TALIUS GROUP LIMITED — Proxy Solicitation & Information Statement 2006

Nov 7, 2006

ADVANCE ENERGY LIMITED

ACN 111 823 762

NOTICE OF GENERAL MEETING

The General Meeting of the Company will be held at 10:00AM on 15 December 2006 (WST) at Suite 4, 16 Ord Street West Perth, Western Australia.

This Notice should be read in its entirety. If Shareholders are in doubt as to how they should vote, they should seek advice from their accountant, solicitor or other professional adviser prior to voting.

Should you wish to discuss any matter please do not hesitate to contact the Company Secretary by telephone on +61 $(08)$ 9486 1122.

ADVANCE ENERGY LIMITED

ACN 111 823 762 NOTICE OF GENERAL MEETING

Notice is hereby given that the General Meeting of Shareholders of the Company will be held at Suite 4, 16 Ord Street West Perth WA on 15 December 2006 at 10:00 AM (WST). ("Meeting").

The Proxy Form forms part of this Notice of General Meeting ("Notice").

The Directors have determined pursuant to regulation 7.11.38 of the Corporations Regulations 2001 (Cth) that the persons eligible to vote at the Meeting are those who are registered as Shareholders of the Company at 5.00PM on Wednesday 13 December 2006 (WST).

AGENDA

Resolution 1 – Clarification of Convertible Preference $\mathbf{1}$ Share Terms

To consider, and if thought fit pass as a special resolution, the following:

"That in accordance with Article 2.3(a) of the Constitution, Chapter 2E of the Corporations Act and for all other purposes. Shareholders approve the amendment of the terms of the Convertible Preference Shares by inserting the underlined text into the terms and conditions of the Convertible Preference Shares in Schedule 2 on the terms set out in the Explanatory Memorandum."

Resolution 2 - Approval of Placement Facility $2₁$

To consider, and if thought fit, pass with or without amendment as an ordinary resolution the following:

"That, in accordance with ASX Listing Rule 7.1 and for all other purposes, the Company approves and authorises the Directors to issue up to 15,000,000 Shares at an issue price not less than 80% of the average market price for Shares on the five trading days prior to the issue of the Shares ("Placement Facility") to institutional and professional and sophisticated investors on the terms and conditions outlined in the Explanatory Memorandum."

Voting Exclusion

The Company will disregard any votes cast on this Resolution by a person who may participate in the issue and might obtain a benefit (except a benefit solely in their capacity as holders of ordinary securities) if the Resolution is passed, or any associate of that person.

However, the Company will not disregard a vote if:

• $(a)$ it is cast by the person as proxy for a person who is entitled to vote, in accordance with directions on the Proxy Form: or
• $(b)$ it is cast by the person chairing the Meeting as proxy for a person who is entitled to vote, in accordance with a direction on the Proxy Form to vote as the proxy decides.

Resolution 3-Authorise Convertible Note Issue $3_l$

To consider, and if thought fit, pass with or without amendment as an ordinary resolution the following:

"That, in accordance with ASX Listing Rule 7.1 and for all other purposes, the Company approves and authorises the Directors to issue up to 15,000,000 convertible notes each with a face value of \$0.50 with a conversion price per share of not less than 80% of the average market price for Shares on the five trading days prior to the issue of the Convertible Notes ("Convertible Note Issue") to institutional and professional and sophisticated investors on the terms and conditions outlined in the Explanatory Memorandum."

Voting Exclusion

The Company will disregard any votes cast on this Resolution by a person who may participate in the issue and might obtain a benefit except a benefit solely in their capacity as holders of ordinary securities if the Resolution is passed, or an associate of that person.

However, the Company will not disregard a vote if:

• $(a)$ it is cast by the person as proxy for a person who is entitled to vote, in accordance with directions on the Proxy Form; or
• it is cast by the person chairing the Meeting as proxy for a person who is entitled $(b)$ to vote, in accordance with a direction on the Proxy Form to vote as the proxy decides

Resolution 4 - Ratification of Prior Share Issues $\Delta$ .

To consider, and if thought fit, pass with or without amendment as an ordinary resolution the following:

"That, in accordance with ASX Listing Rule 7.4, the Shareholders ratify the issue of:

• $\langle i \rangle$ 240,000 Shares and 1,000,000 Options to Claymore Capital;
• $(ii)$ 1.760.000 Shares to clients of Claymore Capital Pty Ltd:
• 1,000,000 shares to clients of Macquarie Equities Limited; $(iii)$
• $(iv)$ 1,000,000 Options to Mr Embry Canterbury; and

$(v)$ 850,000 Options to employees and consultants of the Company.

("Prior Security Issues") in accordance with the terms in the Explanatory Memorandum."

Voting Exclusion

The Company will disregard any votes cast on a resolution by a person who participated in the Prior Security Issues, or an associate of those persons.

However, the Company will not disregard a vote if:

• $(b)$ it is cast by the person as proxy for a person who is entitled to vote, in accordance with directions on the Proxy Form; or
• it is cast by the person chairing the Meeting as proxy for a person who is entitled $(c)$ to vote, in accordance with a direction on the Proxy Form to vote as the proxy decides.

Section 195 Approval 5.

To consider, and if thought fit, pass as an ordinary resolution with or without amendment the following:

"That, for the purposes of section 195(4) of the Corporations Act and for all other purposes, Shareholders approve and authorise the Directors to determine whether the milestones of the Convertible Preference Shares have been met in accordance with the terms of the Convertible Preference Shares."

By Order of the Board

Lance Camacho Company Secretary 6 November 2006

ADVANCE ENERGY LIMITED

ACN 111 823 762

EXPLANATORY MEMORANDUM

$\mathbf{1}$ Introduction

This Explanatory Memorandum has been prepared for the information of Shareholders of the Company in connection with the business to be conducted at the General Meeting to be held at Suite 4, 16 Ord Street West Perth WA on 15 December 2006 at 10:00 AM WST.

The purpose of this Explanatory Memorandum is to provide information the Board of Directors believes is material to Shareholders in relation to the resolutions set out in the Notice of General Meeting. The Explanatory Memorandum explains the resolutions and identifies the Directors' decisions for putting them to Shareholders.

Resolution 1 – Clarification of Convertible Preference $\overline{2}$ Share Terms

$2.1$ General

The Company issued 14 Convertible Preference Shares to the Parties listed in the table below:

Pref Share Con Holder	Class A Con Pref Share	Class B Con Pref Share	Class C Con Pref Share	Class D Con Pref Share
Pty. Ltd Formaine (controlled G by Sklenka)	-1
Fay Holdings Pty Ltd 1 (controlled by A Short)
Spartan Nominees Pty 1 Ltd (controlled by A Bajada)
Beechcraft Pty Ltd
American North Energy

The issue of the Convertible Preference Share was approved by Shareholders on 23 September 2006.

On achievement of the relevant milestone the Convertible Preference Shares convert into Shares at the ratio of 1,000,000 Shares for each 1 Convertible Preference Share.

The milestone for conversion of the Class A Convertible Preference Shares was the listing of the Company on the ASX. This milestone has been achieved and all Class A Convertible Preference Shares have converted to Shares in accordance with their terms

The milestones for conversion of Class B. C and D as expressed in the Convertible Preference Shares is summarised in below.

Class of Con Pref Share	Milestone for Conversion
Class B	Company achieving production of 500 BOPD
Class C	Company achieving production of 1,000 BOPD
Class D	Company achieving production of 1,500 BOPD

It was the intention of the Company when the Convertible Preference Shares were drafted and issued that "barrels of oil production per day or BOPD" include "gas equivalent BOPD (BOEPD)". Consistent with this, the initial valuation undertaken on the Convertible Preference Shares (which was sent to shareholders with the initial notice of meeting approving the issue of the Convertible Preference Shares was prepared on the basis that achievement of the milestones included BOEPD. Accompanying this Notice is the original valuation prepared at the time of the issue of the Convertible Preference Shares. The Company has consulted with BDO and have been advised that it is not necessary to prepare a further valuation. Unfortunately the terms of the Convertible Preference Shares did not expressly include such a term although the Company, its management and its American operating consultants have always proceeded on the basis that performance milestones included BOEPD.

The US Society of petroleum engineers states that "Converting gas volumes to the oil equivalent is customarily done on the basis of the heating content or calorific value of the fuel. There are a number of methodologies in common use. Before aggregating, the gas volumes first must be converted to the same temperature and pressure. Common industry gas conversion factors usually range between 1.0 barrel of oil equivalent (boe) $= 5.6$ thousand standard cubic feet of gas (mscf/mcf) to 1.0 boe $= 6.0$ mscf."

The proposed amendment to the Convertible Preference Shares accepts the lower range of the conversion ratio being 6 mcf of gas will be equivalent to one barrel of oil. On this basis the Company currently produces approximately 113 BOEPD.

The Convertible Preference Shares were issued to Directors and consultants of the Company to appropriately incentivise their benefit from the success of the Company with the performance of the Company thereby maximising returns to Shareholders.

All of the Convertible Preference Shareholders have consented to the variation of the terms and conditions of the Convertible Preference Shareholders as contemplated by this Notice with effect from Shareholder approval of this Resolution 1.

As all of the Directors hold Convertible Preference Shares they have also decided to take this opportunity to amend the mechanism by which the Directors will determine that the milestones of Class B, C and D Convertible Preference Shares have been met. The proposed amendments to achieve this are track changed in the terms and conditions of the Convertible Preference Shares in Schedule 2. The intention of the amendments is to reduce to a minimum the amount of Director discretion involved in making the determination whether the milestones have been achieved by referral of the determination of the milestone to an independent third party.

Resolution 1 seeks Shareholder authorisation to amend the terms of the Convertible Preference Shares as shown in Schedule 2

Resolution 1 is a special resolution.

$2.2$ Current Oil and Gas Production

Current production from the Company's portfolio of assets is oil production of the Company per day is approximately 37 BOPD and gas production is approximately 456 mcf per day (76 BOEPD) for a total of 113 BOPD and BOEPD.

If the Company finalises a formal sale agreement in respect of the acquisition of the further project in the Palo Pinto area which was announced on 12 October 2006 and that acquisition is completed, the Company expects that oil production of the Company per day will remain constant at approximately 37 BOPD and gas production to increase to approximately 2,856 mcf per day (476 BOEPD). This would result in total production of approximately 513 BOPD and BOEPD. This amount of production would be in excess of the milestone criteria for the conversion of the B Class Preference Shares.

$2.3$ Advantages and Disadvantages of amending Convertible Preference Share Terms

Advantages

The Convertible Notes will serve as an appropriate incentive to perform. The interests of the Directors and the Company's consultants will be appropriately linked to the performance of the Company, in a manner always contemplated, thereby maximising returns to Shareholders

The proposed amendments clarify that production milestones must be achieved on a daily average for a calendar month rather then on any one day as currently drafted

The Company's US operator, who is responsible for the management and further development of the Company's current projects and the identification of further projects, is the holder of 3 Convertible Preference Shares. Failure of Shareholders to approve the amendment of the terns as proposed may result in a perceived loss of value by the operator and increased reluctance to progress the Company's projects in the expedited manner that they have been undertaken to date

Disadvantages

The milestone criteria of the Class B Convertible Preference Shares are likely to immediately, or in the near future, be met if the amendment to the Convertible Preference Shares is effected and the recently announced acquisition of further Palo Pinto project areas proceeds

The increased likelihood that the production milestones are met may result in dilutionary effect on the interests of Shareholders as a consequence of conversion or one Convertible Preference Shares into 1.000.000 Shares

$2.4$ Constitution

The Company's constitution provides a mechanism to amend the terms of shares on issue. The constitution provides that all holders of the shares to be amended are required to consent to the variation as well as Shareholders passing a special resolution approving the variation.

The Convertible Preference Shareholders have all consented to the variation of the terms of the Convertible Preference Shares as contemplated by this notice.

Shareholder approval is being sought for the variation of the terms of the Convertible Preference Shares under this Resolution 1.

$2.5$ Chapter 2E of the Corporations Act

Section 208 of the Corporations Act provides that a Company, subject to certain exceptions, may only give a financial benefit to the related party (including a director) if Shareholder approval for the giving of the financial benefit is obtained.

The variation of the terms of the Convertible Preference Shares in Resolution 1 may be the giving of financial benefit and none of the exceptions may apply. Consequently as a matter of good corporate governance the Directors believe it appropriate to seek Shareholder approval under section 219 of the Corporations Act.

$2.6$ Specific Information required for Corporations Act

For the purposes of section 219 of the Corporations Act and Listing Rule 10.13 information regarding the variation of the terms of the Convertible Preference Shares is provided as follows:

$(a)$ The Company is a small public company, which has been formed for the purpose of investing in oil and gas exploration and production assets situated in the United States of America, through acquiring working interests in areas and projects owned and operated by United States based oil and gas companies. The Company has limited funds, most of which are allocated to funding its acquisition of interests in oil and gas projects, and funding the Company's share of expenditure on such projects.

The Company chose to issue the Convertible Preference Shares to companies controlled by the Directors as a key component of their remuneration in order to attract and retain the services of these Directors and to provide incentives linked to the performance of the Company.

A total of 14 Convertible Preference Shares were issued to Directors and $(b)$ consultants of the Company. Of these eight Convertible Preference Shares (in four different classes with different events that trigger the right to convert into 1,000,000 ordinary shares per Convertible Preference Share) were issued to companies controlled by the Directors. The different classes and their respective conversion rights are summarised in the following table:

Conversion Event Class

• $\overline{A}$ The Company listing on the ASX
• The attainment of 500 Barrels of Oil Per Day $\overline{B}$ ("BOPD") production.
• The attainment of 1,000 BOPD production $\ddot{C}$
• The attainment of 1,500 BOPD production D

The breakdown of the Convertible Preference Shares by Class that each Director holds is contained in the table below.

Name of Related Party	Class	Number of Convertible Preference Shares	Number of Shares after conversion	Value per Security	Total Value \$
Formaine Pty Ltd (controlled by G Sklenka)	Α		1,000,000	\$149,000	\$149,000
	В	1	1,000,000	\$89,500	\$89,500
Total for Formaine Pty Ltd		2	2,000,000		\$238,500

Name of Related Party	Class	Number of Convertible Preference Shares	Number of Shares after conversion	Value per Security	Total Value \$
Fay Holdings Pty Ltd (controlled by A Short)	A	1	1,000,000	\$149,000	\$149,000
	B	1	1,000,000	\$89,500	\$89,500
	Ċ	1	1,000,000	\$29,800	\$29,800
	D	1	1,000,000	\$3,000	\$3,000
Total for Fay Holdings Pty Ltd		4	4,000,000		\$271,300

Name of Related Party	Class	Number of Convertible Preference Shares	Number of Shares after conversion	Value per Security	Total Value \$
Spartan Nominees Pty Ltd (controlled by A Bajada)	Α		1,000,000	\$149,000	\$149,000
	В	1	1,000,000	\$89,500	\$89,500
Total for Spartan Nominees Pty Ltd		2	2,000,000		\$238,500

The milestone on the Class A Preference Shares has been achieved and the $(c)$ Shares on conversion issued

• A valuation of the Convertible Preference Shares was obtained from BDO $(d)$ Consultants (WA) Pty Ltd, an independent expert, when Shareholder approval of the Convertible Preference Shares was initially obtained. Details of value of individual holdings of Convertible Preference Shares is set out in the above table. A copy of the original valuation report by BDO Consultants (WA) Pty Ltd has been sent with this Notice. The total value of the Convertible Preference Shares issued to companies controlled by the Directors the terms which are being sought to be varied was \$748,300. The valuation was undertaken at the time of issue on the basis that "BOPD" included "gas equivalent BOPB.
• Resolution 1 seeks to add "BOEPD" to the production performance criteria of $(e)$ Class B, C and D Convertible Preference Shares. The effect of adding "BOEPD" to the calculation of the milestones of the Convertible Preference Shares and the resulting likelihood that the milestones will be achieved is set out in Section 2.2 of this Notice.
• $(f)$ Gordon Sklenka was appointed a Director on 16 November 2004. Mr Sklenka's consent to becoming a Director was given on the basis that he receives the remuneration package including the issue to Formaine Pty Ltd (a company controlled by Mr Sklenka) of the Convertible Preference Shares and the Options outlined in Section 2.7(n) (subject to Shareholders approving the issue of the Convertible Preference Shares). Mr Sklenka has considerable corporate and capital raising skills and listed public company experience.

In addition to the Convertible Preference Shares and the Options issued (see the table in Section 2.7(n)). Mr Sklenka's remuneration package as agreed upon joining the Board includes Directors' fees of \$38,150 with further consulting fees of \$61,850.

Mr Anthony Short was appointed a Director on 16 November 2004 and is the $(q)$ proposed Managing Director of the Company. Mr Short's consent to becoming a Director was given on the basis that he receives the remuneration package outlined herein, including the issue to Fay Holdings Pty Ltd (a Company controlled by Mr Short) of the Convertible Preference Shares and the Options outlined in Section 2.7(n) (subject to shareholders approving the issue of the Convertible Preference Shares, Participating Interest and the Options). Mr Short has experience in oil and gas project development in Texas, financial risk management and accounting expertise.

In addition to the Convertible Preference Shares, Participating Interest and the Options. Mr Short currently receives the following remuneration package:

Total	\$220,000
Superannuation	\$20,000
Salary	\$200,000

$(h)$ Mr Alex Bajada was appointed as a Director on 16 November 2004. Mr Bajada's consent to becoming a Director was given on the basis that he receives the remuneration package outlined herein, including the Convertible Preference Shares and the Options the Options outlined in Section 2.7(n) (subject to shareholders approving the issue of the Convertible Preference Shares and the Options). Mr Baiada has funds management skills and experience and contacts in the superannuation industry as well as general management skills.

In addition to the Convertible Preference Shares, and the Options (see the table in Section 2.7(n)). Mr Bajada's remuneration package as agreed on joining the Board included Director's and Chairman's fees of \$54,500 per annum

• Each Director is also entitled to reimbursement of all reasonable travelling. $(i)$ accommodation and other expenses that a Director properly incurs in attending meetings of Directors or any meetings of committees of Directors, in attending any meetings of members and in connection with the business of the Company.
• Convertible Preference Shares were issued for nil consideration. $(i)$
• $(k)$ Messrs Sklenka, Short and Bajada (Directors) each have an interest in the Resolutions under which the terms of the Convertible Preference Shares and will be issued and therefore do not want to make a recommendation for the Resolutions.
• The number of Convertible Preference Shares was initially determined at the $($ | $)$ time of issue on the basis that:
• $(i)$ that was the level of incentive that the Directors required as part of their remuneration package in order to consent to becoming Directors: and
• the Directors believed that having regard to the circumstances of the $(ii)$ Company; the work required from the Directors to establish and promote the business of the Company, and the desire to align the interests of the Directors with the performance of the Company, that was an appropriate number of Convertible Preference Shares to be issued.

Current Shareholdings of the Directors are as follows: $(m)$

Director	No. of Shares held directly/indirectly	No. of Options heid directly/indirectly	No. of Convertible Preference shares held directly/indirectly
Mr Gordon Sklenka	3,000,003	2,000,000
Mr Anthony Short	8,650,002	4,000,000	З
Mr Alex Baiada	3,020,001	2,000,000

• There will be no dilution effect to Shareholders if the terms of the Convertible $(n)$ Preference Shares are amended.
• $(0)$ The Convertible Preference Shares are preference shares, but rank equally with ordinary shares for payment of any dividend or distribution on a winding up. On conversion the Shares issued will rank equally with all existing Shares on issue.
• No funds will be raised by the variation of the terms of the Convertible $(p)$ Preference Shares.
• The trading history of the Shares is not provided as it is not relevant to $(a)$ Shareholders decision to approve the amendment of the Convertible Preference Share Terms as the milestones of the Convertible Preference Shares are not related to the Company Share Price.
• Other than the information above and otherwise set out in this Explanatory $(r)$ Memorandum, the Company believes that there is no other information that would be reasonably required by Shareholders to pass Resolutions 1.

Resolution 2 - Approval of Placement Facility $3.$

$3.1$ General

Resolution 2 seeks Shareholder approval for a placement facility under which the Company will issue up to 15,000,000 Shares at 80% of the average market price of Shares in the 5 days on which sales were recorded prior to the Placement occurring per Share.

The Company has no current plans to utilise the Placement Facility. However, given the Company's current business strategy to aggressively pursue acquisitions with existing production by a combination of equity and debt where value can quickly be added to the project by enhancing production though stimulating existing wells, undertaking step out wells and bringing behind pipe reserves to production, the Company believes that the Placement Facility will give it the ability to quickly react to opportunities. The Placement Facility will also be used to expedite the development activities at the newly acquired Palo Pinto project.

$3.2$ Listing Rule 7.1 - Shareholder Approval

Listing Rule 7.1 requires Shareholder approval for the Placement Facility as Listing Rule 7.1 provides, subject to certain exceptions, that Shareholder approval is required for any issue of securities by a listed company, where the securities proposed to be issued represent more than 15% of the Company's securities then on issue.

The issue of 15,000,000 Shares will exceed the Company's current 15% capacity for the purposes of Listing Rule 7.1. The Company is seeking Shareholder approval of the Placement so that the Company's future ability to issue up to 15% of the Company's Share capital in accordance with Listing Rule 7.1 without Shareholder approval is maintained. Accordingly Shareholder approval is sought in accordance with Listing Rule 7.3.

$3.3$ Specific information required by Listing Rule 7.3

For the purposes of Shareholder approval of the Placement Facility and the requirements of Listing Rule 7.3, information is provided as follows:

• $(a)$ the maximum number of Shares the Company can issue under the Placement Facility is 15,000,000 Shares;
• $(b)$ the Company will issue the Shares no later than 3 months after the date of the General Meeting (or such longer period of time as ASX may, in its discretion. allow pursuant to a waiver of ASX Listing Rule 7.3.2):
• $(c)$ for the purpose of this Explanatory Memorandum the issue price of the Shares to be issued under the Placement Facility will be at least 80% of the average market price of Shares in the 5 days on which sales were recorded prior to the Placement occurring per Share;
• the identities of the participants in the Placement are unknown, however they $(d)$ will be institutional, professional and sophisticated investors who are not related parties of the Company:
• the Shares are ordinary fully paid shares in the capital of the Company; $(e)$
• $(f)$ the amount that the Placement Facility will raise is unknown at this time as the price at which the placement will be undertaken is unknown. However if the closing Share price of \$0.42 on 26 October 2006 is used the Placement will raise \$6,300,000 (before issue costs) and the funds will be used as set out in Section 3.1:
• $(q)$ the allotment of Shares will occur progressively; and
• $(h)$ a voting exclusion statement is included in the Notice.

$\ddot{a}$ . Resolution 3 - Authorise Convertible Note Issue

$4.1$ General

Resolution 3 seeks Shareholder approval for the issue of 15,000,000 Convertible Notes each with a face value of \$0.50 each which convert to Shares at the Noteholder's election at a price per Share which is at least 80% of the average market price of Shares in the 5 days on which sales were recorded prior to the Convertible Note Issue ("Conversion Price").

The Company has no current plans to undertake the Convertible Note Issue. However, given the Company's current business strategy to aggressively pursue acquisitions with existing production by a combination of equity and debt where value can quickly be added to the project by enhancing production though stimulating existing wells, undertaking step out wells and bringing behind pipe reserves to production, the Company believes that the Convertible Note Issue will give it the ability to quickly react to opportunities. The Convertible Note Issue will also be used to expedite the development activities at the newly acquired Palo Pinto project.

$4.2$ Terms of the Convertible Notes

Material terms of the Convertible Notes are as follows:

• $(a)$ Coupon rate of 11% per annum with interest accruing daily and payable three months in arrears.
• $(b)$ Unless converted by the Noteholder, the term of each Convertible Note will have a minimum term of 18 months and maximum term of 36 months. The Company will repay the Noteholder the face value of each Convertible Note at expiry of the term.
• $(c)$ Convertible Notes are unsecured, unlisted and cannot be transferred.
• The Company may pay an upfront fee of up to 5% on the amount of the $(d)$ Convertible Note.
• The convertible note may be converted by the Noteholder at any time after 30 $(e)$ June 2006 at the Conversion Price (which, per Shares, will be at least 80% of the average market price of Shares in the 5 days on which sales were recorded prior to the Convertible Note Issue).
• $(f)$ If all of the Convertible Notes are repaid or converted then the Convertible Notes are automatically cancelled and may not be re-issued.
• If at any time the Company makes a bonus issue then the Company must $(g)$ issue the same number of bonus securities to the noteholder that the noteholder would have been entitled to receive if the noteholder had converted the Convertible Note immediately before the issue of the bonus securities.
• $(h)$ If the Company undertakes any capital reconstruction then, subject to the Listing Rules, the entitlement of the noteholder to convert the Convertible Note must be reconstructed in the same proportion and manner as the reconstruction.
• $(i)$ The Company must give the noteholder notice of all general meetings and the noteholder may attend general meetings but may not vote unless permitted by the Corporations Act or the Listing Rules.
• The noteholder may by written notice to the Company declare the Convertible $(i)$ Note due and payable on the occurrence of any of the following events:
• $(i)$ the Company fails to make any payment due in accordance with the note conditions within 20 business days of the due date:
• $(ii)$ the Company makes default in duly performing or observing any of the undertakings or agreements contained in the Convertible Note:
• any representation or warranty contained in the Convertible Note is $(iii)$ found to be false or misleading in any material respect;
• $(iv)$ a judgment is entered against the Company on a claim not covered by insurance and such judgments in the opinion of the noteholder has a material adverse effect on the financial position of the Company;
• $(v)$ a petition is lodged and is not withdrawn within 14 business days of lodgement or is not contested on a bona fide basis or an order is made or a resolution is passed for winding up of the Company or placing the Company under voluntary administration or any meetings convened for the purposes of considering the said resolutions;

• $(v_i)$ a receiver or a receiver and manager or administrator of the undertaking or property of the Company is appointed;

• the Company suspends payments of its debts or the Company $(vii)$ without the consent of the convertible noteholder ceases or threatens to cease to carry on a substantial part of its business:

• the Company fails to comply with any of its other obligations under $(viii)$ the Convertible Note conditions or without prior consent of the noteholder, the Company undertakes a reorganisation of capital;
• any other event occurs which has a material adverse effect; $(ix)$
• $(x)$ the main business undertaking of the Company is sold; or
• the Company is removed from the official list of the ASX. $(x_i)$

$4.3$ Listing Rule 7.1 - Shareholder Approval

Listing Rule 7.1 requires Shareholder approval for the Convertible Note Issue. Listing Rule 7.1 provides, subject to certain exceptions, that Shareholder approval is required for any issue of securities by a listed company, where the securities proposed to be issued represent more than 15% of the Company's securities then on issue.

The issue of 15,000,000 Convertible Notes will exceed the Company's current 15% capacity for the purposes of Listing Rule 7.1. The Company is seeking Shareholder approval of the Placement so that the Company's future ability to issue up to 15% of the Company's Share capital in accordance with Listing Rule 7.1 without Shareholder approval is maintained. Accordingly Shareholder approval is sought in accordance with Listing Rule 7.3.

$4.4$ Specific information required by Listing Rule 7.3

For the purposes of Shareholder approval of the Convertible Note Issue and the requirements of Listing Rule 7.3, information is provided as follows:

• the maximum number of Convertible Notes the Company can issue under the $(a)$ Convertible Note Issue is 15,000,000 Convertible Notes:
• the Company will issue the Convertible Notes no later than 3 months after the $(b)$ date of the General Meeting (or such longer period of time as ASX may, in its discretion, allow pursuant to a waiver of ASX Listing Rule 7.3.2);
• $(c)$ the Convertible Notes will each be allotted at a face value price of at least 80% of the average market price of Shares in the 5 days on which sales were recorded prior to the Convertible Note Issue each to institutional and professional and sophisticated investors (none of whom are related parties of the Company or their associates);
• $(d)$ the terms of the Convertible Notes to be issued are set out in section 4.2;
• the amount raised by the Convertible Note Issue is unknown at this time as $(e)$ the price at which the Convertible Note Issue will be undertaken is unknown. However if the closing Share price of \$0.42 on 26 October 2006 is used, the Convertible Note Issue will raise \$6,300,000 (before issue costs) and the funds will be used as set out in Section 4.1;
• $(f)$ the allotment of Convertible Notes will occur progressively; and
• $(q)$ a voting exclusion statement is included in the Notice.

Resolution 4 - Ratification of Prior Share Issues $5.$

$5.1$ General

On 5 July 2006 the Company issued:

• $(a)$ 240,000 Shares at an issue price of \$0.25 per Share to raise \$60,000 to Claymore Capital Pty Ltd;
• $(b)$ 1,760,000 Shares at an issue price of \$0.25 per Share to raise \$440,000 to clients of Claymore Capital Pty Ltd: and
• 1,000,000 Options to Claymore Capital Pty Ltd as part of its fees for being $(c)$ appointed corporate adviser to the Company;
• $(d)$ 1,000,000 Options to Mr Embry Canterbury, a consultant of the Company, as a performance incentive.

On 11 July the Company issued 1,000,000 Shares at an issue price of \$0.25 to clients of Macquarie Equities Limited.

On 5^th July 2006 the Company issued 850,000 Options to employees and consultants as a performance incentive.

$5.1$ Listing Rule 7.5 - Shareholder Approval

The Shares were issued within the 15% limit permitted under Listing Rule 7.5, without the need for Shareholder approval. The effect of Shareholders passing Resolution 4 by ratifying the Prior Share Issues will be to restore the Company's ability to issue securities within that limit, to the extent of the 3,000,000 Shares and 2,850,000 Options.

$5.2$ Specific information required by Listing Rule 7.5

Listing Rule 7.5 requires that the following information be provided to Shareholders for the purpose of obtaining Shareholder approval pursuant to Listing Rule 7.4:

• $(a)$ The number of Shares and Options and the parties to whom they have been issued are in Section 5.1 above (all of whom are not a related parties of the Company):
• $(b)$ the Shares are all fully paid ordinary Shares in the capital of the Company that were issued at an issue price of \$0.25 per Share.
• $(c)$ The Options were all issued for nil consideration and have an exercise price of \$0.25 and an expiry date of 31 December 2010 and are issued on the further terms and conditions contained in Schedule 3:
• $(d)$ funds raised by the Prior Share Issues were used to fund working capital requirements; and
• $(e)$ a voting exclusion statement is included in the Notice.

Resolution 5 - Section 195 Approval 6.

Section 195 of the Corporations Act essentially provides that a director of a public company may not vote or be present during meetings of directors when matters in which that director holds a "material personal interest" are being considered.

In accordance with the terms of the Convertible Preference Shares it is necessary for the Directors to issue the Shares on conversion of the Convertible Preference Shares when advised by the independent third party that the relevant milestone has been achieved. As each of the Directors holds Convertible Preference Shares each may have a material personal interest in the outcome of such determination. In the absence of Resolution 5, the Directors may not be able to form a guorum at a Directors' meeting necessary to issue the Shares on conversion of the Convertible Preference Shares when advised by the independent third party that the relevant milestone has been achieved.

The Directors have accordingly exercised their right under section 195(4) of the Corporations Act to put the issue to Shareholders to resolve upon.

The Company and its Directors note that the terms of the Convertible Preference Shares have been drafted such as minimise the use of discretion by Directors in making the determination whether the milestones have been achieved. This will be matter for the independent third party.

Shareholders passing resolution 5 does not excuse the directors from complying with their statutory and fiduciary duties when making a determination concerning the achievement of milestones on the Convertible Preference Shares.

$\overline{7}$ . Action to be taken by Shareholders

Shareholders should read this Explanatory Memorandum carefully before deciding how to vote on the Resolutions.

A Proxy Form is attached to the Notice. This is to be used by Shareholders if they wish to appoint a representative (a "proxy") to vote in their place. All Shareholders are invited and encouraged to attend the Meeting or, if they are unable to attend in person, to sign and return the Proxy Form to the Company in accordance with the instructions provided. Lodgement of a Proxy Form will not preclude a Shareholder from attending and voting at the Meeting in person.

Schedule 1 - Definitions

In this Explanatory Memorandum and Notice:

"ASIC" means Australian Securities and Investments Commission.

"ASX" means Australian Stock Exchange Limited ACN 008 624 691.

"Board" means the board of Directors of the Company.

"BOPD" means barrels of oil per day.

"BOEPD" means barrels of oil equivalent per day.

"Company" or "Advance" means Advance Energy Limited ACN 111 823 762.

"Constitution" means the Constitution of the Company.

"Convertible Note" means a convertible note issued by the Company under the Convertible Note Issue.

"Convertible Note Issue" has the meaning in Resolution 3.

"Convertible Preference Share: means a convertible preference share on the terms and conditions in Schedule 2.

"Corporations Act" means the Corporations Act 2001 (Cth).

"Directors" means the directors of the Company.

"Explanatory Memorandum" means this explanatory memorandum.

"General Meeting" means the General Meeting of the shareholders of the Company to be held by the Company at Suite 4, 16 Ord Street West Perth WA on 15 December 2006 at 10:00AM $(WST)$ .

"Listing Rules" means the official listing rules of ASX.

"Noteholder" means a holder of a Convertible Note.

"Notice" means this Notice of General Meeting.

Option" means an option over unissued capital on the terms and conditions in Schedule 3.

"Placement Facility" has the meaning in Resolution 2.

"Prior Share Issues" has the meaning in Resolution 4.

"Proxy Form" means the proxy form attached to this Notice.

"Resolution" means a resolution referred to in the Notice.

"Share" means a fully paid ordinary share in the capital of the Company.

"Shareholder" means a shareholder of the Company.

Definitions $\mathbf 1$

In these terms and conditions:

"ASX" means Australian Stock Exchange Limited.

"BOPD" means Barrels of Oil per day and BOEPD produced by the Company (taking into account all the oil and gas produced from properties wholly owned by the Company, and the Company's pro-rata interest in oil and gas produced from properties in which the Company has an interest).

"BOEPD" means the number of barrels of oil equivalent calculated by taking the number of thousand cubic feet of gas (mcf) per day produced and dividing it by 6.

"Class A Preference Shares" means a Class A Preference Share as referred to in clause 2.

"Class B Preference Shares" means a Class B Preference Share as referred to in clause 2 i

"Class C Preference Shares" means a Class C Preference Share as referred to in clause 2

"Class D Preference Shares" means a Class D Preference Share as referred to in clause 2.

"Company" means Advance Energy Limited ACN 111 823 762.

"Corporations Act" means the Corporations Act 2001.

"Directors" mean the directors from time to time of the Company.

"Issue Price" means \$0,0001.

"Listing Rules" means the official listing rules of the ASX, as amended, added to or replaced from time to time.

"Preference Share" means the convertible preference share issued by the Company subject to these terms and conditions.

"Preference Shareholder" mean the holder of any Preference Share.

"Shares" means ordinary shares in the capital of the Company.

Class and rights $2.$

$2₁$ Classes of Preference Shares

The Company may issue Preference Shares which will be known as "Class A Preference Shares", "Class B Preference Shares", "Class C Preference Shares" and "Class D Preference Shares" each at the Issue Price and on the terms and conditions herein

$2.2$ Rights of Preference Shares

The Preference Shares of each class shall have the same terms and rights except in respect of conversion rights, which shall be as specified in clause 4.

Dividend $\overline{3}$ .

$3.1$ Preference Shares not entitled to dividend

Preference Shareholders are not entitled to receive any dividend on their Preference Shares.

Conversion $\mathbf{4}$

$\Delta$ 1 Conversion

Each Preference Shares will automatically convert into 1,000,000 Shares in accordance with this clause 4.

$4.2$ Conversion Formula for Class A Preference Shares

• $(a)$ Each Class A Preference Share will convert into one million (1,000,000) Shares upon the Company's Shares being accepted for listing on the main board of ASX.
• $(b)$ In the event of any reconstruction, consolidation or division into (respectively) a lesser or greater number of securities of the Shares, the number of Shares into which the Class A Preference Shares convert in clause 4.2(a) shall be reconstructed, consolidated or divided in the same proportion as the Shares are reconstructed, consolidated or divided and, in any event, in a manner which will not result in any additional benefits being conferred on the Preference Shareholders

Conversion Formula for Class B Preference Shares 4.3

• Each Class B Preference Share will convert into one million (1,000,000) $(a)$ Shares upon the Company achieving average daily production of 500 BOPD for the period of 30 days immediately proceeding the notice under clause 4.6(a) as determined in accordance with clause 4.6.
• $(b)$ In the event of any reconstruction, consolidation or division into (respectively) a lesser or greater number of securities of the Shares, the number of Shares into which the Class B Preference Shares convert in clause 4.3(a) shall be reconstructed, consolidated or divided in the same proportion as the Shares are reconstructed, consolidated or divided and, in any event, in a manner

which will not result in any additional benefits being conferred on the Preference Shareholders

$4.4$ Conversion Formula for Class C Preference Shares

• $(a)$ Each Class C Preference Share will convert into one million (1,000,000) Shares upon the Company achieving average daily production of 1,000 BOPD for the period of 30 days immediately proceeding the notice under clause $\overline{4.6(a)}$ as determined in accordance with clause 4.6.
• $(b)$ In the event of any reconstruction, consolidation or division into (respectively) a lesser or greater number of securities of the Shares, the number of Shares into which the Class C Preference Shares convert in clause 4.4(a) shall be reconstructed, consolidated or divided in the same proportion as the Shares are reconstructed, consolidated or divided and, in any event, in a manner which will not result in any additional benefits being conferred on the Preference Shareholders.

45 Conversion Formula for Class D Preference Shares

• $(a)$ Each Class D Preference Share will convert into one million (1.000.000) Shares upon the Company achieving average daily production of 1,500 BOPD for the period of 30 days immediately proceeding the notice under clause 4.6(a) as determined in accordance with clause 4.6.
• $(b)$ In the event of any reconstruction, consolidation or division into (respectively) a lesser or greater number of securities of the Shares, the number of Shares into which the Class D Preference Shares convert in clause 4.5(a) shall be reconstructed, consolidated or divided in the same proportion as the Shares are reconstructed, consolidated or divided and, in any event, in a manner which will not result in any additional benefits being conferred on the Preference Shareholders.

4.6 Determination of Production Milestones

• $(a)$ The Preference Shareholder may, by written notice, at any time request the Company to appoint an independent third party, at the Company's cost, to make a determination whether a performance milestones in clauses 4.3(a), 4.4(a) and 4.5(a) (as applicable) has been met.
• $(b)$ Prior to the formal appointment of the third party in clause 4.6(a) the Company will seek from the Company's auditor confirmation of the independence of the third party to make the determination.
• $(c)$ Within 20 Business Days of a request from a Preference Shareholder the Company must appoint the third party to make the determination in clause $4.6(a)$ .
• $(d)$ The Company will provide the third party with access to such documentation (including procuring access to such information relating to any of the Company's projects of which it is not the operator) as is reasonably required by the third party to make the determination.
• $(e)$ The third party shall prepare a report advising the Company whether the relevant milestone has been met. The determination of the third party will be final and conclusive determination of whether the relevant milestone has been achieved.

$(f)$ On receipt by the Company of a determination from the third party indicating the relevant milestone has been achieved, the Preference Shares will automatically convert to Shares in accordance with clauses 4.3(a), 4.4(a) and $4.5(a)$ .

4.7 Statements

As soon as practicable after conversion of any Preference Share, the Company shall dispatch statements or certificates in respect of the Shares issued as a result of the conversion

4.8 After Conversion

The Shares issued on conversion of any Preference Share will as and from 5.00pm (WST) on the date of allotment rank equally with and confer rights identical with all other Shares then on issue.

Winding up 5.

If the Company is wound up prior to conversion of all of the Preference Shares into Shares then the Preference Shareholders will have the right for each Preference Share held and not converted in Shares to be paid cash for the Issue Price in priority to the holders of Shares but will have no right to participate beyond the extent specified in this clause 5 in surplus assets or profits of the Company on winding up.

Non-transferable 6

The Preference Shares are not transferable.

$\overline{7}$ Copies of notices and reports

The Preference Shareholders have the same right as holders of Shares to receive notices, reports and audited accounts and to attend general meetings of the Company but are only entitled to vote in the circumstances referred to in clause 8.

8. Voting rights

The Preference Shareholders shall have no right to vote save for those circumstances listed in Listing Rule 6.3.

Quotation of Preference Shares $\mathbf{Q}$

No application for quotation of the Preference Shares will be made by the Company.

Schedule 3 - Terms and Conditions of Options

$1₁$ Entitlement

The Options entitle the holder to subscribe for one Share upon exercise of each Option.

$\overline{2}$ . Exercise Price

The exercise price of each Option is \$0.20.

3. Expiry Date

Each Option has an expiry date of 31 December 2010.

4. Exercise Period

The Options are only exercisable during the exercise period specified in the Option Certificate (between the Vesting Date as summarised in paragraph 2.2(c) of the Explanatory Memorandum and the Expiry Date set out above).

5. Notice of Exercise

The Options may be exercised by notice in writing to the Company. Any notice of exercise of an Option received by the Company will be deemed to be a notice of the exercise of that Option as at the date of receipt.

6. Timing of issue of Shares

After an Option is validly exercised, the Company must as soon as possible:

• issue and allot the Share; and $(a)$
• $(b)$ do all such acts matters and things to obtain the grant of quotation for the Share on ASX no later than 5 days from the date of exercise of the Option.

The listing of any Shares issued following exercise of an Option shall be subject to the Option holder complying with all requirements imposed by Australian Stock Exchange as a condition to listing (including entering into any required restriction agreement regulating the sale of Shares issued on exercise of an Option).

$\overline{7}$ . Shares issued on exercise

Shares issued on exercise of the Options rank equally with the then shares of the Company.

Quotation of Shares on exercise 8.

Application will be made by the Company to ASX for official quotation of the Shares issued upon the exercise of the Options.

$9.$ Participation in new issues

There are no participation rights or entitlements inherent in the Options and holders will not be entitled to participate in new issues of capital offered to Shareholders during the currency of the Options.

However, the Company will ensure that for the purposes of determining entitlements to any such issue, the record date will be at least ten business days after the issue is announced. This will give holders of Options the opportunity to exercise their Options prior to the date for determining entitlements to participate in any such issue.

$10₁$ Adiustment for bonus issues of Shares

If the Company makes a bonus issue of Shares or other securities to existing Shareholders (other than an issue in lieu or in satisfaction, of dividends or by way of dividend reinvestment):

• $(c)$ the number of Shares which must be issued on the exercise of an Option will be increased by the number of Shares which the Optionholder would have received if the Optionholder had exercised the Option before the record date for the bonus issue: and
• $(d)$ no change will be made to the Exercise Price.

$11.$ Adjustment for rights issue

If the Company makes an issue of Shares pro rata to existing Shareholders (other than an issue in lieu of in satisfaction of dividends or by way of dividend reinvestment) the Exercise Price of an Option will be reduced according to the following formula:

New exercise price = $O - \frac{E[P-(S+D)]}{N+1}$

• $\circ$ $\overline{\phantom{a}}$ the old Exercise Price of the Option.
• $\mathbb{R}$ the number of underlying Shares into which one Option is exercisable. $\equiv$
• $\mathbb{D}$ $\overline{...}$ average market price per Share weighted by reference to volume of the underlying Shares during the 5 trading days ending on the day before the exrights date or ex entitlements date.
• S. the subscription price of a Share under the pro rata issue. $\equiv$
• D. $\frac{1}{100000000000000000000000000000000000$ the dividend due but not yet paid on the existing underlying Shares (except) those to be issued under the pro rata issue).
• N. $\overline{\phantom{0}}$ the number of Shares with rights or entitlements that must be held to receive a right to one new share.

$12₁$ Adjustments for reorganisation

If there is any reconstruction of the issued share capital of the Company, the rights of the Optionholders will be varied to comply with the ASX Listing Rules which apply to the reconstruction at the time of the reconstruction.

$13.$ Quotation of Options

No application for quotation of the Options will be made by the Company.

$14$ Options non-transferable

The Options are non-transferable.

$15₁$ Lodgement Instructions

Cheques shall be in Australian currency made payable to the Company and crossed "Not Negotiable". The application for shares on exercise of the options with the appropriate remittance should be lodged at the Company's Registry.

ADVANCE ENERGY LIMITED ACN 111 823 762

PROXY FORM

The Company Secretary Advance Energy Limited
By delivery:	By post:	By facsimile:
Suite 4. Ground Floor 16 Ord Street WEST PERTH WA 6005	Suite 4, Ground Floor 16 Ord Street WEST PERTH WA 6005	08 94861011
$1/\mathsf{We}$ 1
Оf

being a Shareholder/Shareholders of the Company and entitled to ___________________________________

votes in the Company, hereby appoint²

or failing such appointment the chairman of the Meeting as my/our proxy to vote for me/us on my/our behalf at the General Meeting of the Company to be held at Suite 4, 16 Ord Street West Perth WA on 15 December 2006 (WST) at 10:00AM and at any adjournment thereof in the manner indicated below or, in the absence of indication, as he thinks fit. If 2 proxies are appointed, the proportion or number of votes of this proxy is authorised to exercise is $\cdot$ [ 1% of the Shareholder's votes*/ [ J of the Shareholder's votes. (An additional Proxy Form will be supplied by the Company, on request).

INSTRUCTIONS AS TO VOTING ON THE RESOLUTION

IMPORTANT:

The proxy is to vote for or against the Resolution referred to in the Notice as follows:

		For	Against Abstain
Resolution 1	Clarification of Convertible Preference Share Terms
Resolution 2	Approval of Placement Facility
Resolution 3	Authorise Convertible Note Issue
Resolution 4	Ratification of Prior Security Issues
Resolution 5	Section 195 Approval
Authorised signature/s	This section must be signed in accordance with the instructions overleaf to enable your voting instructions to be implemented.
Individual or Shareholder 1	Shareholder 2		Shareholder 3

Sole Director and Sole Company Secretary	Director	Director/Company Secretary
Contact Name	Contact Davtime Telephone	Date
'Insert name and address of shareholder	Insert name and address of proxy	*Omit if not applicable

Proxy Notes:

A Shareholder entitled to attend and vote at the Meeting may appoint a person or a corporation as the Shareholder's proxy to attend and vote for the Shareholder at that Meeting. If the Shareholder is entitled to cast 2 or more votes at the Meeting the Shareholder may appoint not more than 2 proxies. Where the Shareholder appoints more than one proxy the Shareholder may specify the proportion or number of votes each proxy is appointed to exercise. If such proportion or number of votes is not specified each proxy may exercise half of the Shareholder's votes. A proxy may, but need not be, a Shareholder of the Company.

If a Shareholder appoints a corporation as the Shareholder's proxy to attend and vote for the Shareholder at that meeting, the representative of the corporation to attend the meeting must produce the appropriate Certificate of Appointment of Representation prior to admission. A form of the certificate may be obtained from the Company's share registry.

You must sign this form as follows in the spaces provided:

Joint Holding: where the holding is in more than one name all of the holders must sign.

• Power of Attorney: if signed under a Power of Attorney, you must have already lodged it with the registry, or alternatively, attach a certified photocopy of the Power of Attorney to this Proxy Form when you return it.
• Companies: a Director can sign jointly with another Director or a Company Secretary. A sole Director who is also a sole Company Secretary can also sign. Please indicate the office held by signing in the appropriate space.

If a representative of the corporation is to attend the Meeting the appropriate "Certificate of Appointment of Representative" should be produced prior to admission. A form of the certificate may be obtained from the Company's Share Registry.

Proxy Forms (and the power of attorney or other authority, if any, under which the Proxy Form is signed) or a copy or facsimile which appears on its face to be an authentic copy of the Proxy Form (and the power of attorney or other authority) must be deposited at or received by facsimile transmission at the West Perth office of the Company (16 Ord Street, West Perth, WA, 6005, or Facsimile 08 94861011 if faxed from within Australia or +618 08 94861011 if faxed from outside Australia) not less than 48 hours prior to the time of commencement of the Meeting (WST).

Our Ref: SA:AM:

16 lune 2005

The Directors Advance Energy Ltd Suite 4. Ground Floor 16 Ord Street West Perth WA 6005

Dear Sirs

VALUATION OF ADVANCE ENERGY LTD PREFERENCE SHARES

$1¹$ Introduction

BDO Consultants (WA) Pty Ltd ("BDO") has been engaged by Advance Energy Ltd ("AEL") to prepare a valuation of the convertible preference shares that the company is seeking shareholder approval to issue to director related parties

$\overline{2}$ . Background of preference shares

AEL is seeking shareholder approval to issue a total of 8 convertible preference shares in the Company to director related parties. These are convertible for no consideration with conversion of one preference share for 1,000,000 ordinary shares and are excerciseable based on the following conversion events

• Class A ASX listing
• Class B The attainment of 500 Barrels of Oil per Day Production
• Class C The attainment of 1000 Barrels of Oil per Day Production
• Class D The attainment of 1500 Barrels of Oil per Day Production

There are no restrictions to prevent these preference shares from being converted once the triggering event occurs.

These preference shares have the characteristics of an option and as such in determining a value for the convertible preference shares we will utilise the Black Scholes method.

In accordance with ASIC Policy Statements, unlisted options should be valued at the date that they are granted using an option pricing model that takes into account all of the following factors:-

• $\bullet$ Exercise price of the option
• $\bullet$ Life of the option
• Current share price
• $\bullet$ Expected volatility of the share price
• $\bullet$ Expected dividends; and
• Risk-free interest rate

The Black Scholes pricing model take these factors into consideration where appropriate and as such we have determined that this is the most appropriate methodology to utilise in performing this valuation.

$\overline{3}$ . Valuation of convertible preference shares

The following assumptions have been used to determine a value for the convertible preference shares:

CLASS A

Input		Note
Underlying Security spot price	\$0.15
Exercise price	\$0.00
Dividend rate	Nii
Standard deviation of returns (annualised)	50.23%
Risk free rate	5.70%
Expiration/Conversion period	3Months

• Note 1 The underlying security spot price used for the purposes of this valuation is based on the price (20 cents) that share capital is intended to be raised by the company by way of IPO in the short term future. Accordingly as the convertible preference shares are being issued pre IPO we have applied a discount of 25% resulting in a value of 15 cents.
• Note 2 As at the date of this report the company has not forecast any future dividend payments. For the purposes of this valuation we have therefore assumed that the company's share price is "ex-dividend". If dividend payments were forecast, the value of the preference shares would be reduced.
• Note 3 The anticipated standard deviation over the life of the options is based on a comparable company's historical data from the Australian Graduate School of Management's Risk Measurement Service.
• The risk free rate is the Commonwealth Government securities rate with a maturity date Note 4 approximating that of the expected conversion period of the preference shares as at 14 June 2005. (Source: Reserve Bank of Australia)
• Note 5 The expiration/conversion period is 3 months from the date of this report as this is the anticipated timing of the conversion event provided to us by AEL.

CLASS B

Input		Note
Underlying Security spot price	\$0.15
Exercise price	\$0.00
Dividend rate	Nii
Standard deviation of returns (annualised)	50.23%	२
Risk free rate	5.70%
Expiration/Conversion period	2 Years

• Note 1 The underlying security spot price used for the purposes of this valuation is based on the price (20 cents) that share capital is intended to be raised by the company by way of IPO in the short term future. Accordingly as the convertible preference shares are being issued pre IPO we have applied a discount of 25% resulting in a value of 15 cents.
• Note 2 As at the date of this report the company has not forecast any future dividend payments. For the purposes of this valuation we have therefore assumed that the company's share price is "ex-dividend". If dividend payments were forecast, the value of the preference shares would be reduced.
• Note 3 The anticipated standard deviation over the life of the options is based on a comparable company's historical data from the Australian Graduate School of Management's Risk Measurement Service.
• Note 4 The risk free rate is the Commonwealth Government securities rate with a maturity date approximating that of the expected conversion period of the preference shares as at 14 June 2005. (Source: Reserve Bank of Australia)
• Note 5 The expiration/conversion period is 2 years from the date of this report as this is the anticipated timing of the conversion event provided to us by AEL.

CLASS C

Input		Note
Underlying Security spot price	\$0.15
Exercise price	\$0.00
Dividend rate	Nil
Standard deviation of returns (annualised)	50.23%
Risk free rate	5.22%
Expiration/Conversion period	5 Years

Note 1 The underlying security spot price used for the purposes of this valuation is based on the price (20 cents) that share capital is intended to be raised by the company by way of IPO in the short term future. Accordingly as the convertible preference shares are being issued pre IPO we have applied a discount of 25% resulting in a value of 15 cents.

• As at the date of this report the company has not forecast any future dividend payments. For Note 2 the purposes of this valuation we have therefore assumed that the company's share price is "ex-dividend". If dividend payments were forecast, the value of the preference shares would be reduced.
• Note 3 The anticipated standard deviation over the life of the options is based on a comparable company's historical data from the Australian Graduate School of Management's Risk Measurement Service.
• The risk free rate is the Commonwealth Government securities rate with a maturity date Note 4 approximating that of the expected conversion period of the preference shares as at 14 lune 2005. (Source: Reserve Bank of Australia).
• Note 5 The expiration/conversion period is 5 years from the date of this report as this is the anticipated timing of the conversion event provided to us by AEL.

CLASS_D

Input		Note
Underlying Security spot price	\$0.15
Exercise price	\$0.00
Dividend rate	Nil
Standard deviation of returns (annualised)	50.23%
Risk free rate	5.22%
Expiration/Conversion period	10 Years

• Note 1 The underlying security spot price used for the purposes of this valuation is based on the price (20 cents) that share capital is intended to be raised by the company by way of IPO in the short term future. Accordingly as the convertible preference shares are being issued pre IPO we have applied a discount of 25% resulting in a value of 15 cents.
• Note 2 As at the date of this report the company has not forecast any future dividend payments. For the purposes of this valuation we have therefore assumed that the company's share price is "ex-dividend". If dividend payments were forecast, the value of the preference sahres would be reduced.
• Note 3 The anticipated standard deviation over the life of the options is based on a comparable company's historical data from the Australian Graduate School of Management's Risk Measurement Service.
• Note 4 The risk free rate is the Commonwealth Government securities rate with a maturity date approximating that of the expected conversion period of the preference shares as at 14 June 2005. (Source: Reserve Bank of Australia)
• Note 5 The expiration/conversion period is 10 years from the date of this report as this is the anticipated timing of the conversion event provided to us by AEL.

Black Scholes Valuation $3.1$

The Black Scholes valuation methodology calculates the expected benefit from acquiring the shares outright less the present value of paying the exercise price for the preference shares on

date of expiration. This model is considered robust and sufficiently accurate as a pricing tool where convertible preference shares are not expected to be exercised until the end of the conversion expiry. The model uses historical share price volatility measures and therefore may not approximate actual share price behaviours in the future.

Utilising this valuation methodology and the above inputs, we have determined the indicative value of the convertible preference shares as being: -

Class	Expiry Term	Value of Preference Shares $($ \$ $)$
А	3 Months	\$149,000
В	2 Years	\$149,100
€	5 Years	\$149,200
D	10 Years	\$149,400

We have discounted the above valuations based on the probability of the trigger event occurring as advised by the directors of AEL. The resulting values are shown in the table below.

Class	Probability of Trigger Event	Discounted Value of Preference Shares $($ \$ $)$
А	100%	\$149,000
B	60%	\$89,500
	20%	\$29,800
	2%	\$3,000

3. Vesting

The valuations assume that all convertible preference shares have or eventually will vest to the option holder. We are not aware of any performance hurdles that must be achieved that would otherwise potentially dilute the value of the options to the holder on the assumption that they may not vest.

$\overline{4}$ . Sources of Information

• $4.1$ Information provided by the directors of AEL
• $4.2^{\circ}$ Australian Graduate School of Management Risk Measurement Service
• 4.3 Information available on the public domain.

5. Summary and Conclusion

Based on the valuation methodologies adopted and the assumptions made it is our opinion that the value of the convertible preference shares is

CLASS A \$149,000 per convertible preference share

CLASS B \$89,500 per convertible preference share

CLASS C \$29,800 per convertible preference share

CLASS D \$3.000 per convertible preference share

Qualifications and Consents 6.

BDO Consultants (WA) Pty Ltd is wholly owned by BDO, a member of BDO International, which has extensive experience in the valuation of listed company securities.

BDO Consultants (WA) Pty Ltd holds an Australian Financial Services Licence issued by the Australian Securities and Investments Commission for giving expert reports pursuant to the Listing Rules of the ASX and the Corporations Act 2001.

The persons specifically involved in preparing and reviewing this report were Sherif Andrawes and Adam Myers of BDO. They have significant experience in the preparation of valuations of listed company securities including shares and options within Australia.

This report has been prepared at the request of the company to allow the directors to discharge their responsibilities under the Corporations Act in relation to the Notice of Meeting proposed to be sent to all shareholders of the company. AEL engaged BDO to prepare a valuation of the convertible preference shares to be issued to directors and director related parties.

BDO hereby consents to the Notice of Meeting referring to this valuation in the Notice of Meeting. Apart from such use, neither the whole nor any part of this report nor any reference thereto may be included in or with, or attached to any document, circular resolution, statement or letter without the prior written consent of BDO.

BDO takes no responsibility for the contents of the Notice of Meeting other than to references made to this report.

The statements and opinions included in this report are given in good faith and in the belief that they are not false, misleading or incomplete.

The terms of this engagement are such that BDO has no obligation to update this report for events occurring subsequent to the date of this report.

Yours faithfully BDO Consultants (WA) Pty Ltd

Sherif Andrawes Director