future.

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 nor 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

The consolidated entity financial statements also comply with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB).

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 available-for-sale financial assets.

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 (refer note 3).

Principles of Consolidation

(i) Subsidiaries

The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Advance Energy Ltd (“company” or “parent entity”) as at 31 December 2010 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 de-consolidated 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 Ltd.

Change in Accounting Policy

The group has changed its accounting policy for transactions with non-controlling interests and the accounting for loss of control, joint control or significant influence from 1 January 2010 when a

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

revised AASB 127 Consolidated and Separate Financial Statements became operative. The revisions to AASB 127 contained consequential amendments to AASB 128 Investments in Associates and AASB 131 Interest in Joint Ventures.

Previously transactions with non-controlling interests were treated as transactions with parties external to the group. Disposals therefore resulted in gains or losses in profit or loss and purchases resulted in the reorganisation of goodwill. On disposal or partial disposal, a proportionate interest in reserves attributable to the subsidiary was reclassified to profit or loss or directly to retained earnings.

Previously when the group ceased to have control, joint control or significant influence over and entity, the carrying amount of the investment at the date control, joint control or significant influence ceased became its cost of the purposes of subsequently accounting for the retained interests as associates, jointly controlled entity or financial assets.

The group has applied the new policy prospectively to transactions occurring on or after 1 July 2009. As a consequence, no adjustments were necessary to any of the amounts previously recognised in the financial statements.

(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 joint venture activity have been incorporated in the financial statements under the appropriate headings.

The interest in a joint venture partnership is accounted for in the consolidated financial statements using the equity method and is carried at cost by the parent entity. Under the equity method, the share of the profits or losses of the partnership is recognised in the income statement, and the share of movements in reserves is recognised in reserves in the statement of financial position.

Segment reporting

AASB 8 requires a management approach under which segment information is presented on the same basis as that used for internal reporting purposes. Operating segments are now reported in a manner that is consistent with the internal reporting to the chief operating decision maker (“CODM”), which has been identified by the company as the board.

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 profit and loss.

(iii) Group companies

The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that statement of financial position

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

income and expenses for each income statement are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions), and
all resulting exchange differences are recognised as a separate component of equity.

On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, 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 delivered to the buyer and the costs incurred or to be incurred in respect of the transaction can be measured reliably.

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

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

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.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

iii) Impairment

The carrying values of plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.

For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

If any indication of impairment exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount.

The recoverable amount of plant and equipment is the greater of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

Impairment losses are recognised separately in the profit or loss.

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 profit or loss in the year the item is derecognised.

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 losses are initially recognised at fair value and transaction costs are expensed in the statement of comprehensive income. 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.

(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 statement of comprehensive income 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 statement of financial position 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.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

(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.

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 statement of comprehensive income 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 statement of comprehensive income.

(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.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

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 statement of comprehensive income:

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.

(ii) Net investment hedges

Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges.

Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the statement of comprehensive income within other income or other expenses.

Gains and losses accumulated in equity are included in the income statement when the foreign operation is partially disposed of or sold.

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

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

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-of-production 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 estimated useful life for Oil and Gas Properties is 30 years.

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 (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.

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 non-monetary 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.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

Share Based Payments

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

The cost of these equity-settled 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 equity-settled 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.

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:

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

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, carry-forward 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.

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

Cash flows are included the Statement of cash flows 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

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

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.

New accounting standards and interpretations

The Group has chosen not to early-adopt any accounting standards that have been issued, but are not yet effective. Set out below is a summary of issued accounting standards, relevant to the Consolidated Entity, which are not yet effective and a description of their expected effect on the Group’s financial statements(if any).

AASB 2010-3 Amendments to Australian Accounting Standards – Business Combinations [AASB 3]

(effective 1 July 2010)

In June 2010 the AASB issued an amendment to AASB 3 Business Combinations, which Confirms that any balances of contingent consideration that relate to acquisitions under the superseded AASB 3 must be accounted for under the superseded standard, i.e. not via profit or loss. There will be no impact on initial adoption as adjustments to contingent consideration on acquisitions prior to 1 July 2009 have been accounted for in accordance with the superseded AASB 3.

AASB 2010-3 Amendments to Australian Accounting Standards – Business Combination [AASB 3]

The amendment limits the choice of measuring non-controlling interests (NCI) at either fair value or the NCI’s proportionate share of the acquiree’s net identifiable assets to NCI’s that are present ownership instruments that entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation. Other components of NCI must be measured at acquisition date fair value, or as required by other Accounting Standards. The amendments clarify that acquiree awards that the acquirer chooses to, but is not obliged to, replace, must be accounted for in the same way as acquiree awards that the acquirer is obliged to replace.

AASB 2010-4 Amendments to Australian Accounting Standards – Financial Instruments: Disclosures [AASB 7] (effective 1 January 2011)

In June 2010 the AASB issued an amendment to AASB 7 Financial Instruments: Disclosures, which deletes various disclosures relating to credit risk, renegotiated loans and receivables and the fair value of collateral held. There will be no impact on initial adoption to amounts recognised in the financial statement as the amendments result in fewer disclosures only.

AASB 2010-4 Amendments to Australian Accounting Standards – Presentation of Financial Statements [AASB 101] (effective 1 January 2011)

In June 2010 the AASB issued an amendment to AASB 101 Presentation of Financial Statements, which allows that a detailed reconciliation of each item of other comprehensive income may be included in the statement of changes in equity or in the notes to the financial statements. There will be no impact on initial adoption of this amendment as a detailed reconciliation of each item of other comprehensive income has always been included in the statement of changes in equity.

AASB 2009-10 Amendments to Australian Accounting Standards – Classification of Rights Issues [AASB 132] (effective from 1 February 2010)

In October 2009 the AASB issued an amendment to AASB 132 Financial Instruments: Presentation, which addresses the accounting for rights issues that are denominated in a currency other than the functional currency of the issuer. Provided certain conditions are met, such rights issues are now classified as equity regardless of the currency in which the exercise price is denominated. Previously, these issues had to be accounted for as derivative liabilities. The amendment must be applied retrospectively in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. The Group will apply the amended standard from 1 January 2011. As the

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

performance rights issue made by the group is denominated in the groups functional currency (AUD), the amendment will not have any effect on the group’s financial statements.

Revised AASB 124 Related Party Disclosures and AASB 2009-12 Amendments to Australian Accounting

Standards (effective from 1 January 2011)

In December 2009 the AASB issued a revised AASB 124 Related Party Disclosures. It is effective for accounting periods beginning on or after 1 January 2011 and must be applied retrospectively. The amendment removes the requirement for government-related entities to disclose details of all transactions with the government and other government-related entities and clarifies and simplifies the definition of a related party. The Group will apply the amended standards from 1 July 2011. When the amendments are applied, the group and the parent will need to disclose any transaction between its subsidiaries. However, it has yet to put systems in place to capture the necessary information. It is therefore not possible to disclose the financial impact, if any, of the amendment to the related party disclosures.

AASB Interpretation 19 Extinguishing financial liabilities with equity instruments and AASB 2009-13 Amendments to Australian Accounting Standards arising from Interpretation 19 (effective from 1 July 2010)

AASB Interpretation 19 clarifies the accounting when an entity renegotiates the terms of its debt with the results that the liability is extinguished by the debtor issuing its own equity instrument to the creditor (debt for equity swap). It requires a gain or loss to be recognised in profit or loss which measured as the difference between the carrying amount of the financial liability and the fair value of the equity instruments issued. The group will apply the interpretation from 1 July 2010. It is not expected to have any impact on the group’s financial statements since it is only retrospectively applied from the beginning of the earliest period presented (1 July 2009) and the group has not entered into any debt for equity swaps since that date.

AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 [AASB 1, 3, 4, 5, 7, 101, 102, 108, 112, 118, 120, 121, 127, 128, 131, 132, 136, 137, 139, 1023 & 1038 and Interpretations 2, 5, 10, 12, 19 & 127] (effective from Periods commencing on or after 1 January 2013)

Issued December 2010, the following requirements have generally been carried forward unchanged from AASB 139 Financial Instruments: Recognition and Measurement into AASB 9. These include the requirements relating to:

Classification and measurement of financial liabilities; and
Derecognition requirements for financial assets and liabilities.

However, AASB 9 requires that gains or losses on financial liabilities measured at fair value are recognised in profit or loss, except that the effects of changes in the liability’s credit risk are recognised in other comprehensive income. The entity does not have any financial liabilities measured at fair value through profit or loss. There will therefore be no impact on the financial statements when these amendments to AASB 9 are first adopted.

AASB 2010-6 Amendments to Australian Accounting Standards – Disclosures on Transfers of Financial Assets(effective from annual reporting periods commencing on or after 1 July 2011)

Issued November 2010 requires additional disclosures for entities that transfer financial assets, including information about the nature of financial assets involved and the risks associated with them. As this is a disclosure standard only, there will be no impact on amounts recognised in the financial statements

AASB 9 Financial Instruments

AASB 9 is applicable to reporting periods commencing on or after 1 January 2013 and amends the requirements for classification and measurement of financial assets. The group has not adopted the standard early. Due to the recent release of these amendments and that adoption is only mandatory for the 31 December 2013 year end, the group has not yet made an assessment of the impact of these amendments.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

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 US$ 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 subsidiaries are not exposed to foreign exchange risk as all transactions are denominated in its functional currency being US dollars.

(ii) Price risk

Over the reporting period there has been significant movement in the price of oil and gas, it is therefore considered reasonable to review sensitivities based on a 10% movement in prices. The Group is 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. At 31 December 2010, there were hedging contract in place being put options with the floor price of $65 for crude oil (note 12)(31 December 2009 the Group had a costless collar hedging contract in place for 1,000 barrels of oil per month at a floor price of US$95/barrel which expired on 31 May 2010).

Group sensitivity

Over the reporting period there has been significant movement in the price of oil and gas and given that not all production is hedged, it is therefore considered reasonable to review sensitivities based on a 10% movement in prices. For the Group, at 31 December 2010, if prices had changed by -/+ 10 % with all other variables held constant, post-tax loss and equity for the year would have been A$201,000 lower/higher (2009: A$236,089 lower/higher), mainly as a result of higher/lower revenue from oil and gas sales.

(iii) Cash flow and fair value interest rate risk

Interest rate risk arises from both short and long-term borrowings and cash at bank. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. During 2010 and 2009, the Group’s borrowings at variable rate were denominated in US Dollars. 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.

As at 31 December 2010 the group had the following variable rate borrowings outstanding:

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

Bank loans Net exposure to cash flow interest rate risk	31 December 2010 31 December 2009 Weighted Average Interest rate % Balance $ Weighted Average Interest rate % Balance $
	- - 4.25% 3,806,458
	- - 3,806,458

Group sensitivity

At 31 December 2010, 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 A$69,000 lower/higher (2009: A$148,000 lower/higher), mainly as a result of lower/higher interest expense on convertible notes.

(b) Credit risk

The Group had some credit risk through its hedging programme. There is currently no hedging program in place. The program was managed by a broker of exchange-listed futures and options in the world, MF Global Ltd who are A3/BBB+/BBB+ rated by Moody’s, S&P and Fitch respectively.

(c) Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and, the availability of funding through an adequate amount of committed credit facilities. 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.

(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:

(ii) Consolidated

the Group has entered into a revolving line of credit with a Stirling Bank of Texas 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.

(iii) Maturities of financial liabilities

The tables below analyses the Group’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 2010 and are no different to the carrying values.

Group Financial Liabilities Trade creditors and accruals Convertible notes Interest bearing borrowings Total Financial Liabilities Group Financial Liabilities Trade creditors and accruals Convertible notes Interest bearing borrowings Total Financial Liabilities	2010
	Within 6 months 6 Months to 1year Between 1 and 2 years Between 2 and 5 years Over 5 years Total contractual cash flows Carrying amount
	763,123 - - - 634,172 784,991 - 634,172 - - 7,943,846 - - - - 763,123 9,212,190 784,991 763,123 6,675,500 784,991
	763,123 784,991 - 6,675,500 - 8,223,615 8,223,615
	2009
	Within 6 months 6 Months to 1year Between 1 and 2 years Between 2 and 5 years Over 5 years Total contractual cash flows Carrying amount
	382,890 66,000 - - - - - 5,249,556 4,493,518 - - - - 6,650,500 - 382890 11,966,056 4,493,518 382890 11,966,056 4,493,518
	448,890 - 9,743,074 - 6,650,500 16,842,464 16,842,464

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

(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 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 (note (i)). Where possible they seek to maximise longer term debt and to minimise additional equity capital, to avoid unnecessary shareholder dilution.

Total borrowings Less: Cash and cash equivalents Net debt Total equity Total capital Gearing ratio	Note GROUP 2010 $ 2009 $
	17 7,460,491 16,458,904 9 (2,545,539) (1,254,791) 4,914,952 15,204,113 (4,851,560) 4,494,526
	63,392 19,698,639
	7,753% 77%

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 impairment

The Group tests annually whether oil and gas properties have suffered any impairment, in accordance with the accounting policy stated in notes on page 34. The recoverable amounts of cash generating units have been determined based on value-in-use calculations. These calculations require the use of assumptions like commodity price and production quantity. Some of these assumptions may be amended in the future and this may lead to the subsequent impairment of the assets concerned.

(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.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

(iii) Fair Value of Derivatives

Convertible Notes

Under AASB 132, all classes of convertible notes are classified as compound financial instruments in that they have both a liability and equity component. The Company 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.

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 17. Should these notes not be converted, they will have no effect on equity as they will be repaid. The carrying amount of these convertible notes as at 31 December 2010 was A$6,675,500 (2009: A$11.9 million)

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 Statement of comprehensive income 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 statement of comprehensive income.

4. SEGMENT REPORTING

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker has been identified as the Board of Directors as it makes the strategic decisions.

The Group has adopted a ‘management approach’, under which segment information is presented on the same basis as that used for internal reporting purposes. This has not resulted in change in the number of reportable segments presented. The segments are reported in a manner that is consistent with the internal reporting provided to the chief operating decision maker.

The chief operating decision maker has determined the reporting segments as detailed below :

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

ADVANCE ENERGY LIMITED ANNUAL REPORT	– 31 DECEMBER 20	10
2010 Revenues Segment result (loss) Segment assets Segment liabilities Acquisition of plant & equipment, exploration & evaluation and other non- current assets Depreciation and amortisation 2009 Revenues Segment result (loss) Segment assets Segment liabilities Acquisition of plant & equipment, exploration & evaluation and other non- current assets Depreciation and amortisation	USA $	Australia $ Consolidated $
	2,193,637	695,782 2,889,419
	(7,332,321)	(10,317,534) (17,649,855)
	(1,020,880)	(3,024,610) (4,045,490)
	(7,837,439)	(8,044,077) (15,881,515)
	(1,247,425)	- (1,247,425)
	(1,062,431)	- (1,062,431)
	USA $	Australia $ Consolidated $
	2,360,890	- 2,360,890
	(896,851)	(6,440,558) (7,337,409)
	18,261,138	17,446,948 35,708,086
	(18,428,471)	(12,951,729) (31,380,200)
	3,505,000	- 3,505,000
	(1,312,710)	- (1,312,710)

1) Segment revenue

Segment revenue reconciles to total revenue from the continuing operations as follow:

Total segment revenue Revenue from discontinuing operations Intersegment eliminations Total revenue from continuing operations	Consolidated 2010 $ 2009 $
	2,889,419 2,360,890 (2,193,637) (2,360,890) (652,356) -
	- -

2) Segment results

Segment result reconciles to total comprehensive income as follows:

Consolidated

Total segment result Intersegment eliminations (Profit)/ loss from discontinued operations Foreign exchange elimination Loss before tax	2010 $ 2009 $
	(17,649,855) (7,337,409) 1,586,686 (999,370) 5,915,323 299,477 1,159,491 4,110,617
	(8,988,355) (3,926,685)

3) Segment assets

The amounts provided to the board with respect to total assets are measured in a manner consistent with that of the financial statements. These assets are allocated based on the operations of the segment and the physical location of the asset.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

Reportable segments’ assets are reconciled to total assets as follows:

Segment assets Intersegment eliminations Total assets	Consolidated 2010 $ 2009 $
	4,045,490 35,708,086 (673,435) (14,138,936)
	3,372,055 21,569,150

4) Segment liabilities

The amounts provided to the board with respect to total liabilities are measured in a manner consistent with that of the financial statements. These liabilities are allocated based on the operations of the segment and the physical location of the asset.

Reportable segments’ liabilities are reconciled to total assets as follows:

Segment liabilities Intersegment eliminations Total liabilities	Consolidated 2010 $ 2009 $
	(15,881,515) (31,380,200) 7,657,901 14,305,576
	8,223,615 17,074,624

5. REVENUE FROM DISCONTINUING OPERATIONS

Oil and gas sales	GROUP 2010 $ 2009 $
	2,193,637 2,360,890

6. DISCONTINUED OPERATION

During the year Advance Energy Ltd announced its intention to sell the oil and gas property division and initiate an active program to locate a buyer and complete the sale. The division was sold on 17th December 2010 and the division is reported in these financial statements as a discontinued operation.

Financial information relating to the discontinued operation for the period to the date of disposal is set out below.

Financial performance of discontinuing operations:

Revenue Expenses Profit/(loss) before tax Income tax Profit/(loss) after tax Loss on sale of division before tax Income tax Loss on sale of division after tax Loss from discontinued operations	GROUP 2010 $ 2009 $
	2,193,637 2,360,890 (2,118,504) (2,392,259)
	75,133 (31,369) - -
	75,133 (31,369) (5,990,455) (268,108) - -
	(5,990,455) (268,108) (5,915,323) (299,477)

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

Loss attributable to owners of the parent entity Loss from continuing operations Loss from discontinuing operations Net cash inflow from operating activities Net cash inflow/ (outflow) from investing activities Net increase in cash generated by the division		(3,073,033) (3,627,208) (5,915,323) (299,477)
		8,988,356 3,926,685
		2010 $ 2009 $ 1,170,270 1,507,316 9,686,463 (1,213,279) 10,856,733 294,037

Details of the sale of division:

Consideration received or receivable: Cash Total disposal consideration Carrying amount of net assets sold Loss on sale of asset before tax Income tax Loss on sale of asset after tax 7. EXPENSES Loss from discontinuing operations before income tax has been determined after: (a) Employee/consultant benefit expense Directors/key management expense Share/option based payments (b) Finance costs Interest on borrowings Borrowing costs Total Finance costs		2010 $ 2009 $ 10,933,626 2,297,883 10,933,626 2,297,883 (16,924,081) (3,159,460) (5,990,455) (268,108) - - (5,990,455) (268,108) GROUP 2010 $ 2009 $





		252,460 - 470,674 - 1,426,454 - 1,104,322 -
		1,426,454 1,104,322

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

8. INCOME TAX

8. INCOME TAX
	GROUP
	2010	2009
	$	$
a) Income tax (benefit)/expense
Current tax charge	-	-
Deferred tax relating to origination and reversal of temporary
differences	-	-
Income tax expense/(benefit) reported in the Income
Statement	-	-
b) Deferred tax (benefit)/expense
Decrease/( increase) in deferred tax asset	-	-
(Decrease)/increase in deferred tax liability	-	-
	-	-
The prima facie income tax expense/(income)on pre-tax accounting loss from operations
reconciles to the income tax expense/(income) in the financial statement as follows:
c) Numerical reconciliation of income tax expense to prima
facie tax payable
Accounting loss before tax	(8,988,355)	(3,926,685)
At statutory income tax rate of 30% (2009: 30%)	(2,696,507)	(1,178,006)
Expenditure not allowable for tax purposes	122,654	341,863
Deferred Tax Assets not brought to account	2,935,786	902,149
Foreign exchange movements	(361,933)	(66,006)
Income tax expense/(benefit)	-	-
The tax rate used in the above reconciliation is the corporate tax rate of 30%		payable by
Australian corporate entities on taxable profits under Australian tax law. There has been no
change in the corporate tax rate when compared with the previous reporting period.
d) Unrecognised deferred tax balances
Deferred tax assets/(liabilities) recognised and un-
recognised:
Tax losses:
Australian tax losses - revenue	2,530,912	2,322,651
Foreign tax losses - revenue	3,125,023	397,498
Temporary differences
Australian – other	7,041	7,824
Foreign subsidiaries – Capitalised exploration and evaluation	(244,742)	(6,246,727)
Foreign subsidiaries - Other	10,582	(50,397)
Total unrecognised	5,428,816	(3,569,151)

The franking balance as at the end of the year was nil (2009: nil)

Advance Energy Limited has tax losses arising in Australia of A$8,133,338 (2009: $7,992,643) that are available indefinitely to offset against future profits of the Company providing the tests for deductibility against future profits are met.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

9. CASH AND CASH EQUIVALENTS

Cash at bank 10. TRADE AND OTHER RECEIVABLES Current Trade receivables Other receivables Other loans Other receivables	GROUP 2010 $ 2009 $
	2,545,539 1,254,791
	GROUP 2010 $ 2009 $
	71,454 35,729 - 357,104 - - - 41,001
	71,454 433,834

11. PROPERTY, PLANT AND EQUIPMENT

Plant and Equipments Opening net book value Exchange differences Additions Disposals Depreciation Closing book value Office Equipments Opening net book value Exchange differences Additions Disposals Depreciation Closing book value Total Property, Plant and Equipment	GROUP 2010 $ 2009 $
	427,467 1,450,140 1,359 (258,769) 31,098 65,644 (459,924) (472,878) - (356,671)
	- 427,467
	15,301 21,780 (1,243) (5,150) 3,315 5,831 - - (6,319) (7,161)
	11,054 15,300

	11,054 442,767

12. DERIVATIVE FINANCIAL INSTRUMENTS

12. DERIVATIVE FINANCIAL INSTRUMENTS
Current assets Oil & gas hedging Total current derivative assets	GROUP 2010 $ 2009 $
	- 77,014
	- 77,014

The company utilises derivative instruments periodically in order to manage their exposure to oil and natural gas price volatility. At times, depending on the nature of the derivative instruments used, the results of operations may be negatively impacted in the future by derivative instruments as these instruments may limit any benefit the company would receive from increases in the price for oil and natural gas.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

At 31 December 2010, the company had open derivative contracts for put options with a floor of US$65 for crude oil. The contract positions at year end run from 1 January 2011 through 31 August 2011. Given the strike price of the put options and the forecasted future prices for crude oil, management has determined these derivative contracts have no market value at 31 December 2010.

13. OIL AND GAS PROPERTIES

Oil and Gas Properties

Oil and Gas Properties
Oil and gas properties – cost Less accumulated depletion Movements in carrying amounts are reconciled as follows: Opening balance Acquired during period Sold during period Depletion charge Foreign exchange difference	GROUP 2010 $ 2009 $
	699,262 21,531,131 - (3,158,405)
	699,262 18,372,726
	18,372,726 22,963.990 1,247,425 3,440,125 (16,924,081) (2,566,460) (1,056,113) (949,389) (940,695) (4,515,540)
	699,262 18,372,726

14. OTHER FINANCIAL ASSETS

14. OTHER FINANCIAL ASSETS
Non-Current Prepayments Amounts owed by Blaze Asset Pty Ltd Other financial assets	GROUP 2010 $ 2009 $
	- 358,045 - 301,282 44,746 328,690
	44,746 988,017

15. TRADE AND OTHER PAYABLES

Trade payables Other payables	GROUP 2010 $ 2009 $
	515,773 267,026 247,350 115,864
	763,123 382,890

Refer to Note 2 for foreign currency exposure and disclosures on fair values. Included in trade and other payables are amounts due to related parties. See note 26 for further details.

16. PROVISIONS

16. PROVISIONS
Other Payables	GROUP 2010 $ 2009 $
	- 232,830

The Group has recognised a retirement obligation for its oil & gas producing assets which is reflected in the other payables above.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

17. INTEREST BEARING LOANS AND BORROWINGS

Current Short term loans1 Unsecured Accrued interest Non-current Convertible Notes – unsecured2 Face value of the note Interest accrued Bank loan – secured3	GROUP 2010 $ 2009 $
	566,439 526,854 218,552 159,535
	784,991 686,390
	GROUP 2010 $ 2009 $
	6,675,500 11,900,00 - 66,056
	6,675,500 11,966,056
	- 3,806,548
	6,675,500 15,772,514

1) For further details see note 26 of this report.

2) During the year the Company repaid convertible notes to the value of A$5.25million. In aggregate the listed convertible notes may be converted at the option of the holder into a maximum of 83,443,750 shares before the expiry date, at a minimum price of 8 cents per share. The terms of the listed notes are sixty (60) months with a coupon rate of 9.5% for the listed notes, and a redemption date of 31 December 2014. As at 31 December 2010 all unlisted notes have been repaid.

3) 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. During the year the balance due on the line of credit was paid in full. There was no balance due at 31 December 2010. However the US$40 million line of credit has been retained.

18. ISSUED CAPITAL

18.1 Ordinary shares 217,676,895 authorised and fully paid ordinary shares (2009: 156,367,722) Movements in shares on issue Beginning of period Shares issued during the period 37,569,500 shares issued @ A$0.08 61,309,173 shares issued @A$0.01 Less capital raising costs End of year	GROUP 2010 $ 2009 $
	16,144,258 15,546,888 15,546,888 12,693,552 - - 3,006,648 613,092 - (15,721) (153,313)
	16,144,258 15,546,888

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

(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.

18.2 Options

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

2010 Expiry Date Exercise Price Number at beginning of period Issued	Exercised Expired during the period Number at end of period
31 August 2012 $0.03 202,931,768(1) 31 December 2010 $0.25 13,850,000 - 31 December 2010 $0.40 250,000 -	- - 202,931,768 - 13,850,000 - 250,000 -
14,100,000 -	- 14,100,000 202,931,768

(1) 202,931,768 options issued at $0.001 per option.

2009	Expiry Date	Exercise Price A$	Number at beginning of period		Exercised	Expired	Number at 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	-	-	5,250,000	14,100,000

18.3 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:

2010 Class	No. at beginning of period	Issued	Converted into ords	No. at end of period
CPS – B	5	-	-	5
CPS – C	2	-	-	2
CPS–D	2	-	-	2
	9	-	-	9
2009 Class	No. at beginning of period	Issued	Converted into ords	No. at end of period
CPS – B	5	-	-	5
CPS – C	2	-	-	2
CPS–D	2	-	-	2
	9	-	-	9

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)

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

CPS-C – upon the Company achieving production of 1,000 BOEPD CPS-D – upon the Company achieving production of 1,500 BOEPD

19. RESERVES

19. RESERVES
Option reserve(1) Foreign currency translation reserve(2) Equity reserve(3) (1)Option reserve Opening balance Issue of options during period (see note 18) (2)Foreign currency translation Opening balance Currency translation differences arising during the year (3)Equity reserve Opening balance	GROUP 2010 $ 2009 $
	2,025,845 1,821,455 (2,798,305) (1,638,814) 151,072 151,072
	(621,388) 333,713
	1,821,455 1,821,455 204,390 -
	2,025,845 1,821,455
	(1,638,814) 2,471,803 (1,159,491) (4,110,617)
	(2,798,305) (1,638,814)
	151,072 151,072
	151,072 151,072

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

During the year 202,931,768 were issued (2009: NIL).

(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 A$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: A$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.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

20. ACCUMULATED LOSSES

20. ACCUMULATED LOSSES
Accumulated losses at the beginning of the year Net loss attributable to the members of the parent entity Accumulated losses at the end of the financial year	GROUP 2010 $ 2009 $
	(11,386,074) (7,459,389) (8,988,355) (3,926,685)
	(20,374,429) (11,386,074)

21. EARNINGS PER SHARE

21. EARNINGS PER SHARE
Basic earnings/(loss) per share Reconciliation of earnings to net loss Net loss from continuing operations Net loss from discontinuing operations Net loss Weighted average number of ordinary shares outstanding during the period used in calculation of basic EPS	GROUP 2010 $ 2009 $
	(3,073,033) (3,627,208) (5,915,323) (299,477)
	(8,988,355) (3,926,685)
	Number 184,484,575 Number 134,311,390

Details of the shares issued are included under note 18. Dilutive EPS is not reflected as it would result in the reduction of the loss per share.

22. CASH FLOW INFORMATION

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

Profit (loss) after income tax Non cash flows in profit (loss) from continuing operations Depreciation Depletion Increase/(decrease) in provisions Profit on sale of assets Loss on sale of asset Derivative financial instrument Interest accrued not paid Foreign exchange difference Changes in assets and liabilities Increase/(decrease) in trade creditors and accruals (Increase)/decrease in trade and other receivables Cash flows from (used in) operations	GROUP 2010 $ 2009 $
	(8,988,355) (3,926,685) 6,319 363,838 1,056,113 948,710 (116,805) - - 268,108 5,990,455 - 48,379 21,168 - 55,556 (13,042) (201,277) 865,862 (2,270,072) 398,089 151,479
	752,985 (4,589,175)

Profit (loss) after income tax
Non cash flows in profit (loss)
from continuing operations
Depreciation
Depletion
Increase/(decrease) in
provisions
Profit on sale of assets
Loss on sale of asset
Derivative financial instrument
Interest accrued not paid
Foreign exchange difference
Changes in assets and
liabilities
Increase/(decrease) in trade
creditors and accruals
(Increase)/decrease in trade
and other receivables
Cash flows from (used in)
operations

GROUP
2010
$ 2009
$

(8,988,355)
(3,926,685)
6,319
363,838
1,056,113
948,710
(116,805)
-
-
268,108
5,990,455
-
48,379
21,168
-
55,556
(13,042)
(201,277)
865,862
(2,270,072)
398,089
151,479

752,985
(4,589,175)

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

23. DEFERRED TAX LIABILITIES

There were no deferred tax liabilities as at 31 December 2010 (2009: nil).

24. INTERESTS IN JOINT VENTURES

As at 31 December 2010, the investment in the associate is not brought to account as the Company’s share of losses exceeds its interest in the associate and as such these further losses are not recognised.

25. SUBSIDIARIES

The Consolidated Financial Statements incorporate the assets, liabilities and results of the following Subsidiaries in accordance with the accounting policy described in Note 1.

Name of Subsidiary	Place of	Percentage held	Percentage held
	Incorporation	2010	2009
Advance Exploration and
Production, Inc	Texas USA	100%	100%
AEPI Midstream, Inc	Texas USA	100%	100%
Advance Wolfberry Inc	Texas USA	100%	-

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).

Advance Wolfberry, Inc was incorporated in October 2009 with initial issued capital of US$1,000 (A$1,138)

26. 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 Companies charged by related entities for office and secretarial services, and 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.

The amounts charged during the year to related entities and the trading balances outstanding at the 31 December 2010 are detailed below:

Entity		Amount Owing/ (Owed)	Relationship
		$
AAG	31	42,863	AAG Management Pty Ltd is a management
Management Pty	December		company which provides facilities, human resources,
Ltd/ GBU Capital	2010		and other administration and consulting services.
Pty Ltd			AAG Management Pty Ltd is a fully owned subsidiary
			of GBU Capital Pty Ltd. From 01/07/2010 GBU Capital
			has been charging a fixed monthly fee for the above
			mentioned services. GBU Capital Pty Ltd is a related
			party because Anthony Short and Gordon Sklenka

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

are directors of GBU Capital. The outstanding balance to GBU/AAG is included in trade creditors/other payables. During the year AAG Management has charged $471,186 (2009: 482,442) and GBU Capital has charged $222,559 (2009:Nil). These includes reimbursements and admin charges provided in table 1.1 and 1.2 (page 55).

	creditors/other payables. During the year AAG Management has charged $471,186 (2009: 482,442) and GBU Capital has charged $222,559 (2009:Nil). These includes reimbursements and admin charges provided in table 1.1 and 1.2 (page 55).
Odin Energy Ltd AXG Mining Ltd Kilgore Oil & Gas Limited Greencode Pty Ltd Regal Resources Limited Pure Dawn Pty Ltd /Vector Resources Ltd	31 December 2009 66,776
	31 December 2010 276,876 During the period the company borrowed $250,000. The outstanding balance accrues interest at the rate of 12% per annum and is repayable by 31 December 2011. Odin Energy is a related party because Anthony Short was previously a director of Odin Energy Ltd and David Ballantyne is a director of Odin Energy Ltd and company secretary of both companies. The interest charged during the year was $26,876. The outstanding interest of $18,739 is included in trade payables in note 15. 31 December 2009 18,739
	31 December 2010 - AXG Mining Ltd is a related party because Gordon Sklenka is a director of both companies. 31 December 2009 3,136
	31 December 2010 - Kilgore Oil and Gas Limited is a related party because Gordon Sklenka and Anthony Short are directors of both Companies. David Ballantyne is Company Secretary of both companies. 31 December 2009 308,690
	31 December 2010 31 December 2009 554,828 500,00 Greencode Pty Limited is a related party because it is a subsidiary company of AXG Mining Limited of which Alex Bajada and Gordon Sklenka are directors of. The loan facility accrues 6.25% interest per annum. During the year $54,828 was charged for interest.
	31 December 2010 31 December 2009 - 6,000 Regal Resources Limited is a related party because Anthony Short was previously a director.
	31 December 2010 100,000 Pure Dawn Pty Ltd is a related party because it is a fully owned subsidiary of Vector Resources Ltd a company of which Gordon Sklenka and Anthony Short were previously directors. Subsequent to period end $70,000 has been paid. The outstanding balance of $100,000 is included in trade payables in note 15.

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

Palace Resources Ltd	31 December 2009 126,461
	31 December 2010 44,524 Palace Resources Limited is a related party because Anthony Short was previously a director. This loan has been repaid subsequent to period end. The outstanding interest of $17,671 is included in trade payables in note 15. 31 December 2009 26,853

During the financial year ended 31 December 2007 Odin Energy Limited prepaid the Company A$250,000 for US consulting services that it intended to use in the Company’s wholly owned subsidiary, Advance Exploration and Production, Inc. As at 31 December 2010 the balance owing of A$90,000 has been disclosed as a customer deposit and is included in Trade and Other Payables (refer note 15 to the Financial Statements)

During the year Glory Run Pty Ltd purchased shares valued at A$305,016 (2009: $645,840) in Advance Energy Limited. Glory Run Pty Ltd is a 100% owned subsidiary of Odin Energy Ltd.

During the year the following expenses are reimbursed by Advance Energy Ltd to AAG Management and GBU Capital for Director or consultants travel and other administrative expenses:

Table 1.1
Directors/Consultants	Reimbursement to AAG	Reimbursement to GBU Capital
	Management Pty Ltd	Pty Ltd
Mr. A Short	$44,246	$23,872
Mr. A Bajada	$101,210	$6,633
Mr. G Sklenka	$5,609	$2,820
Total	$151,064	$33,325
Table 1.2
Company	Reimbursement	for administrative expenses
AAG Management Pty Ltd		$211,159
GBU Capital PtyLtd		$165,363
Total		$376,522

In 2009, AAG Management Pty Ltd has charged $482,442 for travel and administrative services. No expenses were charged by GBU Capital in 2009.

Following related parties are holding convertible notes of Advance Energy Ltd:

Company Odin Energy Ltd AXG Mining Ltd Palace Resources Ltd Sandgroper Pty Ltd Total	2010 (Units) 2009 (Units)
	1,600,000 1,600,000 400,000 400,000 135,000 135,000 8,000 8,000
	2,143,000 2,143,000

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 19 of this Annual Report).

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

Details of the transactions including amounts accrued but unpaid at the end of the period are as follows:

Specified Director/Officer	Transaction	Note	2010	2009
			$	$
Alex Bajada	Consulting fees	(i)	14,363	54,500
Anthony Short	Consulting fees	(ii)	121,000	220,000
Gordon Sklenka	Consulting fees	(iii)	55,000	100,728
David Ballantyne	Consulting fees	(v)	27,225	36,875
Kip Plankinton	Consulting fees	(vi)	21,122	49,904
Paul Berresford	Consulting fees	(vii)	13,750	8,667

(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 consultancy services of Sandgroper Pty Ltd, a company of which Mr David Ballantyne is a director.
(v) The Company used the consulting services of Kip Plankinton.
(vi) The Company used the consulting services of Optimus Financial, a company which Mr Paul Berresford 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 A$2,903 (2009: A$4,485).

27. KEY MANAGEMENT PERSONNEL DISCLOSURES

(a) Key Management Personnel Remuneration

Short-term employee benefits Post –employment benefits Long-term employee benefits Share-based payment	Group 2010 2009 $ $
	252,460 470,674 - - - - - -
	252,460 470,674

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 2010

Holder	Held at beginning of year	Acquired	Dispose	Converted CPS	Balance at end of year
Alex Bajada	5,802,144	2,320,857	-	-	8,123,001

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

Anthony Short	16,458,599	9,383,437	49,598	-	25,792,438
Gordon Sklenka	6,805,357	4,122,142	-	-	10,927,499
Paul Berresford
	5,000,000	-	-	-	5,000,000
Kip Plankinton
	-	-	-	-	-

Shares Indirectly Held – Year Ended 2009

Director	Balance at start ofyear		Acquired during year	Acquired during year	Sold during year	Sold during year	Balance at end of year	Balance at end of year
Alex Bajada	5,802,144			-			-	5,802,144
Anthony Short	16,458,599			-			-	16,458,599
Gordon Sklenka	6,805,357			-			-	6,805,357
Kip Plankinton		-		-			-	-
Paul Berresford		-	5,000,000				-	5,000,000
Options Indirectly Held – Year Ended 2010
Holder	Held at beginning of	Acquired		Expired		Exercised		Balance at end of
	year							year
Alex Bajada
	2,000,000		-	2,000,000			-	-
Anthony Short
	4,000,000		-	4,000,000			-	-
Gordon Sklenka
	2,000,000		-	2,000,000			-	-
Paul Berresford
	-		-		-		-	-
Kip Plankinton
	-		-		-		-	-

Options Indirectly Held – Year Ended 2009

						Balance at end of	Balance at end of
Director	Balance at start of year		Acquired	during year	Sold during year		year (vested and
							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
Kip Plankinton			-	-		-	-
Paul Berresford			-	-		-	-
Options – Listed – Year Ended 2010
Holder	Held at beginning of		Acquired	Dispose		Exercised	Balance at end of
	year						year
Alex Bajada
	-	7,581,466			-	-	7,581,466
Anthony Short
	-	24,072,937			-	-	24,072,937

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

Gordon Sklenka
		-	10,198,997		-		-	10,198,997
Paul Berresford
		-		-	-		-	-
Kip Plankinton
		-		-	-		-	-
CPS Indirectly Held – Year Ended 2010
Director	Balance at start ofyear			Acquired during year	Sold during year		Balance at end of year
Alex Bajada			1	-		-		1
Anthony Short			3	-		-		3
Gordon Sklenka			1	-		-		1
Kip Plankinton			-	-		-		-
Paul Berresford			-	-		-		-
CPS Indirectly Held – Year Ended 2009
Director	Balance at start ofyear			Acquired during year	Sold during year		Balance at end of year
Alex Bajada			1	-		-		1
Anthony Short			3	-		-		3
Gordon Sklenka			1	-		-		1
Kip Plankinton			-	-		-		-
Paul Berresford			-	-		-		-
Refer to the Directors’ Report for further information. No shares or						options were issued to directors
during the current or previous financial year.
28. REMUNERATION OF THE AUDITORS
				GROUP
				2010	2009
				$	$
Amounts received or due and	receivable
by BDO Audit (WA) Pty Ltd for:
Audit and audit review services of the
financial reports				52,363	55,334
Other services – Taxation				-	6,500
				52,363	61,834
Amounts received or due and	receivable
by Ferguson Comp & Poll,P.C in relation to
the US based subsidiary companies for:
Audit and audit review services of the				37,634	45,628
financial reports
Other services – Taxation				-		-
				37,634	45,628
				89,997	107,462

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

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

29. COMMITMENTS

There were no commitments as at 31 December 2010 (2009:A$20,000)

30. JOINT OPERATIONS

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- discontinued operations Contingent liabilities Capital commitments	GROUP 2010 2009 $ $ 2,193,637 2,360,890 - - - -

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.

Current assets Trade and other receivables Non-current assets Property, plant and equipment Oil and gas properties Exploration and evaluation costs Current liabilities Payables Net investment in joint venture operations	GROUP 2010 2009 $ $
	32,673 344,105
	39,554 442,767 699,262 18,372,726 -
	738,816 18,815,493
	771,489 19,159,598 (79,893) (316,214)
	691,596 18,843,384

The above assets cover the following areas of interest:

	Project	No. of Producing Wells at end 2010	Net Revenue interest	Net Working interest
Motherlode	Phase III	Development leases	38.25%	50%
		1 Producing well

31. EVENTS SUBSEQUENT TO BALANCE SHEET DATE

There were no subsequent events to balance sheet date.

32. CONTINGENCIES

There were no known contingencies at year end (2009: Nil).

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

33. SHARE BASED PAYMENTS

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

34. DIVIDENDS

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

35. PARENT ENTITY INFORMATION

The ultimate holding Company of the group, Advance Energy Ltd (the “Parent”) has not been reported in these financial statements other than the followings, pursuant to changes to the corporation act 2001;

Parent Entity

Current Assets Non Current Assets Total Assets Current Liabilities Non Current Liabilities Total Liabilities Issued Capital Accumulated Losses Reserve Total Equity Loss for the Year Total Comprehensive loss for the year	2010 $ 2009 $
	2,327,164 1,584,374 697,446 15,862,574 3,024,610 17,446,948 654,336 985,673 7,389,741 11,966,056 8,044,077 12,951,729 16,144,258 15,545,799 (23,340,641) (13,023,107) 2,176,917 1,972,527 (5,019,466) 4,495,219 (10,317,534) (6,440,558) (10,317,534) (6,440,558)

A DVANCE E N ERGY LIMIT E D ANNUAL REPORT – 31 DECEMBER 2 010

DIRECTORS’ DECLARATION

The Directo r s of the Co m pany de c lare that:

1) The fina n cial state m ents and n otes, as s e t out on p a ges 23 to 6 0, are in a c cordance with the Corpor a tions Act 2 0 01 and: a) comply with A c counting Standards and the C orporations Regulati o ns 2001 a n d other mandatory pro f essional re p orting req u irements; a nd
b) give a true an d fair view of the fin a ncial posit i on as at 31 Decem b er 2010 a n d of the perf o rmance f o r the perio d ended o n that date o f the Company and G roup;
2 ) The Dire c tors have d eclared t h at:
a) the financial r e cords of the Company for the financial period h a ve been properly mai n tained in a ccordanc e with secti o n 286 of th e Corporations Act 20 0 1
b) the f inancial st a tements a nd notes f o r the fina n cial perio d comply w ith the Accounting Stan d ards; and
c) the financial st a tements a n d notes fo r the financ i al period give a true a nd fair vie w .
3 ) The re m uneration disclosures included in the Dir e ctors’ Re p ort (as p a rt of the audited Remun e ration Rep o rt), for the y ear ende d 31 Dece m ber 2010, c omply wit h section 30 0 A of the Corpor a tions Act 2 0 01.
4 ) In the Directors’ o p inion ther e are reaso n able grounds to beli e ve that t h e Compa n y will be able to p ay its deb t s as and w h en they b e come du e and paya b le.
5 ) The fina n cial state m ents and n otes theret o are in ac c ordance w ith Interna t ional Financial Reporting Standar d s issued by the International Acc o unting Sta n dards Boa r d

This declara t ion is mad e in accor d ance with a resolution of the Board of Direct o rs.

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G.Sklenka C hairman

A.Short Managing Dire c tor

W est Perth, W estern Australia 3 1st March 2 011

Tel: +8 6382 4600 38 Station Street Fax: +8 6382 4601 Subiaco, WA 6008 www.bdo.com.au PO Box 700 West Perth WA 6872 Australia

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INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF ADVANCE ENERGY LIMITED

Report on the Financial Report

We have audited the accompanying financial report of Advance Energy Limited, which comprises the consolidated statement of financial position as at 31 December 2010, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, 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 of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements , that the financial statements comply 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. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about 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 . We confirm that the independence declaration required by the Corporations Act 2001 , which has been given to the directors of Advance Energy Limited, would be in the same terms if given to the directors as at the time of this auditor’s report.

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Opinion

In our opinion:

(a) 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 consolidated entity’s financial position as at 31 December 2010 and of its performance for the year ended on that date; and
(ii) complying with Australian Accounting Standards and the Corporations Regulations 2001 and
(b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 1.

Emphasis of Matter

Without qualifying our opinion, we draw attention to Note 1 in the financial report, which indicates that the consolidated entity incurred a net loss of $8,988,355 during the year ended 31 December 2010 and, as of that date, the consolidated entity’s total liabilities exceeded its total assets by $4,851,560. The company will be required to seek additional funding through debt, equity or other means to continue its activities. These conditions, along with other matters as set forth in Note 1, indicate the existence of a material uncertainty that may cast significant doubt about the consolidated entity’s ability to continue as a going concern and therefore, the consolidated entity may be unable to realise its assets and discharge its liabilities in the normal course of business.

Report on the Remuneration Report

We have audited the Remuneration Report included in the directors’ report for the year ended 31 December 2010. 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.

Opinion

In our opinion, the Remuneration Report of Advance Energy Limited for the year ended 31 December 2010 complies with section 300A of the Corporations Act 2001 .

BDO Audit (WA) Pty Ltd

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Glyn O’Brien Director

Signed in Perth, Western Australia Dated this 31[st] March 2011

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

SHAREHOLDER INFORMATION

TWENTY LARGEST SHAREHOLDERS- FULLY PAID ORDINARY SHARES as at 13th April 2011

RANK	NAME	UNITS	% OF UNITS
1	FAY HOLDINGS PTY LTD	18,867,436	8.67
2	GOLDBONDSUPER PTY LTD	11,790,458	5.42
3	GLORY RUN PTY LTD	11,365,446	5.22
4	PALACE RESOURCES LTD	11,167,567	5.13
5	JET STRIKE PTY LTD	7,140,000	3.28
6	TODMOR NOMINEES PTY LTD	6,250,000	2.87
7	MCLARTY SUPER PTY LTD	6,250,000	2.87
8	BBH NOMINEES PTY LTD	6,250,000	2.87
9	SPARTAN NOMINEES PTY LTD	5,883,001	2.7
10	FORMAINE PTY LTD	5,572,142	2.56
11	BHK FINANCIAL SERVICES PTY LTD PROPERTY A/C>	5,000,000	2.3
12	ACCORD INVESTMENT CORPORATION PTY LTD UNIT A/C>	4,695,885	2.16
13	MR HUIMING LIN	4,657,710	2.14
14	GLORY RUN PTY LTD	4,470,000	2.05
15	PINEWOOD HOLDINGS PTY LTD	4,375,000	2.01
16	BEACHCRAFT PTY LTD	4,214,000	1.94
17	SHORT NOMINEES PTY LTD	4,124,999	1.9
18	LINESTAR PTY LTD	3,805,357	1.75
19	SMALL BUSINESS FINANCE PTY LTD	2,747,773	1.26
20	BEACHCRAFT PTY LTD	2,562,000	1.18

Totals: Top 20 holders of AVD ORDINARY FULLY PAID		131,188,774	60.27
Total Remaining Holders Balance		86,488,121	39.73

Distribution schedule of the number of holders in each class of equity security.

BY CLASS	HOLDER OF ORDINARY SHARES	NUMBER OF ORDINARY SHARES	%
1 - 1,000	24	4,428	0.00%
1,001 - 5,000	37	128,207	0.06%
5,001 - 10,000	113	919,352	0.42%
10,001 - 100,000	237	9,895,725	4.55%
> 100,000	166	206,729,183	94.97%
Total	577	217,676,895	100.00%

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

TWENTY LARGEST LISTED CONVERTIBLE NOTES as at 13 April 2011

ANK	NAME	UNITS	% OF UNITS
1	HSBC CUSTODY NOMINEES(AUSTRALIA)LIMITED	4,300,000	64.41
2	ODIN ENERGY LIMITED	1,600,000	23.97
3	AXG MINING LTD	400,000	5.99
4	PALACE RESOURCES LTD	135,000	2.02
5	GOLDBONDSUPER PTY LTD A/C>	20,000	0.3
6	DR MARK RODERICK OLIVE + DR BENG HOR EU	15,000	0.22
7	SERGIO IANNELLO	12,500	0.19
8	SILVANA IANNELLO	12,500	0.19
9	BEACHCRAFT PTY LTD	10,000	0.15
10	G & R MCKENZIE PTY LTD	10,000	0.15
11	MR CHRISTOPHER JAMES ASHWORTH	10,000	0.15
12	MR JOHN SHERATON + MS BEVERLEY CHARD FAMILY S/F A/C>	10,000	0.15
13	G P HAMOR PTY LTD A/C>	10,000	0.15
14	DIANA THELMA DANN + SAMANTHA JANE DANN	10,000	0.15
15	MR MAGNUS GISLI GISLASON + MRS JENNIFER JEAN GISLASON	10,000	0.15
16	MS BEVERLEY JOY CHARD + MR JOHN SHERATON	10,000	0.15
17	FOUR FIFTY PTY LTD	7,500	0.11
18	SANDGROPER SUPER PTY LTD A/C>	6,000	0.09
19	ALWAYS HOLDINGS PTY LTD	5,000	0.07
20	ANTHONY BUHAGIAR	5,000	0.07

Totals: Top 20 holders of AVDG CONVERTIBLE NOTES		6,598,500	98.85
Total Remaining Holders Balance		77,000	1.15

Distribution schedule of the number of holders in each class of equity security.

BY CLASS	NUMBER OF HOLDERS	NUMBER OF CONVERTIBLE NOTES	%
1 - 1,000	0	0	0.00%
1,001 - 5,000	37	87,000	1.303%
5,001 - 10,000	10	93,500	1.401%
10,001 - 100,000	4	60,000	0.899%
> 100,000	4	6,435,000	96.397%
Total	55	6,675,500	100.00%

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

TWENTY LARGEST LISTED OPTION HOLDERS as at 13 April 2011

RANK	NAME	UNITS	% OF UNITS
1	JOHN WARDMAN & ASSOCIATES PTY LTD WARDMAN SUPER FUND A/C>	31,407,524	15.48
2	FAY HOLDINGS PTY LTD	18,916,272	9.32
3	GLORY RUN PTY LTD	12,133,333	5.98
4	RPM SUPER PTY LTD	11,386,666	5.61
5	MR ROBERT PAUL MARTIN + MRS SUSAN PAMELA MARTIN	10,000,000	4.93
6	SPARTAN NOMINEES PTY LTD FUND A/C>	5,490,800	2.71
7	FORMAINE PTY LTD A/C>	5,340,665	2.63
8	SHORT NOMINEES PTY LTD	5,156,665	2.54
9	PETER BERTEI	5,007,466	2.47
10	MAROLA PTY LTD	5,000,000	2.46
11	CLOUDAY PTY LTD	5,000,000	2.46
12	MR WALTER SHAMSABADI	4,875,000	2.4
13	ACCORD INVESTMENT CORPORATION PTY LTD	4,382,826	2.16
14	GLORY RUN PTY LTD	4,172,000	2.06
15	PINEWOOD HOLDINGS PTY LTD	4,083,333	2.01
16	MR SIMON WILLIAM TRITTON	4,000,000	1.97
17	BEACHCRAFT PTY LTD	3,933,066	1.94
18	LINESTAR PTY LTD	3,551,666	1.75
19	LISCULLANE PTY LTD	3,000,000	1.48
20	MR PAUL RAMSAY + MRS TERREL RAMSAY	2,800,000	1.38

Totals:	Top 20 holders of AVDOA OP31082012/$0.03	149,637,282	73.74
Total Remaining Holders Balance		53,294,486	26.26

Distribution schedule of the number of holders in each class of equity security.

BY CLASS	NUMBER OF HOLDERS	NUMBER OF CONVERTIBLE NOTES	%
1 - 1,000	5	244	0.00%
1,001 - 5,000	6	17,976	0.009%
5,001 - 10,000	6	42,889	0.021%
10,001 - 100,000	38	1,961,799	0.967%
> 100,000	92	200,908,860	99.003%
Total	147	202,931,768	100.00%

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

ADDITIONAL SHAREHOLDER INFORMATION

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 13[th] April 2011:

	SHAREHOLDER	NUMBER OF SHARES	%
1	FAY HOLDINGS PTY LTD	18,867,436	8.67
2	GOLDBONDSUPER PTY LTD	11,790,458	5.42
3	GLORY RUN PTY LTD	11,365,446	5.22
4	PALACE RESOURCES LTD	11,167,567	5.13

2. Unquoted Securities

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

	HOLDERS	NUMBER OF SECURITIES	CLASS OF EQUITY
	HSBC CUSTODY NOMINEES(AUSTRALIA)LIMITED	4,300,000	Convertible notes
	ODIN ENERGY LIMITED	1,600,000	Convertible notes

Number of holders in each class of equity securities and the voting rights attached.

There are 577 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 55 holders of convertible notes. There are no voting rights attached to these convertible notes.

There are 147 holders of listed options. There are no voting rights attached to these options.

4. Marketable parcel

There are 278 Shareholders with less than a marketable parcel as at 13[th] April 2011.

C. OTHER DETAILS

1. Company Secretary

David Ballantyne

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

The address and telephone details of the registered and administrative office: Suite 2, 16 Ord Street

WEST PERTH Western Australia 6005

Telephone: + (61) 08 9486 1122 Facsimile: + (61) 08 9486 1011

ADVANCE ENERGY LIMITED ANNUAL REPORT – 31 DECEMBER 2010

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.

Restricted Securities

There are no restricted securities.

Review of operations

A review of operations is included in this report under Review of operations.

Exploration Projects

All leases and operations are located in the state of Texas in USA as tabled below :

API#	Operator	Lease	Well#	Field name	RRC#	AEPI WI	AEPI NR	Acreage held
TBD	Hiburnia/Endeavou	Greene	1	TBD	TBD	0.5	0.3825	160

AI assistant

TALIUS GROUP LIMITED — Annual Report 2010

65893_rns_2011-04-27_81f30e61-64d3-41d3-9a63-4dd4b24d8ace.pdf

A D VANCE EN E RG Y LI M ITE D ACN 111 823 762

CONTENTS

CORPORATE DIRECTORY

CHAIRMAN’S LETTER

Dear Shareholder,

REVIEW OF OPERATIONS

Operational Overview

Acquisitions

Divestments

Development

2010 versus 2009 Operational Comparison

Placement of Shares and Rights Issue

Options Issue

Unlisted Convertible Notes

Sterling Bank

Director Movements

CORPORATE GOVERNANCE

COMPLIANCE WITH ASX CORPORATE GOVERNANCE RECOMMENDATIONS

Council Principle 1: Lay solid foundations for management and oversight

1.1 Role of the Board

1.2 Responsibility of the Board

1.3 Materiality threshold

1.4 The Chairman

1.5 The Managing Director

1.6 Role and responsibility of management

1.7 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

Council Principle 5: Make timely and balanced disclosure

Council Principle 6: Respect the rights of shareholders

Company's website

Council Principle 7: Recognise and manage risk

Council Principle 8: Remunerate fairly and responsibly

DIRECTORS’ REPORT

Directors

Principal activities

Operating results

Dividends paid or recommended

Review of operations

Significant changes in the state of affairs

Matters subsequent to the end of the financial year

Likely developments

DIRECTORS’ REPORT (Cont)

Environmental Issues

INFORMATION ON DIRECTORS AND SECRETARY

Other Current directorships

Other directorships within the last three years

Other Current directorships

Other directorships within the last three years

DIRECTORS’ REPORT (Cont)

Other Current directorships

Other directorships within the last three years

Mr Paul Berresford –Non Executive Director CA FTIA SSA (Not re-elected as at 31 May 2010)

Other Current directorships

Other directorships within the last three years

Mr Kip Plankinton –Non Executive Director

Other Current directorships

Other directorships within the last three years

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

Meetings of Directors

DIRECTORS’ REPORT (Cont)

Securities held and controlled by Directors

Options- Unlisted

DIRECTORS’ REPORT (Cont)

Converting Preference shares (CPS)

Retirements and Re-elections of directors

Remuneration Report (Audited)

A. Principles Used to Determine the Nature and Amount of Remuneration

DIRECTORS’ REPORT (Cont)

Fixed remuneration

Performance-linked remuneration

B. Service Agreements

Directors

DIRECTORS’ REPORT (Cont)

Mr G Sklenka, Non-executive Director

Key Management Personnel

TALIUS GROUP LIMITED Annual Report 2010