FINANCIAL POSITIONACE’s operating financial position improved...

FINANCIAL POSITION

ACE’s operating financial position improved substantially this year. Sales revenue was 46% higher
than in 2005 even though commercial sales to China only commenced in the last quarter of the 2006
financial year.

Sales margins are being maintained at an acceptable level and will improve as the proportion of NGVS
components sourced from China increases.

For the fourth year in a row ACE has reported a reduced loss having improved from a loss of $6.4
million in 2002 to a loss of $1.3 million in 2006. The reduced loss is after incurring additional costs in
the establishment of staff and infrastructure in China, an increased number of engine development
programmes and approximately $120,000 additional costs in AIFRS accounting for amortisation of
convertible note equity and expensing employee share options.

Net assets of the group decreased from $203,000 at 30 June 2005 to $48,000 at 30 June 2006. The
major reason for the decrease was the requirement to amend the accounting treatment of Convertible
Notes in accordance with AASB 132. The new accounting standard requires $1,165,000 of the
Convertible Note value to be transferred from equity to non- current liabilities. Without this change of
accounting standards the net assets would have increased from $203,000 at 30 June 2005 to
$1,213,000 at 30 June 2006.

During the 2006 Financial Year the Company issued 17,934,922 ordinary shares to raise $1.5 million
cash, to convert $750,000 debt to equity and to satisfy $150,000 of the $300,000 acquisition cost of
Gas Torque Engines Pty Ltd.

The Group’s working capital improved from $377,000 at 30 June 2005 to $982,000 at 30 June 2006.
Orders from our major customers in China and our continuing supply of spare parts and services to
France and Australia are expected to provide revenue which will see AEC be cash flow positive and
post a maiden profit in 2007.

SUMMARY
The key drivers for the demand for natural gas vehicles, in particular:
• the price of oil;
• environmental concerns, especially in big cities; and
• security of energy supplies, are increasingly becoming more important.

Oil prices continue to hit record highs and urban pollutionand energy supply concerns continue to be major issues, particularly in the Asian region. The Asian
region also has abundant natural gas resources. Thus the natural gas vehicle market in China and the
Asian region is enormous and expanding as national and provincial governments focus on cleaning up
the pollution caused by buses and trucks by using secure local supplies of natural gas. AEC has firmly
established itself as an international frontrunner in the race to supply this booming market.